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Jeff Gundlach Had the Call

Posted by Larry Doyle on August 25, 2010 7:40 AM |

What is it that distinguishes the greatest athletes in sports, such as Michael Jordan, Bobby Orr, Wayne Gretzky, Peyton Manning, Magic Johnson, Larry Bird? While these ‘best of the best’ have and had many extraordinary athletic skills, those who love the game know that these world class athletes were able to see exceptionally fast moving action in slow motion. (In Manning’s case, he still does!!) As such, they played the game three steps in front of their teammates and four steps in front of the competition. As a result, special things happened.

In the world of investing, there are a handful of investment managers who possess similar instincts. Jeff Gundlach of DoubleLine Capital is one of them. Two months ago, Jeff was the keynote speaker at a Morningstar conference. Let’s roll the tape, as I highlighted Jeff Gundlach Sees 10Yr Treasury Rallying to 2.5%:

3. What does Gundlach predict for government bonds?

He said there hasn’t been a single day when the U.S. government bond market has failed to be the beneficiary of risk concerns globally, especially over the euro. “And as long as that’s the case, the probability is the 10-year Treasury is going to go to the yield of two-and-a-half percent,” he said. “Which sounds very low, but it’s been there before. In Japan, when they were dealing with similar problems, the bond yield stayed below that level for 20 years. So the bond market outlook in government bonds, for the time being, is positive.”

Where was the 10Yr Treasury when Gundlach made this call?

Approximately 3.125%. That is a heckuva call and a sizable order of magnitude. The fact that we are resting at a 2.5% yield on the 10yr a mere two months hence is a strong indication of underlying issues within our economy.

On that note, what else did Gundlach have to say about the economy two months ago? Roll the tape:

1. What does Gundlach think about the government stimulus and its immediate and long-term impact on our economy?

Gundlach said the federal government’s stimulus package helped the economy grow for a year or two. But that growth isn’t organic. The stimulus, once over, will likely weaken the overall economy. He expects economic growth to slow within nine months to a year. Gundlach likens the stimulus to pouring a strong chemical fertilizer on top of some perennials. “It works great for a year because it’s basically like putting your perennials on steroids. Or amphetamines. In the short term that works,” he said during a recent interview. “But it ends up burning out the basic strength of the organism. And I think that’s the next stage in the economic cycle.”

2. What does he see on the horizon for our markets and economy?

“We’re starting to see tremendous volatility in the equity market. And we’re starting to see a flight to quality occurring, broadly speaking, again, in the commodity and credit markets,” Gundlach said. “To me, that suggests that the forecast of slow economic growth some several months ahead, or a couple of quarters ahead, is dovetailing with the message of the markets.”
He said the instability could last for several years. This is all part of what Gundlach sees as the problem of over-indebtedness in America. The earlier phase of the current credit meltdown was caused, in part, by consumers who were on a debt binge. He blames the next phase, which we are entering, on government debt.

Gundlach predicts the government will raise taxes in a “well-intentioned” move to balance the budget or attack the deficit. But this, in turn, will hurt the economy further. “As you attempt to raise taxes, what will end up happening is that it will take a bite out of economic growth,” he said.

I will reach out and see if I can get Peyton Manning, er I mean, Jeff Gundlach, to shed further insights onto our markets and economy. Until then, navigate accordingly.

Larry Doyle

I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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