Saturday, November 8, 2014

"Here is the new bond king’s view of the world today" (#Gundlach)

Forbes interview - Gundlach and I agree often:

The Fed may raise the federal funds rate for the wrong reasons.

“They don’t really need the rates to be higher, but they seem to want to reload the gun so they aren’t stuck at zero without any tools.”

Deflationary forces will accelerate if the Fed raises rates.

“With a tightening, the dollar is going to not just be strong, but it will run up like a scalded dog. If that happens, then commodity prices are going down, we will import deflation and you will see an episode of deflationary scare.”

The long end of the Treasury curve will stay put and possibly go down further.

“There’s a 30% chance that importing deflation creates a panic into Treasurys creating a ‘melt-up,’ moving rates to German Bund levels today of around 1%. What is fascinating is, if you sell junk bonds and buy Treasurys, the minute the Fed hikes the first time, going back to 1980, in every case you did well.”

Don’t be surprised to see the yield curve flatten and possibly invert.

“Long rates have done nothing but fall. That tells me the market is saying to the Fed, ‘Go ahead, make my day.’ The curve is going to invert when and if fed funds hit 2.5 to 3%.”

Be long the dollar, especially in emerging market bonds.

“We have been all dollar [denominated in our foreign bond holdings] since 2011. For a while it didn’t really matter, but now it matters a lot. If you are nondollar you are really in trouble.”

Stay away from homebuilders, TIPs and mortgage REITs, and oil will fall further.

“I am convinced the Saudis want the price of a barrel of oil to go to $70. They don’t care if they run a short-term deficit if it slows down U.S. fracking and turns the screws on countries in their region that mean them harm.”
I agree with all of those points. The profile and story of his exit from TCW are good too.


Stagflationary Mark said...


Stay away from homebuilders, TIPs and mortgage REITs, and oil will fall further.

I do think TIPs could underperform nominal treasuries (perhaps even by a large margin).

That said, TIPs are a pure play on slowing real growth. That's just about the only thing I am and have been fairly convinced about. Further, even though I own TIPs, I still root for low inflation (unlike many other irrational holders of TIPs). I can't be taxed on inflationary gains if there are no inflationary gains.

The Long-Term Death of Real Yields

This is definitely not what Prechter predicted. Cash has not been king since 2000. I think there's way too much of it out there (much of it in MZM earning a lousy interest rate).

Just a thought.

Stagflationary Mark said...

I'm not disagreeing with any of his comments by the way. I'm just saying why I do own long-term TIPs. As a retiree, I value safety.

If I own long-term TIPS during deflation (and hold to maturity), it will not hurt my purchasing power. It will only help it. The best case scenario for me is Japan style deflation. No inflation. No taxes on the inflationary gains. The worst case would be high inflation and the high taxes that would go with it. At a high enough inflation rate, the taxes could financially ruin me.

Inflation (or lack thereof) has been very kind to me since the end of the Great Recession. I've been coasting along in a low tax bracket because of it. No complaints!

Nathan said...

I've kept a small position in mortgage REITs under the theory that short rates won't go up as high or as fast as people currently expect. Specifically, I don't see how the Fed starts paying out serious money via IOER without inviting major political opposition (e.g. why are you giving banks money for doing nothing?) or creating major dislocations in the market.

CP said...

It's hard to imagine real yields being positive again.

CP said...

This is great:

Parabolic Trend Failure of the Day: Public Relations Employment

CP said...

what was it about the 1990s that required so much growth in public relations?


Stagflationary Mark said...

what was it about the 1990s that required so much growth in public relations?

When things were going really well at my former company, there was never a need for pep talks telling us how well things were really going.

I quit in 1999. The pep talks were coming fast and furious that year.

The best one was given on a bright sunny day by an executive wearing sunglasses in a dark conference room with the shades closed (seriously, we believe he had a hangover). He was telling us not to worry and how all how our stock options would be repriced (the stock had crashed due to massive accounting fraud).

Did it help morale? Not exactly. Stock options were a very closely guarded secret until that point. Only half the employees had or knew of them. I was asked right after the meeting if I knew about the stock options and if I had any. The person did not care for my answer much, but what else could I say? Sigh.

Stagflationary Mark said...

There is also a quote from the president of my former company that is permanently imbedded in my head.

I saw it in a magazine interview after I quit.

"We have a fun environment with creativity and fun."

Oh, how that made me laugh. I think he really tried to sell the word "fun" too much, for in reality fun was absolutely the last word I would have used to describe the environment there.

Another lead engineer quit the same day I did and neither of us had a new job lined up. We'd both worked there 8 years (were hired just two weeks apart). Neither of us knew the other person was quitting. HR wanted me to confirm that neither of us knew. HR found my confirmation, and I quote, "very disconcerting." No joke.

"We have a disconcerting environment with creativity and disconcertion!"

Quick! Call in the PR agencies! Hahaha! Sigh.

Gallows humor. :(

Stagflationary Mark said...

If thought PR was amusing, then check this one out.

Management Training Employment Has Gone Parabolic Again

Good grief.