Gundlach: Investors Should Stick to Cash

Via Bloomberg:

DoubleLine Capital CEO Jeff Gundlach told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle on “Market Makers” today that “investors should be holding cash” in this environment.  See the full video here.

Gundlach said that risk assets have “diminishing returns” on each round of QE and “it’s almost like a half-life of a radioactive particle.”  Investors shouldn’t turn to risky assets as a “Pavlovian response.”  Gundlach also said that, “I don’t see a lot of value in the U.S. stock market and I think you have to play it safe in the U.S. bond market.”

Gundlach on how to invest in this environment:

“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. The economy is really being supported–this isn’t just in the United States, it’s in Japan, the ECB and Britain–the economy is being supported by quantitative easing that is allowing for a massive budget deficit and money printing exercises to go on…As you address the fiscal problems, you are going to have weak economic growth. 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…Broadly speaking, I think that investors should be looking for lower prices on most risk assets in these developed countries with the exception of Japan…Investors should be looking for the potential inflationary consequences of all this money printing exercise and the place to look for that is Japan…”

On whether Japan is foreshadowing for what will happen in the U.S.

“Possibly…I certainly think that Japan is the pace car here. They started out 20 years ago with their zombie bank problem and they’ve tried various things to get the economy going. Now there’s some political change afoot in Japan and they are definitely in the place to look. Japan is in a uniquely bad position. The United States is not in as bad as a position as Japan.”

“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.”

On whether investors should get more disciplined and look at fundamentals:

“The fundamentals are always important but it does get trumped by policy decisions when policy decisions are so radical as has been the case in recent years…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 would point out that gold, for example, hasn’t done much of anything in the last couple of rounds of quantitative easing. It seems that the fundamentals are starting to exert themselves more powerfully against the backdrop of endless quantitative easing, so it’s possible that the market support is close to finding its limit. This is why I think that investors should be holding cash and buying risk assets at lower prices once the fundamentals assert themselves.”

On whether we’re in a credit bubble:

“I don’t think there is a credit bubble at this point in time actually. The most powerful fundamental, which is really artificial thanks to the central banks, is that there is a zero interest rate in place in this massive market of government guaranteed securities and therefor by extension, very high quality bonds. It pushes people by necessity into other investments. 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.”

“The real killer is going to be the next recession. And there will be one. The policymakers are trying hard to have it both ways…Ultimately as you address the fiscal situation, you’re going to run the risk of a recession.  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…Next recession comes.  So the next recession probably is going to be somewhat cleansing, which means that you’re going to see things repriced lower.”

On where to put your money if not prepared to do short-term trading:

“You’ve got to survive with virtually no return if that’s the way you look at things. I actually recommend that for many investors. 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. People always want investments to go up like a line…That’s just not reality. You make 80% of your money in 20% of the time in investing and you have to be patient…I see some values in some of these foreign markets. I don’t see a lot of value in the U.S. stock market and I think you have to play it safe in the U.S. bond market with funds that are really dedicated to having low volatility.”

On fiscal cliff talks:

“Something is going to get done, it looks like, between John Boehner who has now blinked a little bit going with the million dollar tax bracket and the president going with the $400,000 tax bracket. They’re getting close, but this is all just a big circus really. We have a $3.6 trillion spending going on at the federal government and they’re taking in $2.3 trillion dollars. So the shortfall is $1.3 trillion and what we are talking about with the million dollar increase is about $20 billion of revenue that would be brought in. At the $400,000, you’re talking about maybe $35 billion. So this is just masking a huge fiscal issue. The issue isn’t the fiscal cliff. The issue is the fiscal crisis that the United States has been looking at for the past several years and this is sort of a down payment on finally some fiscal reform.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Boston Larry

    I saw & heard Jeff Gundlach interview on Bloomberg TV this morning. Thought it was good and clear. He said if you look a little further out than one month or one quarter, then the downside risk far outweights the upside in nearly all risk assets except for Japan and China equities, which have been beaten down to bargain levels. Nearly all other risk assets, including SPX, are overvalued in his view. He said the most important thing for individual investors over the next year or two is to protect themselves from downside risk, even if it means settling for a very low positive return. A recession is inevitable sometime during the next 2 years in his view, especially if a serious measure to address deficit is adopted. What do others think who saw this Gundlach interview?

  • Waitingtoretire

    This is so sobering no one is commenting…………

  • linh tu

    Between David Tepper making a bullish case for equities and Jeff Gundlach advice to people keeping their money in cash, I would go with Tepper. That is what my common sense tells me. Gundlach should stick to what he knows best which is bonds and leaves equities to people like Tepper who actually earn their living investing in stock markets.

  • whatisgoingon

    He is my one favorite investors. I don’t know why I don’t listen to his sensible recommendations

  • Kafkaesque

    I respect Gundlach and think he’s a smart man…but I wish he had been more specific on why he considers the equity markets expensive. On an earnings multiple basis, the market is about 13.5x 2013 EPS, which is not unreasonable by historical standards. So if he thinks the S&P is expensive, he must think either 13.5 is too much or EPS forecasts are too high.

    Disclosure, if you care: I am short the S&P and getting pounded day after day. It is not fun.

  • LVG

    Gundlach is always bearish on stocks. What else is new. He’s a bond manager. So he’s talking his book. Any of his opinions on stocks are just noise.

  • Rich

    Lot’s of words and zero content.

  • Boston Larry

    If Gundlach is just talking his book, then why would he recommend buying Japanese equities, and also holding cash? Why advise cash when he could suggest that folks buy one of his DoubleLine bond fund? It is quite rare and refreshingly candid that a CEO of a major mutual fund company (over $ 25B in assets) would encourage cash instead of bonds. An interesting guy. @Kafkaesque, Gundlach believes the SPX is overvalued because the earnings will come under pressure due to very weak growth in 2013, possibly flirting with recession, due to combo of higher taxes and lower gov spending, along with a lower deficit.

  • Boston Larry

    Actually, Gundlach’s content was much more substantive and clearer than that of David Tepper, the cheerleader for the bulls. Tepper has been right for the past 2 days and maybe the next week or two, but wait 3 to 4 months and see which of them had better insight.

  • Rich

    Bad time of year to short large caps, unless the index moves against the historical pattern, then you look like a genius! Not so much this year.

    I went long on mid caps recently and it’s worked out nicely.


  • ChasW

    If i interpret these views correctly and attempt to put the delta numbers into my super simple model GDP2013% = +2%C -1%G -?%I, then the question is really one of timing the growth/recovery of C. C growth should encourage growth in net I, and generate the virtuous circle.

    Hatzius says much the same thing but believes the 1st H2013 is the risk and then the C picks up enough to move the GDP forward in the second half.

    What would you watch to gives indication of this C improvement? I like the rail traffic reports.

  • Andrea Malagoli

    Gundlach is one of the investors I mostly respect. He made some bold calls on last year’s Ira Sohn Conference and many of them came true, including the much criticized call on AAPL.

  • Lance Paddock

    He believes they are expensive for the same reason most traditional valuation metrics that adjust for cyclicality show them as expensive. That is, profit margins are extremely high and thus distort one year P/E ratios. If you believe that profit margins stay high that doesn’t mean they are cheap. but it does mean that equities will grow earnings enough to do okay. If you believe they will not stay at all time highs then stocks will do very poorly.

  • Tom

    It is amazing to me that the two greatest bond investors of our time don’t understand that quantitive easing do not “allow for massive government deficits”. Shocking really.