Making sense of the bond and equity markets and where investors should put their money, with Robert Rodriguez, First Pacific Advisors (FPA).
Robert thinks the odds of a recession are increasing every day, and we have 15 months to fix the crisis. Rodriguez thinks that the “moment of truth” will come on November 23rd, when the super-committee, which is tasked with coming up with $1.5trillion in deficit reduction will meet. Rodriguez stated about the recent deficit reduction plan “the cuts were deferred into 12, 65%, 7 5% of the cuts were deferred until 2016. That was one of the key elements that led to the markets down side volatility beyond the S&P downgrade. It is just an abject realization of the total ineptness of the government. “
He predicted in the past the next crisis would be on the Federal level and not on the corporate level.
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Bob comes in at the 3:20 mark.
Below is the video and transcript:
i want to bring in bob rodriguez, manages$16 billion for pacific advisers. voice of caution for a long timeand often right. and joining us, head of strategy. bob, you joined us in june. i didn’t think you could get any more negatives. i’m curious based on what you said and what you have seensought of our government since then, anything to grab you ahold of to make you feel better? no. in fact, in looking at the lalatest debts cycle, debt round two, it was a joke. the cuts were deferred into 12, 65%, 7 5% of the cuts were deferred until 2016. that was one of the key elements that led to the markets down side volatility beyond the s&p downgrade. it is just an abject realization of the total ineptness of the government. i put out to my firm i’ve been talking about a moment of truth, the moment of truth. this applies to the super committee. that super committee, which is in recess right now, which should be meeting right now, and they have very little time and the market is going to be watching it critically. i could go on about the super committee. unless the government addresses cuts immediately, and now, as opposed to postponing the markets will vote completely negative on these agreements. the government and the congress are still delusional. delusional.moment of truth. gary, yeah? on that delusional point, gob bob, you have had great success over the years looking at allclasses of assets, stocks, bonds, cash. what is the right optimum asset allocation, you’ve been dead right, what is the right optimum asset allocation given today given the concerns that you voices? we’re still holding large amounts of liquidity.35%, 40%, still very concentrated and n. a limited number of areas. but the problem that we keep coming back to and which is what i mentioned earlier this week at my firm, is the 2% level on the ten-year treasury bond, i felt that if the 2% level would bebreached and stay there, it would be an indication of far more volatility on the downside. why, why? why, bob? it would be implying far more recessionary elements. as i said last week, the economy — economic stats would be lowered. they came out negative after i was on your — on cnbc last week with consumer. it’s weakening. george, give me your take on what you’re hearing from bob, especially the ten-year. bob hit a nail on the hade when he said that there’s a lack of leadership, which has resulted in the crisis of confidence. i don’t think this is an exact duplicate of 2008 but the market has the playbook so they get scared and do the same thing they did then, long treasuries. the issue i have now — is 2% more than a number?does it actually send a message that it’s more than simplybeing — larry: all right, 1.9 %, 2%, what’s the difference? fact that we crossed 3% and made a quick run to 2%, the pace of the drop is indicating we are heading towards a slowdown. a signature can’t oificant one, recession. bob, do you think we’rehaving going to have a recession? rising even higher. as i mentioned more than two years ago, that last time we had a credit crisis, this emanated at the corporate level. i said the next time it will occur at the federal level or the sovereign debt level.we are approaching that. and in my opinion, we haveapproximately 15 months to really start demonstrating fiscal rectitude in this country. wouldn’t interest rates be trending higher, not lower? you have a change, they can go lower. if you have a complete break, they can ratchet upward. just very much like the studies have shown, whether you’ve seen it in other countries. i do not expect that to happen here immediately. we have time. but unless the government starts to get its fiscal house in order, does mandatory budget reform in the congress, with this committee, i fear that things will get considerablyworse. you know, pension managers, institutional managers are the key buying these — they’re going to keep buying the tenyear. i wouldn’t be surprised next week if we push past 52%. i think it will go through 2 3rs next week, david, and stay there.george, we hear, is this like ’08? you sit on the desk and listento the market rumors about this. europe, in particular. give us a sense what it is day to day sitting at the desk. are you hearing about shor-term funding, difficulties and are these, in fact, just rumors are or we seeing a problem? concerns are real and you’re seeing it in the money market. you’re seeing a flight into only money market funds. the institutional funds that were buying a lot of these european banks, they’re not rolling over that paper. that’s clear as day. you are absolutely seeinginstitutions not buying commercial paper by your banks? that’s being done. you’re see that in the weekly stats that come out.that’s all public information. the money funds are really justhunkering down and resoring to cash. the big e. iron any is the fed created all of this money and most of the money ended up in europe. now they’re whittling down that stock. bob, we have to talk about europe. players collapsing. say again, what’s collapsing? the money multiplier is collap collapsing. the lending isn’t occurring. the fed policy has been attacking the wrong problem for three years, as i’ve been saying. the fiscal policy has been misdirected. this has been a complete mess on monetary and fiscal policy. what about europe, bob? i mean, that doesn’t look too good from here. doesn’t look too good. i think george saro made some very fine comments within thelast few days about europe. and europe has a very seriouschallenge. so when you’re looking at these major economic centers, be it the united states or europe, the uncertainty is rising, and when uncertainty rises, the willingness to commit capital long term decreases. now, you’ve always shown awillingness to not commit capital. what are you committing capital to, given your view of the world? we have been very reticent on committing capital over the past year. we’ve been raising liquidity out there. unlike ’08-’09 i argued this would be more like chinese water torture. over a longer period of time. so our goal is to deploy capital in a very, shall we say, measured way. my associates who took over for me, dennis, brian, on fpacapital fund have only added two new names in the last quarter.we have not does closed them. they have been raising liquidity.in fact, over the last year the total capital committed has onlybeen about 3% and we’re still at about 35% cash. george, if i’m a viewing and listening to what bob is saying and i want to have liquidity myself and i don’t want to take any interest rate risk, where should i park my money? look, that’s why you’re seeing it, accumulation of cash in the money markets. i still think you can play the bond market. be careful. a lot of easy gains have been made already. market has had a pretty big move. big disconnect is on the yield curve. that’s why you’re seeing apretty big powerful move. one of my clients says it’s likewatching the power window go up in the cadallac, it keeps going up. what should we be watching most likely, perhaps? i think we could see — you’re already seeing buyer exhaustion on the ten year. it’s having a hard time breaking under 2%. we have bad news out there and we’re still under 2%. buyer exhaustion at the ten-year at the 2% level. that’s moving people up the curve to the 30 year. bob, last word. you mentioned at the beginning, moment of truth. do you think we’re there now andwhen are we going to get there? november 23rd, the supercommittee, the pressure is on, guys. get back and meet now.and start looking at real cuts and not the fraud that you’ve been perpetrating on the american public and these last debt hikes.all right. you have to do it now. we’re going to leave it there.robert rodriguez, as always, very nice to have you.