Bob Rodriguez speech – always a great read whether or not one agrees with him – check out the latest below.
FPA Investor Day June 2, 2014
Robert L. Rodriguez
Managing Partner & CEO
Thank you, Mark, and thank you all for taking time out of your busy schedules to share a day with FPA. This is an opportunity for you to gain a better insight into how your money is being managed. I urge you to challenge the respective managers and their teams of analysts with your questions. I’m sure that if any go unanswered, Mark and his team will be able to track down an answer for you. All questions are fair game so hit the teams hard and often with them!
Pardon me for getting a little bit sentimental now because a lot has changed since I joined FPA 31 years ago. From a small $1.6 billion single product firm, we have grown into a diversified $30 billion company with the greatest depth of analytical and investment management talent in its history. I am proud of the fact that we have never lost sight of our core principles. Our value-driven, independent thinking and disciplined investment culture permeates all aspects of what we do. We sincerely thank you, our partners, for the trust that you have demonstrated by investing with us. We hope and expect to be able to protect and grow your capital in the volatile markets that we anticipate will be the norm in the future.
Now on to the fun stuff!
As many of you know, and for those of you who don’t, I’ve been a harsh critic of the fiscal and monetary policies that have been deployed these past several years. Since returning from my 2010 sabbatical in 2011, I’ve been very cautious about capital deployment, as many of my successors will confirm. In light of the stock market’s astounding rise since 2009 and five years of near zero short-term rates, I’ve reassessed and challenged my basic fundamental understanding of how the financial markets operate. I’ve seen the error of my ways and I believe I’ve been reborn. To achieve this new state of understanding and peace, I’ve had to do something that no self-respecting, able-bodied and semi-sane money manager would do, though my partner’s would probably take issue with this statement. You know, don’t you? To have a manager actually say he’s WRONG!
I want you to know I’ve been wrong. Yes, wrong! Yep, I blew it! Shame on me! God that feels good. I feel so much better now. I’ve come to the realization that the only way to succeed in this new financial world is to convert. Convert to the philosophy that valuation and prudence are of little importance. The only thing that matters is to trust in, you know who? Trust in the Gods of the all-knowing and all powerful. Trust in the God of qualitative monetary forecasting and policy implementation and everlasting blather, the FED. Trust in the Gods of fiscal policy management and leadership, our members of congress and the president–paragons of fiscal rectitude. I’ve converted. My conversion feels good. I’m at peace. I’m free. Now I can run with the “Risk-On” crowd. The crowd feels good. I feel the love, the affection and the psychological support it provides. What more can I say? Ah, its crowd pleasing. At that moment, I realize I’ve just awakened from a bad dream. Not a bad dream of trusting in the Gods. Oh no! I mean THE BAD DREAM of actually being a money manager who lowers his defenses and admits to, of all people, a client, that he has made a mistake. Thank God I haven’t lost all good sense.
Yes, we live in an investment world that hangs on each and every word of the Fed and other governmental luminaries. How absurd is this? Why should it be so? When I reflect upon the Fed and its former chairman, Ben Bernanke, how would or how could anyone, with half an ounce of sanity and intelligence, have any confidence or faith in their economic forecasts and monetary policy?
I believe it is time for a REALITY CHECK.
Need I remind you of what the Fed and Bernanke said?
- Bernanke is quoted in both 2005 and 2006 Fed minutes that, in his opinion, there is no housing bubble.
- In both April and June of 2007, Chairman Bernanke said there would be no contagions from sub-prime credit. I argued differently.
- The Fed’s June 2009 economic forecast envisioned real GDP growth of upwards of 4% to 5% in 2010 and 2011, though they did caution it could be lower. Actual: 2010: 2.8%, 2011: 2.1%. The Fed has been consistently overly optimistic in its economic growth forecasts.
- Unemployment would decline, though somewhat slowly, to a long-term 4.5 to 5.3% level, without any adjustment for a potential decline in the labor participation rate.
- Chairman Bernanke assured us, in his November 4, 2010, Washington Post op-ed, that
QE would lead to an economic “virtuous” cycle through the wealth effect. We’re still waiting.
In contrast, back in 2008, 2009 and 2011 my forecasts were:
- June 2009, a sub-standard economic recovery will occur.1 I subsequently clarified “substandard” as approximating 2% real growth. Actual outcome: 2.2% since 2009. It was 2%, until the Bureau of Economic Analysis revised its method of estimating GDP in July 2013 that created $500 billion of additional economic growth out of thin air.
- Also, the recovery will be accompanied by elevated levels of unemployment that are structural in nature. Result: we’ve had the worst employment recovery since the
Depression. The unemployment rate looks better than it really is because the labor participation rate has fallen 3.4 percentage points since December 2007.
- I expected little bang for the buck from the 2009 $831 billion Keynesian economic stimulus plan that wasted money and time on one-time quick-start gimmicks such as
“cash for clunkers” and an $8,000 one-time credit to buy a home.
- QE and ZIRP will not lead to a robust economic cycle and it will likely be accompanied by many negative unintended consequences. This is yet to be determined on the unintended consequences.
- Pre-tax margins will not experience a robust recovery. I was wrong on this one; however, much of the margin improvement has been driven by lower interest and wage costs that may prove to be non-sustainable. Labor compensation is currently at the lowest level of National Income since 1948.
- Finally, my Treasury debt forecast of between $14.6 and $16.6 trillion by the end of 2011, versus $10 trillion at September 30, 2008, proved to be right on target.
This comparison of the accuracy of my forecasts, versus the Fed’s, hopefully lends a degree of credibility to my comments and forecasts that follow.
Last year I delivered a speech entitled “Future Shock” to the USC graduate student investment program. I borrowed the title from Alvin Toffler’s popular 1971 book. It coined the term “information overload.” I explained how, as a young investment professional, I was “future shocked” by two major