A recent article in Advisor Perspectives offers highlights of an interview with Robert Rodriguez, award-winning fund manager and former managing partner at Los-Angeles-based asset manager FPA.
Here is a summary of his comments:
- “Monetary policy has gone from the ridiculous to the absurd. The Fed, in my opinion, is clueless and is driven by theories with little basis in reality.” He believes that the central bank has been “consistently on the wrong side of economic outcomes prior to the last financial crisis and also in its subsequent actions after it.”
- Rodriguez predicted that the recovery after 2009 would be “sub-standard,” a scenario which the Fed did not expect, and which is evidenced by real GDP growth of 2% and “the worst productivity and capital spending cycles since the Depression.”
- The Fed’s answer to weakening economic data, says Rodriguez, “is and will be to lower rates again into a negative real yield level,” policies which “did not work the last time, so to expect a different outcome from similar policies this time would appear to be the definition of insanity.”
- “Monetary policy has released a pernicious attack on prudence and financial discipline by those who save. The older generation’s income is under attack to foster these bubble-headed policies.”
- Debt levels, says Rodriguez, are now at a percentage of GDP that is “equal to or greater than where they prior to the last financial crisis in 2007.”
- “If one truly has a value discipline,” he says, “how does a manager invest when the theoretical discount rate to determine long-term value is so totally distorted by central bank monetary policies?” Corporate credit quality—as measured by the rating agencies—has been in secular decline, he says, and may suggest that the “optimal capital structure has shifted to favor increased leverage.”
- Rodriguez cites the example of Japan, who he says “threw the kitchen sink at its economy via debt leverage to stimulate its growth. What has it achieved? Very little.”
- China, he says, is growing debt leverage at an unsustainable level, which sets the stage for volatility.
- Rodriguez says he is concerned that “the Fed has trained a new generation of politicians that debt and deficits don’t matter.” He adds that he would have some optimism if “I could see the insanity of the present monetary and fiscal policy environments changing for the better. But that seems like a very long, long shot.”