The opening keynote at the Morningstar Investment Conference 2010 on Wednesday, June 23, was given by Jeffrey Gundlach, co-founder and CEO of DoubleLine Capital. It was one of the more pessimistic and wide-ranging addresses of the conference, with a number of welcome idiosyncratic touches like discussions of American consumer culture driven by television and as seen through the eyes of Andy Warhol. Despite his worrisome message, Gundlach was an engaging and enlightening speaker.
A few quotes:
The next several years will be one of the most difficult times that we will face in our investing careers.
Ross Perot complained about deficits when they were miniscule compared to what we’re facing going forward — the “debt parabola.”
The problem for the near term is that all this debt is deflationary — the temptation will be to monetize, but I don’t think we’ll go that route.
Unlike every other recovery in the last 60 years, we are now in a jobless recovery.
Countries have defaulted throughout history, starting with bond inventor Venice hundreds of years ago. Argentina is a serial defaulter.
Gundlach believes we will need to increase taxes to begin to address the problem. It’s difficult to cut public spending — we could tax benefits, like France now does, but nobody here talks about it.
Long-term US treasury bonds are now outperforming everything and are a reasonable investment.
There are still opportunities. Example: Wells Fargo Alternative Loan Trust
WFALT 07-PA3 1A1
Trades at 68 cents on the dollar.
Gundlach’s scenario analysis shows loss-adjusted yield of 9.67% to 13.17%
He says he is fond of muni bonds because he believes taxes are going up. But one day the dollar will drop and “you must sell (bonds) immediately.” [See below.]
Later, journalists met Gundlach in the Morningstar Press Room overlooking Lake Michigan at Chicago’s suddenly darkening waterfront. Ominously, as thunder rumbled and webs of lightning crackled above the horizon, we were told to remain confined in the windowless room because of tornado warnings, extremely rare for the city’s downtown. High windows outside the Press Room overlooking the battered gray lake put some of the world’s smartest investors at risk. The stormy weather seemed unusually appropriate, given what Gundlach was saying.
More quotes from the post-keynote interview:
Deleveraging needs to get in vogue at the government level.
Over a period of decades, banks replaced lending to businesses with lending to consumers. Lending to businesses and even students makes more sense — because they can pay you back. Consumers just use credit to consume. Borrowing to buy a car makes no sense to me. It will be worth zero in ten years.
Bull markets give rise to cooperation — the euro. Bear markets give rise to division, such as talk of US states seceding.
Emerging markets seem to be a better play than our markets — the only buy-and-hold investing I would do.
T-bonds are negatively correlated, but everything else goes up and down together.
When foreign sovereign debt is downgraded in the future, the first time when Treasuries don’t react by rallying will indicate that the special status of the US is over.
This is a piston-like market — great volatility, no progress.
In 2013 inflation may become a problem. The pain of austerity measures and the crushing weight of debt deflation will being about a crisis — and inflation will follow.
This is not about printing money. The money has already been created, the debt has already happened. It pushed consumption into the present from the future. It’s the same for a society as an individual.
I would have let all the banks fail.
Background: He believes that debt is still a problem:
The stimulus, once over, will likely weaken the overall economy. He expects economic growth to slow within nine months to a year.
“It’s kind of like pouring Miracle-Gro on top of some perennials,” Gundlach said during a recent interview. “It works great for a year because it’s basically like putting your perennials on steroids. Or amphetamines. In the short term that works, but it ends up burning out the basic strength of the organism. And I think that’s the next stage in the economic cycle.”
He said he doubts the government will continue any economic stimulus programs because the public views them negatively.
“You can’t just government-stimulate your way to a healthy economy in perpetuity,” he said. “The economy is going to suffer underneath the retrenchment of this stimulus.”
Gundlach has an interesting backstory:
The former manager of the TCW Total Return Bond fund was named Morningstar bond fund manager of the year for 2006, thanks to his top-performing bond fund. He has beaten his peers by a wide margin in the past 10 years amid a mortgage meltdown that tripped up other bond giants. His fund attracted $12 billion in assets, adding to the $70 billion his team managed at TCW.
But Gundlach’s 24-year tenure at TCW came to an abrupt end late last year after he was fired.
Since then, what did he learn?
I didn’t learn anything. I have a different job. I’m a CEO of what’s going to be a very successful firm. I was basically running within TCW, where businesses are very standalone, by far the biggest business. I know very well how to run a big business. We’re not a big business yet, but we’re not exactly puny either. What I took away from it is there are a lot of evil people in the world. That’s what I learned from it.
He leaves behind a history of outperformance:
Before leaving T.C.W. in December, Gundlach and Barach ran its Total Return Bond Fund. The fund outperformed virtually all rivals, with an average annual return of 7.7 percent over the past 10 years.
Two other top lots from the Jonas collection were the pair of boxes by Joseph Cornell, Untitled (Medici Princess) (ca. 1952) and Untitled (Pinturicchio Boy) (ca. 1946). The works are something of a matched pair (both carried the same presale estimate, $700,000-$1,000,000), and indeed were won by the same bidder, a man in an electric blue suit, pink shirt and designer sunglasses sitting in the fourth row. Medici Princess brought $2,592,000, a new record for the artist, and Pinturicchio Boy brought $1,584,000. An observer in the room identified the buyer as Jeffrey Gundlach, a West Coast fund manager and new collector.
I asked him if he was still currently investing in art, which he said has done much better than at least his personal stock portfolio. “No, everything is going into the business (DoubleLine).”
The following evening, DoubleLine hosted a reception at the Art Institute of Chicago, just yards away from one of the world’s finest collections of boxes of Joseph Cornell.
Update: 4 Oct 2010 InvestmentNews.
Update: 20 Sep 2012 – Unfortunately some of Gundlach’s art collection and other property has been stolen.
Update: 28 Sep 2012 – Thieves caught.