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In his monthly call with DoubleLine investors, Jeff Gundlach ratcheted up the gloomy rhetoric – and considering the rising voices claiming central banks are rapidly losing both credibility and control, he has been spot on – and said on Tuesday investors are dropping risky assets and turning to safer securities including Treasuries and gold because they are losing faith in central banks.
As Reuters puts it Gundlach, who oversees more than $100 billion at DoubleLine, is one of the first heavyweight investors to publicly raise red flags, and to keep hammering it at every possible opportunity, about the credibility of major central banks, including the U.S. Federal Reserve, as countries struggle to manage economic growth. Last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China’s slowing economy would pressure emerging markets. In 2014, he forecast U.S. Treasury yields would fall, not rise as many others had expected.
“Central banks are losing control and they don’t know what to do … just like the Republican establishment and Donald Trump,” Gundlach told Reuters in a telephone interview, speaking one day before the Fed is widely expected to again announce it will do nothing as it continues its one-and-done “strategy.”
“The Fed is confused and their confusion spills into investor psychology,” said Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine. “The Fed changes its tone so frequently, it seems every other week the message is different. They’ve turned into the ‘Zombie Fed.’ They say the meeting this week is ‘live,’ but investors all know it isn’t at all.”
In terms of investments, Gundlach said it is a “dangerous price appreciation game” to purchase German Bunds at current levels and that gold and gold miners are still an attractive place to put money to work. He also said that negative interest rates, notably in Japan, were backfiring. “Negative interest rates don’t do what they’re theoretically supposed to do,” he said, noting the appreciation in the Japanese yen.
He added that negative interest rates “aren’t leading to higher economic growth” and forecast that world GDP could be averaging around just 1 percent against the backdrop of aggressive global monetary policies. To make his case, Gundlach noted the dramatic “drawdowns” from the highs in several stock markets. Germany is down 22 percent, Japan is down 23 percent, China is down 45 percent, the United Kingdom market is down 15 percent and France is down 20 percent.
“Negative rates do not prop up stock markets,” Gundlach said on the webcast. Correct: there’s QE for that… and helicopter money.
But while his pessimism about monetary policy continued, Gundlach was far more sanguine about next week’s key event: the UK referendum vote. “I believe ‘Stay’ will prevail,” Gundlach said during the webcast. He said the polls reflect people’s complaints and frustration rather than the actions they’ll take when voting in the June 23 referendum. “I believe that ‘Leave’ is over-polling, it’s punching above its weight class,” the fund manager said. “When it comes up for a vote, I think it will fail.”
This confirm what UK-based bookies also think (and where people are actually putting their money): the political bookmakers (www.poliiticalbetting.com) still have a 60% (up 1% after ComRes poll) probability of ‘remain’ winning even if it has fallen substantially in recent days. This could reflect a few things: a) pure weight of money staked, b) the view that referendums in the likes of Quebec and Scotland saw late swings for the status quo, c) the debatable reliability of opinion polls in recent years and d) the phone polls which are rightly or wrongly seen as more accurate still showing ‘remain’ in a slightly more favourable light.
Of course, if Gundlach is wrong, bad things will happen as he himself admits: “If leave prevails, it’s the beginning of the end for the Eurozone.”
No matter what happens with Brexit, however, Gundlach is expecting volatility to return soon: “This summer is going to be a rocky ride.”
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For those who missed it, here is his latest presentation given yesterday, titled “Timing and Strategy”
