Wednesday, October 05, 2011

Jeffrey Gundlach interview: deflation risk


Noted bond fund manager and DoubleLine founder, Jeffrey Gundlach speaks with FT.com about the economy, deflation risks, and his views on Treasury bonds. 

Some highlights from this interview:

  • DoubleLine notes that the market has been affected by shifts in sentiment relating to potential inflationary outcomes vs. deflationary outcomes. Gundlach seeks to take advantage of pendulum shifts in sentiment by positioning his portfolio more into government bonds when everyone is focused on inflation, bucking the prevailing sentiment trends. 
  • As unattractive as Treasury yields appear to be from a historical standpoint, investment managers should own bonds "even today" as a hedge.
  • "I used to be an inflationist several years ago". Gundlach understands the printing-money-to-cover-entitlements view, but feels that this pro-inflation scenario is unlikely to happen without a crisis. Gundlach feels you will first see economic weakness and a societal trend towards reigning in deficit spending. Hence, deflationary arguments are at the forefront.
  • Tremendous income polarization in the United States. This has often led to societal unrest. Hard times for working class vs. plush times for multinational corporations will lead to calls for increased corporate taxes. Expect lower PEs for stocks in that environment.
Catch the full take at the link above.