Legendary money manager Robert Rodriguez, who predicted the financial crisis of 2008 and the dot-com bust of 2000, has never been shy about speaking his mind. Nor is he now, officially retired from the financial services industry, as of last Dec. 31. Indeed, the controversial value investor is as candid as ever, an exclusive interview with ThinkAdvisor reveals.
For decades, Rodriguez — CEO of First Pacific Advisors for 25 years — has maintained that the 2016 presidential election and the following eight years would determine the direction the country would take leading to either happy days or distressing decline. Today, Rodriguez is hopeful that President Donald Trump will remedy all that ails America — or what the former fund manager believes ails America.
For five years now, Rodriguez has warned of another massive financial crisis unless major structural changes in U.S. fiscal policy, regulation and health care are implemented. He insists that “excesses” in the system continue to cause pressures that will lead to a meltdown, which, he says, is unquestionably on the way if the status quo isn’t changed. Precisely when that crisis will occur, he’s not sure.
In the interview, Rodriguez offers predictions for the economy, the markets and the Federal Reserve, among other hot-button areas. He also serves up his provocative point of view on what might be Trump’s negotiating strategy and style (think Oscar, Emmy, Tony).
Rodriguez earned a striking record during his years at First Pacific, based in Los Angeles. The firm’s FPA Capital Fund, which he managed from 1984 to 2009, boasted an annualized return of 14.2% during that period, according to Morningstar. It outperformed the market indexes by 500 to 600 basis points compounded for those 25 years, Rodriguez says. In the bond arena, the FPA New Income Fund’s annualized return came to an impressive 8.8% under his management.
Safe to say that most of the time, Rodriguez gets it right. In 2009, he forecast a substandard U.S. economic recovery accompanied by elevated levels of unemployment and subpar GDP growth of 2% “as far as the eye can see.” Indeed, from June 2009 through June 2016, GDP growth averaged about 2%, according to the Commerce Department.
In 2012, Rodriguez turned over day-to-day management of FPA’s two key funds to his partners but continued with the firm in an advisory role before retiring at the end of last year.
He may be out of the investment industry, but he’s enthusiastically into something else: researching an area of “collectibles of historic importance,” as he describes his project, cryptically.
ThinkAdvisor recently talked with the famed investor, who was speaking by phone from his home in Lake Tahoe, Nevada. The opinions he expressed reflect his personal views only and not those of FPA. Here are highlights of our conversation:
THINKADVISOR: What do you think of President Trump’s job performance thus far?
ROBERT RODRIGUEZ: The good news is that it’s nice to see someone who’s trying to fulfill his campaign promises. Targeting tax, regulation and health care is long overdue.
Any bad news?
It’s going to take an extraordinarily herculean effort to attack even one of those areas in a major way because of entrenched interests. There are strong forces both within and outside the Republican Party that don’t want to see him succeed.
Some people criticize Trump for being unpredictable and erratic and for using Twitter excessively. Your thoughts?
I have my anxieties about the current president, as I know many people in the country do. But I hope he has the potential to try to pull off what he says he will. The last time we had a president who balanced the budget and had the U.S. debt at zero was Andrew Jackson. He was considered a pretty unstable person too.
You have to ask yourself: Does his way of behaving reflect his normal way of thinking, or is he a great actor? Part of the art of negotiating is to be viewed as somewhat unstable and unpredictable.
I see…Ever try it?
That’s exactly the type of negotiating stance I decided to take when I took back [repurchased] First Pacific Advisors from our British owner, Old Mutual. At a management council meeting with my parent company in 2004, I was over the top. I stood up and was screaming. I accused some people in the room of being [analogous to] “ladies of the night” and that they were out of their blanking – beginning with an “f” – mind. I knew what I was [deliberately] doing, but did anybody else know? No, except my COO. I had told him I was going to give an Academy Award performance.
What do you think Trump’s chances are for reforming taxes, regulation and health care?
If anybody can potentially break the logjam in one of those three areas, it might be Trump, though his window of opportunity is incredibly short. He hopes to have major tax code reform [accomplished] in eight months. That would be monumentally historic. But I’m hopeful. Trust but verify!
You said in 2010 that if the U.S. didn’t get its balance sheet together by 2013, we’d have “a crisis of equal or greater magnitude” than the 2008 financial crisis. That didn’t happen – thank goodness.
I still stand by what I said. I felt that pressures would be building and that something significant would likely have to take place because the finances of this country were, and are, on a non-sustainable course. But there’s no way to forecast a timeframe explicitly.
As of today, what’s the likelihood of a crisis?
We’re eight years into a recovery, and we’re going to be working with major changes in taxes, regulation and health care. Are the odds in our favor that that will postpone a recession? The more extended the cycle becomes in terms of time, the greater the odds of something negative occurring. This is a critical year. It’s going to be an incredibly dynamic, hostile environment.
In 2009, you said that if nothing was done about the fiscal situation, we’d be facing a huge crisis with total debt outstanding of about $20 trillion to $24 trillion by 2018. Still think so?
Well, we’re at $20 trillion right now; and by the time the presidential election of 2020 occurs, current budget estimates say the U.S. debt is going to be at least $23 trillion — without anything that Trump does. Over the next five to 10 years, if deficits continue to rise and the debt continues to expand, will that lead to the 4% GDP growth that he envisions? I think it’s a low-odds outcome. This is a ticking time bomb.
The president says he wants to spend money on upgrading the nation’s infrastructure. If he does, how can he keep the deficit down?
