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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Notes from DoubleLine lunch


  • edited April 2014
    Thanks, Josh does a nice job, as always.

    Makes me wonder how our nation might differ

    if more smart folks like Jeff Gundlach

    would help offer solutions to the challenges we face

    instead of just pointing them out.

    You know, be more like Scott!
  • beebee
    edited April 2014
    Thanks Bud for posting,

    With respect to the first slide: "Who owns our Debt". I try remind myself that holding debt is a choice. For the Fed, who prints money and controls the Fed's fund's rate, they are attempting to get the US through this debt cycle by picking up some of the slack that a healthy economy would provide. Hopefully this will be a short term dynamic. For most americans, this doen't feel like a personal choice (the fed's voice is not our voice), yet it's actions impacts us on personal level.

    For foreign countries who hold US reserves, they often choose to settle a trade with the US by taking some of that settlement in the form of credit (US reserves). Why do this instead of demanding full payment? Taking full payment is not always in their best interest (in the short term). US reserves provide foreign countries a mechanism to control inflation in their own country. US reserves help exporting countries fight inflation in their own country. Without reserves an enormous amount of inflation would be exchanged between countries at the settlement of the trade. China, Japan and other countries would rather have a mechanism to control some of this inflation. Interesting that other countres still is us as credit worthy when the media would like us to think we've sold the company store to foreigner.

    Also, US reserves are available to be exchanged between the holder and a third party. For example, China might use US reserves to settle a trade with a third party for a totally different, oil, raw materials, etc.

    US reserves allow us to push payment into the future. Like any form of credit it needs to be used wisely and in a productive manner...not always a bad thing.
  • Very nice content-rich article.

    @charles, not to diminish Gundlach in any way, but people who are good at pointing out problems are seldom people good at solving them and vice versa. Happens in corporate America on a daily basis. And yet we seem to elect people based almost entirely on how loudly they point out problems than meaningful and realistic solutions.

    I am surprised why Gundlach doesn't see the mechanism of how Fed policies give rise to asset bubbles. Perhaps, he doesn't look at equity investing as much as he does bond investing. Money reaching for returns in equities is not that different from reaching for yield in bonds.

    One thing that hasn't been talked about yet is the amount of cash flow into US assets from the 1% globally now that the barriers to movement of capital has largely been removed globally and money is getting concentrated at unprecedented levels.

    We have always assumed it is the hot money flowing into Japan or China or Brazil that created bubbles in those countries. US might also be in the same boat.
  • cman said:

    I am surprised why Gundlach doesn't see the mechanism of how Fed policies give rise to asset bubbles.

    @cman: Would you mind going into the mechanism of how Fed policies, e.g., quantitative easing and Fed Funds rate of 0-.25%, gives rise to asset bubble in stocks? (It's much more clear to me how those Fed policies raise the prices of bonds).

    The explanation I've heard is that low interest rates cause people to borrow, and therefore spend and stimulate the economy, thereby raising the prices of stocks. But I've also heard from good sources that banks are not lending, and it's difficult to get a loan from a bank. And that banks may be much more inclined to lend if interest rates rise.

  • edited April 2014
    Hmmm. I think the bubble scenario is that banks, other financial institutions, hedge funds can borrow money at near nothing and invest those funds in higher yielding positions. So, in effect, buying on margin with "Money for Nothing" and "artificially" escalating valuations. Similar, I suspect, to when folks could buy homes for low starter rates and no money down; consequently, "artificially" inflating home prices. That's probably simplest scenario for my simple brain.
  • @Charles has part of the answer. But borrowing to invest is just a small part of it. Fed policies make a lot of existing money available to invest from people who have capital.

    Part of it is from a need to increase returns from low yields on bonds. Part of it is from the moral hazard of Fed action like QE which reduces long term rates but also extends the time frame in which one can expect low interest rates. After all they won't increase interest rates until they reduce QE. So the probability of loss in markets from interest rate movements decreases which decreases Value at Risk measures which means more capital can be put at risk.

    I am sure many here have increased their allocation to equities from some of these reasons whether aware of the reasons or not and it snowballs to create an asset bubble.

    This has nothing to do with the economy, very little of this is being deployed for any productivity that contributes to economic growth. It is just a financial ponzi scheme bidding up prices.

    Economic growth requires Increase in broad consumption from the masses that leads to increased production in a virtuous cycle. This requires a start to growth in income. This has not happened at all. In fact, quite the opposite.

