FPA (Rodriguez): More of The Same

[dcollon]

http://www.fpafunds.com/MORE%20OF%20THE%20SAME%20Sept%202011.pdf

[AZ_Value]

PDF attached.

 

Bob Rodriguez is a really good investor but I am not sure I like the person that much (just my opinion no need to chastise me)

 

An interesting exercise is to compare his write-up with Marty Whitman's in the thread below:

 

http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=5202.0

 

MORE_OF_THE_SAME_Sept_2011.pdf

[dcollon]

Peter,

 

The link works for me...sorry about the problem.

 

Take care,

David

[Myth465]

Rodriguez  inmo is too political. His version of the world is the only one that should exist, and if not we get doom and gloom. Whitman's letter was great, I plan on diving into this one later today. Rodriquez is right about our debt problems though.

[Packer16]

I think Rodriquez and the guys at Sequioa (you should read if you haven't already) have a great point about debt and stimulus.  If this is a long-term structural problem (due to excess debt induced demand), then gov't stimulus has just provided the addict more high and not dealt with the withdrawl.  It appears no one except those who want to cut spending want to deal with the core problem (to much artifical demand - including gov't spending).  Increasing taxes does not fix the artifical demand problem it only makes it worse (by providing more drugs for the addict).  It only becomes political when one side thinks this point is not true and tries to convince folks that there is no artifical demand.

 

Packer

[Guest misterstockwell]

Rodriguez  inmo is too political. His version of the world is the only one that should exist, and if not we get doom and gloom. Whitman's letter was great, I plan on diving into this one later today. Rodriquez is right about our debt problems though.

 

It's hard not to be political in this case. Our government sucks at the moment. Useless bickering fools abound. Nothing gets cured, but the band-aids flow freely. It can't go on like this. Whitman talks a great patriotic game in his piece, yet notice that he invests almost nothing in USA companies. We're a great country, but not a better prospect than Asia at the moment.

[Hawk4value]

I do not believe Rodriquez is being political in his essays.  I believe he is being Rational.  The reason he may sound political to some is because at this particular point in time the Right is being much more rational than the Left.    As far as both Parties are concerned, they have each proven in the present and the past that their interest in getting elected and holding power trumps any desire to do whats right for the country and its citizens.

[AZ_Value]

The reason he may sound political to some is because at this particular point in time the Right is being much more rational than the Left.

 

I will just point this sentence out and refer you to the recent debt ceiling comedy (more like a drama actually) that took place in Congress where "rational" meant any sort of compromise was out of question, and also the rationality that took place during the recent GOP candidates debate where they were asked if a debt reduction plan that had a 10 to 1 ratio of spending cuts to tax increase was acceptable or what ratio they'd be willing to accept, and they all (every single one of them) said they would never accept any such deal.

 

And then I'll leave it at that because debating these things non stop has yet to result in anything constructive I think

[Myth465]

I do not believe Rodriquez is being political in his essays.  I believe he is being Rational.  The reason he may sound political to some is because at this particular point in time the Right is being much more rational than the Left.    As far as both Parties are concerned, they have each proven in the present and the past that their interest in getting elected and holding power trumps any desire to do whats right for the country and its citizens.

 

LOL both parties appear irrational to me. I agree with your last sentence though.

[Packer16]

One item that would be useful but not presented is how much each entitlement benefit costs.  If you want x benefit then here is what it will cost in your taxes (not someone elses - as everybody wants someone else to pay for thier benefit).  So for example, if you want the gov't to pay unlimited Medicare (without a cap - dollar amount) this is how much your taxes will have to increase to make this happen.  You can make the scale slide with income but everybody should put money in the pot and have to pay a deductable.  This can also be applied to student grants and other entitlements so the electorate can make eductated decisions on what they pay taxes for. 

 

Packer

[Myth465]

Having read the article I can say that I was wrong. I agree with just about everything Rodriguez wrote except for 1 thing. I believe revenue "enhancements" (who comes up with these words), should be on the table now. His message isnt really political, just honest. I firmly believe this is structural and disagree with liberals who think a bit of stimulus will fix it.

 

----

 

I would end the wars and give the army 1/4th of the proceeds for covert action to keep us safe, another 10% to 25% would go to troops for retraining, college, and healthcare (why shaft them). The remaining balance would go to closing the deficit gaps. I would then close the remainder of the gap with half spending and half cuts. In addition to that I would do real healthcare, education, and entitlement reforms. But what do I know.

[ERICOPOLY]

I firmly believe this is structural and disagree with liberals who think a bit of stimulus will fix it.

