Bob Rodriguez: Welcome to the ‘End of the Capital Markets as We Know Them’

The coronavirus is “the pin that pricked the speculative bubble,” but the Federal Reserve’s pledge of unlimited quantitative easing and the passage of the $2 trillion stimulus package signals “the end of the capital markets as we know them,” Robert Rodriguez, acclaimed former CEO of First Pacific Advisors who forecast the dot-com bust and the financial crisis of 2008-2009, tells ThinkAdvisor in an interview.

He blames the coming transformation of “the perversion and conversion to a dystopian capital market and economic system” on government manipulation and distortion.

Owing to his shrewd investing, Rodriguez, 71, who exited direct ownership of equities in 2016, not only hasn’t been hurt by this month’s sharp market decline, he made a profit during the carnage. Now, he says, he might buy equities “if there’s more mayhem.”

Rodriguez, who retired from FPA in 2016, has long predicted another financial crisis, based chiefly on consumer and government debt and the Fed’s “insane monetary policy,” as he called it.

In a 2009 speech to Morningstar, he said that “If we don’t get our economic house in order, we will experience a crisis of equal or greater magnitude than the 2008-2009 period” and that this would occur after 2017.

Now he is forecasting a market rebound in the shape of a “lower-case “v”; that is, “not a rocket ship capital “V” — because of several changes that have occurred relative to the market; for example, stock buybacks by companies benefiting from the fiscal stimulus will be banned.

Rodriguez maintains that the market will not get back to its prior high “anytime soon” and that it will be necessary for companies, sure to suffer profit-margin pressure, to reevaluate management strategies.

In the interview, he also reveals what’s in his 65% liquid personal portfolio, including where he deployed capital earlier this week.

During the 25 years that he was FPA’s CEO, Rodriguez scored a remarkable record: The FPA Capital Fund, which he managed from 1984-2009, had an annualized return of 14.2% during that span, according to Morningstar. The FPA New Income Fund’s annualized return came to an impressive 8.8% under his management.

In recent years, he has personally invested in — and intends to continue to buy — rare commodities and collectibles. His argument: “The public equity and debt markets are now nothing more than the greater fool markets that are led by the greatest fools of all, the Fed and the Congress,” as he wrote in a note to colleagues on Tuesday.

He continued: “We have entered a far more dangerous environment where normal rules of analytics will likely not apply,” where “the risk side of the equation” has been “truncated,” making a “return-vs.-risk evaluation essentially meaningless” — because “everything is essentially socialized as to risk.”

Thus, “There is no accurate pricing discovery in the capital markets because we have entered into a period of total manipulation,” he wrote.

ThinkAdvisor interviewed Rodriguez on Wednesday. He was speaking from his home in Lake Tahoe, Nevada. After discussing his deep disappointment with the Fed and the chaotic market, he commented: “My mind is running at warp speed about the repercussions and implications of all this.” In December 2018, he told ThinkAdvisor that the likelihood of another calamitous financial crisis was a “a near certainty.”

Here are excerpts from Wednesday’s interview:

THINKADVISOR:  How have you been impacted financially by the market decline? 

BOB RODRIGUEZ: I haven’t been affected by this mayhem one iota. I’ve avoided 100% of the market carnage — and I’m also profitable. During the last 10 years, I’ve been a turtle, and the stock market has been a rabbit. Right now, the turtle is ahead of the rabbit.

What are you invested in?

Treasury bonds and a bond fund that, until last week, was down 1%, which I’d call a rounding error. The other areas of my portfolio are doing just fine. I haven’t had direct ownership of equities since 2016. Now, by having liquidity, I can decide what to do. If I’ll decide to commit capital to the equity market, I’ll probably want to see more mayhem.

Broadly, what’s your investment strategy, and what are those other areas of your portfolio?

I want to invest in areas where there’s a minimum of governmental interference. An obvious one has been the gold market.

Where did you deploy capital this week?

I was buying gold and silver closed-end funds.

There were massive margin calls going on, and one market you could see that in was gold because gold prices were falling rather dramatically. I’ve been following the closed-end fund “Sprott Physical Gold Trust (PHYS) for the last decade. I wouldn’t call it an equity, as people perceive equities. Two weeks ago Friday, when all the mayhem was occurring, the discounted net asset value went to 4.4%, a big discount. I wish I had bought more.

Do you have any bonds in addition to the Treasurys?

I invest in the FPA New Income Fund, a fund from my former company, First Pacific Advisors. I also own a small exposure in their international fund, run by Pierre Py. And I still own a small residual amount in the FPA Capital Fund.

What’s your forecast for a stock market rebound?

The permutations that will evolve from this are mind-boggling. To believe that you go back to where you were prior to all this mayhem would be foolish. So I have a lower-case “v” shape [recovery] in mind. I don’t see a rocket-ship capital “V.” I have a very hard time envisioning how the market gets back to its previous high anytime soon because there have been changes.

Such as?

One of the key supports of the stock market over the last five years — buybacks — has been taken away. Consumers have had devastation in their accounts. Are they going to run back and buy stocks? I don’t think so. The median stock prior to this recent rally was down over 50%. That wiped out pretty much all of the stock market run.

But weren’t investors who are diversified protected somewhat?