Saturday, July 30, 2016

Jeffrey Gundlach: "Sell Everything"

Jeffrey Gundlach, who now oversees more than $100 billion in capital, spoke with Reuters over the phone on Friday and provided his thoughts on global asset prices. I could not agree more:

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. 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 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."
"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 Treasuries.
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.

Jeffrey Gundlach, founder of DoubleLine Capital, speaks at the Sohn Investment Conference in New York City, U.S. May 4, 2016.  REUTERS/Brendan McDermid

Wednesday, July 27, 2016

Total Global QE Continues To Grow In Size

Money flows across borders much easier than goods or people. The financial markets are an interconnected system, and a hedge fund manager in London can purchase financial assets in Hong Kong with just a few easy key strokes. Investors solely focused on what is happening within their own borders will be blindsided by the impact of the surrounding world.

The following chart provides an excellent visual of the monthly dosage of QE provided by the "Big 4" central banks; the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE) and the Bank of Japan (BoJ).

You can see they are now printing more money monthly ($180 billion) than at any time since the financial crisis began in the summer of 2007. While the Fed (blue) carried the load for the world from 2009 to late 2014, the baton was passed to the ECB (black) and the Bank of Japan (red) to continue to prime the liquidity gusher. This chart does not include China where credit and money growth has taken on Biblical proportions.

What happens when money is printed and pumped like a fire hydrant into the financial system? It sloshes around the world violently. This is why you see liquidity flooding into the real estate markets of major cities in Australia, Canada and the United States. You see liquidity flooding into stocks, bonds, commercial real estate and fine art. The high end car market is booming. The world is completely drunk on free money, low interest rates and unlimited debt growth. 

The hangover and consequences, when the music finally stops, will be catastrophic. The real global economy had a heart attack in the fall of 2008, was never given an opportunity to heal and has been living on life support since. At some point artificial asset prices will peak, turn lower and then collapse back to the level the real economy can support. Until then, we'll see how creative the central banks can get in order to keep everyone at the party drinking as much as possible.

Monday, July 25, 2016

John Hussman On Foreign QE & U.S. Stock Valuations

From his weekly commentary:

On Quantitative Easing and Helicopter Money:

As for the enticing concept of “helicopter money,” my impression is that many observers are using the term with no understanding of what they are talking about. Despite the uninhibited imagery it evokes, “helicopter money” is nothing but a legislatively-approved fiscal stimulus package, financed by issuing bonds that are purchased by the central bank. Every country already does it, but the size is limited to the willingness of a legislature to pursue deficit spending. Central banks, on their own, can’t “do” helicopter money without a spending package approved by the legislature. Well, at least the Federal Reserve can’t under current law.

To some extent, Europe and Japan can do it by purchasing low-quality bonds that subsequently default, but in that case, it’s a private bailout rather than an economic stimulus. See, those central banks have resorted to buying lower-tier assets like asset-backed securities and corporate debt. If any of that debt defaults, the central bank has given a de facto bailout, with public funds, to the bondholder who otherwise would have taken a loss. So almost by definition, low-tier asset purchases by the ECB and Bank of Japan act as publicly-funded subsidies for bondholders, rather than ordinary citizens. My sense is that if the European and Japanese public had a better sense of this, they would tear down both central banks brick-by-brick.

On U.S. Stock Valuations:

The current half-cycle market advance is remarkably long-in-the-tooth. There little basis for investment at these valuations - only speculation. Without a strong safety net, that speculation amounts to an attempt to gather pennies under a chainsaw. In recent weeks, we’ve heard some rather ignorant talk of an ongoing “secular bull market” that presumably has years to go. Unfortunately, these analysts don’t appear to recognize that secular bull markets have typically started from valuations literally one-quarter of their present level (see 1949 and 1982), and far below those observed at the 2009 low. With the exception of the 2000 extreme, every secular bull market has died before reaching even the current level of valuations. Moreover, even if this were a secular bull, one would still expect a cyclical bear from current extremes. 

By our estimates, investors can expect to scrape out scarcely more than 1% in nominal annual total returns in the S&P 500 Index over the coming 12-year period. We expect that all of this will be from dividends, and that investors will experience a steep roller-coaster of draw-downs and volatility in the interim. The index itself is likely to be below current levels 12 years from today. Even the lowly returns available from cash will likely serve investors better. Of course, we expect the discipline of investing in alignment with the market’s expected return/risk profile, as it changes over the course of the market cycle, to do far better still.