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Wall Street’s Wildfire

00:00AM Oct 10, 2008

Recessions are like forest fires—they clean out the underbrush so the forest emerges with a new start. So sayeth Jim Rogers, author of bestselling investment books (A Bull in China, Hot Commodities, Adventure Capitalist, Investment Biker), cofounder of the famed Quantum Fund, and commodity trader.

When asked if the market fire is out of control and possibly taking peoples' homes and livelihoods with it, his reply: "Well, forest fires are wild. That's why everyone panics. This is the worst one since World War II. But we'll come through it with a better financial system—unless the government keeps getting involved.”

What will you drive? Without a doubt, farmers, with their wealth in land and machinery, are less likely to go down in flames than those whose jobs and savings are tied to financial systems. "Real assets are the way to protect wealth,” says Rogers. "Stockbrokers are turning in Maseratis. In the next decade, farmers will drive them!”

Commodity prices are impacted two ways—direct de-investment and reduced demand if the recession deepens and crosses borders.

People do pull money from commodity funds when panic ensues. "Investors tend to sell everything—especially if it is traded on margin,” Rogers says. "But when the worst is passed, money pours back into commodities first.” They'll turn up again in months, not years, he estimates.

Still, demand will soften. Unem-ployment already was climbing before the flash fire. Consumer spending accounts for nearly 70% of the U.S. economy and it was slowing. Add the pink slips now being delivered from Indiana to India and tighter credit, and even more purchasing power goes up in smoke.

For now, cash is king. Take a conservative approach in your business, management specialists advise (see sidebar below).

To contact Linda Smith, e-mail

Your Credit Insurance
Credit will be tighter. One way to ensure access to the cash you need is to increase your working capital, says Phillip Johnson, director of the Thornton Agricultural Finance Institute at Texas Tech University.
"That may mean delaying capital expenditures, such as equipment purchases, if the purchase will require the use of cash,” Johnson says. He offers these tips:
•Increase working capital by retaining earnings and maintaining liquidity.
•Talk to your lender early and often about your financial needs and situation.
•Maintain flexibility. Market conditions change rapidly.
•Negotiate price with suppliers if you can pay cash. "Suppliers are under the same working capital crunch as you are,” Johnson says. —Jeanne Bernick



Top Producer, October 2008