Gundlach: What Everyone Gets Wrong

September 14, 2015

Jeffrey Gundlach requires no introduction. The DoubleLine chief executive and chief investment officer has built a reputation as one of the most insightful fixed-income investors. This year, he brought that expertise into the ETF space for the first time with the launch of the SPDR DoubleLine Total Return Tactical ETF (TOTL). The actively managed fund hit its first $1 billion in assets in just about five months, all the while outperforming its competitors. Gundlach, who is a keynote speaker at this year’s ETF.com Fixed Income Conference, taking place Nov. 4-5 in Newport Beach, California, shares his views on the world and on where the opportunities are.

This is the second of two parts. Read Part 1 here.

ETF.com: We saw a pickup in volatility late in the summer in global markets. Has your view on the health of the U.S. economy and the global economy changed at all?

Gundlach: [On Sept. 1,] I came to the opinion that markets were showing contradictory signals, and that the risk markets seemed to be out of sync. So I made a comment that got circulated: “If you look at commodity prices, and you look at emerging market equity prices, and you look at junk bond prices, and you look at U.S. nominal GDP, you would probably expect—looking at only those four things—that the Fed should be easing, not tightening.”

It seemed like stock market investors were walking around as if in a daydream, missing the fact that we have multiyear lows in commodity prices, multiyear lows in junk bond prices, multiyear lows in emerging market equity prices, and the U.S. equity market was very near its all-time high. That seemed completely out of sync with messages that were being sent elsewhere.

Also, the Shanghai Composite Index in China—the second-largest economy in the world—was crashing. The U.S. market was in need of pricing downward to get in line with the signals being sent elsewhere.

One has to believe that one of the drivers of the crash in commodity prices was a slowdown in China, which isn't really hypothetical anymore, because the autocrats in charge of that economy have reacted by cutting interest rates five times and changing reserve requirements, and the like, another three times. So, eight times this year, the Chinese authorities have found it a good idea to do some sort of emergency measures. Finally, they devalued their currency, which was a strong signal that they were concerned about their exports and were trying to amp up economic growth.

We did analysis recently where we said, what if the Chinese economy is not growing at 7.5 percent or 8 percent, which is what they hope to do? What if it’s growing at 2 percent or 0 percent instead? And we came to the conclusion that the global economic growth could very well be only 1 percent right now on an annualized basis. That’s an incredibly low rate of growth.

The problem with 1 percent on average global economic growth would be that a large fraction of countries would probably be in recession. When average growth is at 1 percent, some are at 3 percent and some are at negative 1 percent. Once you're negative, you're in a bad place for economic growth, and you probably want to do something about it. And the thing that’s left for most economies to do is to devalue their currency.

We’ve been of the view, for nearly three years now, that we entered a world in which currency devaluations were going to be the norm. And the reason we picked November 2012 is that’s when Abenomics began—when Japan started to vocally report that they wanted to stimulate their economy by devaluing their currency in a systematic way. They did that, and the yen has weakened very dramatically from 80 nearly three years ago to 120 versus the dollar. It’s a pretty big devaluation.

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