Look Toward the Rising Sun

If you don't speak Chinese, in a few years you just won't be on the map

In January of this year, Jim Rogers, his wife Paige and their four-year-old daughter were all packed up to move to Asia. Ahead of the move, Rogers put his Manhattan town house on the market for an asking price of $16 million.

Town house value depends on location and evidently Rogers' location was prime. Believe it or not, he bought his building in 1977 for $107,000. Even if you factor in inflation from that time, the amount seems laughable in terms of today's market in the Big Apple, or in any other major business hub in the world.

Rogers, who has spent nearly 40 years making a living in the capital market and from financial forecasting, never thought that his town house would be worth 150 times what he had paid for it, during his lifetime.

Noam Gottesman, manager of the hedge fund GLG Partners (and son of the Israeli businessman Dov Gottesman) also didn't think that in May 2008 he could offer his home in Palace Green, near Kensington Palace in London, for above $200 million. In his case "above" was $32 million more than that sum.

Property values in Manhattan and London have increased by hundreds of percent, reflecting the tremendous growth the West has experienced in the last decade, and an explosion of wealth that has generated intense demand for prime properties in places presently seen as the most important centers in the world.

Maybe selling his Palace Green mansion will compensate Gottesman for the collapsing value of the hedge fund company he founded eight years ago. Shares of his company, which had been one of the first big funds and went public by merging with a stock market shell, have lost 40% of their value this year following the upheavals in the global hedge funds market.

Rogers has had ups and downs in his career in finance, but last year did well by him, because he's identified with predicting the boom in the commodities market. For a decade now he's been forecasting an unprecedented explosion in this market, and in January, after prices skyrocketed by hundreds of percent, he predicted that they would just keep on going up. And they have: From December 2007, when he talked with TheMarker, the index of commodities has increased by 14% more.

The wild surge in oil prices and in other commodities such as corn, wheat, copper and platinum - in fact, in practically everything mined from or growing on the planet - has turned the focus in the global marketplace to commodities, after 20 years of focusing almost exclusively on stocks. The "story" is simple enough: The growth of emerging markets worldwide has created a hunger for raw materials and food. China and India are growing fast and every morning hundreds of thousands of people join their middle classes and start consuming.

Now that oil and other commodities have risen by hundreds of percent in price, the investment world is divided. One camp argues that we face an era of constantly rising commodity prices. The other side counters that the speed of the increase and growing meddling by speculators indicate that it was just another bubble like the dot.coms, credit, or U.S. housing. Bubbles in the markets are part of human nature, they insist.

But the learned experts in both camps neglect to explain the difference between the commodities market and the stock market. Unlike oil or peanuts, a share has a real economic value. A share price can deviate from its real economic value during major market swings, whether up or down, but at the end of the day, its real economic value derives from the cash flow that the business generates (as well as fluctuations in the risk and interest rates in the market).

Not so for commodities. Oil, corn and sugar don't generate cash. Their value is based on supply and demand in the market on a daily basis, and surplus supply or demand can result from hundreds and thousands of parameters, which are terrifically hard to calculate - such as inventories, discoveries, investments in various sectors, technological developments, and so on.

Take the oil market. It's one of the biggest and most advanced, right? But even with oil at $130, any 10 experts will proffer 100 opinions about the world's true oil reserve situation - how fast consumption will grow, whether "peak oil" has arrived, when true alternatives might arise, and so on. The markets have plenty of information about "black gold," but it's also true that the world is changing fast.

Today's second-biggest oil consumer is China and its government doesn't know and doesn't want to know how much it's actually consuming, or how much it actually produces. In Russia and the Arab nations, too, the true status of their oil reserves and production potential are shrouded in impenetrable fog.

Which means that it's almost impossible to predict whence oil prices, or the prices of almost any commodity for that matter. With the prices soaring and tremendous amounts of money from hedge and pension funds pouring into commodities and derivatives, the risk in investment portfolios is also mounting.

The only other market so impossible to forecast is forex. Countless investors are companies are licking wounds caused by the dollar's collapse against the shekel. Few had predicted its intensity. The dollar and commodity prices are two screaming examples of the global economy's changes in the last few years - dramatic changes whose origin lies in the East.

How well is Israel prepared for these changes? Regarding U.S. currency, its collapse means at least one good result: the end of "dollarization", or linkage to the greenback, that relic of the era of hyper-inflation.

What about exports? Well, Central Bureau of Statistics figures for the first quarter of 2008 show that it increased by 12.6%, despite the implosion of the greenback against the shekel. You could argue that the true damage done by the shekel's appreciation will only show up later in the year, or you could argue that Israel's main export, high-tech, isn't that vulnerable to exchange rates: what matters is innovation and a competitive edge.

Manufacturers grumble about exchange rates, but in the long run, the question of the dollar-shekel doesn't matter. What matters is whether Israel's exporters and entrepreneurs will succeed in China, India and the other exploding emerging markets as they did in the U.S. and Europe.

Israel's children speak English well, but they don't know Chinese or any other language, for that matter. The new generation of businesspeople will have to forge links to the East. If you aren't there in five or ten years, you aren't in the global game.

Maybe you don't have to be as fanatic as Jim Rogers, who hired a nanny who speaks to his daughter exclusively in Chinese. But when you get up in the morning, don't automatically turn your face to the West any more.