August 16, 2011
Don’t interpret last week’s volatility as merely a reaction to S&P’s downgrade of US Treasury debt, according to Doubleline founder and chief investment officer Jeffrey Gundlach. Investors are actually fearful of a global banking crisis, he said, because many countries face a perilous choice – defaulting on their sovereign debt or inflating their way out of trouble.
“The markets are in a state of panic,” Gundlach said. “This is not really a great time to be a seller of anything.”
Gundlach spoke with investors on Wednesday via a special conference call to address the heightened market volatility.
Bond yields decreased following S&P’s downgrade, as Gundlach predicted, and he said Wednesday that they will likely continue to fall. Incremental moves to address the deficit will force yields lower by weakening the economy and decreasing the supply of Treasury bonds, which will drive prices higher.
It’s unlikely the S&P will close above 1,250 for the next several quarters, he said, and he advised selling ”risk assets” if it approaches that level.
Bernanke’s interesting rhetoric
On Tuesday, the day before Gundlach spoke, Fed Chairman Ben Bernanke announced that short-term rates would be kept near zero until at least mid-2013.
Gundlach, however, is not convinced this will happen.
He said the Fed could change its position “at any time” without penalty. “It is an interesting bit of rhetoric,” Gundlach said, but not one that investors should take at face value.
The problem with the Fed’s announcement, he said, is that it contained no new information. Rates are already low and are being kept there by market forces. “What the Fed did yesterday didn’t help the market psychology in any way.”
Bernanke said the economy is a lot weaker than it should be, but the announcement that he will keep rates low represented an unhelpful lack of action of the Fed’s part, according to Gundlach.
Gundlach said QE3 was unlikely because QE2 didn’t work – it only caused a “weird allocation of capital” and “euphoria in certain assets.”
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