DoubleLine Capital Founder Jeff Gundlach held his quarterly webcast on global markets and the economy on Tuesday.
The main takeaways included:
- The dollar is overdue for a rally, even after many investors inaccurately believed that it would rise because the Fed was raising rates.
- Commodities are very cheap compared to equities, and this is great for investors looking for “long-term secular timing.”
- On politics, President Donald Trump would likely deliver ‘tax-reform lite,’ and we will have to accept that North Korea is armed with nuclear weapons.
- On bitcoin, Gundlach said: “I’m going to let this mania go on without me.”
In his second-quarter webcast in June, Gundlach advised short-term stock traders to raise cash, and warned that low volatility should not be seen as a new template for the market.
A little over a month later, he told Reuters that he had bought S&P 500 put options in a bet that volatility would rise. The trade, he said, was “like free money.” Volatility spiked briefly early in August but has remained near historic lows.
Gundlach’s flagship fund has also been in the news. The Wall Street Journal reported in August that assets under management at DoubleLine’s Total Return Bond Fund fell 13% from their peak last September to $US54 billion at the end of July.
Gundlach, who recently joined Twitter as @TruthGundlach, criticised the story before it was published. He later told Bloomberg he was reducing positions in the firm’s funds to invest in higher-quality credit assets, which could be costly to performance in the short term.
Gundlach began by addressing the Wall Street Journal's story on his flagship fund's performance.
He said that DBLTX -- the DoubleLine Total Return Fund -- outperformed the Bloomberg Barclays Aggregate Index, its benchmark.
Returns are 'actually better on an absolute risk-adjusted basis,' he said.
Gundlach moved on to the European Central Bank, which has taken a more hawkish tilt compared to the doldrums of negative interest rates.
The German 10-year yield is set to move higher when the European Central Bank starts tightening, he said.
The spread between junk bonds in Europe and Treasurys in the US has come down as the investors bought the much riskier corporate debt.
'Which of these should you want to own?'
You never get a recession with the leading indicator positive, Gundlach said.
This, for example, 'doesn't look good.'
The last two times that commercial and industrial-loan growth rolled over and was headed to zero, the Fed had already started to ease interest-rate conditions. But the Fed is moving in the other direction to lift rates further away from zero.
Loan growth may get a boost in the fourth quarter from businesses that are rebuilding after the hurricanes, Gundlach said.
'I'm going to let this mania go on without me,' Gundlach said.
But he noted he's argued with 'smart' millennials about the cryptocurrency. 'I philosophically don't believe that its unhackable,' Gundlach said.
He said his 86-year-old mum texted him with a link to a bullish article on bitcoin, asking whether she should buy as it moved higher. It was higher then, near $US4,500, and at $US4,217 on Tuesday, she probably won't be interested in buying at this lower level.
But it won't endure, he said. The US dollar index could go to as high as 97 before it moves another leg lower -- just not now.
The blue line is the percentage of S&P 500 components above their 200-day moving average. Generally when you start to see weakness, it's foreshadowing potential trouble, Gundlach said.
The price-to sales ratio of the S&P 500 is as bad as 2007 on an equal-weighted basis, and as bad as 2000 on a price-weighted basis.
Gundlach recommended shorting the SPY and going long the iShares MSCI Emerging Markets ETF.
He said he's not really fond of EM in the short term because he doesn't think the dollar is going to keep falling. But emerging markets are attractive on a long-term basis.
The valuation of commodities versus equities is 'incredibly cheap.' It usually coincides with the period near the peak and is good for 'long-term secular timing.'
It's flatter, but from a very high level, Gundlach said.