Gundlach ? Avoid Riskier Assets
Commodities, gold and emerging markets
Indeed, Gundlach said he is “taking risk exposure more in commodities than in equities.”
Real assets now comprise approximately 25% of Doubleline’s multi-asset growth fund. Gundlach said he has increased natural gas holdings to about 6% of the portfolio. He has been bullish on natural gas in the past, and he plans to build his position up to 15% of the portfolio gradually, as part of a long-term strategy.
“I’ve been liking gold whenever it is below $1,600 per ounce,” Gundlach said. He has increased his gold allocation to 12% of the portfolio, he said.
Since late in 2010, Gundlach has been advocating for investors to eliminate all non-dollar-denominated risk. Last week, however, he softened his position.
“I am no longer unwilling – almost – to listen to the idea of buying other currencies,” he said.
Although he hasn’t yet bought any emerging market equities, he said that part of his long-term strategy is to build that position. Wealth will be growing in the stronger emerging markets at the expense of the developed world, he said, and “we do believe that the opportunities are likely to get cheaper in that area.”
Gundlach said he is “waiting for an opportunity to deploy significant capital” into some emerging market sectors.
He won’t be buying the sovereign debt of the weaker European countries. Gundlach expects Spanish yields, which are now approximately 7%, and Italian yields, which are between 5% and 6%, to go higher. “I think you are out of your mind if you owned Spanish bonds,” he said, “and maybe Portugal’s as well.”
Housing and eminent domain
One area Gundlach sees improving is housing. He said that half of the cities in the Case-Shiller index are increasing on a year-over-year basis, and nearly as many went up in the most recent monthly data.
But he is highly skeptical of the eminent domain strategy currently under consideration.
He described the effort as “some ex-Wall Street guys” who plan to lobby financially strapped counties and cities, to get them to use eminent domain to seize mortgages that are currently performing, but which are underwater.
Gundlach said those individuals claim that will buy mortgages at fair value. “The problem of course is that these are ex-Wall Streeters and therefore, what they mean by fair value is probably below fair value, because this is a for-profit enterprise,” he said.
He expects that they will “pocket the profit or perhaps share the profit with sort-of corrupt politicians, and thereby have this great seizure of wealth.”
Support for the idea comes from claims – by its proponents – that it will help out financially strapped cities and counties, at least in the short term. Gundlach doesn’t believe that, although he didn’t say specifically why – only that the plan itself is illogical. He also said it would not withstand a constitutional challenge.
One of the problems Gundlach noted was that the pools that would be seized would not be eligible for Fannie Mae good delivery.
If it were to succeed, he said that it would set a bold and pernicious precedent. The core precept of the plan, Gundlach said, is that it is “immoral” for people to have to pay back debt that is underwater. But, he said, paying back such debt occurs with virtually every credit card transaction. When one buys, for example, a pair of jeans and charges the purchase, the merchandise will be worth less when they walk out of the store. When you charge a meal at a restaurant, he said, it is worth nothing once it is consumed.
“If we are going to start getting people to be forgiven down to market value on all their underwater debt,” he said, “we will be forgiving all credit card debt.”
Facebook, five-year Treasury bonds, and desperate investors
Gundlach was asked about a comment he made, at some point in the past, to the effect that Facebook was a better investment than five-year Treasury bonds. Rather that earn nearly zero on those bonds, he said he proved he could do much better with Facebook stock. He did so by purchasing some with his own money. Because of the volatility of the stock, he was able to sell it in less than 15 minutes at a 4% profit, proving his contention.
But that story was one bit of positive market news amid Gundlach’s bleaker outlook for riskier assets.
Gundlach has said in the past that it is neither fear nor greed that causes investors to lose money; the need for return does that. “Need-based investing is the most deadly,” he said, “because all types of shaky valuations and shaky investments get justified with the fact that at least they have a chance to provide some sort of return.”
“It seems to me, investors right now are downright desperate,” he said.
Investors are underestimating the degree of risk in the markets, according to Gundlach, who said that the fiscal crises in the US and Europe are far from over.
Gundlach said that typically expects to make 80% of his money over 20% of the time. This year has not been one that fell into that 20% category.
He acknowledged that the returns for the multi-asset growth fund have been modest (it is down 0.14% year-to-date), reflecting the conservative positioning of the portfolio. But, he said, “I think that is appropriate.”