For several years now, Rodriguez has been voicing concern about the dramatic and unsustainable explosion of U.S. debt. He claims American consumers added more debt to their balance sheets in the six years between 2001 and 2007 than they did in the 40 previous years.
Now major change is afoot. Ever since World War II, the principal objective of the global economy has been to satisfy the demands of U.S. consumers. That game has come to a screeching halt.
Rodriguez believes we are about to witness the sharpest increase in the U.S. savings rate in 50 years, as a paradigm shift in consumer spending dramatically reshapes economic activity. He predicts the savings rate will climb from 2.8% to 8%, an increase of $600 billion in incremental savings. Even so, that won't be enough to absorb the enormous Treasury issuance that is likely to continue for several years. "Consumption is going back to 66%" of GDP, or maybe lower, from the 71% level it stood at one year ago.
Rodriguez was scathing in his criticism of the stimulus of the Obama administration, and its predecessor. Programs designed to spur consumption and borrowing are nonsensical to him. "That's what got us into this mess," he notes. "Why should we expect a different outcome when we keep doing the same damn thing?"
A major opponent of government spending and Federal Reserve bailouts of banks, Rodriguez believes we need to go ahead and let the recession, which he sees as closer to a depression, run its course. Ultimately, there's only one thing that can pull us out of this trap and it's not consumption or "gubmint" spending; it's exports, which Rodriguez estimates need to rise from 14% to 24% of GDP. That's a decade-long project.
Regulators keep trying to tackle the wrong problems. "It's not a liquidity recession; it's a solvency, capital-destruction recession," he maintains, pointing out the government's desire to avoid inflicting pain on as few investors as possible and even exempting subordinated debtholders at Fannie and Freddie from taking haircuts. "Bernanke and Paulson have been all about obfuscation and lack of transparency," he says.
What we're facing, he believes, is analogous to World War II, when the U.S. savings rate spiked to 25% and government employees took about $500 billion in wage cuts, back when $500 billion was a lot of dough. Today, California state employees are out picketing over the prospect of two-day unpaid furloughs. Rodriguez can't help but note most major social trends in the last century have begun in California and spread east. Is political dysfunction next?
In the economic environment likely to prevail in the next few years, Rodriguez thinks operating profits will remain highly variable. That means that P/E multiples are likely to be restrained.
What does Rodriguez think of financial advisors who dumped his fund because he was holding too much cash and/or they couldn't find a place for it in their style boxes? Take a guess. Buy and hold is a silly concept when the planet is experiencing tectonic shifts. "Only cash can diversify" a portfolio in this type of environment, he says.
But last fall between mid-October and mid-December, he was able to put $438 million in cash to work, and 64% of his purchases went into energy stocks, which he believes will offer a long-term hedge against looming inflation.