Gundlach: Banking Crisis Is ‘Just Like 2008’; Stay Away From Markets

Star manager says there are no opportunities to invest, so investors should ‘stay conservative’

Investor reacting to falling stock prices. (Photo: AP) Investor reacting to falling stock prices. (Photo: AP)

Superstar fund manager Jeffrey Gundlach counsels investors to “stay conservative,” adding they should not make the mistake of thinking swooning markets represent an opportunity to buy.

The DoubleLine portfolio manager, named by Morningstar as Fixed Income Manager of the Year in 2006 and nominated in 2009 for Fixed Income Manager of the Decade, told AdvisorOne in a phone interview that Thursday’s market mayhem—the Dow closed down 3.7%, the S&P 500, 4.5%, and Nasdaq, 5.2%, with European markets falling as much as 5.8%—was the result of the “undeniable problems in Europe which keep escalating. It seems likely that given the price action of bank stocks in Europe there is the serious possibility of a global banking panic.”

jeffrey gundlachGundlach (left) says “the time is ripe” for another AIG or Lehman-level collapse “based upon the growing lack of confidence in the growing debt of Spain, Italy, Greece, Portugal, Ireland and ultimately of France.”

Adding to the danger is the fact that European financial institutions—particularly French banks own these toxic assets. The result will be a “restructured default”—unless the Germans are “going to pay the debts of everybody in Europe,” something Gundlach says is extremely unlikely.

European banking stocks fell 6.7% on Thursday, but that loss is of lesser importance to Gundlach than the trend, which is not just down, but “accelerating on the downside.” Société Générale, for example, was trading at 52 six months ago, but fell below 22 on Thursday—almost 60% on the downside, he said.

What makes global banking fears realistic is that “they’re all tied together with swap contracts. This is just like 2008, he said, citing the “knock-on effects” on other financial institutions of a weakened AIG.

Adding extra weight to Gundlach’s warning that he seems to have made some correct predictions in recent statements, including his warning on a conference call with investors on Wednesday in which he described global banking problems as being in a DEFCON spiral—referring to the highest level of military alert before the outbreak of war.

Following S&P’s downgrade of the United States, Gundlach had advised selling stocks when the S&P reached above 1,200—a level he does not expect the index to reach again for several quarters—and he noted that Monday’s stock market rally provided the last opportunity for investors to do so. “That was their chance,” he told AdvisorOne.

The DoubleLine manager was emphatic that acceleration of the global banking crisis is the real problem as opposed to other problems that might get more headlines. Main Street looks at unemployment and housing, he said, but those problems have been with us for some time.

 

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He acknowledged, however, that domestic problems feed a depressed psychology. Most Americans aren’t reading Bloomberg, he said, but when they see potholes go unrepaired and services cut, they are increasingly convinced we are in a depression.

Gundlach expects economic difficulties in the U.S. to intensify because of a withdrawal of stimulus at a time of anemic growth. The lesson of the debt ceiling drama in Washington is that “it just doesn’t seem likely we’ll throw another couple of trillion dollars to get temporary growth.”

Longer-term, Washington’s deficit spending has distorted the economy, he said, comparing fiscal policy to the plant-stimulating product, Miracle-Gro. You put it on the plant and it looks beautiful for a while, he said, but “you’ve got it on a steroid. You need mulch and compost in the soil. You don’t just spray an amphetamine on the plant. That’s what happens when the government deficit spends,” he said.

Gundlach’s bottom line: “Stay in low-risk. Do not think a small drop in risk assets is a tremendous buy opportunity.”

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