In Search of the Perfect Investment

Jeffrey Gundlach has gold, bonds and cash. Yet equities are reaching new highs.

Recently we were in a “mini-recession.” But Fridayebullient employment numbers proved that we’ve recovered. For now.

Brexit is going to mess up Europe and destroy the sales of American firms there.

But it hasn’t happened yet. And stocks are up.

My friends are enjoying Europe. It’s on sale, especially England. The dollar is climbing.

Barrons interviewed Gundlach.

Excerpts from the interview:

Both Brexit and Trump are being driven, in part, by antagonism toward globalization. Protectionism, however, was one of the factors that led to the Great Depression.

The establishment media is putting out a lot of scare pieces about how Trump is going to destroy the world economy; that [his presidency] could lead to protectionism, noncooperation, tariffs, and stuff like that. And, in Europe, you are having a new uptrend in noncooperation.

But I’m pretty sure that if Trump wins—and I do think he is going to win—he is going to increase the deficit. He talks about building up the military, building walls. These things cost money. And if the deficit goes up, which it would under a President Trump, that will give a short-term bump to economic growth. So maybe it is not as scary as people think.

Still, you’re invested very conservatively.

When the going gets tough, it is OK to go slow and watch your footing. You don’t want to fall and roll down the mountain. You keep hearing about how this is the bull market people love to hate. When I hear that, I just have to shake my head. The S&P is the same as it was 19 months ago. I don’t like the value. People say earnings will grow because they’re coming off a relatively low base. The guess for 2017 is 15% earnings growth. But how in the world can earnings go up if nominal GDP is rising by less than wages? Profit margins must be squeezed. I’m not so sure that we’ll get some big bounce in earnings, particularly after Brexit.

Stocks are close to a new high, leading many to think they’ll continue to rise.

The S&P 500 has been going sideways for 18 months. But even so, it really stands out that the U.S. is the last man standing. Italy and Spain are down about 35% from their recent highs; Germany is down 25%; Japan is down 25%; China is down 40%. These are big numbers.

Yet the S&P 500 is sitting right near 2100.

Look, I wouldn’t be surprised if the S&P hit a new high. But every time the S&P 500 gets to 2100, you hear, “This is it, this is the one, it is time to buy,” which is the strangest way to think about the market. It has gone from 1100 to 2100, so now is the time to buy? If the stock market really is such a great buy at 2100, it will still be a very good buy at 2200. I want the market to prove itself. I would rather miss that 100 points than be the fool who bought at 2100 only to watch it go to 1900.

Why do you think stocks are doing as well as they are?

It has a lot to do with [European Central Bank President] Mario Draghi. He said that we need not just tremendous amounts of central planning, but also the central planners in every country to have some sort of coordinated approach to policy. It sounds like his dream would be a worldwide central bank. To a conservative person like me, it’s fairly horrifying. But the markets love hearing that central banks are going to do something, and they think the U.S. may cut rates—may even join the rest of the debt-burdened developed world with negative interest rates. I think it’s a false hope.

Despite your risk aversion, you like emerging market bonds. What is the story there?

It is a dollar play. The weaker dollar has been very good for emerging market debt, which is up 12% year to date. We expect the dollar will continue to be weak. For the past year or so, maybe even longer, there has been an incredible correlation between the probability that the Fed is going to hike interest rates and the value of the dollar. The probability of a rate hike is pinned to the ground right now. The market says there is almost zero chance the Fed will raise interest rates through November of this year. The dollar is going to have a hard time, despite the fact that it has been strong recently on the Brexit upset.

How much lower could yields on Treasury bonds go? Could we see a 1% yield?

We just passedthe all-time low on the 10-year yield of 1.39%, which we saw in July 2012. It is no surprise the 10-year has been strong after Brexit. I’m not at all convinced that we are going to see much lower yields in the U.S. But even if we do, you’re talking about a de minimis profit. Even if the 10-year yield drops another percentage point, how much will you make? Less than 10%. There are better ways to speculate.

Such as?

Gold miners have a very high probability—if you bought them today and were disciplined—of making 10%. One of the things driving markets lower is a declining belief in—and enthusiasm for—central-planning authorities and the political establishment. In this environment, gold is a safe asset. There’s an 80% chance of making 10% in gold; the probability of a 10% gain on Treasuries is 20% at best. I’ve never seen a worse risk-reward setup.

That doesn’t make for a very exciting portfolio.

Our portfolios are high-quality bonds, gold, and some cash. People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.

You can read the full piece here.

Gundlach thinks Trump will win. Income disparities are driving the extreme anger that you see in Trump supporters.

The middle class is suffering. There are an awful lot of them. Despite many being employed, they’re earning a lot less than they used to.

A September 2014 Demos study found that median white family wealth is $134,000. Among whites in the working class, however — the bottom 32.1 percent — the average net worth is $0. Read that again — zero.

In July 2014, USA Today estimated that in the United States, where the median household income was $53,567, the minimum annual cost of living the American dream was $130,357.

The diminished status of white working class men, however, is not limited to dollars and cents. For some of these men, there is a less talked-about sense of status displacement that stems from the surge of women, including wives, girlfriends and daughters, into the work force. This has served to focus attention on the erosion of the traditional male self-image as provider and protector.

By 2011, nearly a quarter of married women (24.3 percent) made more money than their husbands. For working class white men, the economic ascendance of women taps into what psychologists describe as anxiety and anger about “precarious masculinity.”

Joseph Vandello, a professor of psychology at the University of South Florida, who has published extensively about “precarious masculinity,” wrote in an email:

Manhood is an uncertain, tenuous status and one that is easily threatened; thus, men will often take compensatory measures to restore or affirm manhood. In this case, manhood can be affirmed symbolically through one’s vote or show of support to a candidate who embodies manhood.

For working class whites, Vandello wrote, the loss of their privileged status and loss of manufacturing jobs go to the

core of what it means to be a man in our culture — being the protector and provider.

Today Amazon is up. Gold is down.

Diversification works. So might a little day trading – unless you prefer to play tennis, which I did at 7:30 this morning. It was glorious.

Why Brexit? From my friend presently visiting Europe:

Fear and loathing of illegal immigrants is #1 reason. However, free flow of legal immigrants from 27 other countries who gravitate from the poorer countries, Romania, etc., to the wealthier  countries, UK, France and Germany, has overwhelmed welfare systems, created school and hospital overcrowding and a created a lot of ill will.

  
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