http://fpafunds.com/pdfs/commentaries/Caution_Danger.pdfCAUTION: DANGER AHEAD
Speech to Institute for Private Investors
By Robert L. Rodriguez, CFA
Managing Partner and CEO
February 15, 2012
*
"I hope that this brief historical review of my career should help allay fears that what follows
does not come from the likes of a perennial pessimist and doomsayer. Neither does “CAUTION:
DANGER AHEAD” spring from recent capital market volatility. Oh, No! When I left to take my
sabbatical for a year in 2010, I conveyed to my associates and clients that the current crisis was
only Phase 1, and the coming year would prove to be simply an interlude. If the nation’s unsound
fiscal policies persisted, within 3 to 7 years, it would face another financial crisis of equal or
greater magnitude, and it would emanate from the federal level. I wish I had said sovereign level,
covering all my bases, but I did not arrive at this conclusion until once away on sabbatical when
my attention and thinking shifted to the international area--European sovereign debt in particular.
Phase 2 is now beginning and I think we are on the cusp of a decade of extreme economic and
financial market turbulence. Uncertainty as to the effects of high system wide
financial leverage and the outcome of the battle to determine what the proper roll and magnitude
of government should be within an economy are key elements in this future turmoil."
"In stocks, we are cautious -- defensive but opportunistic."
Comments
http://www.fpafunds.com/pdfs/commentaries/Crossing_the_Rubicon.pdf
Below is a recent article on FPA Capital fund and its 40% weighing in oil.
http://www.businessweek.com/news/2012-02-16/fpa-s-bryan-tops-peers-betting-on-volatile-oil-riskless-return.html
More excerpts from the OP speech:
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The final member of this trio of fiscal misfits is our own United States. Exhibit 5 below shows that U.S. total debt to GDP is nearly 350%, and this is before taking into account off balance sheet entitlement liabilities and guarantees that would bring it to more than 500%.
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I have been highly critical of our nation's fiscal policies and budgetary trends for years. Both political parties disgust me because of their incredible fiscal ineptitude and unwillingness to be truthful with the American people. A chaotic future will be the result if our representatives continue to fail at their fiscal restructuring responsibilities. It is easy for me to speak of Europe and Japan in cold clinical terms, but not the U.S.; this is home and our nation's fiscal mess is like a life threatening cancer that is not being treated.
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I believe 2013 is the most crucial year, of the past 80 years, for fiscal budgetary reform and the potential of new health entitlements makes a grand bargain more difficult to attain. Success or failure in this process will determine this nation's economic stability in the next decade.
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Finally, tax reform is desperately needed. The following exhibit demonstrates, in a quantitative fashion, how the U.S. tax code has grown and become totally bazaar at nearly 72,000 pages and has nearly tripled since 1984.
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If credible and material fiscal reforms are not implemented by the end of 2013, I fear that, between 2014 and 2016, this nation will confront a crisis similar to that of Europe. Time is running out because, starting in 2018 and continuing through 2024, various entitlement trust funds will be either depleted or beginning the process of liquidation. Budgetary financial pressures will explode.
{...}
Every additional year wasted beyond 2013 will increase the size and scope of the necessary fiscal response; furthermore, negative capital market reactions are more likely. Congress and the president should not become complacent, given today's low Treasury yields. Without reform, this is only a temporary calm before a much larger storm.
{...}
My bond market view is worse. Exhibit 8 on the next page demonstrates how much risk, and little return, there is if interest rates rise by 100 basis points in one year for the Barclays Aggregate Index.
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Without a material improvement in the fiscal outlook, these low rates should prove to be unsustainable. Remember the suddenness and magnitude of the interest rate rise for Italian and Spanish ten-year sovereign bond yields this past year. Over the next decade, I expect low single-digit to negative total returns for intermediate and long-term bonds.
{...}
In stocks, we are cautious -- defensive but opportunistic.
Thank you for the story link.
Regards,
Catch
You note: "A debt to GDP analysis ignores the fact that while the liability side of America's balance sheet has grown enormous so have its assets. There is immense wealth in America--well over $60 trillion--part of which could be used to pay down that debt gradually over time if capital gains, income and estate taxes weren't close to as low as they ever have been in the last 70 years. Rodriguez completely ignores this fact to attack entitlements and say they must be cut to save the nation. He never even mentions that maybe taxes should go up. "
>>>>> liability side The liability is in the current low interest rate environment. Wait until interest rates increase and the "minimum payment" due on the old credit card moves to newer highs.
>>>>>$60 trillion $60 trillion of what and from what time period? Part of which could be used to pay down the debt??? I presume that you consider that if each and every American paid their fair share of the reported $140 K liability of Federal debt burden; that the D.C. machine would reform and not piss any new money down the drain, eh? What would be a fair amount of monies to tax in the form of capital gains, income and estate taxes? And from whom would these monies arrive? Do you consider that any monies the taxing authority(s) choose to remove from the public are monies that are not spent into the economy? Where is the breaking point of no returns to this action? When governments choose to tax and spend; the consideration of enlightened spending must be a consideration that the government knows best of how to allocate the monies. Yes, there are functions of which a well run and efficient government is better able to provide for the citizens with a scale of volume. One may suspect that this type of government is only written about in books of theory.
>>>>>attack entitlements This covers a lot of ground. Which entitlements? Home mortgage deduction, child care credits, minimum earned income credit? Don't forget the almost tax free status of muni bond investments. Even retirement programs (401k's and related) are entitlements, eh? Lets get rid of those, too.
Too many in D.C. do the wrong things for the wrong reasons. How about the "clean energy" machine? Ethanol fuel? Oh, ya...........a real gem there. It requires more energy to produce, versus the benefit received. One may suppose a few new and temporary jobs have been created. Could or would you or I start such an operation based upon the merits of such an investment? I would not at this time.
In summary to your notes. Some group of folks need to pay more to operate the "monetary sink hole" in DC. Lets see: it is reported that about 50% of taxpayers pay no taxes, and the ultra rich don't pay as much as joe and jill sixpack. That only leaves what remains of a psuedo middle class. Given enough time, I can make most people appear to become rich upon the basis of inflation and tax code. If the current notation of $200K in earnings and above is rich; I can get you there eventually, if I never change the $200K level in the tax code. One may consider that a young couple who have studied their butts away to earn a masters degree and still paying off the student loans wonder why the government thinks they are rich with a gross income of $201K; solely based upon the fact that they are educated and have work that demands the wages they are making. Such a tax code kills incentive to become educated and work hard, eh? Our house is not rich, but I know our state and federal governments think we are today. 'Course they don't understand that we have to plan for the future and increased spending by our household. I am 64 years young. I have worked since I was 8 years old. I was pulled into a political war for 4 years of my young adult life. My spouse and I have been very prudent with our budget over the years; and those licking their chops over tax revenues of the boomer generation have a plan to grab a vast amount of wealth of this generation. This is money that will not be spent into the economy.
As you are here at MFO, I must presume you have interest in growing your invested monies. I will suggest that you should not work harder, or get more education or have monies in a 401k, 403b or IRA. Just spent the money now and enjoy. Don't even think about buying a home. In the end, your government will just take it all away from you. Why bother, eh?
Be totally aware of the flim-flam folks who speak with forked tongues and from both sides of their mouths in the "land of DC". Sadly, many "don't know, that they don't know". The blissfulness of ignorance.
Regards,
Catch
First of all if you read Rodriguez's speech, you would know that the specific "entitlements" he and I are referring to are Social Security and Medicare. He states as much. Second, I would be willing to bet a decent sum that you or someone in your family or some of your friends or their families have received such entitlement benefits as Social Security and Medicare in the past or are receiving them today. Are they a waste of taxpayer dollars? I don't think so. They keep elderly people alive. And yet they account for a huge portion of government spending. So how can your thesis that government spending is all wasteful and inefficient be true? As for economic stimulus goes, you say if more tax dollars are collected the government will just waste it and that it will stymie economic growth. Since you are on this board, I will presume you have heard of the economic term called "the multiplier effect." Anyone familiar with the multiplier effect knows that this neocon canard that "the government can't create jobs" and "can't stimulate economic growth" is bogus. If the government collects taxes to pay for programs such as Medicare and Social Security well those Medicare and Social Security dollars are injected back into the economy and are economically stimulative. Elderly people collect their Social Security checks and buy groceries, etc. and that stimulates the economy. In fact, if the government takes tax dollars and uses it to build a road that is far better than say just allowing some wealthy person to keep his assets via a lower tax rate because building the road is definitely investing money in America. Meanwhile, a wealthy person who keeps his assets might just use that money to buy a foreign made Mercedes or buy a villa in Italy or abscond with the money to the Cayman Islands. There's no guarantee that the money will be circulated back in the U.S. economy. As for waste and inefficiency, you seem so eager to point to waste in the public government sector, but make no mention of waste in the private sector. If you think the government is such a big destroyer of capital, what do you think of Enron, Worldcom, Adelphia Communications, AIG, Lehman Brothers, Bank of America, Countrywide, etc. Need I go on? In fact, most would argue that we wouldn't be in this current economic mess were not for the misdeeds of certain elements in the private banking sector. But finally and most important, none of what you're saying actually addresses my initial point--that analyzing the U.S.'s financial condition based on a debt to GDP ratio is shoddy incomplete financial analysis, that it's like looking at a companies revenue and total debt without considering the company's assets, interest payments as opposed to total debt or the maturities and nature of the debt. Nor does analyze the company's abilities to increase revenues to pay down the debt--in this case the ability to raise taxes on ample assets. If an analyst at FPA working for Rodriguez gave such a shoddy incomplete analysis of an individual company's financial condition, he would be raked over the coals. But because such an analysis serves Rodriguez's political and rhetorical ends, it is acceptable to him it seems. Why not really look at the debt as deeply as he does for companies?
