September 18, 2012

FPA’s Bob Rodriguez Blasts Bernanke for Going ‘All In’ With QE3

The legendary manager has harsh words for Fed chairman in latest commentary

The latest commentary from famed money manager Bob Rodriguez is far from blue skies and sunshine, taking specific, and at times personal, aim at Fed Chairman Ben Bernanke.

"My worst fear is that fiscal gridlock continues, coupled with the policies of this activist Fed chairman,” Rodriguez, FPA Capital’s managing partner and CEO, wrote on Thursday in response to the central bank’s announcement that it would initiate a third round of quantitative easing. “Today’s Fed actions add to my anxieties. ‘All in’ may be a good strategy for poker but not for this economy."

After a brief history of economic stimulus since 2009 and a discussion of market reaction late last week to the Fed’s latest announcement, Rodriguez bluntly stated the challenges he sees for the economy.

“The Fed chairman recently expressed the opinion that he does not view unemployment as structural. However, he is using this ‘All In’ approach to shock the economic system. This reflects something other than normal times. He believes if the Fed gets interest rates low enough for a sufficiently long period, the recovery will finally gain traction. This is pure speculation. I view this approach as highly dangerous, misdirected and untested.”

Rodriquez noted that Bernanke is held in high esteem by the consensus, but that, “As usual, I am not with this consensus.”

“He refuses to admit the Fed made monetary policy errors that helped create the housing bubble," he wrote. "He maintains it was a worldwide savings glut that caused it and not the Fed. In fact, for both 2005 and 2006 he held the view that there was no housing bubble—a major miss.

"In contrast, at FPA we were of the opposite opinion and took action in the portfolios to hopefully protect capital before the bubble burst. The only retraction Bernanke has made was in reference to his May 2007 comment that he thought the subprime mortgage mess would be contained. I publicly expressed the opposite view and said that subprime was the canary in the credit coal mine.”

Turning to investment managers and their non-reaction to the threat he feels Fed action poses, Rodriguez then said they “do not appear particularly concerned with, [or] worried about, the finer nuances of an academic debate between two different schools of economic thought. It is all about not underperforming the market or a benchmark, so don’t fight the Fed. Unfortunately, a strategy of following the Fed’s urging to take on greater risk will likely end in heartbreak.

"Should the stock market continue its upward march, both our clients and FPA’s portfolio managers will be tested. This is a time for discipline. Given that economic growth is languid at best and is likely slowing, the divergence between the stock market and economic reality cannot be sustained. One or the other has to adjust.”

The Fed’s actions today are but another attempt to “reshape the yield curve,” he wrote.

“Some would say manipulate. The end goal is to improve housing demand via lower interest rates and spur capital spending and risk taking. The shape of the yield curve will be an important indicator of things to come. If the Fed is successful in bending the curve downward with lower long-term rates, this will place extraordinary pressures on fixed-income investors and financial organizations. It will enhance the 'risk trade,' and I believe it will result in creating financial cancers because capital is or will likely be deployed in an unbalanced risk fashion, resulting in a duration or credit risk mismatch. Call it a bubble of another sort that will result in unintended consequences.

Should the yield curve steepen, with 10-year bond yields moving above 2% while short-term rates are anchored near zero, it would imply that a longer term inflation fear is re-entering the market. Inflation fears are not just driven by improved economic expectations. The Fed believes it can manage this risk. It also believes it can manage the unwinding of its massive QE portfolio without market disruption. This is opinion and not fact based. Intelligent people can disagree about this view.”

Getting to the heart of the matter, Rodriquez concluded by writing that it’s time for Bernanke to go.

“Future outcomes will also be materially affected by whether Chairman Bernanke remains in office next year, the composition of the new congress and who will be president. I believe that Chairman Bernanke should be replaced with a new far less monetary-policy-intrusive chairman. The composition of the Congress and who the next president is will likely shape how or if a fiscal Grand Bargain can be achieved. Chairman Bernanke has consistently argued that any expenditure cuts should do no harm to the nascent recovery. As is typical in Washington, postpone the tough decisions. 2013 is a critical moment in time. If a material and timely fiscal restructuring does not take place by next September, I fear and believe that it will not occur before 2017.”

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