You have to see it from Bob Rodriguez's perspective. Twice he has spotted an approaching storm. Twice he has warned the world. Twice he has been pooh-poohed and seen investors abandon the two mutual funds he managed. Twice he has taken steps to shield his clients from the coming crisis.And twice -- first with Internet stocks in the 1990s, and then with the financial crisis of 2008 -- Rodriguez has been right.
The looming debt crisis
Standard & Poor's has just announced that it's downgrading the outlook for U.S. debt, and Bob Rodriguez couldn't be cheerier. It's another sign, he says, that at least some people are waking up to the looming debt disaster. As he paces FPA's offices in Santa Monica on a spring day, he sips coffee from a stained green-plastic mug. It's a 20-year-old souvenir from a company called Green Tree Financial; Rodriguez keeps it because it reminds him of one of his worst investing losses.
Since coming back to work on Jan. 1, he has found himself galled once again by what he sees. Fund managers, emboldened by their mammoth gains, clamor for risk. Junk bonds remain wildly popular. Even more stunning, says Rodriguez, is the government's failure to address its debt. "I know one thing from business," he says, his voice quavering as he tries, mostly successfully, not to yell. "Unless you correct the problems that are already occurring, you don't add on new leverage and new, other responsibilities until you correct the old! All you're going to do is capsize(傾覆) the ship!"
Rodriguez argues that the U.S. debt as a percentage of GDP ratio (currently 64%) is massively underreported because it doesn't count off-balance-sheet entitlements such as Medicare, and debt owed by Fannie and Freddie. If you factor in those liabilities, he says, the actual ratio is greater than 500% and growing. The U.S. must reduce that before 2012, Rodriguez says, because it's unlikely to accomplish anything during the election year. If nothing changes, he adds, investors will start to get nervous about the amount of debt on the U.S. balance sheet. As lenders balk at buying Treasuries, rates will spike, causing borrowing costs to skyrocket across the financial system. "The financial system is held together with a very thin filament called confidence," says Rodriguez. "When you clip(剪) that, all hell breaks loose."
The situation isn't irreparable(不可挽回); Rodriguez believes the government can keep rates from climbing too high if it starts making cuts of $350 billion to $500 billion per year. But he has little faith(信念) in its willingness to do so. If it were up to him, there would be serious tax reform, with all tax deductions (including mortgage interest) on the table. A former Republican, he describes himself as a "fiscal conservative but social moderate" who has grown disgusted with both parties: "I say, 'A pox on both their houses.'"
So FPA's managers, guided by Rodriguez, are battening down again, trimming risk. FPA Capital now has 30% of its portfolio in cash and 38% in energy stocks because he believes the world's oil supply is declining. Still, even in that sector, he doesn't see many opportunities. (Forget other sectors.) He refuses to buy most bonds or long-term government debt. His restraint has rankled some investors: FPA New Income has begun to shrink again, and a few FPA Capital clients are grumbling(牢騷).
It takes thick skin to be a contrarian. Rodriguez is used to losing his shareholders' faith, but he seems weary of it. "I don't think you get rewarded in this business for doing the right thing," he says. "It's a love-hate relationship. You could feel bitter about it, but then I ask, 'What would I do differently?' The first thing you have to do is live with yourself." For him, that's easy. Convincing others is the challenge.
The looming debt crisis
Standard & Poor's has just announced that it's downgrading the outlook for U.S. debt, and Bob Rodriguez couldn't be cheerier. It's another sign, he says, that at least some people are waking up to the looming debt disaster. As he paces FPA's offices in Santa Monica on a spring day, he sips coffee from a stained green-plastic mug. It's a 20-year-old souvenir from a company called Green Tree Financial; Rodriguez keeps it because it reminds him of one of his worst investing losses.
Since coming back to work on Jan. 1, he has found himself galled once again by what he sees. Fund managers, emboldened by their mammoth gains, clamor for risk. Junk bonds remain wildly popular. Even more stunning, says Rodriguez, is the government's failure to address its debt. "I know one thing from business," he says, his voice quavering as he tries, mostly successfully, not to yell. "Unless you correct the problems that are already occurring, you don't add on new leverage and new, other responsibilities until you correct the old! All you're going to do is capsize(傾覆) the ship!"
Rodriguez argues that the U.S. debt as a percentage of GDP ratio (currently 64%) is massively underreported because it doesn't count off-balance-sheet entitlements such as Medicare, and debt owed by Fannie and Freddie. If you factor in those liabilities, he says, the actual ratio is greater than 500% and growing. The U.S. must reduce that before 2012, Rodriguez says, because it's unlikely to accomplish anything during the election year. If nothing changes, he adds, investors will start to get nervous about the amount of debt on the U.S. balance sheet. As lenders balk at buying Treasuries, rates will spike, causing borrowing costs to skyrocket across the financial system. "The financial system is held together with a very thin filament called confidence," says Rodriguez. "When you clip(剪) that, all hell breaks loose."
The situation isn't irreparable(不可挽回); Rodriguez believes the government can keep rates from climbing too high if it starts making cuts of $350 billion to $500 billion per year. But he has little faith(信念) in its willingness to do so. If it were up to him, there would be serious tax reform, with all tax deductions (including mortgage interest) on the table. A former Republican, he describes himself as a "fiscal conservative but social moderate" who has grown disgusted with both parties: "I say, 'A pox on both their houses.'"
So FPA's managers, guided by Rodriguez, are battening down again, trimming risk. FPA Capital now has 30% of its portfolio in cash and 38% in energy stocks because he believes the world's oil supply is declining. Still, even in that sector, he doesn't see many opportunities. (Forget other sectors.) He refuses to buy most bonds or long-term government debt. His restraint has rankled some investors: FPA New Income has begun to shrink again, and a few FPA Capital clients are grumbling(牢騷).
It takes thick skin to be a contrarian. Rodriguez is used to losing his shareholders' faith, but he seems weary of it. "I don't think you get rewarded in this business for doing the right thing," he says. "It's a love-hate relationship. You could feel bitter about it, but then I ask, 'What would I do differently?' The first thing you have to do is live with yourself." For him, that's easy. Convincing others is the challenge.
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