    The earlier real estate bubble allowed the masses to monetize it, giving people the money in lieu of income to consume. That stimulated the economy as a consequence. This financial market asset bubble isn't the same. The gains are concentrated in the top 5% or so since the 95% doesn't have enough capital, and so doesn't increase consumption in the same way.

    What is a mystery to me is the mechanism by which the Bernanke Fed expected the money velocity to increase in the economy with their policies rather than just snowball the financial market gains as it has done.
  • edited April 2014
    Good stuff cman.

    Not sure I see same lack of production and consumption you see however.

    Airlines, restaurants, freeways seem very busy to me.

    DC was slammed this past week 'cause of Cherry Blossom Festival, of course. Every hotel, budget and luxury full. Same with restaurants and bars. Chock full with travelers, vacationers, business people from all over. Domestic. International.

    Big construction cranes dot the DC skyline.

    Here in California, construction all around. Condos. Freeways. Motels. Metro. Hospitals. Airline terminals.

    New wineries, where old historic buildings once abandoned are now being fully restored beautifully. Boutique vineyards being planted with high-end prices.

    Malls started/stopped in 2007/2008, finally being finished.

    Lots of new car and RV purchases. Pricey new Teslas on the road. And pricey Airstreams.

    Elsewhere, I see HELOC loans on the rise, once again.

    Innovation of using more aluminum in trucks.

    Oil investment abounds due to new drilling technology. (Yes, it's currently killing cash flows, but longer term...) Expanding global market for LNG.

    Airlines starting to order new planes, finally.

    Soon, thanks to folks at Scaled Composites, tourists will cross into space via Virgin Galactic. (Yes, just the wealthy at first, but same was the case with airlines.) Have you seen the new spaceport in New Mexico? Amazing!

    Recent success of SpaceX.

    Lots of solar start-ups with now practical installations.

    Ha! Lots of babies being born...many strollers out and about =).

    And, of course, all the innovative stuff Scott posts about.

    Granted, may be some anecdotal stuff on my list.

    I don't know. Just seems like a lot happening across the nation.

    Did you hear that LA is actually getting a second newspaper? Yes, newspaper, printed! Kind of unbelievable. But, it's happening.

    Companies once consolidating, now expanding. Like UTC with their move back into West Palm Beach.

    Texas is the rage I hear. Very favorable tax structure, attracting lots of new businesses.

    Nevada is even recovering.

    More IPOs (granted some seem awful...King Digital).

    More acquisitions (here too, some seem awful...WhatsApp).

    Hey, the Yanks beat the Red Sox this past weekend. With home runs no less!

    All this activity needs to be generating some increase of productivity and consumption, more broadly than just the top few percent, no?

    All the while, folks remaining rather wary of the next bubble, which I think is healthy.

    Fingers-crossed, the nation continues to prosper and grow for foreseeable future.

    And, we will not have to look back at the Fed's policies as doing us in.

    Perhaps instead, history will show that they actually helped us climb out of the Great Recession (yes, I know, even if they did help us get into it in the first place).

    Enough fun. Gotta finish my taxes (yuck).
  • beebee
    edited April 2014
    I think that aside from the top 5% (mentioned by cman) benefiting from the Feds actions, the Fed also get credit for bringing corporations, pension funds, state and municipal investments, banks, and even IRAs back from the abyss.

    I see the Feds actions as part one; addressing systemic risk, which if they can avoid a hard landing they will have accomplished, and part two; fostering aggregate demand, which we see little evidence of.

    I think the Fed and the banks will play a role in extending credit when that happens, but right now the banks are still sucking on the Feds Teet. No room for the thristy masses.

  • @bee is exactly right. Treasury+Fed action of backstopping prevented the fiscal cliff from much worse condition.

    @charles, you have made the case anecdotally that we are not in recession. I am not saying we are. And the contrast from the recession is stark as you may have noticed. But this should not be confused for sustainable economic growth.

    The economic growth we need is reflected in the GDP numbers, employment (I wish somebody would calculate the wage weighted employment numbers to measure progress) and top line growth of companies all of which are anemic. I am pointing out the structural problems why.

    The markets are divorced from economics hoping the latter will catch up while the Fed policy as explained earlier keeps it propped up. It hasn't done much beyond that.

    The reason this is important is that the market can correct very quickly to reality.
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