Steve Romick: Trade Into The Gold You Can Eat, Farmland < 2 >

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Romick: Well, no, with the bonds we went into, it’s very, very important to know, we invest in stocks and bonds.

We’re not buying conservative bonds. We’re buying high-yielding bonds. And we do buy debt. It’s corporate debt. Higher-yielding corporate debt, distressed debt, restructurings, et cetera. So the bonds we went into in 2009, it may say corporate bonds in our portfolio, but in fact what we were doing, we were heavily invested in higher-yielding bonds and distressed debt.

So actually, I and our team look at high-yield bonds as equities. We use equity-like risk to that asset class. So in 2008 and 2009, we believe that corporate bonds had priced in a depression. Common stocks had not priced in a depression. So we were able to go out there and buy these businesses with huge asset coverage, whether it be airplanes in the case of international lease finance or a combination of trains and airplanes and lots of other kind of things in the case of C.I.T.

So we actually were taking a very aggressive posture in 2009 in investing. What’s happened since then is many of those bonds, we were on the precipice of a depression. That depression was avoided. Many of the bonds we own have matured or went above par and we’ve ended up selling those bonds. And we’ve repositioned the portfolio and other higher-quality global franchises.

Forbes: Talking about bonds, you’ve written about how we seem to be in something of a bubble today. Anyone who can issue a bond is insuring a bond at record levels. I think you used the number $780 billion on the corporate side. What do you see unfolding there, this kind of promiscuous issuance of debt?

Romick: Well, what you were talking about really was, what I was speaking to was the fact that high-yield bonds in the last few years over $300 billion worth of bonds have been issued. And not only have they been issued, these companies are appropriately taking advantage of an unusually low interest rate environment. I would argue too low of an interest rate environment.

Zero interest rate policy perverts the capital allocation decision. An elderly person’s who’s all of a sudden not getting much return on their portfolio all of a sudden feels obligated, pushed into out of need into investing in something with greater risk. And many corporations do the same thing. So of these $800-plus billion in bonds that have been issued, higher-yielding and corporate bonds in the last three years, there’s been the largest dollar amount in history of triple-C and non-rated debt have been issued.

And in the levered loan environment, 25% of the issuance of bank loans are covenant light. So we’re actually looking at more risk in that system than we actually have had in many years. How it unfolds is you tell me what’s going to happen to the economy. And it’s scary to me, but we look at that as fodder for future opportunity.

Forbes: Let’s hit the Fed. And then we’ll get to investments.

Romick: Let’s hit them?

Forbes: I’ve hit them. One of your letters, you have this wonderful quote from Malcolm Gladwell, “Incompetence is the disease of idiots. Overconfidence is the mistake of experts. Incompetence irritates me. Overconfidence terrifies me.”

Romick: I wish I had said that.

Forbes: Explain the thing.

Romick: It’s a wonderful turn of phrase. We look at the Fed and we look at the actions they’ve taken and we look at statements that have been made by Ben Bernanke, who in 2006 didn’t think there was a housing crisis, quoted as saying such. In 2007, didn’t see the subprime issues being much of an issue. In 2008, argued that there wasn’t a recession coming, the we weren’t on the precipice of a recession. And also said at that point in time that Fannie and Freddie were solid. In 2009, they told us that the Fed would not monetize the debt. Then in 2012, he wraps it all up with the statement that us along with other central banks of developed economies are in the process of learning by doing. Doesn’t give you a great deal of comfort. So this academic argument that many economists have is just that. And how it actually will manifest itself as it’s put in place is anybody’s guess. So they’re hoping that this academic argument will alchemize into reality.

Forbes: You use that word “alchemize” deliberately?

Romick: Deliberately. And without any evidence that they actually have the skill set to do that or that their past prognostications have been anything close to accurate. And we’re giving them trillions of dollars of our money to bet with. To me (and I’m not an economist) that’s scary.

Forbes: The fact that you’re not an economist is probably a good thing. You wouldn’t believe this stuff out of thin air. Yes, it always works. Getting on the investing side, in the past, you’ve closed funds. Explain why you did that and what decision goes into opening and closing.

Romick: I used to basically run my fund myself. You’re referring specifically to the FPA Crescent Fund.

Forbes: 2005, yes.

Romick: And I closed the fund in 2005. I was more or less running the fund by myself. And I wasn’t seeing much opportunity. So as I wrote at that time I said that, “Until we see more opportunity and have built up a team, I’m not going to reopen the fund.” So 2008 rolls around and there was a lot of opportunity. I spent the last few years building a team. And that allowed us to reopen, because we had the ability to deploy the capital. I think that as long as one has a stated goal, as one believes they can continue to deliver on that goal, one can remain open. I felt in 2005 that I wasn’t going to be able to.

Forbes: In terms of building a team, you mentioned a disdain for MBAs. Do you share that?

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