March 24, 2009
In an unforgettable scene from the 1976 movie Network, the character Howard Beale (played by Peter Finch) exclaims, in an impassioned diatribe, that he is “not going to take this any more!” Jeffrey Gundlach, Chief Investment Officer of the TCW Group, says bearish investors have reached the same breaking point.
Gundlach delivered his remarks in a conference call with investors on March 18.
“People were just too bearish – not on the ultimate outcome, but on the near-term direction of the market,” he said as he explained the reasons behind the markets’ 19% rally since March 9, when he chose the title of his presentation, “You’re Too Bearish.”
Gundlach characterizes the underlying fundamentals in the equity markets as “terrible.” Still, despite the “maximum possible uncertainty” about government programs, monetization, and the level of government borrowing, he says equities could finish the year unchanged from their January 1 level.
Towards the end of the call, Gundlach voiced a bit more optimism. “It would not surprise me at all the see the S&P go to 950 or 1,000,” he said, perhaps believing that market bears – unlike Beale in the movie – will ultimate overcome their pessimism.
Movie buffs may recall that Network ends with Beale being shot to death on air, presumably because of bad ratings.
Overall Market Conditions
The underlying force moving the capital markets is “The Great Leveraging,” illustrated below by the build-up of credit market debt as a percentage of GDP.
Despite ongoing deleveraging, overall debt as a percentage of GDP continues to rise, because GDP is declining. Gundlach expects this trend to continue until inflation takes hold.
Equity market declines now equal those in the 1973-4 and Dot Com crashes, and the decline is on pace to equal the losses absorbed during the Great Depression.
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