"In 2011 IPI was acquired by Campden Media, which serves ultra-affluent business-owning and fnancial families worldwide."
https://www.memberlink.net/about-ipi
... Rodriguez starts off slow and subtle - like a walk through the park. Along the way, however, come the inevitable comparisons to Europe and Japan - followed by admonitions we better cut Social Security, Medicare and other social welfare programs lest we wind up just like them rascals. Nothin about how he'd help the near third of families living in or close to poverty, the disappearing middle-class, seniors whose pensions been gutted, or kids that can't afford college. Or, for that matter, the outrageous disparity of wealth - where half resides in the hands of the upper 2 or 3%.
By way of perspective: (1) Parallels to Japan and Europe are easy to make rhetorically, but an awful big leap in terms of culture, resources, history, institutions and other. Having lived through the 70s and 80s, recall similar rhetoric (invariably from the party out of power) that we weren't doing enough to emulate Japan - and would surely be left behind in their dust. (2) If he wants to insist on those dire projections, then, speaking to a group of affluent investors, why not focus on how to protect and grow their already enormous wealth? Which assets or companies will do well under the future he envisions? Knowing the proclivity of politicians to bite the bullet tough on fiscal matters, I'd guess he's already stashed his $$ in them safe havens - whatever he identifies them to be. (3) His "slash and burn" rhetoric may have received a generous ovation. What have the "ultra affluent" got to fear? For Aunt Millie struggling to subside in retirement or the neighbor without work, it's likely a whole different ball game.
The board ain't for politics and social change. But when a money manager invokes it under the guise of investing, than fair enough. Now, budgets consist of income and outflow. Did he mention any reductions in defense spending? If so, I missed it. He talks of a more equitable tax system, but that's pretty vague. How about the Buffet proposal wherein millionaires would have to pay at least 30% in taxes each year? My social security's currently taxed at around 20%. But a big name millionaire running for President paid 16% last year. Didn't hear Rodriguez mention that. My budget's in balance. Yours probably is. Truth is this country's budget's rarely been balanced since at least Hoover's time.* We done pretty well from 1940s to 2008 - and that included a world war, a space race, and several smaller wars. You'll find a fair number of economists who don't think it should be balanced. I don't know, just saying beware solutions put forth in forums devoted to the super rich.
*Recent Presidents who submitted balanced budgets:
Eisenhower 3
Nixon 1
Clinton 1
I must state that I appreciate the discussion. We may or may not agree on some points; but I am always open to learning, too.
Note: >>>>> = my reply
First of all if you read Rodriguez's speech, you would know that the specific "entitlements" he and I are referring to are Social Security and Medicare. He states as much. Second, I would be willing to bet a decent sum that you or someone in your family or some of your friends or their families have received such entitlement benefits as Social Security and Medicare in the past or are receiving them today. Are they a waste of taxpayer dollars? I don't think so. They keep elderly people alive. And yet they account for a huge portion of government spending.
>>>>> Yes, I know of numerous folks who have or are using SS or Medicare. And I agree that these monies do indeed generate many other jobs and the monies do flow back into the economy. I will be in the Medicare camp this year; and if I play the investment cards properly, won't be using SS until age 70.
So how can your thesis that government spending is all wasteful and inefficient be true? As for economic stimulus goes, you say if more tax dollars are collected the government will just waste it and that it will stymie economic growth.
>>>>>I believe I stated along the lines of there being too much government spending that has been and is wasteful and very inefficient. I stated that there are items better suited to some government levels. Quick examples would be EMS, police, fire and related.
Since you are on this board, I will presume you have heard of the economic term called "the multiplier effect." Anyone familiar with the multiplier effect knows that this neocon canard that "the government can't create jobs" and "can't stimulate economic growth" is bogus. If the government collects taxes to pay for programs such as Medicare and Social Security well those Medicare and Social Security dollars are injected back into the economy and are economically stimulative. Elderly people collect their Social Security checks and buy groceries, etc. and that stimulates the economy. In fact, if the government takes tax dollars and uses it to build a road that is far better than say just allowing some wealthy person to keep his assets via a lower tax rate because building the road is definitely investing money in America.
