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Bob Rodriguez Is Back, Refreshed, and Angry

FPA's leader fears that nothing was learned from 2008.

Russel Kinnel, 02/28/2011

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Bob Rodriguez is back at FPA, but he isn't taking back the reins at his former funds. My colleague Chris Davis and I had a chance to catch up with the three-time Morningstar Fund Manager of the Year and he filled us in on what he's up to now that he's back.

You may recall that he took 2010 off for a much-deserved sabbatical after steering his funds safely through the 2008 meltdown. He said he spent the year traveling--he was in the Galapagos Islands when the flash crash hit--reading and racing in the American Le Mans Series at the pro level.

Now that he's back at FPA, he's serving as CEO. He says he's been working on building up the team and figuring out the threats to the markets and to FPA's portfolios.

He's also worried about investors' eagerness to take on risk. "I'm amazed that I have been away for a while and I come back, and in many cases it's as if nothing has really changed," he said. "Last week, I cut out a couple of headlines from the Wall Street Journal. This is from Feb. 7: 'Investors Expand Appetite In Hunger For Higher Yields,' 'Aleris Debt Sale Covenant-Lite.' The next day, 'Yield on Junk Approaching All-Time Low.'"

Rodriguez worries that the soaring national debt could trigger a crisis in the next two to five years. "One of the things that I can do on my return is make sure that we have prepared our firm again for the potential of the next crisis and I alluded to it in my Morningstar speech (in summer 2009) when I commented about the government, the insane growth in debt that was going on," Rodriguez said. "I commented that, at the end of 2011, Treasury debt outstanding would be somewhere between $14.6 trillion and $16.6 trillion and I think it's pretty safe to say, it's going to be north of $15 trillion at the end of this year and that these trends were not sustainable. And, in my opinion, the next crisis, as opposed to focusing on a particular financial institution, would probably emanate from the governmental area, be that federal, state, or local, and nothing has changed."

Rodriguez thinks the Fed is way off base with its inflation measurements, too as its lack of attention to stock and real estate prices meant it was unknowingly creating bubbles and not understanding the influence it would have on inflation as people spend their gains from real estate or stocks. "The Fed focuses on its core inflation numbers," Rodriguez said. "As I argued before back in the late '90s, if you put the Dow Jones or the S&P 500 in the CPI index and they would have said, 'Oh! My goodness, we're having inflation,' and they would have taken a different monetary policy. The second time around I was arguing that their inflation numbers, if they include single-family pricing rather than rents, the way the composition was, that they would say, 'We're facing inflation, we are going to have to constrain the economy.'

"Well, we are going again and inflation is subdued, but there it is leaking out into other areas, and I would say it's leaking out into asset valuations, commodities. I would argue that the sloshing around of excess liquidity--especially from the Federal Reserve--has resulted in some countries putting on forms of capital controls.

"I am more concerned about inflation longer-term from a standpoint of a monetary phenomenon. But, if you're going to pin me down for an inflation number this year, my guess would be is that the inflation number will be being pressed higher as we exit this year, and as various, shall we say, rental inflation, gets pushed through the CPI through that component of the CPI.

"By the way, the policies that have been implemented over the last couple of years, the zero-interest-rate policy, when you really get down to it, has been an attack on savings. Talk to any retiree and the low rates, one of the target reasons for getting rates down was for the housing sector. Has there been a recovery in housing? I don't think there has. So, I think the monetary policies and the extraordinary monetary policy that has and is being pursued has a serious risk to it. I would feel more comfortable about the Fed, what they're doing. If the Fed had acknowledged that they were a co-conspirator to the blow-off the bubble in housing and to their failure to take appropriate actions with regard to credit accesses that they had regulatory authority."

Rodriguez is recommending a book that he thinks explains the worries about debt nicely: David M. Walker's Comeback America. "It's a mandatory read," Rodriguez said. "David M. Walker was former comptroller general of the United States. He served four different presidents, Republican and Democrat. He was the one who put the financial statements of the government more on a proper accounting basis, accrual basis rather than the cash-management basis that you typically, what you normally see. ... My review on Amazon is second down.

"I don't know where the breaking point is with the national debt. We have the luxury of being a reserve currency. I can still believe that we're going to be a reserve currency in some form or another probably five or 10 years from now. But I am not sure at what cost in the intervening period, so I think there's a lot of optimism that has been built up, but when you really get down to it, has the consumer balance sheet really been improved all that dramatically? It has improved, but we are not even half the way to where they were prior to when this crisis unfolded.

"So, I don't see how we can continue on this pathway without having some form of instability or volatility enter the equation again and as such, I think as a firm and for our clients, we have to be mindful of that. We need to know if we are being compensated for the risks and we need to know the ground rules upon which we are participating before committing capital. I don't think a lot of managers ask those questions, especially about the ground rules."

Russel Kinnel is director of mutual fund research with Morningstar.

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