Jeffrey Gundlach: "This Time It's Different" Webcast

[petec]

But we always have to be careful when assuming that markets are acting rationally, especially in the very short term.

 

+1

 

To me the macro is entirely confusing, as it usually is.

 

 

+2

 

So I buy good businesses that should do well and deploy capital well regardless.

 

+3

 

Still nervous though ;)

[petec]

 

He says that if it gets to 40 or below he is concerned about the geopolitical risks, my guess he is talking about chaos and collapse in various countries.

 

 

Might be true but I don't see it as a bad thing for the global economy.  The regimes that would struggle are a) unpleasant, b) unfriendly, and c) only of any importance on the global stage because of high oil prices.  Let them fade into insignificance, even if it is unstable insignificance.  Horrible for the people who live there, but this is a conversation about the global economy.

[petec]

 

And government spending compared to GDP is at all time highs (like 10-15% of the economy).

 

 

I think it is now over 20% in the US, 45% in the UK and I have read (although can't quite believe) that it is 60% in France.

[jay21]

I must have missed this part of the discussion, but why do we care what Jeffrey Gundlach says?

 

http://online.barrons.com/articles/SB50001424052970204442204576144662301971254

 

From Feb. 21, 2011:

 

Gundlach rarely is shy about offering his opinion on markets. Like most bond honchos, including Gross, a member of the Barron's Roundtable, he seldom likes stocks, which are, after all, bonds' primary rival for investment dollars. "Though I rarely go public with specifics on stocks, I think the Standard & Poor's 500, which is now over 1300, will hit 500 in the next couple of years," he says. "I usually couch my belief by saying merely that 2011 will be a tough year for equities."

 

Well, I suppose he was right that 2011 ended up being a tough year for equities, but we're still waiting for the S&P 500 to hit 500...

 

Gundlach might be the greatest forecaster/predictor of all time.

 

He makes outlandish statements that shock and awe when he says them knowing that they will be forgotten and never brought up again if he's wrong. And if he's right it is brought up again and he gets to go on TV and tell people how smart he is.

 

What makes him a great investor is that he doesn't position his portfolio based upon the forecasts he makes on TV, but a deep analytical approach.

[yadayada]

 

And government spending compared to GDP is at all time highs (like 10-15% of the economy).

 

 

I think it is now over 20% in the US, 45% in the UK and I have read (although can't quite believe) that it is 60% in France.

 

So basicly if a government cannot pay up anymore, you will see GDP shrink by huge amounts, not seen before in history.

[ni-co]

Another great sign for 2015: Not a single "strategist" is forecasting falling equity markets in 2015…

 

Stock strategists are a perennially bullish bunch: Since 2000, the average forecast has called for higher share prices each year. Analysts didn’t foresee the dot-com bust of the early 2000s or the financial crisis. But last year, many undershot the index, leaving them scrambling to raise their targets.

 

This year, even the least bullish analysts think the Fed’s rate increase isn’t likely to deal a lasting blow to stocks. Everyone polled by Birinyi expects U.S. stocks to end the year higher.

 

WSJ (via google)

[petec]

 

And government spending compared to GDP is at all time highs (like 10-15% of the economy).

 

 

I think it is now over 20% in the US, 45% in the UK and I have read (although can't quite believe) that it is 60% in France.

 

So basicly if a government cannot pay up anymore, you will see GDP shrink by huge amounts, not seen before in history.

 

That depends on whether the government in question can print money. 

[Ham Hockers]

 

And government spending compared to GDP is at all time highs (like 10-15% of the economy).

 

 

I think it is now over 20% in the US, 45% in the UK and I have read (although can't quite believe) that it is 60% in France.

 

Supporting data on the U.S.?

[petec]

 

And government spending compared to GDP is at all time highs (like 10-15% of the economy).

 

 

I think it is now over 20% in the US, 45% in the UK and I have read (although can't quite believe) that it is 60% in France.

 

 

Supporting data on the U.S.?

