Subprime Warning
As an investor, Gundlach goes on buying sprees when asset values plunge. After warning investors at a 2007 Morningstar conference that the subprime lending market was a “total unmitigated disaster,” he started to load up about a year later on the distressed mortgage-backed securities that most of the world was shunning.
The winning bet produced a return of 21.7 percent in the Total Return Bond Fund in 2009 through Dec. 4, when he was booted from TCW.
Now, after a global financial debacle, bank bailouts, the European debt crisis, a slowdown in China and a halting U.S. recovery, Gundlach is preparing for another bout of bad news -- his so-called third phase. While he doesn’t expect any countries to default in 2013, he points to Japan as an example of a government that may have to embark on more-aggressive asset buying that could lower the value of its currency.
Its economy contracted at an annualized rate of 3.5 percent in the third quarter. Japan’s trade deficit rose to a half-year record 3.22 trillion yen ($40.5 billion) in the six months ended on Sept. 30. And the central bank increased its asset purchase program on Oct. 30 to 66 trillion yen to overcome deflation.
European Events
“Japan is running out of policy tools,” he says.
Following actions by the European Central Bank that pumped $355.4 billion into the region starting in 2010, DoubleLine managers see several possible events that could hammer markets, from Finland exiting the euro zone to another near default of a Spanish bank.
“The only reason asset prices are up is because of all the liquidity in the system,” says Luz Padilla, manager of the $707 million DoubleLine Emerging Markets Fixed Income Fund. “Our concern is that it can turn very quickly.”
In the U.S., Gundlach sees a postelection, pre-fiscal cliff economy that’s growing anemically and only because of consumer loans, government stimulus and the Fed. He says inflation could jump by 2 percentage points if the Fed ramps up its purchases of government debt beyond what it has done so far.