With the S&P touching new all time highs on Friday, Barron’s took the opportunity to ask the recently rather skeptical Jeff Gundlach what he thinks of stocks here. Not surprisingly, DoubleLine’s new “bond king”, was less than enthused: “Look, I wouldn’t be surprised if the S&P hit a new high. But every time the S&P 500 gets to 2100, you hear, “This is it, this is the one, it is time to buy,” which is the strangest way to think about the market. It has gone from 1100 to 2100, so now is the time to buy? If the stock market really is such a great buy at 2100, it will still be a very good buy at 2200. I want the market to prove itself. I would rather miss that 100 points than be the fool who bought at 2100 only to watch it go to 1900.“
And while fundamentals leave much to be desired, especially with bond yields in the US slamming new all time lows suggesting a deflationary environment as far as the bond market can see, stocks continue to gain. Gundlach’s reasoning for this relentless levitation: central banks in general and the ECB in particular.
It has a lot to do with [European Central Bank President] Mario Draghi. He said that we need not just tremendous amounts of central planning, but also the central planners in every country to have some sort of coordinated approach to policy. It sounds like his dream would be a worldwide central bank. To a conservative person like me, it’s fairly horrifying. But the markets love hearing that central banks are going to do something, and they think the U.S. may cut rates—may even join the rest of the debt-burdened developed world with negative interest rates. I think it’s a false hope.
Speaking of Treasuries, Gundlach is just as bearish on the “safe haven” plays, saying that “it is no surprise the 10-year has been strong after Brexit” but he is “not at all convinced that we are going to see much lower yields in the U.S. But even if we do, you’re talking about a de minimis profit. Even if the 10-year yield drops another percentage point, how much will you make? Less than 10%.”
The flipside is how much would one lose on a 1% rise in rates, aka the convexity of fixed income product. The answer, as the following JPM chart shows, is a 9% drop in 10Y prices, while a 1% rise in yields would send 30 Year TSYs lower by 19% (and alternatively, higher by 25% if the 30Y were to drop to just about 1%).
But if Gundlach is staying away from both the broader equity market, as well as bonds, and as he adds “there are better ways to speculate”, where is he allocating funds now – what are those ways? His answer:
“Gold miners have a very high probability—if you bought them today and were disciplined—of making 10%. One of the things driving markets lower is a declining belief in—and enthusiasm for—central-planning authorities and the political establishment. In this environment, gold is a safe asset. There’s an 80% chance of making 10% in gold; the probability of a 10% gain on Treasuries is 20% at best. I’ve never seen a worse risk-reward setup. “
Which brings us to the punchline: what does Gundlach’s portfolio look like: “our portfolios are high-quality bonds, gold, and some cash.” And before CNBC makes fun of yet another “gold-bug”, Gundlach is already prepared with the snyde answer: “People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.”
And since the S&P 500 merely tracks the size of the Fed’s balance sheet, the next leg higher in the US stock market may have to wait for the Fed to finally launch QE4, which considering both Treasury and stock prices are at all time highs, is something the market is increasingly comfortable assuming will happen sooner rather than later.
For now, however, our money is on Gundlach.
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