If last week's buoyant stock market brightened your mood, don't listen to Jeffrey Gundlach.
The former bond fund manager at The TCW Group Inc., who launched DoubleLine Capital LP after being fired in 2009 and quickly attracted $30 billion in assets, sees gloom everywhere.
“We have a culture of cowardice at DoubleLine; we're scared to death of everything,” Mr. Gundlach told attendees at the Investment Management Consultants Association's national conference last week in Washington.
“Investors will continue to bounce from despair to euphoria,” he said. Things can go on for longer than you think, but we're going to jump the track.”
Mr. Gundlach argued that the mountains of debt that have accumulated in developed economies over the last 30 years will hobble financial markets and wreak havoc on investment portfolios for years to come.
He suggested that growing opposition to austerity measures in Europe doesn't bode well for an economic recovery in the eurozone. Japan's bad demographic profile and depleted savings pool likely will mean continued difficulties there.
And the United States is scarcely better off.
Median real income in the United States has been flat for decades, while household debt has skyrocketed. Labor participation rates are falling for every age group other than those over 55, and government spending on defense, health care and Social Security has exploded.
Mr. Gundlach has little confidence that politicians will do much more than postpone the day of reckoning with still more borrowing and further stimulus efforts to prop up moribund economies. Armed with dozens of charts and graphs depicting the severity of the situation, and peppering his narrative with quotes from Shakespeare, Mr. Gundlach suggested that indebted countries have neither the will nor inclination to fix themselves.
“Everybody wants change, but no one wants to be the one to change,” Mr. Gundlach said.
“I wish the global debt problem would go away, too,” he said. But if you cover your ears, it doesn't mean it will.”
The advisers appreciated Mr. Gundlach's early-morning session.
“I agree with him and like the way he presented his ideas. We have some major problems, and there's often a tendency to glaze over them,” said Thomas Fife, a Pensacola, Fla.-based adviser with Raymond James Morgan Keegan.
“I liked every word of the presentation, and I loved the Shakespeare quotes,” said Gary Bedford, an adviser who runs a firm in Boulder, Colo., affiliated with Mid Atlantic Capital Corp. “Capital should be advised by wisdom.”
Others were less impressed with the speech.
“Analysts get attention with extremism,” said one wirehouse adviser, who asked not to be identified. “I don't think the situation is as dire as he paints it.”
“He had a lot of wiseguy comments, but what's he doing with his money?” said another wirehouse adviser, also requesting anonymity.
Indeed, other than a suggestion to “go long natural gas and short Apple [Inc.], and leverage it 100 times,” Mr. Gundlach didn't spend a lot of time offering up investment ideas.
LAND GRAB?
“The bottom line is that investors can't have a long-term horizon anymore unless they plan on buying land for their great-great-great-grandchildren,” he said.
Mr. Gundlach advised U.S. investors to diversify with more alternatives, real assets and international exposure, and get used to the volatility.
It isn't surprising that Mr. Gundlach has a dour outlook, said Michael Jones, chief investment officer of RiverFront Investment Group LLC, which manages $3.3 billion in assets.
“Gundlach is a bond guy. He sees the doom and gloom,” Mr. Jones said.LESS PESSIMISTIC
Mr. Jones also spoke about the global debt crisis at the IMCA conference but has a less pessimistic view of the investment horizon.
“The environment is horrible for bond investors, but it's good for equity investors,” he said. “That's where I differ from Mr. Gundlach.”
Mr. Jones also thinks that economic conditions are far better than they were two years ago, with two key factors improving the outlook.
The heavily indebted U.S. consumer is now in better shape — in large part thanks to the Fed's policy of keeping interest rates down.
“In the last 18 months, the ratio of debt payments to income for U.S. consumers has dropped dramatically,” Mr. Jones said.
The second key positive is Europe. Although Mr. Jones said that there are still problems to deal with, he also thinks that the politicians and central bankers understand the situation better now.
“In my assessment, the European Central Bank now knows what it has to do. If there's a run on banks, they're going to print money and keep them afloat,” Mr. Jones said.
The Fed's policy of financial repression — similar to the strategy after World War II — will be hard on fixed-income investors but good for corporations and their shareholders.
Mr. Jones is using a 60/40 stocks-to-bonds allocation but invests in “stocks that look like bonds, and bonds that look like stocks.” In other words, he is interested in less volatile stocks and high-yield bonds.
“We still have a lot of problems, but I saw dramatic improvement over the last year,” Mr. Jones said. “We'll have pullbacks in the market, but I don't think we'll have a crash like we did in 2008 or even last year.”
aosterland@investmentnews.com