 

Google is your friend...to an extent:

http://data.worldbank.org/indicator/GC.XPN.TOTL.GD.ZS says 23-25%

http://en.wikipedia.org/wiki/Government_spending says 42%?!?!?!

[ni-co]

Bill Gross chimes in:

 

When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.

 

[…]

 

If real growth in most developed and highly levered economies cannot be normalized with monetary policy at the zero bound, then investors will ultimately seek alternative havens. Not immediately, but at the margin, credit and assets are exchanged for figurative and sometimes literal money in a mattress. As it does, the system delevers, as cash at the core or real assets at the exterior become the more desirable holding. The secular fertilization of credit creation and the wonders of the debt supercycle may cease to work as intended at the zero bound.

 

https://www.janus.com/bill-gross-investment-outlook

[original mungerville]

Gundlach's reasoning makes sense to me. He lays out a case for a risk which should not be neglected. Its a risk, he is not calling it a certainty.

 

Bill Gross is negative.

 

Ray Dalio said in December 2014, the equity environment is good for another 1-2 years - after that, he says the global economy WILL MATERIALLY CHANGE. He says European and Japanese monetary policy is effectively tapped out right now (as the short-end is at zero and the yield curve pretty flat already) and interest levels and the spread is what drives this financially driven capitalistic system. In the US, they may have another 1-2 years and then he believes they will also be tapped out. This will come at a time when asset prices are already very elevated and secular deflationary forces may cause a recession where the Fed has no ammo left.

 

I dunno, but the bond / macro guys do not seem too optimistic going forward. Dalio however seems quite content to hold equities this year - at least early in the year. Even Tepper the bull said its going to be a good year but like 1999, you may have to know when to get out.

 

Hopefully you are all smart enough to know when to take some risk off as I agree with a previous poster's very well expressed comments: there are two ways stock yields can go down - either stocks go higher (seems like they will in the first bit of this year) or earnings shrink.

 

[original mungerville]

Oh, and if Liberty and Petec want to dismiss this macro stuff because they can't predict it, go right ahead. But not being able to predict it means you should be hedged or partially hedged, and not 100% long equity exposures in general because that would be speculative in my view. 

 

You can still be a value investor and be somewhat hedged. Just look at Ericopoly, he pretty much only hedges.

 

And by the way Eric has gone short the Russell and S&P in December as well - so lets add him to this list: Gundlach, Gross, Dalio to a degree later this year, Tepper to a degree later this year, and Ericopoly!! I don't know, my best guess is that we may be OK for another few months - but hey, I've been so wrong on my timing so many times and for so long, I just kinda stay semi-hedged.

 

I don't like poor financial management, excessively leveraged economies with continuously growing debts and widening deficits, or central banks which print gobs of money - call me crazy.

 

 

[innerscorecard]

Oh, and if Liberty and Petec want to dismiss this macro stuff because they can't predict it, go right ahead. But not being able to predict it means you should be hedged or partially hedged, and not 100% long equity exposures in general because that would be speculative in my view. 

 

You can still be a value investor and be somewhat hedged. Just look at Ericopoly, he pretty much only hedges.

 

And by the way Eric has gone short the Russell and S&P in December as well - so lets add him to this list: Gundlach, Gross, Dalio to a degree later this year, Tepper to a degree later this year, and Ericopoly!! I don't know, my best guess is that we may be OK for another few months - but hey, I've been so wrong on my timing so many times and for so long, I just kinda stay semi-hedged.

 

I don't like poor financial management, excessively leveraged economies with continuously growing debts and widening deficits, or central banks which print gobs of money - call me crazy.

 

The main issue for me is that being hedged means that your returns basically come only from your securities picking skill. I know that for me at least, I'm unskilled enough that I want to take advantage of equity returns in general which are positive over long time frames, and also unskilled enough that I cannot accurately predict the times when these returns for stocks as a whole are negative going forward.

[original mungerville]

My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.

 

And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).

[original mungerville]

Oh, and if Liberty and Petec want to dismiss this macro stuff because they can't predict it, go right ahead. But not being able to predict it means you should be hedged or partially hedged, and not 100% long equity exposures in general because that would be speculative in my view. 

