Jeffrey Gundlach is known as the "bond king" for a reason - with $150 billion in assets under management, his DoubleLine Capital is one of the largest players in the international bond market.
Since his livelihood relies on his ability to analyze broad market trends, Gundlach spends a lot of time thinking about the economics of various industries and countries. In a recent interview with Yahoo Finance, Gundlach voiced his opinion that expectations of a "V-shaped" economic recovery are misplaced.
Delaying the inevitable
Gundlach said the U.S. Federal Reserve used its power as the central monetary authority to reduce volatility in the stock, bond, commodity and interest rate markets back in March, wryly remarking that âwhen investors use the word âvolatilityâ, what they really mean is âdown.ââ He believes that conditions during March and April were far worse than they were back in 2009.
He pointed to the dearth of buyers in the U.S. credit markets in 2020, saying that it was impossible to find a buyer for many types of corporate debt. This led to the Federal Reserve taking the unprecedented step of buying corporate bonds (which they had not done in 2008), despite the fact this is technically in violation of the central bank's founding principles. Gundlach pointed out that this willingness to bend its own rules indicates that the U.S. central bank is committed to go even further. However, he thinks they are just delaying inevitable bankruptcies.
âI think weâre delaying the inevitable, because under my analysis, many bond prices that have been pushed up by the Fedâs buying of ETFs and individual corporate bonds more recently - the prices theyâve pushed these assets up to is, I think, a higher price than youâll receive through a bankruptcy workout when a lot of these companies have to go through a filing.â
No V-shape in sight
Gundlachâs baseline assumption is that a V-shaped recovery - that is, one in which the U.S. economy rebounds quickly from its coronavirus-induced slump - is highly unlikely:
âA V-shaped recovery basically implies that you can take 20% of the US workforce and put them in jeopardy, put them on unemployment benefits, have them produce nothing, and instead receive money thatâs being lent by the Federal Reserve to buy the bonds, and you can do all that and nothing bad will happen. It just doesnât seem very likely that you can have that kind of hardship roll over the economy and that nothing will happen.â
At this point, we still have no idea what the long-term consequences of the lockdown will be, but it seems quite likely that there will be significant changes in the functioning of the economy. Gundlachâs basic point is that it is unreasonable to expect a swift recovery given the seismic changes that have occurred. It is impossible to know the future, but what investors can do is buy stocks of quality businesses with strong cash positions that are capable of withstanding further problems.
Read more here:
- What Cash Flows Can Tell You About Incomeâ
- Howard Marks: Everyone Makes the Same Mistakes
- The Value Investorâs Handbook: Operating Leverage
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