Government Must Act Now to Avoid Fiscal Crisis: Fund Manager

Time is running out for the United States' fiscal problems to be fixed, said Robert Rodriguez, one of the mutual fund managers who correctly predicted the last two stock market crashes.

Businessman with crystal ball
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Businessman with crystal ball

Congress and the U.S. presidents over the last decade "have been totally irresponsible in their spending," the principal and CEO of the $16 billion money management firm First Pacific Advisors told CNBC Wednesday.

The U.S. has to start cutting expenditures now and demonstrate, "like a borrower who was foolish and extravagant," that it has become fiscally sober, he said.

"That is not the case today," added Rodriguez. "We are looking at an environment which is unprecedented. I have been arguing for the last three years that the economy would be substandard, low economic growth."

Much of the "earning power that you are witnessing is coming from overseas, and secondly in the financial sector the reduction of loan loss reserves," Rodriguez said.

For that reason he has a 30 percent cash position and has been raising liquidity over the course of the past year.

Rodriguez's stock fund, FPA Capital, has returned 15 percent annually over the past 25 years. His bond fund, FPA New Income, has never posted an annual loss.

In addition, he will not "commit" to a long-term bonds economy. "The 3 percent [on U.S. 10-year Treasury bonds] is an illusion. It's a manipulated market...these are buyers that are not, shall we say, interest rate-sensitive. They have other agendas."

"History shows that interest rates can change very dramatically in a short period of time," added Rodriguez.

In 2007, as the subprime-market was starting to become unglued, he revised his strategy and shifted 40 percent of FPA Capital's assets to cash and invested the rest in oil and gas companies with strong balance sheets.

Rodriguez described his concern in a speech entitled "Absence of Fear": "After many years of an excessively easy monetary policy, a bubble of massive proportions has been created in the housing market."

As a result, the firm had large cash reserves on hand when the financial crisis hit, and the stock fund ultimately returned 54 percent in 2009.

In 1999 he said in a letter to shareholders that the upsurge in Internet stocks was "nothing more than speculation masquerading in the costume of investment" and begun cutting back on his technology holdings. The fund assets shrank from $800 million to $350 million. But when the dot-com bubble came to a head, FPA Capital returned 29 percent against -38 percent for the S&P 500 from 2000 to 2002.

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