America is in “a rolling depression,” and stocks are “dancing to the tune of the Federal Reserve,” Bob Rodriguez, the legendary former CEO of First Pacific Advisors who predicted the 2008-’09 financial meltdown and the current crisis, tells ThinkAdvisor in a phone interview.
In an email exchange this morning concerning President Donald Trump’s contracting COVID-19, he said:
“Likely to hamper [Trump’s] ability to campaign, [the illness] could increase the odds of a [Joe] Biden win. Should this occur, the stock market would likely experience more downside price risk. Biden’s economic plan poses several risks to the economy and shares many similarities to the ill-fated economic policies of FDR in 1937 that led to a renewed economic decline in 1938.”
Rodriguez continued: Trump’s “announcement will increase volatility and uncertainty within the financial markets. The risk-off trade gets reflected in a somewhat stronger dollar, slightly lower Treasury yields and gold holding on to its recent recovery gains. Stocks and cyclically sensitive areas, such as oil, should weaken.
“The realization that no one is totally safe from the virus could lead to a more cautious attitude by many about how they socialize and reenter the workplace; that is, a more cautious attitude about reopening the economy,” he said.
In the phone interview, conducted Sept. 29, Rodriguez argued that it will be 2024 or 2025 before the economy is back to its pre-coronavirus Q4 2019 level.
Indeed, he looks for “alarm bells going off” in Q1 or early Q2 2021, signaling a period of “economic stagnation,” or limited growth.
Investors who feel comfortable with portfolios that have recovered from the big March decline are “in a very foolish position of comfort” since they’re in the line of fire, he contends in the interview.
Rodriguez, who retired from FPA in 2016 and exited direct ownership of equities that same year, has long predicted another devastating financial crisis stemming mainly from consumer and government debt and the Fed’s “insane monetary policy,” as he’s called it.
For the last few years, he has invested, increasingly, in gold and collectibles, a move that “insulates him from damage,” he insists. In fact, his alternative physical hard asset allocation represents about 50% of his net worth.
At FPA for 25 years, Rodriguez chalked up an outstanding record: The FPA Capital Fund, which he managed from 1984 to 2009, had an annualized return of 14.2% during that span, according to Morningstar. The FPA New Income Fund’s annualized return came to an impressive 8.8% under his management.
In the interview, he discussed his gold strategy and lots more. He was speaking from his home in Lake Tahoe, Nevada.
Here are highlights of our conversation:
THINKADVISOR: What’s your forecast for the U.S. economic recovery?
BOB RODRIGUEZ: The economy isn’t recovering according to present expectations: recovery by 2022. There’s not a snowball’s chance in hell for that to happen.
Has there been much growth in the third quarter?
With reopenings and some inventory reordering, we’ll probably see a GDP growth number of between plus-23% and plus-33%, which recovers about 60% of the devastation that went on in the second quarter.
What about beyond that?
I expect that in either Q4 or Q1 2021, or in combination, the economy will be decelerating. Alarm bells will be going off at the end of the first quarter or early in the second quarter. Regardless of who’s president, we’re in for a prolonged period of economic stagnation — limited growth.
How long is prolonged?
It will stretch to 2024 or 2025 before we get back to the pre-COVID-19 fourth-quarter 2019 level.
So is the country in a recession, or is it in a depression?
I call it a rolling depression because each area of the economy gets hit hard, then another gets hit hard [and so on]. The recoveries for each will be very transient. The areas now in depression are the airlines, hospital, restaurant industries. If a stimulus doesn’t come down within the next 30 days, you’ll be watching small businesses drop like flies. They’re barely hanging on by their fingernails.
Where does the coronavirus enter your thinking?
The economic collapse in February-March was attributed to the effects of COVID-19. I would argue that COVID-19 was only the pin that pricked the incredible bubble we had. It was going to pop anyway. It was just a matter of time.
The stock market hasn’t seemed to care much about what’s happening in the economy. Are we in a bull market?
I believe we’re in a [B.S.] market. The stock market is dancing to the tune of the Federal Reserve, and [Fed Chair] Jerome Powell is the orchestra leader. I have zero confidence in what’s going on. The market is so far away from any kind of fundamental valuation numbers that it’s not funny. Prospective P/Es are in the stratosphere. As measured by the Wilshire 500, the stock market as a percentage of GDP is at or near all-time record levels.
What are the implications?
These kinds of elevated levels — even higher [relatively] than those [prior to the] 1929 [crash] — generally haven’t been good for equity investment returns.
What’s your forecast for the market, then?
For the next decade, I fully expect equities to provide a negative real return. Normal return will reflect [the level of] inflation. For the next year or two, I expect inflation to be virtually nonexistent. There will be pockets of inflation [because of] shortages; other areas will be in deflation. This period could be analogous to stagflation in the 1970s. However, certain pockets of the stock market could be beneficiaries.
What sectors would do well short-term?
All those companies that have been beneficiaries of the distributed workplace [remote working]. The obvious one is Zoom and other [firms for virtual] presentations and [communication]. Companies in cloud computing have been great beneficiaries. But, when you look at the S&P 500, only about six stocks are driving the returns. What does it mean when so few companies are successful while the rest are not?