If you don’t have sufficient money in your family budget, you make choices about what you’re going to spend and not spend on. That’s what’s going to happen [regarding the U.S. deficit]. If not, the debt will explode beyond what it already is.
What’s your take on the Federal Reserve?
I wouldn’t give [chair] Janet Yellen the responsibility of managing a hot dog stand! She’s as clueless as [chairs Ben Bernanke and Alan Greenspan] were. With the Fed’s insane monetary policy and distortion of the financial system for the last eight years, they haven’t accomplished any real economic growth.
Repression of interest rates has helped the budget in the sense that it’s keeping rates low and has driven the financial markets. But it’s going to end with many unintended consequences. Is this a sustainable outcome as you’re quadrupling the debt of the United States? The odds are it isn’t.
What track do you think the Fed is on as we speak?
If we have a crisis right now, the only one in the sandbox that can be blamed is the Federal Reserve. However, if the federal government starts spending and building up fiscal policy stimulation and something happens, then the Fed can have somebody else in the sandbox to point their finger at.
What do you see when it comes to securities industry regulation?
This is a battle that’s going to take place over the course of the next year. One reason I’m no longer in the investment industry is that I got completely and totally fed up with the out-of-control regulatory environment. I said, “I’ve had enough of this crap!” Dodd-Frank is the epitome of regulatory insanity. The [Securities and Exchange Commission] doctrine of “broken windows” is anathema. Hopefully, President Trump can turn all of this back. We’re at a 25-year low in new business startups – and that’s in the face of an economic recovery!
What’s your forecast for the stock market this year?
I absolutely, categorially hate the equity market. I’ve continued to liquidate my personal equity holdings, including [some] this year. I’m at my lowest exposure since 1971 — less than 1%.
Is that because you think there’s another crisis en route?
There isn’t any question that there’s going to be a crisis. The timing is questionable. Uncertainties are continuing to build because Trump wants to expand fiscal policy but doesn’t want to address entitlements. I don’t see how you can expect to have a sound budget in this country unless you start addressing entitlements. Some of the things Trump says sound good, and some make no sense. He wants to attack the tax code, but there’s an issue about how to do that. All this creates high levels of uncertain outcomes.
What does that mean for equity investors?
It’s not the kind of environment a classic value investor would describe as [having] a surplus of investment opportunities — it’s a wasteland of opportunities. Are you getting compensated for the risks in the equity market? Absolutely not. We’re close to all-time record highs in valuations.
Anything else contributing to uncertainty in the market?
I don’t believe a lot of investors are thinking about how index-type investing can destabilize the marketplace when things aren’t so rosy. The rapid growth of exchange-traded funds and index funds could add more destabilization to the equity market because they don’t carry cash: When a redemption comes in, it’s an automatic sell right into the marketplace. As active management becomes a lower percentage of the total investment universe, there’s less liquidity in the system.
So, if you’re invested so little in equities, what are you invested in?
Transportable hard assets that are fully paid for.
What do you predict for the bond market?
You’re not getting compensated for risk in high-yield bonds — a 5% yield to take on the credit risk in a worldwide system that right now has higher leverage than it did prior to the last final crisis. There’s less leverage in the corporate sector, but there’s greater leverage in the sovereign debt sector. Our country has created a Gordian Knot: The system is so highly levered that you can barely have an interest rate increase before it starts to drive a hole in the U.S. budget. It’s even more of an unstable environment than it was 10 or 20 years ago.
What are the greatest threats to the market this year?
A failure to achieve tax reform, regulatory reform and whether businesses will accelerate or moderate capital spending. If you don’t know what the tax code is going to be, you’ll probably want to wait a little to see how the winds are blowing.
What do you think Mr. Trump should do first in working with Congress?
Attack the tax code. You already see pushbacks in the regulatory area.
Do most businesses want to reduce taxes?
There will be large segments that will be working on the Republican side of the aisle that will be impediments to reform. Businesses say they want lower taxes. But if, for example, a large chunk of your manufacturing is in Ireland — a very low tax rate zone — and your competitor is a U.S. company, you may say to your congressional representative, “I don’t want lower taxes” because that means you're going to have more competition coming from the U.S. into Ireland. Further, I don’t think too many tax attorneys and accountants want the tax code simplified.
Does the wealth management industry want it simplified?
How many individuals have used advisors to create generation-skipping trusts to minimize their taxes? If you change those rules, what about them? This is why getting structural changes made won’t be an easy task. This is going to be a war.
As a first-generation Mexican-American, what do you think about the wall that Trump wants to build between the U.S. and Mexico? It took your forebears seven years to enter the U.S. from Mexico.
Between 1916 and 1923, there was no fence between the border of Sonora, Mexico, and Arizona. You could just walk across. My grandmother explained to our family why we weren’t going to do that: “Our future is not in Mexico. Our future is in the United States. But I want my children to be able to walk down the street with their heads held high and their eyes looking ahead, not over their shoulder. We will enter the country legally.” That’s why it took seven years.
But what about the wall that President Trump said he’ll build?
I’m holding a standard no different from the one my grandmother had for our family. I’m all in favor of anything that will be an impediment to restrict the illegal flow of people from the South to the North. It’s an atrocity that we have this violation of law, which is reflective of our broken immigration system.
All in all, the Trump presidency is ushering in a unique period in American history.
In many ways, this is a fight for what the country is to be. If you believe in centralized government and the power of the federal government, then you’ll want to see Trump fail. If you believe too much power has accumulated in Washington, then you want to see that broken up — you want a return to the states and the local communities.
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