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Bram de Haas
Bram de Haas
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Gundlach: Focus on Preservation of Capital Into 2019

A summary and review of Gundlach's CNBC interview where he explains his current market views

December 18, 2018 | About:

Jeffrey Gundlach is CEO of DoubleLine, and Barron's proclaimed him "The New Bond King." He has degrees in mathematics and philosophy. DoubleLine is quickly becoming a signficant player in bonds with hundreds of billions of assets under management. Its primary objective is “to deliver better risk-adjusted returns.”

Gundlach just appeared on CNBC Dec. 17 and made some interesting market observations and calls. He tends to be outspoken and doles out advice according to how he views things.

What to do in this market

Gundlach said that he currently believes the right strategy is capital preservation. He believes the best portfolio to enter 2019 with would be a high-quality bond portfolio, consisting of mostly two-year Treasuries. He did reiterate that he likes commodities and they have been doing surprisingly well. He did indeed call for broad-based commodity exposure, but he also has been fond of emerging markets for a while and they didn't do great.

We are not officially in a bear market yet. The market needs to be down 20% from its high, but Gundlach thinks that 20% is a rather arbitrary number. He has a point. If the market declines 16% from its high and shows all signs of continuing to go down that path, you might as well call it a bear market at that point.

Passive investing

Gundlach specifically said his strongest advice is "not to invest in passive U.S. equity funds." He believed passive investing has gone into mania status.

This is not a suprising call because he has said negative things about index funds before. Guru Murray Stahl (Trades, Portfolio) and Steven Bregman believe these are being terribly abused.

Like Stahl and Bregman, Gundlach also believes robo-advisers played a role in the market's current situation. Robo-advisers offer easy market access online. They are often powered by portfolios filled with exchange-traded funds with low expense ratios. That makes it easier for the robo-adviser to charge its fees on top.

Outlook

Interest rates might have a life of their own. It may not matter that markets can’t handle higher rates. Gundlach said he believes the Fed shouldn’t raise rates this week. The bond market is clearly telling the Fed it shouldn’t raise rates and is pricing in a hike this week, but it is also pricing in a cut in 2019 and two more in 2020

The problem is the deficit, Gundlach said. Because it is so out of control so late in the cycle, they have a problem. It has never happened that the Fed raised rates while the budget deficit is expanding.

The budget deficit usually expands in response to a recession. In this case, the U.S. extended the cycle through growing the deficit.

At the same time the Fed has been tightening interest rates much harder than people understand because it is also rolling back QE.

A study by the Fed indicated that QE programs had the same effect as 300 basis points of negative interest rates.

Gundlach estimates we currently have raised rates the equivalent of 10 interest rate hikes instead of eight.

Tariffs

Gundlach also made several comments on government and its policy. He believes the government's dysfunction is starting to be unhelpful to the economy. He is worried about tariffs, which appears to be a change in his thinking. Prior to this interview, I have understood Gundlach to believe tariff risks to be overstated. He thinks China does not want to be told what to do by President Trump. Meanwhile, Trump loves to bully people. He is probably going to raise tariffs. Gundlach hopes that does not happen. But hope is not a strategy. If you see identifiable risks, you need to take action, he said.

Disclosure: No position in any stocks mentioned.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website


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