 

Personally, I don't believe stimulus will fix it, but I feel it will make things more pleasant until final demand returns.

 

Robert Shiller believes in tax and spend (stimulus) as a way to get things moving again.  He doesn't see why people believe that stimulus spending implies deficits. 

 

[Myth465]

In that case I agree with Schiller. What I mean is I dont think its a typical recession where we can prime the pump a bit and things get going again. I think Consumers have been burned significantly on both sides (household income, and assets, while debts remain high). They are reducing leverage and wont / cant spend inmo. I think Liberals are making a miss calculation by promising that this will all be solved if we pass another bill. Also with this stimulus also being 50% comprised of tax cuts I dont think it will produce significant results, similar to the last one. It may prevent things from getting much worse, but last time I checked thats still a lousy platform to run on.

 

I am tired of these gimmicky things (temp tax cuts, temp demand type things), and would prefer a real leveraged infrastructure bank (similar to what Gross talked about, with some sort of public private partnership), and direct job creation via projects with low bid contracts. 

 

I think more spending without other changes will simple cause the government to have significant financial issues at some point. I would stimulate but also readjust things so it could be done without a deficit as a point of policy. I would like to see the US adapt counter cyclical policies actually.

 

I think Richard Koo is right, but believe the way we are implementing things is not sustainable. Thinking outside of the box and ending the wars and redirecting that money towards something more useful inmo is the way to go. My biggest issue with Obama is he is destroying the liberal and basic economic concepts brand by trying to appease everyone. Stimulus is now a dirty world because it was done incorrectly.

[oec2000]

He doesn't see why people believe that stimulus spending implies deficits.

 

Haven't read exactly what he said but balanced budgets do not create any net stimulus. Keynes, aka the guy who wrote the book on stimulus spending, advocated running deficits to counter recessions. If Shiller's thesis made any sense, the US could instantly solve its problem by raising $5t in taxes and spending it all on stimulus - that would be one heck of a free lunch.

 

For a country like the US that consistently runs trade deficits, stimulus spending that is aimed at increasing consumer spending invariably results in leakages (due to money flowing out for imports) and does not provide good value. Until the politicians figure out how to spend money more productively, it seems a bad idea to tax and spend more. Because of the election cycle and the focus on short term stimulus, there is little hope that they will make the right decisions on spending.

 

 

[rijk]

sobering but excellent and very relevant article

 

http://advisorperspectives.com/commentaries/fpa_021812.php?WT.rss_f=CommentaRSS&WT.rss_ev=a&WT.rss_a=Danger:_Caution_Ahead

 

rodriguez and watsa seem to be on the same page when it comes to economic/financial outlook, however, the difference in bond maturity profiles is striking: rodriguez currently maintains a near record low portfolio duration of 0.8 years while fairfax currently holds approx 75% of their bond portfolio > 5 years

 

regards

rijk

[biaggio]

RIJK, thanks for posting.

 

Typo I believe-For those who have not read article, his bond duration is  0.8 years not 8 years

[ERICOPOLY]

JPMorgan actually stated that the largest component of the decrease is due to mortgage refinancing at low rates (of course maybe he declines to mention this because it contradicts his view that low rates are wrong policy?):

 

Annual debt servicing cost has declined by about $200 billion but a large portion of this contraction is a function of mortgage foreclosure and the ceasing of debt repayments.

 

But what about the debt service relief from refinance?  And isn't the higher pace of principle repayment (forced by the amortization schedule) on a refinanced loan a form of savings?  Isn't getting the interest payments down a topic at least worthy of mention in his letter given that consumer debt is at such a record level?  I mean, he talks only about the lost income -- not the lost interest service payments.

 

The Fed’s zero interest rate policy (ZIRP), which I consider to be so egregious and deleterious to savers in this country, has retarded a recovery in gross personal income by an estimated $400 to $600 billion annually

 

Except for the 1970s-1980s period, right?

 

Exhibit 7 shows that the S&P 500’s P/E ratio, the yellow line, has declined over the past 12 years to a level not seen since the mid-1950s

 

 

 

[racemize]

But what about the debt service relief from refinance?  And isn't the higher pace of principle repayment (forced by the amortization schedule) on a refinanced loan a form of savings? 

 

 

Is this true?  This is the scenario I'm envisioning:

 

Person has mortgage at an initial rate, let's say 6% and pays that rate for 3 years, leaving 27 years left.  Then, the rate is decreased to 4% with a new 30 year mortgage.  So now he pays a lower rate, but for 30 years (3 more years than would have been on the original mortgage)--it seems like the principle repayment would not be faster in that case, e.g., since the refinance results in a new amortization schedule and presumably lower payments.  Perhaps you are talking about a different type of situation?

