In a recent Vanity Fair article by William Cohan, DoubleLine Capital bond manager Jeffrey Gundlach is interviewed regarding his take on bonds.
Gundlach’s answer is straightforward, “Why would anyone invest in bonds?” Seldom does anyone get such a contrasting view on an investment that is counter to their own best interests. And yet, somehow, Gundlach manages to go downhill from there.
Gundlach starts off saying, ‘‘I’m stuck in it,’ of his massive bond portfolio..." as if the job of collecting all the fees is some sort of gang that he can’t get out of. Gundlach, you’re not stuck. You actually have a fiduciary duty to get out of an investment if it isn’t in the best interest of you're clients and you believe you know about it in advance.
Gundlach is basically saying, "you're forcing me to take your money in fees for a product I don't think will do well." Do what Warrant Buffett did in the sixties, close the business until you believe opportunities are available. At the very least, close the funds to new investors.
Somehow, Gundlach massive investment holdings seems to have gotten the better of him when he said that his job is to get his clients "…to the other side of the valley.” This must be how Lloyd Blankfein, CEO of Goldman Sachs, thought he was "...doing God's work…", naturally because Goldman is “very important.” Seems there is an illness of moneyed folks who can't let go but have a "following."
As with Blankfein, Gundlach basically mocks those who entrust their money to him. He says, "That’s why I’m still at the game. I want to see how the movie ends.” Dude is getting out the popcorn and collecting fees, just for kicks and giggles.
More absurd than the fact that Gundlach is forced to collect fees on investments he thinks are lousy, is that he has clung to a blithe philosophy that is jumped on by conspiracy theorists and others who don't understand the economy. That philosophy is that declining interest rates have "...been caused by 'manipulated behavior' by central banks." Why is this such an idiotic belief? Well, let's look at the history of inflation in the US.
From 1954 to the peak in 1980/81, the percentage change from the prior year in inflation draws out a clear rising trend and from 1980/81 it shows a clear declining trend. Next, let's look at the history of Federal Reserve rates that can be "manipulated."
Interest rates, as managed by the Federal Reserve, in the form of the Discount Rate, show a clear pattern in alignment with the inflation data above. Generally rising from 1954 to 1980/81 and generally falling from 1980/81 to the present. Next, let's look at the free market 3-month Treasury rate.
The 3-month Treasury is supposedly determined by what the market seems to think short-term rates should be. However, the short-term Treasury leads the way lower and the Federal Reserve routinely FOLLOWS the direction of the 3-month Treasury, RATHER than periodically leading the direction of rates. Let’s look at the 30-year Treasury to see how, since 1977, it has fared.
So far, we have seen that market driven rates and Federal Reserve rates have started to descend since 1980/81 to the present. Now, in some way, the Federal Reserve has some hand in the Treasury market through their market operation. However, what would a “separate” data set tell us about the direction of yields and rates. Let’s look at Moody’s Corporate Bond Yield in the 1954 to 2017 period.
There seems to be an uncanny resemblance to all of the sources over exactly the same period of time. Let’s look at the period of 1836 to 1914 on corporate rates, a period when the Federal Reserve Bank did not exist.
It appears that, on the whole, interest rates are following a tried and true pattern and the Federal Reserve is simply responding to the conditions rather than taking a lead that has influence on the actual direction. To further the point, let’s look that Dewey and Dakins Wholesale Prices as plotted from 1790 to 1947.
What is the blue circle and red circle for? Oh, those are the expected peak and trough in inflation, 1980 and 2006 as plotted in 1947. How is it that the plotting of these wholesale price have managed to follow the expected pattern over such a long period of time with or without a centralized banking system in place? Now, if the history of inflation has been fairly regular for longer than the existence of the Fed and Fed policy ALWAYS FOLLOWS market rates, how has the Fed had any meaningful impact on a pre-existing condition in the economy?
Adding irony to the lack of understanding of economics, Gundlach goes on to say, "European interest rates 'should be much higher than they are today...[and] once Draghi realizes this, the order of the financial system will be turned upside down and it won’t be a good thing." Gundlach implies that some guy [Mario Draghi] will realize his folly AND THEN "...financial system will be turned upside down...". Markets don't wait for some dude to come to his senses. Market acts and people react as seen in comparison of the Fed Discount rate versus the 3-month Treasury) from 1948 to 1982.
Based on what Gundlach has said so far, he seems to be implying that governments need to be more centrally planned than already exists. Gundlach offers the following gem, "It will mean the liquidity that has been pumping up the markets will be drying up in 2018...Things go down. We’ve been in an artificially inflated market for stocks and bonds largely around the world.”
How long does Gundlach think that the market has been "artificially inflated?" By our reckoning, based on the data provided, Gundlach is saying that the start of the decline in interest rates in 1980/81 was all for the purpose of fueling the market boom from 2009 to 2018. This is both idiotic and absurd, all at once.
Does this mean that Gundlach didn't contribute value added insight in his bond investments? After all, it was a Fed induce binge and Gundlach was the smart guy in the room to charge a fee to clients that he is “leading through the valley.” Is Gundlach going to cut his fees and give a portion of his bonuses back to his flock for the money that he obtained since he implies that he hasn't done much for them?
Naw, of course Gundlach isn't going to give back his false profits. Instead, he is going to sit back and watch as he collects fees while his client pay for him to stay in the "game."
Like nails on a chalkboard, Gundlach closes with the following hubris, “My job is to find scary things…My critics say, ‘You find seven risks for every one that exists.’ Guilty. That’s my job. My job is to try to find out what can go wrong, not cover my ears and hum. It’s better to keep your eyes open.”
Gundlach speaks as though he is divinely chosen to guide his hapless flock through some mysterious valley where he can fleece as he goes, apparently knowing that the grass is not greener on the other side.