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Jeffrey Gundlach: "This Time It's Different" Webcast


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Given the run in FFH over the past year, is it not possible that the market has already priced in deflation to the shares?

 

I think some groups of market participants have been realizing it but it's not a widespread opinion, yet. However, there are signs of a change in common sentiment everywhere. Maybe I'm suffering from confirmation bias since I've been thinking about this question for a few weeks now. Yet, look at the 10y treasuries – are they supposed to look this way in expectancy of rate hikes by the FED? Why is the market reacting negatively on the oil price movement when "conventional wisdom" dictates that this should be a boon to the economy?

 

In my opinion, people are beginning to ask the right questions. You have to be very cautious with your equity investments now, because what Mr Market hasn't realized yet is that high dividend yields don't protect you from a deflationary scenario. Assets with high constant yields are about the only protection; but, to be effective, yields have to be there and they have to stay there (how about XOM's dividend yield, for example, in case those oil prices prevail?).

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Why is the market reacting negatively on the oil price movement when "conventional wisdom" dictates that this should be a boon to the economy?

 

Maybe. But we always have to be careful when assuming that markets are acting rationally, especially in the very short term. The speed of the oil decline can easily have caused some panic among market participants (many of whom care tremendously about momentum, TA, sentiment, etc). Couple that with margin calls for those invested heavily in the sector (who then sell indiscriminately and affect people who aren't invested in the sector...), and you get a lot of babies being thrown out with the bathwater, including companies that will benefit from lower oil prices.

 

To me the macro is entirely confusing, as it usually is. Some places look weak, some places look strong.. Then you have everybody looking at this landscape and reacting accordingly, so the outcome will vary depending on perception (reflexivity)... Who can know?

 

So I buy good businesses that should do well and deploy capital well regardless.

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Thanks, very interesting. I agree with almost anything he says, apart from this statement:

 

I think that certain things are starting to concern investors and maybe it is all tied around speculation on the Federal Reserve raising interest rates. As prospects for a Fed tightening have increased over the year, the Dollar has strengthened and the treasury bond market has been declining in yields. It is almost as if the treasury market and the junk bond market are projecting that the Fed raising interest rates will cause a recession. I am not going to predict that myself. I am just reading what the market’s message is. How could you explain all these markets acting this way? Well, it seems like as if it had something to do with a policy mistake.

 

I don't think this is the market's message. In my opinion the message is: Fuck, there seems to be no demand at all for this oil anywhere in the world right now! This is a very bad sign for the health of the global economy as a whole. All the while, equity markets jump around all time highs – even if you adjust for inflation. There is something severely wrong with this picture.

 

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Why is the market reacting negatively on the oil price movement when "conventional wisdom" dictates that this should be a boon to the economy?

 

Maybe. But we always have to be careful when assuming that markets are acting rationally, especially in the very short term. The speed of the oil decline can easily have caused some panic among market participants (many of whom care tremendously about momentum, TA, sentiment, etc). Couple that with margin calls for those invested heavily in the sector (who then sell indiscriminately and affect people who aren't invested in the sector...), and you get a lot of babies being thrown out with the bathwater, including companies that will benefit from lower oil prices.

 

To me the macro is entirely confusing, as it usually is. Some places look weak, some places look strong.. Then you have everybody looking at this landscape and reacting accordingly, so the outcome will vary depending on perception (reflexivity)... Who can know?

 

So I buy good businesses that should do well and deploy capital well regardless.

 

For me, this is not a question of "either … or". I also try to buy good businesses (apart from one or the other special situation) but I want to know or at least try to know where we stand. This is not a short term issue. When Gundlach is right, and I think he is, this is going to be important for the next couple of years.

 

Which "places" do look strong? There is one single place that looks strong at the moment: the US. Now, what is going to happen when the US weakens, either because the FED raises rates prematurely or a strong USD is importing deflation? EU, Japan, EM – everything else is slowing down or downright in recession. Most importantly: China is slowing down, too (China might have been the trigger for the oil price imploding, after all). If the US economy weakens now, there is a very high probability for a worldwide deflationary recession.

 

Ray Dalio has been saying for a few years that what keeps him up at night is this: What can central banks do when they are at zero interest rates worldwide and there is an economic slowdown? Well, the oil price decline is suggesting: here it is. I completely agree with Gundlach that this oil price movement is incredibly important right now. Not because oil is important in itself, but because it's one indicator of the global economy severely slowing down. This is not the usual media hype (like e.g. "the sequester") – there are a lot of signs for real problems if you want to see them.

