Iconoclast, super-bear, doomsayer — legendary money manager Robert Rodriguez has been labeled all of these. The record shows, however, that this famed independent thinker who lives five to 10 years in the future has correctly forecast two of the worst calamities in modern financial history: the 2000 dot-com bust and the global financial crisis of 2007–09.
For the past four years, Rodriguez, managing partner of First Pacific Advisors, or FPA, in Los Angeles, has predicted that, unless the U.S. government’s fiscal and monetary policies are substantially restructured, another hideous meltdown could occur by 2018.
For 2016, the fiscal conservative is still singing the blues, warning to protect assets from what he says is a looming disaster.
In anticipating the global financial crisis, contrarian Rodriguez, 67, moved to a cash level nearly 12 times that of the industry. For his prescience and prudence, he endured sharp shareholder criticism and heavy fund redemptions.
For nearly two decades now, Rodriguez has maintained that the presidential election of 2016 and the following eight years will determine the direction that the U.S. takes — leading to either prosperity or decline.
Rodriguez joined FPA in 1983, serving as CEO for 31 years. For the past four, he has taken a supporting and advisory role following a one-year sabbatical — part of his long-time succession plan — after which he turned over day-to-day management of key funds to his partners.
Value-oriented FPA manages about $34 billion for institutional and mutual fund investors. Compound growth rate of the FPA Capital Fund from Aug. 1, 1984, through Oct. 30, 2015, was 13.50%. The FPA New Income Fund, with a compound rate of 7.32% since inception, has never had a down year in 31 years.
From Rodriguez’s vantage point, nothing much has changed on Wall Street since the crisis: many of the questionable practices that were employed by banks and investment firms and the theory of “too big to fail” are still operating.
In a wide-ranging phone interview with Research in mid-November 2015, Rodriguez, from his Lake Tahoe, Nevada, base, forecast the markets, the economy, financial regulation and more for the coming year.
Here are 20 things (in random order) he is watching carefully in 2016, in his own words:
1) Regulation: It’s out of control, and more is coming. It’s insane: we’re giving more power to the Federal Reserve, which helped create the last financial crisis. The SEC couldn’t even find Bernie Madoff for 10 years when they were told about him! Increased, enhanced regulation will work to destabilize markets, not stabilize them.
2) Market Volatility: I fully expect the markets to be down, but they’ll have higher volatility because of the election-year frenzy. We’re going to go into a period of extended hyper-market volatility, and one of the things that will contribute to it is the absurd, unsound, insane Dodd-Frank law.
3) The Fund Industry: It will continue to expand, but the mix will be changing. The active manager industry is under duress from index funds and ETFs. Active managers are finding it progressively more difficult to outperform the financial markets.
4) Earnings: They’re coming down. Nominal GDP is affecting earnings-per-share growth going forward. EPS growth has risen because of the bottom-line engineering of stock buybacks. But now there are fewer levers to pull. So EPS growth in the S&P will be more a function of top-line revenue growth. We won’t achieve [others’ forecasts of] a $120 earnings number unless corporations can borrow a ton more money to buy back a ton more shares so they can manipulate bottom EPS upwards.
5) Stock Market: I hate the stock market; I just find it unappealing. The industrial sector is in or is about to enter recession. The mining sector is being crushed. Earnings challenges will grow next year across several sectors. Stocks will not be good performers. So I don’t see a lot of opportunities. Based on my thinking that energy prices would be vastly different from the past 30 years, I [had reduced energy holdings and] sold my last energy stock in my personal portfolio in July 2014. I’m watching Shanghai steel rebar [construction reinforcements] prices, which recently hit a low of about 1,980 yuan. That’s indicating the industrial weakness in China. Thus, we have industrial manufacturing headwinds worldwide.
6) Bonds: Our bond portfolio is of exceedingly high quality and short duration. But bonds are a push, and I don’t see a lot there. I’m waiting patiently. Why should I get excited about a market that, in terms of interest rates, is near 300-year lows! The ability to transact in the corporate bond market has collapsed. The reality will be far greater volatility in bonds than what people are envisioning today. From a longer term standpoint, I think bonds are effectively a loser’s game.