Fully agree with projects such as upgrading the existing interstate highway system. I was a young boy when I-75 came in place in Michigan and I watched the big D-8 cats flatten a wonderful wild strawberry patch....another story. On the other hand, does the state of Florida need a high speed rail system between the cities of Tampa and Orlando? I don't think this is wise spending of monies.
Meanwhile, a wealthy person who keeps his assets might just use that money to buy a foreign made Mercedes or buy a villa in Italy or abscond with the money to the Cayman Islands. There's no guarantee that the money will be circulated back in the U.S. economy.
>>>>>I won't disagree with this. 'Course they may also buy a "beemer" made in the Carolina's. But, yes; there has been and continues to be the funny and cute little things that the ultra wealthy do; that are beyond our abilities.
As for waste and inefficiency, you seem so eager to point to waste in the public government sector, but make no mention of waste in the private sector. If you think the government is such a big destroyer of capital, what do you think of Enron, Worldcom, Adelphia Communications, AIG, Lehman Brothers, Bank of America, Countrywide, etc. Need I go on?
>>>>>I've worked for very small and very large public and private businesses over my years. The ones that are operated in an efficient manner are far and few. Sadly, with one organization of which I have long employment; the last president of the company who really cared, and really knew and wanted to know what was going on in the company beyond his office door, was in 1990. He would travel to all states and have meetings with the regular folks. That is all gone now, of course. It is a wonder some companies make a decent profit.
In fact, most would argue that we wouldn't be in this current economic mess were not for the misdeeds of certain elements in the private banking sector.
Won't disagree with this. Should already be many more prosecutions for misdeeds.
But finally and most important, none of what you're saying actually addresses my initial point--that analyzing the U.S.'s financial condition based on a debt to GDP ratio is shoddy incomplete financial analysis, that it's like looking at a companies revenue and total debt without considering the company's assets, interest payments as opposed to total debt or the maturities and nature of the debt. Nor does analyze the company's abilities to increase revenues to pay down the debt--in this case the ability to raise taxes on ample assets. If an analyst at FPA working for Rodriguez gave such a shoddy incomplete analysis of an individual company's financial condition, he would be raked over the coals. But because such an analysis serves Rodriguez's political and rhetorical ends, it is acceptable to him it seems. Why not really look at the debt as deeply as he does for companies?
>>>>> I did not address this area with your original write. I was most short of time earlier today. As I am not formally schooled in economics, I can not provide a likely, proper answer for the debt/GDP view. I would expect, however; than any number of skilled economists may have varied opinions about this topic. As to the measurement, I will suspect that for some economists, is the ability of a growing GDP to have the ability to continue to pay the debt the may be expanding faster than the GDP. This would apply in this case, as to the interest due now and growing. Greece would be a primary example of the likely inability of the country to have anythling more than an orderly default; as one may have a difficult task of finding their GDP growing at a rate to pay only the interest upon the debt.
As to the taxes upon estates and related in your original note; I find no faith or will in the current federal government actions to become efficient. Per the current "debt-clock", the debt burden per person is about $140K. I don't find how higher taxes will relieve any fiscal situations; other than the transfer of wealth via taxes to remove the discretionary spending of the citizen. I will note that current tax laws are out of whack, in my opinion; and favorable tax policies do exist that cause some serious misalignments.
Am ultimate tax package could set a 10% tax on all wages, capital gains/dividends and related; no hidden accounts.... blah, blah, blah. The tax would be adjusted for inflation via the CPI or 1.5% annually, which ever is lower. Eventually, the tax rate would rise to such a high level, that spending would stop; deflation would take place and all would be happy. Federal and state spending could not rise above 10% from a preset earlier level; without legislative language for a fix and reduction. If this could not be performed, the matter would have to be voted upon with a general, national election upon the matter.
Well, that is my "tongue in cheek" view of the tax jungle.
Take care,
Catch
"
As for the ultra-affluent, this did get some discussion a while ago:
http://politicalgates.blogspot.com/2011/12/citigroup-plutonomy-memos-two-bombshell.html
From the above link - "Beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more ‘equitable’ share of wealth."
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As for the political nature of this thread, I'm not going to even get into it.
From my humorous side of life: and in salute to G. Orwell and 1984; I will suggest through the magic of "double speak" that this thread is merely an expression of thoughts that are "societal" in nature and not political.
Repsectfully,
Mr. Catch