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It always pays to look at the numbers. 2014 actually had more oil consumed then 2013. It was still under predicted demand, but only a v small %. I think it is the perfect shit storm of speculators shaken out, OPEC not cutting, shale not being able to cut for the most part because of debt and finally deflation (so people dont like commodities in that enviroment). Sort of a lollapalooza. I think the economy only plays a small role in this whole thing.

 

I just keep looking at USD/Yen. If that starts to go rapidly to 200, i will start selling some of my stocks. Meanwhile I keep my cash in USD. I cannot imagine that not more people worry about all those massive countries that are in debt traps, combined with an aging population and huge government liabilities and deficits everywhere while consumer debt is still very high. It seems serious pain has to come at some point. But staying out of the market because of that would be a mistake I think.

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It always pays to look at the numbers. 2014 actually had more oil consumed then 2013. It was still under predicted demand, but only a v small %. I think it is the perfect shit storm of speculators shaken out, OPEC not cutting, shale not being able to cut for the most part because of debt and finally deflation (so people dont like commodities in that enviroment). Sort of a lollapalooza. I think the economy only plays a small role in this whole thing.

 

Are we talking about estimates or real consumption for 2014?

 

I just keep looking at USD/Yen. If that starts to go rapidly to 200, i will start selling some of my stocks. Meanwhile I keep my cash in USD. I cannot imagine that not more people worry about all those massive countries that are in debt traps, combined with an aging population and huge government liabilities and deficits everywhere while consumer debt is still very high. It seems serious pain has to come at some point. But staying out of the market because of that would be a mistake I think.

 

I think that staying out of the market – wholly or partly – is not a problem in a deflationary environment. What's the worst that can happen? You "lose out" on some equity gains but keep your money in real terms. Cash is only "dangerous" because of inflation. Keeping your money in USD seems to me the right thing to do. But I certainly don't think that I have to own stocks right now.

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real consumption.

 

The problem is, there are some real bargains out there. But I think i should have been a bit more conservative. It is probably best to have like 15-30% in cash now. And stay out of Japan and Europe for the most part. And limit exposure to financials, especially the ones outside the US.

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real consumption.

 

The problem is, there are some real bargains out there. But I think i should have been a bit more conservative. It is probably best to have like 15-30% in cash now. And stay out of Japan and Europe for the most part. And limit exposure to financials, especially the ones outside the US.

 

This is about the most recent data I could find:

http://www.eia.gov/forecasts/steo/report/global_oil.cfm

 

…and it ends right where it becomes interesting. Anyway, even if there were higher consumption in 2014: The futures market is about today's demand/future consumption – not today's consumption. You're going to see futures prices fall and then consumption to weaken – not the other way around.

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Ray Dalio has been saying for a few years that what keeps him up at night is this: What can central banks do when they are at zero interest rates worldwide and there is an economic slowdown? Well, the oil price decline is suggesting: here it is. I completely agree with Gundlach that this oil price movement is incredibly important right now. Not because oil is important in itself, but because it's one indicator of the global economy severely slowing down. This is not the usual media hype (like e.g. "the sequester") – there are a lot of signs for real problems if you want to see them.

 

Have there ever been no/almost no signs for real problems? I stopped worrying (and learned to love the bomb). There are always going to be shit storms and I'd rather own super cheap stuff in the eye of it (Greece baby!) than pay up (US now) for clear weather.

 

 

 

I think some groups of market participants have been realizing it but it's not a widespread opinion, yet. However, there are signs of a change in common sentiment everywhere. Maybe I'm suffering from confirmation bias since I've been thinking about this question for a few weeks now. Yet, look at the 10y treasuries – are they supposed to look this way in expectancy of rate hikes by the FED? Why is the market reacting negatively on the oil price movement when "conventional wisdom" dictates that this should be a boon to the economy?

 

 

Could you tell me why it wouldn't be a boon? What exactly happens? I know next to nothing about macro.  We as a couple are already spending 3-4% less of our monthly income on gas, and that is only after a 25-30% drop in prices (taxes sadly don't drop as much) and with one car. Living in one of the world's best scoring countries  for redividing wealth, I'm unlikely to get many yearly net raises of 4% or a 4% tax cut (we also win that category...) so I welcome it with open arms. The gas bill in many countries is a lot higher than in the US and I don't see how it could be anything other than an incredible general boost to consumers and businesses. Add a weakening Euro and you got yourself a party.

