Jeffrey Gundlach, Chief Executive Officer of DoubleLine Capital LP and the putative heir to Bill Gross’s throne as “bond king,” gave a compelling interview this morning on Bloomberg TV. Gundlach talks about the performance of the U.S. bond and stock markets and investment strategy. Here are a few highlights:
One thing is clear that this is the beginning of an attempt to bring the fiscal deficit under control, or at least start to address it. When you raise taxes and when you cut spending, whatever the combination is going to be, you will have headwinds for the economy … What that means is that you are in an environment that is going to have further trouble in terms of investment returns that are in areas that are based on economic growth and areas that do relatively well like bonds.
Ultimately, when you start to look at all this money printing which may continue – Ben Bernanke has said forever, basically, that yes, at some point, one has to worry about inflationary consequences. I’ve been saying for years, though, that investors who are focusing on the near-term on inflation are way too early and that’s still the case in the U.S.
There seems to be diminishing returns on the various rounds of quantitative easing. It’s almost like a half-life of a radioactive particle. The first quantitative easing brought 50%, the second brought a little more than half of that, the third half again, the fourth less than half again. It just seems that the idea of a Pavlovian reaction when you see quantitative easing that you should go out and buy risk assets – it has worked four times, but it doesn’t seem like you are getting much bang for your buck any more.
I don’t think there is a credit bubble at this point in time actually … I don’t believe that, until there are cracks in the credit quality structure of the credit system, that you are going to see a substantial selloff in the credit markets for high yield bonds, non-guaranteed mortgage securities, emerging market debt. So I don’t really expect that is going to happen.
When the next recession comes, it’s going to be a real killer because what exactly is going to be the policy response. It will be policies in terms of raising taxes and cutting spending that help to bring on the next recession I think, so I don’t think it’s very plausible that you’re going to just turn around and go back to the old method of pumping up the economy with debt.
I think the small amount of money that you might make by trying to push it here as we get closer and closer to the end game, where this thing might tail out, the amount of money you might make will be dwarfed by the amount of money you might lose when things reprice lower. Put it another way, if you just stay in cash and earn a small return, or stay in a low risk investment and earn a middling single digit return, the money you might be able to make as we move into late 2013 or early 2014 with repricing, the amount of money you might make if you are able to deploy the money at that point will make all the difference.
To see the entire interview, click the following link: