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Jeff Gundlach of TCW Calling for Deflation and Dollar Rally

Posted by Larry Doyle on September 10, 2009 8:39 AM |

Jeff Gundlach did not become one of the most highly regarded and respected money managers in the business by accident. His long term track record managing TCW’s Total Return Bond Fund (TGLMX) is nothing short of spectacular. Gundlach presented at a conference yesterday. Inside sources shared with me that he received a standing ovation for his thorough yet sobering commentary. MarketWatch provides a review of this Sense on Cents Economic All-Star’s outlook in which he is calling for a serious bout of deflation and a resulting rally in the dollar.

Alistair Barr of MarketWatch writes:

The stock market’s recent rally is likely to run out of steam soon and equity prices may collapse again, Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund giant TCW Group Inc., said Wednesday.

The benchmark Standard & Poor’s 500 index is “extremely unlikely” to climb above 1,100, before collapsing again, he said during a conference call.

“You’ve made 90% of the money you’re gonna make in this rally,” Gundlach said, advising investors to sell on strength when the S&P 500 is above 1,000.

The S&P 500 closed at 1,033 Wednesday, leaving it up more than 50% since early March.

Gundlach, who also runs TCW’s flagship Total Return Bond Fund (TGLMX 9.98-0.01-0.10%), had spotted cracks that subprime mortgages were forming in the financial system by June 2007 and was among the first to warn that an era of easy money would come to a bad end. See full story on Gundlach’s warning.

His new concern is the massive debt being accumulated by the U.S. government as it tries to stimulate an economy that’s been mired in the worst recession since the World War II.

“We’re basically borrowing money and calling it economic growth,” he said on Wednesday. “It’s not real economic activity.”

Debt-fueled government stimulus, such as the “cash for clunkers” program, may keep the U.S. economy growing for one or two years, but then growth will probably “just die,” Gundlach said.

Cash for clunkers, in which the government gave up to $4,500 to new car buyers if they handed in old gas-guzzling vehicles, illustrates another of Gundlach’s concerns, that of deflation.

“Deflation is so strong that you can’t even sell cars unless you slash prices 20% through government subsidies,” he said.

Gundlach is similarly bearish on credit markets and commodity prices, arguing that “a turning point is close at hand in these markets.”

One of the few areas he’s bullish on is the U.S. dollar — but not for good reasons.

Gundlach sees such large debt defaults in coming years that he thinks the trend will cut the supply of dollars, pushing up the currency’s value.

“We’re standing on the edge of a major default wave,” he said. “Defaults are the elimination of dollars. You could eliminate so much actual wealth that this could be the source of a strong dollar rally.”

I wholeheartedly agree with his economic assessment and said as much yesterday in responding to a reader’s comment here at Sense on Cents. I wrote:

How do you fill the gap left by consumers who borrowed too much? Have Uncle Sam step in and borrow too much. One way or the other it’s all borrowed funds which will have to be paid back at some point in the future…

People can call it growth, the appropriate term is leverage. As I wrote above , leverage should not be confused with brains when the market is rising, but it is death when the bull becomes a bear.

In regard to the markets, I view them more as a sideshow while the real action is the race between the Fed and Treasury pumping liquidity into the system to stem the ongoing and increasing wave of defaults. Mr. Gundlach clearly believes this wave will ultimately overwhelm Uncle Sam and our economy.

I respect Mr. Gundlach too much not to give his concerns serious consideration. In fact, I believe the rally in U.S. government bonds over the last few months is sending a warning signal of deflation on the horizon. Recent downward price action in the DJ-UBS Commodity Index may also be an early warning sign. Price action in the equity market would appear to be inconsistent with these markets, but it has been for a while.

For those interested in reviewing Mr. Gundlach’s entire 47-page slideshow, please click on the image below:

Thoughts and comments always welcome.


  • Aaron Kramer

    Thank you for the information. Count me as a member of this camp and a doubter of the current rally. For me the biggest clues guiding us are sales tax revenue and electrical consumption. Both of these barometers are negative yoy and until they recover we won’t. Typically productivity helps lead stock market rallies but this is only possible when demand is stable. In our current situation productivity gains will only soften the loss in revenue from declining sales.

  • One more thing to consider about sales tax revenue, many states and localities have already raised the tax rate so the fall off is even greater when on considers the higher tax rate.

  • Mike


    Didn’t you mention in a previous post about an important Fibonacci level in the DJ index @ 9600? Well it looks like were finally there…

  • Larry Doyle

    Great memory, Mike!!!

  • Nigel

    Sorry, in the battle of ‘flations…my money (speaking only figuratively) is on Ben. He’s a master printer and he recently got a vote of confidence.

    I’m sure, Ben will ensure the world is knee deep in dollars.
    Ergo,I’m dumping my dollars (earth to blog: so is the rest of the world).

    • Blog to earth: Nigel just explain to me why the bond market has not moved lower? I do not disagree with your statement over the long run but I have been confounded by the massive demand for US Treasuries. Additionally have you noticed that the US $ hasn’t made no lows against the Aussie, Euro, Pound or C$. The trade weighted Dollar index is making yearly lows based on the yen and relative strength in the previously mentioned currencies. Far too many are calling for an imminent end to the dollar, when this happens it won’t be a trickle lower but a collapse. Before you say look at gold, I have one question should we look at the largest most deep and active markets or the smaller less deep markets?

  • Nigel

    To answer a question directed to me:

    The bond market is the backyard of the Fed and the primary dealers. These institutions rule supreme in their backyard. I fully acknowledge that they have smart, experienced, motivated (oh, and let’s not leave out…greedy) folks to dream up ways to game the system and cover their trails.

    I’m sure that for a period of time they are capable of getting the bond market to do their bidding. Only these days events have gone global in an unprecedented way. The US has the strengthening bric countries chomping at the bit to replace the USD, they have an ever awakening,angering US public, issues such as COMEX beginning to be exposed as the fraud that it is, China just recently giving the OK for their state companies to renounce derivative contracts (not accidentally coinciding with their opening the path for their citizens to own precious metals).

    In other words, there’s a host of factors coming together now to work against the weaknesses of the US financial/government system.

    Also, don’t discount the sheer power that lost of trust engenders. People (including US citizens) increasingly don’t trust US institutions. Heck, with the recent reports of insiders selling stock at unprecedented levels, we see even the rats are fleeing the sinking ship (and this ties back to whether a dollars collapse would be rapid or not… when humans and confidence levels are involved, a wildcard comes into play)

    The dollar index is tanking, and with future yearly trillion dollar US deficits stacked up like planes waiting to land at a busy airport… does anyone believe that the situation won’t accelerate.

    I’ve read that bond, equities and FOREX dwarf the Precious Metals markets. As such I’d expect the larger entities to change at a slower rate that the smaller PM market. It appears we’re seeing that now.

  • Brad Schroth

    I’ll take his word for it that defaulted debt gets subtracted from the supply of dollars. He also said that the Fed is currently now only printing greenbacks at an amount equal to our current account deficit which would not come close to the level anticipated defaults, hence his case for deflation. Someone asked if the Fed wouldnt simply step the printing to match the rate of defaults and he thought that the Fed would not. It would be nice to track defaults to the printing presses and also the dollar index. Anyone have a clue where to get some historical correlations?

  • Matt Wheeler

    “The benchmark Standard & Poor’s 500 index is “extremely unlikely” to climb above 1,100, before collapsing again, he said during a conference call” Uhhhhhh……..

  • Larry Doyle


    Jeff Gundlach is widely regarded as one of the top money managers in the business.

    That’s not to say that the market can’t or won’t go higher but I’d much rather invest alongside Gundlach than almost any manager in the business.

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