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Gundlach: Low Yields Leading to ‘Mass Psychosis’

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The market is full of madness, but there are still opportunities to watch for, said DoubleLine Capital CEO Jeffrey Gundlach. 

“There’s something of a mass psychosis going on related to the so-called starvation for yield,” said Gundlach, during a call with investors on Tuesday. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money.”

He shared his confusion and astonishment with investors’ demand for government bonds as a safe haven, which has driven prices of 10-year Treasury notes up and yields to record lows. The fixed-income guru says he thinks 10-year yields will improve to 1.7% but only return 2% next year.

“I still believe, and more strongly than ever, that we’re looking at a long-term bottoming process in interest rates here,” Gundlach said.

The record-low yields and market chatter talking up Treasury notes is “the worst setup” he has ever seen in his 30-plus year career, he adds.

The bullish sentiment is misguided, the fixed income specialist says, as are many incorrect and simplistic views on market “maxims,” such as “bond yields simply cannot go up” and “nothing can make them [yields] go up,” he explained.

Pundits were certain gold wouldn’t rise from $1,075 earlier this year, Gundlach points out, though it now trading near $1,345.

“If you are going to speculate on something, do it where you’ll make some real money,” the DoubleLine executive stated.

Wheat is “down massively,” and if it were to increase in price, investors could make 10% or 15%, which is better than what the 10-year Treasury is offering, he explains. To make money on 10-year Treasuries, investors would need to sell these assets to “some greater fool at its lowest all-time yield.”

Stock Options

In the more immediate term, he urges investors to “watch out” for stock-market highs being rejected, which is what happened on Wednesday.

His strategy focuses on having “a cautious view of the stock market” and shorting some equities. In fact, he says, there is “big money” to be made on the “short side” if equities fail to stay near current highs. “A minor new high in the S&P might be rejected, which is what happened with U.S. Treasuries,” the bond guru explained.

Gundlach points to gold as a better safe haven than Treasuries, given problems in Europe’s banking system – including possible insolvency at some institutions – and other issues, such as negative interest rates.

Comparing the price movement of Bank of America (BAC) shares in the 2005-2009 period and those of Deutsche Bank (DB) since 2013, he says there was a bit of appreciation before “a total collapse.” Deutsche Bank’s shares traded lower on Wednesday near $14, well off their 52-week high of $35.38. When the DB shares go to single digits, the DoubleLine CEO argues, there should be more calls for bailouts in Europe. Investors get scared when bank shares fall into the single-digit range, he adds.

Policy moves in response to these insolvency concerns in European are likely to be “bond unfriendly” and create inflation “that would take everybody by surprise,” he explains.

Other Issues

Junk bonds, Gundlach says, are “dangerous because of their declining recovery rates.”

He says he glad DoubleLine made the “right” decision recently to buy emerging market debt over junk bonds and sees emerging market debt, especially in local currencies, as a better bet for now than U.S. junk bonds.

As for oil prices, they are more likely to drop below $40 than top $50 due to high inventories.

And in the presidential race, Gundlach says he’s “quite sure” that Donald Trump will be elected.

— Check out Morningstar Gives Gundlach’s Flagship DoubleLine Fund a ‘Neutral’ Rating on ThinkAdvisor.


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