 

You can still be a value investor and be somewhat hedged. Just look at Ericopoly, he pretty much only hedges.

 

And by the way Eric has gone short the Russell and S&P in December as well - so lets add him to this list: Gundlach, Gross, Dalio to a degree later this year, Tepper to a degree later this year, and Ericopoly!! I don't know, my best guess is that we may be OK for another few months - but hey, I've been so wrong on my timing so many times and for so long, I just kinda stay semi-hedged.

 

I don't like poor financial management, excessively leveraged economies with continuously growing debts and widening deficits, or central banks which print gobs of money - call me crazy.

 

The main issue for me is that being hedged means that your returns basically come only from your securities picking skill. I know that for me at least, I'm unskilled enough that I want to take advantage of equity returns in general which are positive over long time frames, and also unskilled enough that I cannot accurately predict the times when these returns for stocks as a whole are negative going forward.

 

Understood, this is why I mention being partially hedged - and always asymetrically (so your short can't kill you). Although an asymetric hedge (ie put) costs even more than a symmetric one (short). In any case, maybe be 80% long equities, 20% cash or bonds, and have a put covering 20% of your portfolio. So you would still be long 60% equities and benefit from that, and your hedging costs are minimized at 20% of notional. I am just making the case that, as value investors, we should use our Alpha pretty much at full throttle all the time (to Liberty's and Petec's point), but in certain cases we should take the foot off just a bit and hedge just a bit. After a 6 year bull market, sometime in the next 2 years may be the time that that positioning will be very beneficial.

[ni-co]

Gundlach's further market outlook for 2015 – "V":

https://event.webcasts.com/starthere.jsp?ei=1048843

[peter1234]

Gundlach's further market outlook for 2015 – "V":

https://event.webcasts.com/starthere.jsp?ei=1048843

 

Thank you. Very interesting.

:)

[vinod1]

My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.

 

And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).

 

original mungerville,

 

I did a little analysis on hedging, it seems to me that buying puts is very expensive and the payoff does not seem all that attractive. I would love to hear your opinion on a short half page analysis that I am attaching below.

 

Basically, you need to put nearly 16% of your portfolio into put options to be able to hedge your portfolio completely against a 40% loss. That means we can invest only 84% into stocks. I might be missing something and any feedback would be most welcome.

 

Thank you!

 

Vinod

Hedging.pdf

[ni-co]

My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.

 

And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).

 

original mungerville,

 

I did a little analysis on hedging, it seems to me that buying puts is very expensive and the payoff does not seem all that attractive. I would love to hear your opinion on a short half page analysis that I am attaching below.

 

Basically, you need to put nearly 16% of your portfolio into put options to be able to hedge your portfolio completely against a 40% loss. That means we can invest only 84% into stocks. I might be missing something and any feedback would be most welcome.

 

Thank you!

 

Vinod

 

There is a cost effective way: You could short futures on an index, the Russell 2000 for example. The only problem with this solution is that you have to take exposure in $80k (Nasdaq 100) to $130k (Russell 2000) increments.

[CorpRaider]

S&P mini futures

[vinod1]

ni-co & CorpRaider,

 

Thanks!

 

Futures would be a lot more risky unless valuations reach truly absurd levels. At the current level, there are enough economic scenarios in which shorting could cause quite a bit of pain. So I am primarily exploring puts - it is not hedging as much as buying insurance.

 

Mungerville pointed the use of puts, but I am just not seeing them to be of much help unless one gets the timing right.

 

Vinod

[original mungerville]

My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.

 

And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).

 

original mungerville,

 

I did a little analysis on hedging, it seems to me that buying puts is very expensive and the payoff does not seem all that attractive. I would love to hear your opinion on a short half page analysis that I am attaching below.

 

Basically, you need to put nearly 16% of your portfolio into put options to be able to hedge your portfolio completely against a 40% loss. That means we can invest only 84% into stocks. I might be missing something and any feedback would be most welcome.

