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FPA’s Bob Rodriguez Has a Message for Washington

Posted by Larry Doyle on May 17, 2012 8:05 AM |

First Pacific Advisor’s Bob Rodriguez is a renowned money manager. I hold him in the highest regard.

The only issue I have in regard to Mr. Rodriguez is that he is not in Washington managing our nation’s fiscal policy.

The simple fact is Rodriguez knows of what he talks and relates it in language that is foreign to most politicians, that is, plain English.

With the ongoing budget fiasco, debt ceiling, and accompanying fiscal cliff on our horizon at year end, recent comments by Rodriguez should ring long, loud, and clear throughout Washington. 

You can have Warren Buffett. I will take Bob Rodriguez any day. He spoke recently on our nation’s fiscal policy and other topics with Robert Huebscher of Advisor Perspectives.

In terms of attacking the fiscal excesses, you support Dave Walker’s Comeback America 12 platform for reform. He supports a number of measures for how entitlements, such as Medicare and Social Security, need to be reformed. But he also calls for more-or-less across-the-board spending cuts in order to reduce our debt-to-GDP ratio. Does that necessarily abandon a strategy where the government might be able to foster a recovery through growth, with, say, infrastructure spending?

If you believe that, then I would argue that that you also believe in the tooth fairy.

There is no easy way out of this. It has taken us basically four decades to get into this mess, and you are not going to get out of it with just a simple infrastructure spending program. I’ve looked at the president’s budget and, yes, it is a negotiating instrument, but, still, let’s look at it between 2011 and the end of 2014.

Under his budget, public-sector debt grows $1.5 trillion more than the Simpson-Bowles commission estimated. Obama has never really incorporated the commission’s work publicly. Under his budget, it would not get to a lower level of public debt outstanding versus the Simpson-Bowles plan until 2018, two years after he is out of office, assuming he is reelected. Who in their right mind believes that is a realistic trend?

So it’s a negotiating document. Let’s not ascribe too much credibility to the Congressional Budget Office’s analysis, because what was their forecast back in 2000? We were going to have a shortage of Treasury securities. I published a commentary back then, and I said, “How many believe in fairy tales?”

I viewed the Simpson-Bowles’ economic growth assumptions as being too optimistic, but it was at least an attempt to get both sides of the aisle to come together. It was close, but it never got done. I got very discouraged when I gave the “Danger Ahead” speech on February 15, because just three or four days earlier Congress passed the payroll tax reduction.

People don’t realize that last year’s payroll tax reduction was four to five times greater than the first year expenditure cuts called for under last year’s August debt limit accord requiring $917 billion of expenditure cuts over ten-years.

If we are to reestablish fiscal balance, you are going to have to take hits now. It’s just like your dad coming home from work saying, “My hours have been cut back. I can’t earn this money. We are going to have to make some cuts right now. I am not going to bet that my income is going to be up two or three years from now.”

That is the decision we have to make. Every study I have looked at says you get far more bang for the buck longer term if you attack your expenses earlier in the game, as opposed to tax increases. Otherwise, you pass a point where the necessary expenditure cuts are so onerous that you get into the classic death spiral – very much what Greece is in right now.

We have an example of someone who made the hard decisions. All we have to do is look north of the border to Canada. If you look at the Canadians in 1993, they were in the exact same fiscal position as the United States is today. They had their credit downgrade. Within four to five years they had balanced their budget, and within 11 years they had taken their debt-to-GDP from approximately 70% to 72% down to approximately 30%.

That is one of the reasons why the Canadian dollar is now trading at a premium as opposed to a substantial discount to the US dollar. Canada took approximately seven dollars in expenditure cuts per dollar of revenue increase. Dave Walker is proposing three dollars of expenditure cuts versus one dollar of revenue enhancements.

But Congress can’t even come up with even a few pennies. It is an absolute unmitigated disgrace. I don’t see how financial markets, equities or bonds, do well longer-term if you continue to erode the fiscal integrity of our financial system.

Rodriguez is a true giant and stands out amongst the money manager crowd. How so? Keep reading.

Let’s talk about investing style. You were forecasting a global financial meltdown starting as early as 2007, and you moved to a large cash position. And for this prudence you received shareholder criticism and redemptions.  From a business – but not necessarily an investing point of view – does it make sense to take an extreme position away from the consensus?

That is always a hard question to answer.  When I speak to graduate students at the University of Southern California, I say, “Each of you is going to have to answer that question yourself.”  For me, investing comes first and what happens to the business comes second. If I didn’t pay attention and do what was right investment-wise, I wouldn’t have a business longer-term.

I got an early test of that in the 1980s, when a client terminated me and the account was one of the best at our firm.  It represented a 50% to 60% loss of business in one day.  It was because I was not willing to pay kickbacks to keep the account. I said, “What more can happen to me than that?”

In one way it was very negative, but in another way it was very freeing. I have never looked back.

President Obama, Paul Krugman, Ben Bernanke, Tim Geithner, Harry Reid and many more would challenge the assertions put forth by Mr. Rodriguez. I stand firmly by our Sense on Cents Economic All Star.

I maintain our economy would run like a scalded dog, if the pols in Washington had the courage and character to enact the following:

1. deeply meaningful deficit reduction combined with entitlement reform
2. equally meaningful tax reform (a flatter tax system overall…I will grant that the carried interest rate  should be increased)
3. tough but transparent regulations
4. rescind Obamacare which has a stranglehold on many small businesses.

In the midst of those reforms, though, our pols would also have to stop taking kickbacks and reform campaign finance. If they need an example and role model on that front, they should place a call into Bob Rodriguez.

I may be wrong but my ‘sense on cents’ is telling me that the aforementioned reforms and the hidden kickbacks are all going to be MAJOR political issues this fall as the anti-incumbent “throw the bums out” phenomena continues to sweep through Washington.

In regard to Mr. Rodriguez, any questions as to why this perennial all star occupies the highest of all positions within the Sense on Cents Hall of Fame?

For those interested in reading the entire interview, Bob Rodriguez on the Dangers in Today’s Markets.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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