Gundlach Warns “The Order of The Financial System Is About To Be Turned Upside Down”
“I’m not a big fan of bonds right now,” may seem like an odd way for the so-called Bond King to begin, but in an audience at Vanity Fair’s Establishment Summit, DoubleLine’s Jeff Gundlach told Bethany McLean, “I haven’t been really [a fan of bonds] for the past four years, even though I manage them, and institutions have to own them for various reasons.”
Gundlach urged investors to be “light” on bonds.
As Vanity Fair’s William Cohan reports, Gundlach admitted “I’m stuck in it,” of his massive bond portfolio, adding that interest rates have bottomed out and been rising gradually for the past six years.
Gundlach said his job now, on behalf of his clients, “is to get them to the other side of the valley.”
When the bigger, seemingly inevitable hikes in interest rates come, “I’ll feel like I’ve done a service by getting people through,” he said.
“That’s why I’m still at the game. I want to see how the movie ends.”
But it can’t end well. To illustrate his point about the risk in owning bonds these days, Gundlach shared a chart that showed how investors in European “junk” bonds are willing to accept the same no-default return as they are for U.S. Treasury bonds, pointing out that this phenomenon has been caused by “manipulated behavior” by central banks.
European interest rates “should be much higher than they are today,” he said,
“…[and] once Draghi realizes this, the order of the financial system will be turned upside down and it won’t be a good thing.
It will mean the liquidity that has been pumping up the markets will be drying up in 2018…
…Things go down. We’ve been in an artificially inflated market for stocks and bonds largely around the world.”
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