July 17, 2012
A copy of Jeffrey Gundlach’s presentation is available here.
Since early this year, Jeffrey Gundlach has warned investors to avoid exposure to riskier assets, among them equities, non-dollar-denominated securities and sovereign debt. Still reluctant to move to a more aggressive position, Gundlach said on Thursday that “substantial opportunities await” – but they may be as much as a year away.
“We are ready to shake the world up with some decisions in the Eurozone that have to be made in the next year,” he said, “and in the US regarding its debt problems.”
Those decisions will be sufficiently disruptive to the markets to create buying opportunities. Until then, Gundlach advised investors to “not try to press it.”
Gundlach spoke in a conference call with investors. He is the founder and chief investment officer of Doubleline Capital. Summaries of his previous two conference calls – during which he made similar warnings about riskier assets – are available here and here.
Gundlach discussed how he has reduced exposure to certain assets in Doubleline’s multi-asset growth fund. Let’s review his outlook across the capital markets – and how he proved that Facebook’s stock was a better investment than five-year Treasury bonds.
US bonds and equities
Low-yielding US Treasury securities are unattractive across the maturity spectrum, offering “reward-free risk,” Gundlach said. His funds hold cash instead of short-duration high-quality fixed income, such as Treasury bonds. Holding cash, he said, keeps him aware that he has “dry powder” to deploy, should opportunities arise.
Gundlach said the return on Treasury bonds, even if yields fall a bit further from today’s levels, is unappealing in comparison to other vehicles – including Doubleline’s total return fund, which yields 5%.
It’s not only Fed policy that is keeping rates low, he said. Flight-to-quality is having a profound effect, and fearful investors in distressed European countries are choosing securities such as the 10-year Treasury as a safe haven.
Don’t expect another round of quantitative easing, either. Gundlach said that the Fed is “starting to realize that QE III is really not going to be effective” and will be reluctant to implement it.
That may mean value of the dollar is poised to decline, he said, which would in turn imply that the US Treasury market “may be near some sort of a peak in price.”
The recent bankruptcy filings by San Bernardino and Stockton have heightened awareness of the perilous state of city and state finances, Gundlach said. On the day he spoke, he said that the price of NMUNI, a benchmark municipal bond fund, had declined by about 50 basis points. Gundlach reiterated a warning he has made in previous conference calls: The tax advantage of municipal bonds may be legislated away, as part of an overall plan to raise taxes on the wealthiest individuals.
Corporate profits at an all-time high as a percentage of GDP – with wages at an all-time low – will stoke public support for taxes on the wealthy, Gundlach said. He predicted that Obama will be reelected, and he said that Obama’s side comment in March to Russian President Medvedev that he would have “more flexibility” after the elections should be viewed as one indication of the likelihood of tax increases.
Gundlach said he has taken his fixed income allocation down “a bit,” and reduced the duration of his bond holdings to boot. He has reduced his cash position slightly in order to deploy money in commodities.
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