Sell Everything Except Gold?
Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks.I like Jeffrey Gundlach a lot, think he's one sharp bond manager and deserves the title of the new bond king even if that is now in jeopardy. But when he tells everyone to "sell everything" and recommends gold and gold miners, I tune off.
Noting the recent run-up in the benchmark Standard & Poor's 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a world of uber complacency.
The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. gross domestic product in the second quarter grew at a meager 1.2 percent rate.
"The artist Christopher Wool has a word painting, 'Sell the house, sell the car, sell the kids.' That's exactly how I feel sell everything. Nothing here looks good," Gundlach said in a telephone interview. "The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong."
Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went "maximum negative" on Treasurys on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent.
"We never short in our mainline strategies. We also never go to zero Treasurys. We went to lower weightings and change the duration," Gundlach said.
Currently, the yield on the 10-year Treasury note is 1.45 percent, which has translated into some profits so far for DoubleLine.
"The yield on the 10-year yield may reverse and go lower again but I am not interested. You don't make any money. The risk-reward is horrific," Gundlach said. "There is no upside" in Treasury prices.
Gundlach reiterated that gold and gold miners are the best alternative to Treasurys and predicted gold prices will reach $1,400. U.S. gold on Friday settled up at $1,349 per ounce.
Gundlach lambasted Federal Reserve officials yet again for talking up rate hikes for this year while the latest GDP data showed disappointing economic growth. "The Fed is out to lunch. Does the Fed look at what's going on in the economy? It is unbelievable," he said.
Overall, Gundlach said the Bank of Japan's decision on Friday to stick with its minus 0.1 percent benchmark rate — and refrain from deeper cuts — reflects the limitations of monetary policy. "You can't save your economy by destroying your financial system," he said.
Sure, gold miners (GDX) and junior gold miners (GDXJ) have taken off huge from their lows in early February but where was his recommendation to buy them then? I don't care if Soros, Druckenmiller, Gundlach and now Bill Gross are all long gold, where are the big returns going forward? All these gurus typically come out to tout an asset when they're looking to unload after recording huge gains.
That brings me to another point. Gundlach says "the risk-reward is horrific" in the 10-year Treasury note and "there's no upside". Bullocks!! If he's calling a secular low on the 10-year note yield, he needs to back it up with concrete evidence that central banks have won the war on global deflation.
In my last comment questioning Morgan Stanley's call that the US dollar is set to tumble, I ended by noting:
Given my bullish USD views, I wouldn't touch gold, especially after the big run-up this year but I agree with his stance on the greenback which is why I remain short commodity currencies and emerging market stocks (EEM), bonds and currencies.I'll be honest, it was a year ago where I wrote a comment on time to load up on biotechs and it has been a gut-wrenching roller-coaster ride ever since. Not only did biotech investors endure hair scalping downside volatility, they totally missed the big bounce in metal & mining (XME) and energy (XLE) shares from February on.
In terms of risk assets, I continue to recommend the biotech sector (IBB and XBI) and see it continuing to gain in the months ahead heading into the US election and beyond but it will be volatile. If you want to hedge your portfolio, stick to good old US bonds (TLT), the ultimate diversifier in a deflationary world.
And make no mistake, despite talk of a redistributive war on inequality, deflation isn't dead, not by a long shot, which is the biggest reason why I remain long US dollars. In fact, if you want to understand the bigger trends in currencies, just look at which parts of the world are grappling with deflation most and short their currencies on any strength (like the yen below 100 USD).
Still, I haven't lost my macro focus and given my views that global deflation remains a serious threat, I continue to steer clear of energy, commodity, and emerging market shares and focus my attention on biotechs that are breaking out. There are many small and large biotechs that are ripping higher now but unless you are willing to stomach insane volatility, don't bother investing in this sector.
And unlike Gundlach, I continue to recommend good old US bonds (TLT), the ultimate diversifier in a deflationary world. Bond managers hate negative yields but it's interesting to note that Japan's GPIF recorded a 4.1% gain in its domestic bond portfolio despite negative yields in that country.
Why would anyone invest in negative yielding government bonds? Quite simply, for diversification purposes and limiting downside risks of risk assets. Just because some sovereign bonds are yielding negative yields, it doesn't negate portfolio theory and their diversification benefits.
Of course, record low bond yields are forcing pensions with a very long investment horizon to look elsewhere, like infrastructure. But infrastructure investments are no panacea; they carry their own set of risks like illiquidity, regulatory and currency risks (think Brexit) and if economies enter a long deflationary slump, their yields can come down significantly. Also, as more and more pensions and sovereign wealth funds compete for prize infrastructure assets, their returns will come down.
All this to say while everyone hates government bonds at record low or negative yields, there is no substitute for their liquidity and diversification benefits. If you want to limit downside risks, bonds are still your best bet in a deflationary world.
Can gold shares melt up after a huge run-up? Sure they can, they can go parabolic and continue making new highs. But that will just be another gold bubble and we Canadians all remember what happened to Bre-X. That didn't end well for investors and if you ask me, there are much bigger downside risks to investing in gold, energy and commodity shares right now than investing in biotechs or US Treasurys.
On that note, let me go back to trading some biotechs I'm watching closely (click on image):
Remember, when biotechs swing, they swing hard both ways, so don't bother trading or investing in them if you're not ready to stomach YUGE downside risk (also best to stick to ETFs like IBB and XBI).
Speaking of huge downside risk, if my fears of global deflation materialize, I would definitely book my profits and maybe even start shorting these stocks leveraged to global growth (click on image):
Below, Jeffrey Gundlach, chief executive of DoubleLine Capital feels markets should be down, but investors seem convinced that nothing can go wrong.
A lot can go wrong and investors should heed the bond market's ominous warning however I don't see a summer crash ahead but keeping my eye on the surging yen. So far there's no need to panic, just pick your spots carefully and hedge your downside risk accordingly using good old US bonds.
I also embedded a clip where Paul Britton, Capstone Investment Advisors CEO & Founder, discusses the state of US markets and the economy within the current volatile climate. Using options and other derivatives intelligently is another way to manage downside risk in these volatile markets.
Comments
Post a Comment