GUNDLACH: THE USA CAN’T HANDLE RISING INTEREST RATES
Jeff Gundlach, the savvy bond manager at DoubleLine and the only bond manager who consistently outperforms Bill Gross, says the de facto interest rate tightening of the last few weeks is unsustainable. In a conference call with investors yesterday Mr. Gundlach detailed his outlook. Gundlach believes the higher interest rates will weigh on the debt burdened nation:
“I don’t think the economy can take much of a rate rise above 3.5 percent….The economy, society and government are fueled by debt.”
Gundlach believes we have catapulted from one extreme to another as investors, who were quick to hedge against deflation in August, are now overly optimistic about inflation. Gundlach believes the current environment remains more likely to lead to deflation than inflation in the next two years:
“Deflation is more likely in the next 24 months.”
Ultimately, he sees the current sell-off in bonds as a buying opportunity.
“This is not the time to be selling bonds and buying stocks. This is the time to do the opposite.”
Mr. Gundlach’s newly formed DoubleLine Total Return Fund is up 9.7% since its inception earlier this year. This is an annualized equivalent of 13.7%. A review of the Total Return fund’s holdings show a similar approach to that of Bill Gross described earlier this year. Gundlach’s funds are primarily invested in government agency obligations and CMOs.
http://finance.yahoo.com/expert/article/futureinvest/294376
Thoughts on Siegel and QE2′s adding tgo the money supply?
Btw, I hope that Gundlach is just pushing his case to attract $$$ to his new bond fund.
Tpc – for the first time in this cycle I picked up an official, hard short signal yesterday from my work. Got close over the past two months, but no cigar until yesterday. Also building a long 30 yr position per Gundlach above…just sayin!
Gundlach is not the only one to outperform Gross. Dan Fuss of the Loomis Sayles Bond Fund has outperformed Gross’s Total Return fund by several percentage points in the last 10 and 15 years.
I stand corrected then. Thanks.
“This is an annualized equivalent of 13.7%.”
A meaningless number. Worse yet, deceiving. Partial years should not be presented in this fashion, since they give the impression that there is a constant rate at which performance is generated, no matter the market condition.
If DoubleTree was up 20% in two months, would you annualize it?
Fund inception was April so the YTD number is misleading. That’s the only reason I annualized it. No deception intended.
Sorry, I didn’t mean it as if you intended to deceive. It just is deceiving, and there are investment managers who try to market such annualization. Usually you need to watch your wallet with the ones that do.
Yeah, he left TCW recently so the start-up of Double Line came after the year began. He’s off to a good start….
I was pretty amazed by the sell-off in the 30yr and longer dated muni’s yesterday. I have to agree with B Ferro, it looks like a good time to start legging into the 30yr. If TYX blows through 4.85 then I’m out, but building a small long position with options is something that I am considering. A yield movement that has been this violent is setting itself up for a reversal.
I entered this comment earlier, it posted and then was disappeared!?
We understand that QE is not money printing. And also that in spite of the positive US economic news of the past four months the economy is far from full recovery. There is still a huge dent in net worth due to the depressed real estate market.
Why does the Fed not increase QE to $10 Trillion of five+ year Treasury paper, or just buy up all long dated US paper and thereby truly flatten the yield curve?
This would bring mortgage rates down to 1% and restore real estate values to previous bubble highs thus relieving multiple problems.
You wrote it on another thread – the Annaly thread.
My response over there:
They could. And I’ve explained that this is the only way BB can control the long end of the curve. The concern is input costs. Just look at the fears over money printing in the last 3 months. BB has even specifically explained on TV (TWICE) that it’s not money printing. Do you know how unusual it is for a Fed chief to make comments like that?
I think he is realizing he doesn’t control the long end, but is concerned about what he’d have to do to control it. He’d have to name a rate and leave the buying open ended. If he did that we’d likely see input costs surge 50% in a month because it would be seen as money printing….And in that case the cure might be worse than the disease….
do you have a link to conference call
No, but will post when I do.
Thank you for the reply. And my apologies for my confusion on where I posted the first comment.
Yes – it is as you say. BB would have to specify a long rate and place the QE nuclear weapon on the table and prove he is ready to use it. And yes you are probably dead on when you say the input costs would surge in a highly market distorting way as a result. Input costs have already surged significantly and may decapitate the current rally in a meaningful way if they continue to surge.
