Bob Rodriguez: We are in a Rolling Depression

Robert L. Rodriguez was the former portfolio manager of the small/mid-cap absolute-value strategy (including FPA Capital Fund, Inc.) and the absolute-fixed-income strategy (including FPA New Income, Inc.) and a former managing partner at FPA, a Los Angeles-based asset manager. He retired at the end of 2016, following more than 33 years of service.

He won many awards during his tenure. He was the only fund manager in the United States to win the Morningstar Manager of the Year award for both an equity and a fixed income fund and is tied with one other portfolio manager as having won the most awards. In 1994 Bob won for both FPA Capital and FPA New Income, and in 2001 and 2008 for FPA New Income.

The opinions expressed reflect Mr. Rodriguez’ personal views only and not those of FPA.

I interviewed Bob last week.

When we last spoke a year ago, it was before the pandemic surfaced, yet you had argued strongly against monetary easing by the Fed. You were very critical of rising federal deficits. Now in response to the pandemic, the Fed has eased monetary policy further and the deficit has grown sharply. Did policy makers have a choice?

Monetary policy was excessive throughout the decade and leading up to this period. It created a massive financial bubble. Last year, I conveyed to my colleagues and others that, in the next financial crisis, the balance sheet of the Fed would grow by approximately $4 to 6 trillion from approximately $4 trillion and we would likely be a facing recession in Q4 of 2019 or Q1 of 2020.

Just before we talked last September, the repo market had just experienced a disruption, where rates rose from 2% to 10% in one evening. I considered this a warning shot across the bow. But the Fed did not. When the crisis hit, we had the highest system-wide financial leverage in history. This situation forced the Fed's hand. It had to enact massive support measures for the economy. Those actions stemmed the immediate crisis in the bond market and also private businesses.

But you have to ask the question, “At what cost?” The Fed is now in a deeper hole than when it was with quantitative easing this past decade. As I wrote nearly a decade ago about quantitative easing: It was very much like the roach motel – you can check out, but you just can't leave.