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@tom, the macro situation basicly boils down to this, governments everywhere spend more then come in, and government debt is really high all over the world.  In some places even 20x+ tax income. A large % of this goes to health care and social security (so old people). In the old days, it was always population growth that saved the day (so a growing number of tax payers). Now that number is shrinking or staying even. Because for the first time, everywhere in the civilized world, people have no kids or have only 1 kid. So working population compared to old people sucking up tax money will shrink. So income will go down or stay even, instead of up, while governments keep growing those debts to very dangerous levels.

 

And government spending compared to GDP is at all time highs (like 10-15% of the economy). So that will have a very serious impact on the economy at some point if that grinds to a halt. Likely bigger then the housing crisis. Question is when. For a very long time governments have been spending what they cannot afford, and since there were always people willing to borrow them money at low rates, the doomsayers have been wrong for a long time. But it has to end at some point. The only reason it still happens is because people have this crazy believe that somehow governments of first world countries cannot go broke. Madoff's schemes lasted over 15 years... So the fact that it still goes on is not a reason to not worry really.

 

It is a sentiment, thing, it goes on untill people decide it cannot go on anymore. So really hard to predict. So probably best to just find really cheap stuff. Even if you do 15% a year for 3 years with 30% cash, and then lose 50%, you would do better as holding cash all that time.

 

If you hold cash and you got your expenses in euro's, holding USD is best. Because they are in a better situation debt wise then Europe. Holding the dollar is sort of like a gold lite I think.

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I agree with US assets. I've been holding all of my and my wife's assets in USD since 2012 and I can't see any argument why to change that.

 

Ray Dalio has been saying for a few years that what keeps him up at night is this: What can central banks do when they are at zero interest rates worldwide and there is an economic slowdown? Well, the oil price decline is suggesting: here it is. I completely agree with Gundlach that this oil price movement is incredibly important right now. Not because oil is important in itself, but because it's one indicator of the global economy severely slowing down. This is not the usual media hype (like e.g. "the sequester") – there are a lot of signs for real problems if you want to see them.

 

Have there ever been no/almost no signs for real problems? I stopped worrying (and learned to love the bomb). There are always going to be shit storms and I'd rather own super cheap stuff in the eye of it (Greece baby!) than pay up (US now) for clear weather.

 

 

Yes, there have been signs. All I can say is that 1. the signs got a lot clearer to me, 2. the stock markets worldwide have become a lot more expensive, 3. if something cannot go on forever, it will stop. Does it have to stop this year? No. Maybe we continue this rally, but I won't participate. I hedged my portfolio to market neutral and I'm going to wait and see.

 

 

I think some groups of market participants have been realizing it but it's not a widespread opinion, yet. However, there are signs of a change in common sentiment everywhere. Maybe I'm suffering from confirmation bias since I've been thinking about this question for a few weeks now. Yet, look at the 10y treasuries – are they supposed to look this way in expectancy of rate hikes by the FED? Why is the market reacting negatively on the oil price movement when "conventional wisdom" dictates that this should be a boon to the economy?

 

 

Could you tell me why it wouldn't be a boon? What exactly happens? I know next to nothing about macro.  We as a couple are already spending 3-4% less of our monthly income on gas, and that is only after a 25-30% drop in prices (taxes sadly don't drop as much) and with one car. Living in one of the world's best scoring countries  for redividing wealth, I'm unlikely to get many yearly net raises of 4% or a 4% tax cut (we also win that category...) so I welcome it with open arms. The gas bill in many countries is a lot higher than in the US and I don't see how it could be anything other than an incredible general boost to consumers and businesses. Add a weakening Euro and you got yourself a party.

 

The question is: Are you going to consume it or save it? If you save it, it does nothing for the economy. And at this moment, US consumers, Europeans, Japanese and Chinese – they all want to save it.

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Could you tell me why it wouldn't be a boon? What exactly happens?

 

 

He says that if it gets to 40 or below he is concerned about the geopolitical risks, my guess he is talking about chaos and collapse in various countries. Seems like a reasonable assumption, though for sure not a definite outcome as prices can be manipulated back up.  Iran has been talking about opening up lately, Qatar has reached some sort of agreement with Saudi Arabia, so if these guys sort it out, somehow, oil prices can go up quickly. Russia is a failed third world country, we should adjust our expectations accordingly.

 

The oil, commodities, Europe, China... it's all linked and this time it is different, it's not a pop of a tech bubble due to fed tightening or whatever.  I'm still invested, but being ignorant of the general macro situation is a mistake at least in the sense of "not losing money" by being cautious.

