Eight months ago, in a February interview with AdvisorOne, legendary money manager Robert Rodriguez, CEO of First Pacific Advisors, warned that if Congress failed to seriously address the country's fiscal issues within seven months, financial markets would be hit hard. That prediction has proven to be all too accurate.
Now, in a new AdvisorOne interview, Rodriguez says that current federal and congressional monetary and fiscal policies still do not attack structural issues and have therefore been ineffective.
The country is headed for recession next year, Rodriguez forecasts. His outlook for the markets? Unequivocally cautious. Congress and the Obama administration have created high levels of uncertainty that continue to create volatility and a negative bias in the markets, the money manager says.
Rodriguez forecast the global financial crisis of 2008-2009 as well as the "caterpillar-like" form of the United States' recovery.
Last January, following a year's sabbatical, he turned over day-to-day management of the FPA Capital Fund and FPA New Income Fund to his partners, as planned. Rodriguez, a managing partner, remains advisor to both funds.
The Los Angeles-based firm manages assets of $16.2 billion. Compounded rate of return of FPA Capital from its launch in July 1984 through Sept. 30, 2011, is 14.39%. FPA New Income hasn't had a down year in 33.
Here are excerpts from our telephone interview with Rodriguez, whose office is in Lake Tahoe, Nev.:
What is the biggest threat to the securities market next year?
Continued political incompetence with regard to fiscal issues. From a standpoint of health care as well as fiscal policy, 2012 is the most important year in 80 years.
Are we on the road to another financial crisis?
Unless there is fundamental, structural budgetary reform in the Congress, I don't trust them. Why should we trust a Congress that has a 13% [Gallup Poll] approval rating with our budgetary future?
What's your outlook for the economy and stock market in 2012?
Decidedly cautious. I believe Europe is in or near recession and that the odds are increasing north of 50% that the U.S. will be in recession next year. I'm looking for GDP growth at about 1%, probably even lower at times. It's going to be a very languid year economically, and the stock market will face profitability issues along with governmental issues.
What about bonds?
They're absolutely terrible. We don't like the risk in the bond market and haven't for many years.
What do you propose to turn things around?
A discussion and then implementation of real, substantive congressional budgetary reforms that have a standing in law. In other words, these guys can't wiggle out of their promises. Federal expenditure and entitlement reforms must involve meaningful cuts in the near future and not at the end of the next presidential term in 2016. And we have to have a radical restructuring of our tax code.
How do you assess Federal Reserve Chairman Ben Bernanke's handling of the recovery?
Well-intentioned, but his view of the world is and has been incorrect. While he's been trying to improve the situation, he's really harming it.
How so?
We have this economic car going down the road: on one side is fiscal policy pressing on the gas pedal. At the same time, the Fed is putting their foot on the brake thinking they're stimulating the economy with their zero interest rate policy. But they're hitting savings big-time, which is acting as a detriment to consumption.
And the result?