Please tell us.
Every time we’ve gotten into a concentrated market of performers, it generally isn’t a healthy sign. For example, in late 1999, if you didn’t own dot-com or dot-net stocks, you were out of the ballgame.
In view of all this, what should financial advisors be telling their clients?
I would argue that people who are feeling comfortable today because their portfolio has recovered [from the March decline] are in a very foolish position of comfort in this very inflated, manipulated, distorted arena that’s the stock market.
Does that mean they’re in the line of fire?
I would say so.
You analyze data, for sure. But the data you study are available to others, too. Why do you make accurate calls, like the financial crisis of 2008-09 and the present crisis — far in advance, when most other experts don’t?
We’re looking at the same data. but I’m using a different lens about how an economic system works. Most folks have been trained to analyze the economy from a Keynesian economics standpoint. But there’s an alternative view called the Austrian school of economics, which I learned about after I was out of school. I thought it had more relevance than the Keynesian.
What does the Austrian school focus on?
They argue that before every great monetary inflation or stock market bubble comes a credit inflation — credit excess. The Austrian school was arguing, starting in about 1925, that we were on the verge of a major economic disruption. This was the 1929 collapse. So when I saw what was going on pre-2007-2009, I thought that was one of the great credit excesses of all time. And now, here we are again.
There has been a debt explosion in both the private and government sectors. The U.S. economy today is now at a more levered position than we were prior to the bubble that burst earlier this year. Bankers aren’t taking on credit risk, and all bankers have raised their credit standards. They’re actually buying Treasurys. So they must be fearful of something out there.
You exited direct ownership of equities in 2016. Are you invested in any equities now?
I have five basis points, maybe less, in equities. I own one mutual fund, the FPA International Value Fund.
Do you own any bonds?
I have bond funds; [for example], ownership in the FPA New Income Fund, a high-quality bond fund. But [if] rates come down further and spreads contract, it’s going to be very tough for [the fund] to operate, as it will be for most bond funds.
Instead of stocks and bonds, you’re heavily invested in gold. Please discuss why.
I have little confidence in what I see unfolding in the stock market regardless of who’s elected president. I’ve made money in areas that aren’t part of the inflated, manipulated, distorted stock market. If it were to break and the economy were to get hit again, which is what I anticipate, I fully expect that the areas that I’m in, particularly gold and collectibles, will be considerably more insulated from damage and probably will be longer-term beneficiaries.
Please discuss your strategy for gold.
As a result of what the Fed and the federal government were doing in March, I concluded there would be little constraint on either Fed or fiscal policy and that we were headed to 200% debt-to-GDP, as well as a lot of other things [I forecast] that are going to transpire. Thus, I concluded for the first time in my career that fiat currencies are an endangered species, and I started building a major position in gold.
When did you begin?
The week of March 20 — I was extremely active on March 23 and 24. What the Fed and federal government are doing isn’t positive for the dollar longer term, and neither is what foreign countries are doing for their currencies longer term. So I’m willing to put a lot of money into areas that would be beneficiaries of eroding confidence in currencies. And there’s less distortion in the commodity market than in the stock or bond markets.
How are you buying gold?
I’ve been acquiring it through the closed-end fund Sprott Physical Gold Trust. When the stock market was in absolute collapse and margin calls were at all-time records, Sprott Physical Gold Trust fell to a record low discount-to-NAV of just over 4%. And I was buying it.
How are your gold investments doing now?
In the last six weeks, after a huge run, gold has been consolidating. It got up to like, $2,070 and really broke down and hit as low as about $1,848, where it was trading last night in Asia. Over the last six weeks, I’ve more than doubled my gold position. It’s the largest acquisition of a securities asset I’ve made in the last 15 years.
When did you first start to seriously think about gold?
I’ve been studying it since 2013, when it fell out of bed, down [$200] an ounce [over two days]. I thought that the planets were aligning in this field. Now interest rates that are effectively zero and negative real yields make holding gold that much more attractive.
Anything else that’s a positive for gold?
In the initial stages of this crisis in March, there was a rush to safety — Treasury bonds and the dollar. Now, as the dollar weakens, its effective price in terms of foreign ownership is going down. Today it was down to $93.87 — and, as you might expect, gold prices did better.
You’re about to go on vacation for a couple of weeks. Will you be investing during that time or just relaxing?
Relaxing. I don’t have to worry about Mr. Stock Market or Mr. Bond Market.
What about Mr. Gold Market?
If gold went up 50% or down 50%, it wouldn’t change my lifestyle. I have a barbell portfolio for risk. If the stock market and the economy were to collapse, my liquidity and hard assets would probably do quite well.
What if the opposite occurs?
If the economy goes to the moon and we have a V-shaped recovery, and I’m totally wrong, I’ll say, “Well, I missed that one!” But the odds are that my teeter-totter isn’t going to be affected [adversely]. I’m in a kind of neutral position as to risk. So I sleep very well at night.
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