Jeffrey Gundlach has a history of good calls. The title “King of Bonds” speaks for itself, while he was among the very few to warn of the dangers of the housing bubble in the mid-2000s. The CEO of DoubleLine Capital rightly pointed out that the subprime market was a “total unmitigated disaster”. So what does he think of today’s markets?
The good news, he notes in Barron’s, is that he doesn’t see any disasters in the offing. But given the cyclicality of speculation and human nature, investors should always keep an eye out for signs of incipient madness. Periodically, “the world is afflicted by mass psychosis” and, when the scales fall, people can’t believe they have been participating in a mania, he says. It happened in the 1990s during the dotcom era. A decade ago, people believed that the widespread issuance of subprime mortgages wouldn’t lead to massive defaults. Today we see a similar sort of thinking in the cryptocurrency market. Although the cryptomania may not pose a threat to the financial system, bitcoin has been “important in framing the speculative mood” in today’s markets.
Bets on low volatility are another sign of excess. Recently, “many quantitative investors, thinking they were individually clever, all bet on the same thing: that stockmarket volatility would remain perpetually at historically low levels. That trade blew up last month”. He finds the outlook for US stocks uninspiring, given that they are richly valued and interest rates are heading up; there is also the possibility that the Fed could withdraw liquidity too rapidly. “I expect the market to close the year down.” But he remains keen on Brazil and Japan.