 

 

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I must have missed this part of the discussion, but why do we care what Jeffrey Gundlach says?

 

http://online.barrons.com/articles/SB50001424052970204442204576144662301971254

 

From Feb. 21, 2011:

 

Gundlach rarely is shy about offering his opinion on markets. Like most bond honchos, including Gross, a member of the Barron's Roundtable, he seldom likes stocks, which are, after all, bonds' primary rival for investment dollars. "Though I rarely go public with specifics on stocks, I think the Standard & Poor's 500, which is now over 1300, will hit 500 in the next couple of years," he says. "I usually couch my belief by saying merely that 2011 will be a tough year for equities."

 

Well, I suppose he was right that 2011 ended up being a tough year for equities, but we're still waiting for the S&P 500 to hit 500...

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I must have missed this part of the discussion, but why do we care what Jeffrey Gundlach says?

 

http://online.barrons.com/articles/SB50001424052970204442204576144662301971254

 

From Feb. 21, 2011:

 

Gundlach rarely is shy about offering his opinion on markets. Like most bond honchos, including Gross, a member of the Barron's Roundtable, he seldom likes stocks, which are, after all, bonds' primary rival for investment dollars. "Though I rarely go public with specifics on stocks, I think the Standard & Poor's 500, which is now over 1300, will hit 500 in the next couple of years," he says. "I usually couch my belief by saying merely that 2011 will be a tough year for equities."

 

Well, I suppose he was right that 2011 ended up being a tough year for equities, but we're still waiting for the S&P 500 to hit 500...

 

It's something interesting to consider. It's also important to keep in mind that these guys occasionally come out with such statements as a confidence marketing tool. People give a lot of credit to sounding confident. He could have said nothing or "I usually couch my belief by saying merely that 2011 will be a tough year for equities." But, again, it's not that important if he got his prediction right on timing, he even states clearly that he cannot predict where the bond market will be five years from now. He states some interesting concepts which are worth thinking about when combined with other sources of information out there.

 

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The guy is a superstar regardless if he made a mistake guessing s&p 500 in 2011...look at his average returns to benchmark. He has outperformed.

 

Good to review his comments and reasoning, don't get lost in the exact forecast or "target"

 

A lot to be gathered with the global view and market comments right now from him and others if you are a fixed income investor.

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It doesn't matter whether he's been wrong in the past or whether he's a superstar. There are always "superstars" out there contradicting each other (think of David Tepper's recent comments for example) – so whom to pick?

 

The reason I like to listen every time Gundlach is making a comment is that he is a highly idiosyncratic thinker and I really enjoy listening to such people. If they are right at times when almost everybody else is wrong this can be very profitable. Yes, it can be really painful when they are wrong.

 

In the end, it pays to listen to the arguments. Ray Dalio says that having thoughtful people disagree is the way to gain the most valuable insights. I think, this time, Gundlach's arguments are very good and I also think that the consensus's (and Tepper's) argument for a prolonged bull market is weak. Nobody – nobody – argues with a fundamentally improving outlook for businesses. In a nutshell, the argument is: Compared to interest rates, stocks are not expensive but reasonably priced and since interest rates won't go up (all that much) in the near to mid term, stocks won't go down.

 

I think this relative value argument is very dangerous, because there is no margin of safety. Either it's true, then you don't win all that much, or it's false then you're going to lose substantially. This is not a good risk/reward scenario. There are two ways for earnings yields to come down (i.e. P/Es to go up): stocks can rise or earnings can fall. A S&P 500 PE of 20 is only "cheap" (relatively, i.e. compared to interest rates) if you think that the earnings per share are at least stable. How did companies, in the aggregate, grow their earnings last year? With share buybacks! The economy hasn't really been growing much for years.

 

So, what's the difference to 2011? Valuations and market outlook. I listened to Gundlach in 2011 and his view on the stock market – which was also the consensus view at the time – didn't convince me at all. Stocks were cheap, balance sheets were in great shape and the present state of the economy was not that great – meaning: room for improvement. Now, stocks are pricy on frothy earnings, balance sheets are deteriorating and the economy is still in a recovering state. If this recovery stops, hell will break loose in the equity markets. This is a completely different situation from 2011. If you buy/hold the S&P 500 at a 20 PE you have to be really convinced that earnings are on their way up – and I just can't see that. That's why I became more and more cautious towards the end of last year.

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