FPA’s Bob Rodriguez: Window Narrowing to Avoid Fiscal Disaster

The legendary manager has made his money by correctly anticipating fundamental economic shifts

Bob Rodriguez at his office in Lake Tahoe, Calif. Bob Rodriguez at his office in Lake Tahoe, Calif.

In a wide-ranging keynote address to investors, famed money manager Bob Rodriguez warned that the U.S. has a narrow window ahead to escape the kind of sovereign debt crisis that Europe is now experiencing.

Rodriguez, FPA Capital’s managing partner and CEO, said next year would be the most crucial in the past 80 to right our fiscal path before “budgetary financial pressures will explode” starting in 2018.

Speaking to an Institute for Private Investors audience in New York last week, Rodriguez said that every year beyond 2013 without structural reform would “increase the size and scope of the necessary fiscal response” amid likely negative capital market reaction of the kind we’re now seeing in Europe.

Rodriguez, a rare money manager who has outperformed in both equity and fixed-income spaces, has in recent years developed a reputation for issuing stark warnings about the direction of the economy. But in his talk, he rejected accusations of being some kind of perma-bear disaster monger, calling himself a “realist” instead and showing through extensive citations that his predictions have been accurate while official forecasts of economic growth or of budget trends have tended to be overly optimistic.

To cite one example, in a year he described as pivotal in his career in investment management, he began holding high levels of cash in 1998 during the dot-com bubble. Anticipating the 2000 stock market bust and 2007 credit bust, Rodriguez maintained cash levels averaging more than 25% in his FPA Capital Fund and peaking at 45% in 2007, compared to 1% to 3% levels in the 14 years in investment management leading up to 1998.

From March of 1998 to the end of 2009, when he left active management for a year-long sabbatical, a 3-month Treasury bill returned 3.1% per year on average compared to the S&P 500 annual average return of 1.9% and an average inflation rate of 2.5%. His FPA Capital Fund achieved an annual average return of 8.2% during that time.

A lesson Rodriguez shared with investors is that stock and bond markets are slow to respond to structural economic shifts. His high liquidity position went against the norms of investment management at that time, and he lost clients in the process. Rodriguez has not shied away from bold moves since then, as when he liquidated all corporate debt holdings in Fannie Mae and Freddie Mac–representing 40% of his funds’ fixed income assets–after a nightmare in 2006 when he envisioned the two government-sponsored enterprises going into bankruptcy.

Rodriguez argues that we are entering a new time of danger in the global economy and that the Great Recession of 2007 to 2009 was merely Phase 1. If the U.S. does not make significant structural changes including entitlement reform, budgetary reform and a simpler tax system, he foresees another financial crisis of possibly greater magnitude in the years ahead.

Says Rodriguez: “For starters, entitlement reform should include benefit cuts, an increasing of the age for qualifying, and means-testing. Congressional budgetary reform must include statutory controls that prevent a future Congress from overturning expenditure cuts enacted now but are to be implemented later.”

He also calls for simplifying a tax code that has grown to 72,000 pages–tripling in size since 1984.

Finally, Rodriguez calls for a grand fiscal compact in 2013 after the election, and failing that the arduous task of effecting these structural changes through Constitutional amendment.

Read Bob Rodriguez' predictions he made in interviews with AdvisorOne in October 2011 and February 2011.

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