So will subsequent QE events occur incrementally, ultimately bringing us to the point where US long term rates mirror those of Japan? Demographically the US population is about 13 years younger than Japan although immigration continues to boost the younger end.
Gundlach is a guru when it comes to non-agency mortgages. His track record even through the worst of the housing crisis was exceptional. Never had a losing year, despite a 10-yr average return of 7.2%.
TGMNX (former fund at TCW)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD
13.57 8.71 11.08 2.75 4.92 2.97 5.05 6.18 0.90 19.50 11.07
I’ve been trying to wrap my head around this, but all I get is a headache.
1. BB initiates QE2 to lower interest rates. Result: They rise, instead.
2. If BB ends QE2 in the latter part of 2011 as he promised, what happens? Rates rise because he’s not buying the notes any more, or do they drop?
3. US Govt, many state govts, many pension plans, and much of the public, are facing high debt levels, high future obligations, or both. Meanwhile, more people are retiring, and workforce participation % stubbornly refuses to rise. Result: The obligations rise and the ability to pay them stays weak. Won’t this require more bailouts in one form or another? So should we expect $$Trillion federal deficits for years, and federal debt as a percentage of GDP going up? Would this not require BB to engage in QE3, QE4, etc, or can the bond market handle $1 to $2 Trillion in federal deficits annually without breaking?
I understand that QE as it has been practiced so far is not, strictly, money printing. But isn’t that what will eventually happen, or do we really expect to “grow” out of this mess?
SM
1. No surprise here.
QE has been tried before in Japan for example. Short term the rates go up instead of down. In less than a year the rates go back where they were.
Reason: QE is interpreted as money printing (wrongly),thus creating inflation expectations which do not materialize.
2. QE3, QE4 .. etc.
the fed cannot accomplish anything at the zero bound. But they cannot say “there is nothing we can do”. So they swap assets around to simulate activity and relevance.
3.yes, yes , yes , yes
No(the fed will withdraw the excess liquidity when there is inflation), yes (or most likely inflate out way out)
“I think he is realizing he doesn’t control the long end, but is concerned about what he’d have to do to control it. He’d have to name a rate and leave the buying open ended. If he did that we’d likely see input costs surge 50% in a month because it would be seen as money printing….And in that case the cure might be worse than the disease….”
As I said some weeks ago, the pragmatic maxim, still applies and your words above are saying the same thing in practice……Pragmatic Maxim paraphrased.
‘Whatever is perceived to be the practical implications of said is in fact the true definition of said.’
An extremely powerful thing to understand in my experience.
I think you need to provide MUCH MORE DATA on EXACTLY how the US will “fall apart” with rising bond rates. I’m sorry but I actually feel otherwise on the issue but that’s just me. In fact now that I am hearing all this talk of “bond vigilantes” and it’s all a hoax, and everyone needs to get out of bonds, etc., etc. I am starting to consider updating my deflationary stance and looking at possible INFLATIONARY moves in the market. Production and GDP is UP across the board here in the US…these are important. I do think stocks are ripe for a dip after such a run as of late but what’s the big deal with bond yields rising?!?! I mean do you honestly think it’s the interest on bonds that accounts for the US fiscal issues?!?!? I don’t have numbers in front of me but to me that’s just ridiculous…the US has NEVER defaulted on bonds and their not going to anytime soon either!! Show me how much of the US debt is actually accounted for by the yield payments on bonds and then MAYBE I’ll consider going further in this thought….but until then see ya lata alligata.
I don’t necessarily agree with the Tea Party guys about austerity AT ANY COST…but I do think that a tighter fiscal policy will REALLY help foreign views of the US and just be frankly good for the US…I only hope this tax cut on the rich 2% of the population does NOT pass and we seriously cut military spending and get out of so many useless wars and war-base expenditures and heck bring those troops home. And maybe even cut the salaries for politicians and cut their health benefits (they can pay for them on their own like everyone else right!?!?) and stop automatic raises for government employees across the board as well as revamp the tax code and start supporting new technologies and subsidies in certain key industries like education, health care, and renewable energy systems across the board (from cars to trash to clothing, etc.). Just my opinion and my thoughts. Thanks for your website and posts…I love it over here at this blog!!