The world according to Gundlach

Marcus Tuck

A few years ago, thieves broke into the home of Jeff Gundlach, the mercurial founder and CEO of the US fund manager, DoubleLine Capital. The thieves stole millions of dollars' worth of abstract art. They also took two worthless abstract paintings signed by an amateur artist named Helen Fuchs, Gundlach's late grandmother. The police were unable to find the culprits until Gundlach gave them the idea that the thieves would probably do a Google search using his grandmother's name to find out more about the paintings and how much they might be worth. Sure enough, only two such Google searches were made, one by Gundlach himself and the other by the thieves. The police successfully traced the search, the culprits were apprehended and all of the paintings were returned to Gundlach.

That example of left-field thinking is typical of how Gundlach has built up a formidable performance track record (although this year has been a difficult one for him) while at the helm of the US$100 billion DoubleLine bond fund. He was highly critical of the Fed's decision to raise interest rates back in December 2015 and has remained steadfastly bearish on growth. He recently went public with some pretty strong views about the current state of markets. He said on Friday that many asset classes look frothy, and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks.

Noting the recent run-up in the S&P 500 index to a record high at a time when economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a "world of uber complacency." The weaker-than-expected US GDP numbers on Friday showed annualized growth of only 1.2% in Q2, not much higher than the 0.8% growth recorded in Q1. "Sell the house, sell the car, sell the kids. That's exactly how I feel - sell everything. Nothing here looks good," Gundlach said in a telephone interview. "Investors seem to have been hypnotized that nothing can go wrong."

Gundlach said that his firm went "maximum negative" on Treasuries on July 6 when the yield on the benchmark US 10-year Treasury note hit 1.32%. "We never short in our mainline strategies. We also never go to zero Treasuries. We went to lower weightings and changed the duration," Gundlach said. "The yield on the 10-year may reverse and go lower again, but I am not interested. You don't make any money. The risk-reward is horrific," Gundlach said. "There is no upside in Treasury prices."

Gundlach reiterated that gold and gold miners are the best alternative to Treasuries and predicted gold prices would reach US$1,400/ounce. Gundlach lambasted Federal Reserve officials again for talking up rate hikes for this year. He said, "The Fed is out to lunch. Does the Fed look at what's going on in the economy? It is unbelievable." He also said the Bank of Japan's decision on Friday to stick with its minus 0.1% benchmark rate, refraining from deeper cuts, reflects the limitations of monetary policy. "You can't save your economy by destroying your financial system," he said.

Yesterday Japan's cabinet approved 13.5 trillion yen (US$133 billion) in fiscal measures as part of efforts to revive Japan's flagging economy, with cash payouts to low-income earners and increased infrastructure spending. The headline figure for the package totals 28.1 trillion yen, but that includes public-private partnerships and other amounts that are not direct government outlays and may not give an immediate boost to growth. The stimulus spending is part of a renewed government effort to coordinate its policy with the Bank of Japan, but growing concerns that the BoJ policy has reached its limit triggered the worst sell-off in Japanese government bonds in three years.

Closer to home, the Reserve Bank of Australia delivered the 25 basis point rate cut that the market had been expecting, lowering the official cash rate to 1.50%. The news did little to settle the equity market, though, which closed near its lows of the day, with the energy sector being the weakest on the back of falling oil prices. It quickly became clear that the big banks will not pass on all of the rate cut to borrowers, a repeat of what happened after the last rate cut in May.

The RBA's statement noted that, "... conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China's growth appears to be moderating." It also noted, "In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term. Recent data confirm that inflation remains quite low. Given the very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time."

Australia's economy is clearly doing better than most, but our markets remain correlated with the US's. If Gundlach's view of the world is right, we will still catch a cold when Wall Street sneezes.

Article contributed by Mason Stevens: masonstevens.com.au


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