[link01]

sobering but excellent and very relevant article

 

http://advisorperspectives.com/commentaries/fpa_021812.php?WT.rss_f=CommentaRSS&WT.rss_ev=a&WT.rss_a=Danger:_Caution_Ahead

 

rodriguez and watsa seem to be on the same page when it comes to economic/financial outlook, however, the difference in bond maturity profiles is striking: rodriguez currently maintains a near record low portfolio duration of 8 years while fairfax currently holds approx 75% of their bond portfolio > 5 years

 

regards

rijk

 

a bond portfolio with an avg duration of .8 yrs yields little more than cash, & certainly has a negative current real yield. if you have an over-weighted probability forecast of deflation doesnt it make sense to at least go far enough out on the yield curve to earn a coupon a smidge over the current inflation rate? bill gross at least has the courage of his (well publisized) convictions, short cash, long the farther end of the curve for a duration of 7 or so. rodriguez seems to be stuck in neutral between the 2 polar viewpoints, really, with no strong view at all.

[racemize]

Maybe I missed it, but was he actually on-board with deflation, or just indicating that things look bad?  I would agree with your comment if he is in the deflation camp.

[link01]

I firmly believe this is structural and disagree with liberals who think a bit of stimulus will fix it.

 

Personally, I don't believe stimulus will fix it, but I feel it will make things more pleasant until final demand returns.

 

Robert Shiller believes in tax and spend (stimulus) as a way to get things moving again.  He doesn't see why people believe that stimulus spending implies deficits.

 

well, if each new incremental dollar of deficit spending yields increasingly less than a dollar of real GDP growth & attendant & tax revenues then where does the magic intersection of a real turning point come into view?

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-11

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-13

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-14

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-15

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-16

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-17

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-19

 

http://www.businessinsider.com/doubleline-jeff-gundlach-us-decline-fall-roman-empire-2012-2#-20

 

 

 

[rijk]

 

biaggio, sorry, corrected the obvious typo.....

 

per below, rodriguez is clearly in the inflation camp, so, while both have similar cautious economic outlooks, rodriguez expects inflation, while watsa expects (at least temporarily) deflation.....

 

"Do you expect inflation or deflation next year?

 

Rodriguez: Right now, we have deflation and inflation simultaneously: deflation in home prices and inflation in commodity prices. If we do not address our fiscal issues within no longer than three years, you could see long-term monetary inflation taking hold. Congress has been irresponsible."

 

http://www.advisorone.com/2011/11/23/research-roundtable-gundlach-rodriguez-others?page=3

 

regards

rijk

[ERICOPOLY]

But what about the debt service relief from refinance?  And isn't the higher pace of principle repayment (forced by the amortization schedule) on a refinanced loan a form of savings? 

 

 

Is this true?  This is the scenario I'm envisioning:

 

Person has mortgage at an initial rate, let's say 6% and pays that rate for 3 years, leaving 27 years left.  Then, the rate is decreased to 4% with a new 30 year mortgage.  So now he pays a lower rate, but for 30 years (3 more years than would have been on the original mortgage)--it seems like the principle repayment would not be faster in that case, e.g., since the refinance results in a new amortization schedule and presumably lower payments.  Perhaps you are talking about a different type of situation?

 

 

Yes, I'm right.  It's true that low interest rates imply a higher principle payment.

 

In your example, 6% loan with 27 years left, the next monthly principle payment is $185.98.

 

At 4% on 30 year schedule, the initial monthly principle payment is $216.12 for a 150k loan.

 

So not only is the refinanced payment increasing the savings level (debt repayment being a form of savings), the household also has a lower absolute mortgage payment due to the interest savings.

 

So they can spend more at the same time as saving more.  Absolutely!

 

[racemize]

interesting, but it seems like that can't be true across all time periods.

 

I just ran it for a 10 year gap and the principle paid is less, though the payment is obviously less. 

 

It appears there is a break-over point, but it is probably less than the ones we're talking abut with the 2008 crisis.

[ERICOPOLY]

Let humidity be a metaphor for interest rate. 

 

Does ninety-five degrees in Las Vegas feel the same as it does in Florida?

 

These charts comparing the absolute level of consumer debts across decades are not adjusted for the cost of debt service.  Similar to the weather report not having a "feels like" component.