Gundlach's High-Conviction Investment Idea
December 26, 2012
by Robert Huebscher
Count Jeffrey Gundlach among those who expect Japan’s currency to collapse because it can’t service its debt. Japan’s challenges may parallel those that the US faces, and Gundlach feels strongly that they have created a compelling investment opportunity.
Speaking a day before Federal Reserve Chairman Bernanke announced that the Fed would step up its quantitative easing policies, Gundlach warned investors that such efforts would have diminishing returns. Near-zero interest rates and an expansion of the Fed’s balance sheet won’t boost asset returns, he said, and they don’t address the fiscal imbalances our country faces.
“We’re in this predicament owing to a simple fact,” Gundlach said. “The United States has been spending more than 50% more than it’s been taking in in taxes. “ Addressing the budget deficit will be costly, he added, and an “instant recession” will ensue if deficits are reined in too quickly.
In Japan’s case, meanwhile, Gundlach said quantitative easing will have far more insidious effects – most notably, debasement of the yen – and that creates opportunities for investors.
Gundlach, the founder and chief investment officer of Los Angeles-based Doubleline Capital, spoke to investors in a conference call on December 11. The slides from his presentation are available here.
I’ll discuss Gundlach’s high-conviction investment idea in more detail, but first let’s review his assessment of the economic landscape – including the fiscal cliff – and his outlook for Japan, which may prove to foreshadow the fate of the US economy.
A challenged US economy
“Clearly, people don’t want to see the economy contract very substantially next year,” Gundlach said. “But, as I’ve said for several years now, addressing the budget deficit equals economic weakness and headwinds, and perhaps if it’s addressed aggressively, that’s just instant recession.”
Gundlach was very skeptical that progress would be made to avert the fiscal cliff, much less toward addressing the larger deficit issues. The fiscal cliff negotiations have been unable to bridge gaps as small as $70 to $80 billion annually in tax increases, he said, which does not bode well for addressing the $1.3 trillion deficit.
“Ultimately, you must balance the budget,” he said. “To do that, you have so much more work to do than this tiny little issue about 2% of the population.”
Lack of progress on the fiscal cliff has impeded growth, according to Gundlach, by delaying businesses’ decisions about spending. Confidence among corporate leaders has “plummeted,” he said, since reaching a fairly high level in the first part of 2011, and the data show that purchases of equipment, software and other goods have been very slow lately.
Higher taxes are likely, according to Gundlach. He warned that other states may follow the example set by California in the recent election; it raised taxes by 30%, retroactively, on its wealthiest citizens. He also said that more granular tax brackets were probable, such as additional brackets at $500,000 or $1,000,000.