One of the intriguing things about being an editor of a financial magazine is that there is a never-ending stream of commentators making zany remarks about the economy and the markets. Verbal bomb throwers like Jeremy Grantham provide a steady source of highbrow entertainment several levels above what we get from Charlie Sheen.
The other day I listened to a conference call with Jeffrey Gundlach, CEO and CIO of DoubleLine Capital, which was celebrating its first anniversary. During its first year in business, DoubleLine has attracted more assets than any new mutual fund complex in history and its flagship Total Return Fund was up 19.2% in its first 12 months.
The next major political party in this nation will be the Taxes-Are-Too-Damn-Low Party, Gundlach told his clients and shareholders. In his view, the relatively low tax rates of the last decade has exacerbated income disparities to the point where it is threatening the nation's social fabric.
I presume that, since DoubleLine is based in Los Angeles, Gundlach is a California resident. I have many friends of all different political pinstripes in California and I never heard any of them complain about low taxes before, but there is a first time for everything. I suspect we're going to hear more than anyone, even an accountant, wants to hear about taxes in the next 18 months.
That wasn't all Gundlach had to say. Unlike the folks at Pimco who have sold U.S. Treasurys short, Gundlach thinks they will rally when QE2 ends. At that point, the U.S. economy will look a "lot like Rory McIlroy at Amen Corner" on Sunday, April 9, he said. For those who don't follow golf, McIlroy is a brilliant young golfer who began the day as the tournament leader and went on to a staggering collapse.
When QE2 is terminated in June, people are going to ask if the U.S. economy can stand on its own two feet. Gundlach thinks it will struggle and that yields on 10-year Treasurys won't go above 4.0% because the economy can't handle anything higher. He also thinks the fact that many big investors have followed Pimco's suit and are either out of or short Treasurys creates future buying power for the instruments. The last time the Fed ended QE1, some Treasury yields fell 160 points, he explained, although they got a big assist from Greece last spring.
The fact that politicians in Washington, D.C., are starting a serious conversation about reducing the federal budget deficit is another positive factor for bonds, in Gundlach's view, even if it's a negative factor for the economy.
Finally, Gundlach quoted the immortal Yogi Berra, who once remarked, "Be careful if you don't know where you are going because you might not get there." I'm looking forward to hearing Gundlach at our alternative investment conference in Chicago in June.
P.S. Don't miss our new column, Investment Views, which kicks off on page 111 with a piece from ETF expert Tom Lydon.
Evan Simonoff, Editor-in-chief
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