Over the Waterfall, But Still Going South

Christopher Davis: Hello, I am Christopher Davis. I am a Fund Analyst at Morningstar. We are at the Morningstar Investment Conference with two of the fund industry's best managers. From First Pacific Advisors, we have Bob Rodriguez, the Manager of FPA New Income as well as FPA Capital and his co-Manager at FPA New Income, Tom Atteberry. So, thank you both for joining us here today.

Bob Rodriguez: Thank you.

Christopher: Well, as early as 2005 both of you were sounding alarm bells that there was going to be perhaps a credit crisis down the road. You were very worried about the housing boom spiraling out of control. Bob, you were here at the conference last year really ringing the alarms bells about the potential for crisis. And a lot of this scenario that you outlined has come to pass.

So now that some managers are saying we have heard it here today and I hear it from a lot of people I talk to that the worst is over, that we can go back to business as usual and to some extent I have a feeling you kind of just sent from that view I am feeling you do as well, so maybe can you explain what you see coming down the line in the future. Really is the worst over?

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Bob: Tom, I think you should answer that one.

[laughter].

Tom Atteberry: If you define the worst is over as you have, now identify what the problem was, which one of the things we screened about was this is a solvency issue and you have attacked the solvency issue and you say OK I am going to keep all the banks alive so to speak, then yes most of that has passed.

If you look at it in broader terms and think about the fact, it took us 20, 25 years to get to this position. Now the last five years we were sort of on turbo charge to get here. You realize while the worst might be over, the recovery is not going to be rapid. It is a very slow, a very long repair process and while we are doing that, we are also looking at a situation where the rules of the game to help the repair go on are being changed and they are not in place yet, so that slows it down even further.

So our view going forward is, yes maybe the worst is over and it is not going to get uglier from here, but around the corner is not a quick recovery, it is a long drawn out recovery Bob alluded to some of it in his speech this morning and maybe you could get some details on timelines you are thinking of as far as when do we get back to a more normal growth.

Bob: What I described it as was we went over a waterfall and now you have hit a pool of water and you say it is over. Well, as I said the river is still flowing south, so it is still going to continue to have problems and so I said the bulk of the credit issues still lie ahead of us. And as a result of that, that is going to be an impediment to this recovery process.

Secondly, the consumer was so leveraged up and was spending so far in excess that, that takes some time. So, the consensus is I see with 74% of the economists said recession over by the third quarter, another 19% by the fourth quarter and 7% by Q1 of '10. Mind you, none of the economists had the recession.

In December of '07 when we were talking in a piece called "credit crisis" that we were at or in recession right now. So I think they are being duly optimistic and it is going to be a lot more drawn out and more difficult. So we have a long ways to go.

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