On the heels of his less-than-optimistic presentation, DoubleLine’s Jeff Gundlach tells Europe’s Finanz und Wirtschaft “he’s concerned about the growing amount of speculation” and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns “In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class.” His biggest worry (for investors, as opposed to his funds), “the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds.”
Mr. Gundlach, on Wall Street you’re well known as an influential bond investor. But you are also a connoisseur of art. What does it say about the mentality of today’s financial markets when a painting like Francis Bacon’s Triptych sells at a record auction price for more than $140 M.?
The art market is an interesting way to look at what’s happening to societal trends. On the headlines the art markets looks like it is incredibly strong. Pieces like the Triptych or the Scream of Edvard Munch are trading for huge prices. But when you move down and look at things that aren’t so iconic, the art market’s weak.
What’s really happening in the art market reflects this: The very expensive things in the world have had incredibly high price gains. Look at real estate in London, real estate in Hong Kong or penthouses in New York City. They’re up massively in value in the last few years. And then as you move down, things are much less robust in terms of price gains. So for a lot of the art that I own, my Californian paintings for example, prices are down substantially in the last ten years. They fell in 2008 and 2009 and have never recovered. It’s like an L-shape: It went down and it sits there. It’s a price point that doesn’t attract billionaires. It’s a price that attracts people who have a little bit of extra money. And those people are being squeezed tremendously by zero percent interest rates. They worry about their retirement. Rather than spend like $ 200’000 on some painting, they want to keep their money.
So what does that say about social trends?
It shows that When you look at history there is quite a high correlation between bubble talk and the top of the market. Today a lot of people say that maybe there is a bubble. But more commonly, the talk is about why it’s not a bubble. So they use the word bubble and say: “But these are the reasons that there isn’t a bubble”. I just read something this morning about someone who monitors how many times the words equities and bubble are referenced in the media. And While many people think Quantitative Easing is an inflationary policy, I don’t see that at all. What I see is that the Fed has created a huge shortage of high quality investments. They are all sitting on central bank balance sheets now. And maybe there will be some sort of an event that causes demand for treasury bonds. A lot of people think that doesn’t matter because who wants them anyway with these low yields? But what if you have a need to buy them, because you’re short and money is leaving? So you must cover your short. It’s really amazing how, over the last two years, the concern about the Euro and the European Union has disappeared. All ECB president Mario Draghi had to say was: “We will do whatever it takes”. My impression is that the policies that have been in place for the last couple of years are very popular among the elitists but not very popular among the average person. So I think at the upcoming elections in May it’s possible that elitists get undermined and something from a popular standpoint could kind of float up to the surface. This risk could potentially cause some sort of volatility. The European markets have been incredibly strong last summer and relatively weak recently. It just seems to me that the demographic problem in Europe is huge. You look for fear or concern but there isn’t any. It’s surprising to me how there appears to be no concern in the global investment community about the situation, particularly in France with the French banks. I don’t own any European stocks and I particularly dislike European bonds because they are really expensive versus US bonds.
How are you positioned personally against this background?
I can divide my personal wealth into three categories: Financial assets, real assets and my ownership in DoubleLine. Looking at the first two: I have about 60% of those assets in real assets like real estate, gemstones, artwork etc. So that leaves 40% that is in financial assets. Of that 40% I now have 30% in cash which leaves 70% that’s actually in assets. Of that I have 50% in DoubleLine products.
This takes us back to the art market. Where do you spot opportunities here?
I actually was participating at the most recent auction season in New York with the Triptych and all that. And it was the first season in ten years that I had bid on nothing and completely avoided it. Prices may go up a little bit further but I am not interested in being the incremental buyer at the price levels of a lot of assets today. It will probably go higher in the short therm. But who knows what the top is? The high end art market in particular is being driven by the great wealth creation in China, Russia and South America. It’s a totally different culture. These people can’t get rid of their money fast enough, they just don’t trust it. So they want to buy something that they think is real. That’s why there is huge demand for very high value: real estate, art or diamonds. Two years ago, I liked the art market, I liked the real estate market and I liked the gemstone market. I don’t dislike them now. But they have been going up a lot. Someone else can take the ride from here.