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Portfolio > Alternative Investments > Commodities

Gundlach Bearish on Stocks, Doubts QE Will End in 2014

By Janet Levaux

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DoubleLine CEO and CIO Jeffrey Gundlach is concerned about economic weakness in China, which could spill into the global economy. The fixed income expert also continues to be upbeat on agricultural commodities and is considering buying some Russian debt.

Gundlach — who correctly predicted a messy equity market and an uptick in gold miners earlier this year — shared these and other views with investors during a call Tuesday about two DoubleLine closed-end funds that invest heavily in debt securities.  

When asked what his favorite investment is right now, the contrarian investor said, “I still like things such as agricultural commodities. Wheat, which suffered from low prices, is now at a high-water mark.”

As for equities, he doesn’t see S&P rising 20% this year, regardless of whether or not certain economic indicators — such as those tracking bank loans and rail-car loadings — remain strong.

“People want to act like equities are unstoppable,” explained Gundlach. “Long-term Treasuries have outperformed the S&P [500] handily year to date.”

As he reminded investors earlier in 2014, “It’s best to watch hard and fast conclusions,” especially those surrounding where the markets are headed.

The S&P 500 will likely break below its 200-day moving average “at some point this year,” Gundlach added. “It was way over that all year in 2013, so the laws of probability mean that you won’t see that happening again.”

Tapering Talk

The DoubleLine leader also discussed the end of the Federal Reserve’s quantitative easing measures and an increase in interest rates, which Fed Chairwoman Janet Yellen indicated could come in April 2015.

For interest rates to begin rising, he said, “You first have to have quantitative easing go away completely in 2014. I am not convinced this will be the case, as it’s quite likely that there will be volatility” in the economy this year.

In other words, “I do not see us out of QE in 2014. And I would not say there will be a rise [in rates] for sure in April 2015. It’s just a possibility.”

As for the U.S. housing markets, which he referred to as a general “pillar of the forward-looking economy,” there has been a softening of prices. “We will never back to where we were in 2000. That was an anomaly.”

Rather than 1.5 million yearly housing starts, Gundlach says, 1 million is likely to be “the norm for next few decades.”

Chinese Conundrum

Despite the recent jump of the Shanghai Composite Index above 2,000, the DoubleLine exec is sanguine about the Asian powerhouse.

“I am quite concerned and becoming increasingly skeptical about the Chinese authorities’ ability to maintain growth,” Gundlach said. “It’s been 7.5%-plus for 24 years. It’s due for not just a slowdown but even possibly a negative 7.5% consolidation. It’s overdue for economic consolidation.”

He pointed to the fact that there are “no people net net” entering the labor force. “Chinese demographics are very bad,” Gundlach noted.

“There’s some reason to worry about the Chinese economy affecting global growth. It’s been a huge contributor. Watch the Shanghai index and commodities prices there,” he cautioned.

(Earlier this week, the country’s manufacturing index declined to 48.1 in March from 48.5 in February, signaling a contraction.)

Long-Term Rates

While many experts think a 10-year treasury earning 2.7% is at a low level, “there’s no guarantee that interest rates will rise quickly over the next few months,” Gundlach said. “Interest rates movement has a saucer shape, not a V shape.”  

If and when a bump-up in rates occurs, it should emerge slowly and then move up quickly, he adds. “A lot of people thought they would be higher already…inflation indicators do not support rapidly rising rates.”

The bond guru also noted that changes in China’s economic growth story would influence inflation and interest-rate moves. “And the odds are pretty good that there will be some change versus what we’ve seen over the last 25 years.”

U.S. 10-year Treasury rates are higher than those in France, as well as being close those in Spain and Italy.

“You can conclude that Treasuries are cheap compared with virtually everything else, and that does not bode for a big shock in interest rates,” Gundlach said.

While the U.S. continues to push back against Russia over its invasion of Crimea, DoubleLine is considering purchasing some Russian debt: “We are on the edges looking. It’s a geopolitical assessment,” he noted. “It’s interesting, but not definite ‘must buy.’ ”

Closed-End Funds

Also during Tuesday’s call, Gundlach reported the recent results of the DoubleLine Income Solutions Fund (DSL) and the DoubleLine Opportunistic Credit Fund (DBL).

For the second half of 2013, DSL was up about 9% on a net asset value (NAV) basis, while DBL was up 7%. Since their inception, both funds have outperformed their respective bond indexes in total returns, he says.  

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