 

Thank you!

 

Vinod

 

Vinod, I am sure your analysis is reasonable. Just to be clear, I am advocating the following:

 

1. My neutral position is no longer 100% cash, its something like 90% cash (or less) and 10% (or more) precious metals. This is because of the global monetary debasement and its irrespective of whether we get deflation or inflation coming. Its just about the debasement.

 

2. I advocate being at least partially hedged after a 5 to 6 year run. The alternative is reduce value picks and move to cash. But if you are a really good value investor, then some hedging allows you to benefit from your Alpha without incurring market risk.

 

3. I advocate asymmetrical hedges. They are more expensive, but they can't kill you like symmetric ones which go the wrong way. After all, with money printing, the stock market's potential return is very very high - so you can get killed on a symmetric hedge. Asymmetrically hedging your entire portfolio is extremely expensive - I agree. And it would not permit you to invest the entire portfolio unless you use some margin for the hedge.

 

4. After over ten years at this, I have come to the conclusion that diversifying your hedge is intelligent. So buy some puts, but also be fearful when others are greedy (and the reverse) by moving to cash (and vice-versa), and also consider using long govt bonds as a third and less expensive option. (But in this environment with bond yields already so low I am less inclined). The point is don't put all your hedging eggs in one basket, and don't necessarily hedge 100% of your portfolio.

 

So, for example, after a 6 year bull market, maybe instead of hedging 100% of your portfolio, something like the following:

 

Neglecting my point #1 above for simplicity:

 

A) 25% cash, 75% value picks (ie discard your worst 25% of ideas to get from 100% down to 75%), hedge with puts say 35% of your entire portfolio. So net you would be long equities 40% and effectively be 60% cash.

 

B) IF we were in a more normal environment for govt bonds, you could instead invest the 25% cash in long govt bonds which earns a better yield and is roughly the equivalent of say an extra 15 % hedge on your equities (at least according to Ray Dalio of Bridgewater - and I am talking in very rough terms), so effectively you would then be 25% unhedged equities (instead of 40%) and effectively 75% cash. In reality, you would have 25% long bonds, 75% equities and 35% of notional covered by puts you bought on margin.

 

C) You might want to split A) and B) if you do not feel comfortable relying on the inverse correlation between the long-bond and equities. I would either do A) or C). The idea is to diversify the hedge.

 

D) Also, if a major holding is a large cap, you could consider buying the LEAPs instead of the common. Its more costly, but they act as a floor on what you can lose. So if you are really really scared of the environment and 25% to 40% long equities is still too long, you might consider a bit of this (should you have this type of security in your portfolio). Diversify the hedge into 3 or 4 strategies (all of them asymmetric) so you can't get killed by things working against you for some time and also the cost won't kill you because you limit your maximum notional your puts reference to 35% of your entire portfolio's notional

 

Now, having said all the above - given the monetary debasement going on, cash is probably going to ultimately be trash. So how does one stay conservative (ie how does one not be forced to hold equities as central banks debase and force everyone into equities?) as equity valuations go sky-high - at a time that cash is likely to be debased? I think its really important for everyone to hold at least 10% of their portfolio in physical precious metals. I am not going to get into how that should fit into a hedged value portfolio in this thread, but basically with A through D above, and combining that with #1, each person can figure it out for themselves.

 

 

[vinod1]

My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.

 

And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).

 

original mungerville,

 

I did a little analysis on hedging, it seems to me that buying puts is very expensive and the payoff does not seem all that attractive. I would love to hear your opinion on a short half page analysis that I am attaching below.

 

Basically, you need to put nearly 16% of your portfolio into put options to be able to hedge your portfolio completely against a 40% loss. That means we can invest only 84% into stocks. I might be missing something and any feedback would be most welcome.

 

Thank you!

 

Vinod

 

Vinod, I am sure your analysis is reasonable. Just to be clear, I am advocating the following:

 

1. My neutral position is no longer 100% cash, its something like 90% cash (or less) and 10% (or more) precious metals. This is because of the global monetary debasement and its irrespective of whether we get deflation or inflation coming. Its just about the debasement.

