October 18, 2011
Prices for risky assets are straddling the extremes of two potential outcomes. A “hurricane” may hit, in the form of a blow-up in Europe or a move to put the US federal government on an austerity program, driving prices lower. Or world economies will plod along, in which case optimistic pricing makes sense. But prices should be “truly cheap” against those parallel problems, according to Jeffrey Gundlach, and that is not yet the case.
The euro, for example, is now trading at 135, but could rise to 200 if the Eurozone breaks up and the euro is retained only by the core countries. Or, if the peripheral countries’ struggles are dragged out with ongoing bailouts, it could sink to par.
“My view is that the hurricane ultimately has to hit,” Gundlach said. “We will be seeing a cheapening of risk assets, but right now, for the short term, it makes sense to be priced at this middling level.”
Gundlach, the founder and CEO of Doubleline Capital, spoke in a conference call last week to discuss the positioning of its Multi-Asset Growth Fund (DMLAX).
I’ll look at which assets Gundlach favors for the near term and then turn to his views on the political landscape – in particular, his thoughts on “Occupy Wall Street,” a movement which he previously predicted would emerge.
An ultra-safe position
Gundlach said he has greatly reduced his risk exposure in the multi-asset growth fund. “Sharp increases of volatility tend to precede very large market moves and reversals,” he said, adding that recent market volatility indicates dangerous investor unease. “If anything, we'd be inclined to short risk assets at the now-high prices.”
Across virtually all risky asset classes, Gundlach has taken a defensive position.
The only equities in the fund are “Dow Jones Industrial-types” of stocks, according to Gundlach, who said he is avoiding soft goods and discretionary items. He has no exposure to non-US equities.
Junk bonds are priced in “no man’s land,” he said. Although they are a lot cheaper than they were six months ago, he said yields on high-yield bonds, even at today’s 1,000 basis point spread over Treasury bonds, do not reflect the risk of a recession and accompanying defaults and bankruptcies.
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