 

2. I advocate being at least partially hedged after a 5 to 6 year run. The alternative is reduce value picks and move to cash. But if you are a really good value investor, then some hedging allows you to benefit from your Alpha without incurring market risk.

 

3. I advocate asymmetrical hedges. They are more expensive, but they can't kill you like symmetric ones which go the wrong way. After all, with money printing, the stock market's potential return is very very high - so you can get killed on a symmetric hedge. Asymmetrically hedging your entire portfolio is extremely expensive - I agree. And it would not permit you to invest the entire portfolio unless you use some margin for the hedge.

 

4. After over ten years at this, I have come to the conclusion that diversifying your hedge is intelligent. So buy some puts, but also be fearful when others are greedy (and the reverse) by moving to cash (and vice-versa), and also consider using long govt bonds as a third and less expensive option. (But in this environment with bond yields already so low I am less inclined). The point is don't put all your hedging eggs in one basket, and don't necessarily hedge 100% of your portfolio.

 

So, for example, after a 6 year bull market, maybe instead of hedging 100% of your portfolio, something like the following:

 

Neglecting my point #1 above for simplicity:

 

A) 25% cash, 75% value picks (ie discard your worst 25% of ideas to get from 100% down to 75%), hedge with puts say 35% of your entire portfolio. So net you would be long equities 40% and effectively be 60% cash.

 

B) IF we were in a more normal environment for govt bonds, you could instead invest the 25% cash in long govt bonds which earns a better yield and is roughly the equivalent of say an extra 15 % hedge on your equities (at least according to Ray Dalio of Bridgewater - and I am talking in very rough terms), so effectively you would then be 25% unhedged equities (instead of 40%) and effectively 75% cash. In reality, you would have 25% long bonds, 75% equities and 35% of notional covered by puts you bought on margin.

 

C) You might want to split A) and B) if you do not feel comfortable relying on the inverse correlation between the long-bond and equities. I would either do A) or C). The idea is to diversify the hedge.

 

D) Also, if a major holding is a large cap, you could consider buying the LEAPs instead of the common. Its more costly, but they act as a floor on what you can lose. So if you are really really scared of the environment and 25% to 40% long equities is still too long, you might consider a bit of this (should you have this type of security in your portfolio). Diversify the hedge into 3 or 4 strategies (all of them asymmetric) so you can't get killed by things working against you for some time and also the cost won't kill you because you limit your maximum notional your puts reference to 35% of your entire portfolio's notional

 

Now, having said all the above - given the monetary debasement going on, cash is probably going to ultimately be trash. So how does one stay conservative (ie how does one not be forced to hold equities as central banks debase and force everyone into equities?) as equity valuations go sky-high - at a time that cash is likely to be debased? I think its really important for everyone to hold at least 10% of their portfolio in physical precious metals. I am not going to get into how that should fit into a hedged value portfolio in this thread, but basically with A through D above, and combining that with #1, each person can figure it out for themselves.

 

original mungerville,

 

Thank you for the detailed and very insightful reply. It looks like you have put a great deal of thought into this issue.

 

My portfolio since late 2011 has been mostly in LEAPS. It is partly due to the concerns you mentioned, partly due to valuations and partly because the opportunity set (BAC, AIG, et al.) of deep value + Tail risk lent itself to LEAPS.

 

I also have about 2% in precious metal equities (GDX) because they are attractive on their own due to valuations (mean reversion) while also serving as a hedge.

 

Vinod

[ni-co]

http://video.cnbc.com/gallery/?video=3000466813

 

Nice Gundlach idea: Long closed-end high yield/short S&P 500. I put some of it on HIO/SPY.

[Jurgis]

http://video.cnbc.com/gallery/?video=3000466813

 

Nice Gundlach idea: Long closed-end high yield/short S&P 500. I put some of it on HIO/SPY.

 

Hmm, I see a number of ways this could blow up.

 

Disclaimer: I don't short.