Should the retirement age be raised to 70?
One expert argues that life expectancy is up, so raising the retirement age is necessary to preserve benefits.
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On Stock Dividends Being "Higher than the Yield on a Ten-Year Treasury": he says this is nonsense because there is no risk parity between a stock and a Treasury bond, he says you have to look at this comparison on a volatility-adjusted basis or not at all. For example, If the yield on the ten-year bond doubles overnight from 3 to 6%., you've lost about 20% of your principle - but if Microsoft's yield doubles from 3 to 6% overnight, you've probably lost 50% of your principle. Apples and oranges.
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Joshua has been managing money for high net worth clients, charitable foundations, corporations and retirement plans for more than a decade.
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On Economic Indicators: The ECRI Growth Index is extremely important, as of the latest reading, this index is at negative 7.
On the US Dollar: While everyone is whining and crying about the falling dollar, the simple fact is that the dollar actually bottomed three years ago and is now strengthening. "The problems in Europe are wildly bullish for the dollar". "All of our assets are dollar denominated."
On Gold: "I understand the allure of gold but in a deflationary environment or a true liquidity crisis, there is serious risk to gold prices up here." he says around 1500 gold gets interesting again. Jeffrey showed us the pronounced daily volatility in gold prices (hi-lo chart) since the Debt Ceiling debate - he notes that "Increases in volatility almost always precedes a reversal in trend." Jeffrey bought gold personally in 1997 because he thought it looked cheap - "For five years it did nothing, I actually lost money, then I made five-fold on my investment."
On Natural Gas: The all-asset class portfolio is currently legging into a long natural gas position - slowly. Jeffrey says it probably goes nowhere in the short-term but in a decade or two could be a five-bagger just like his gold trade was. Natural gas is very cheap and has a lot of potential in the long-term.
On Copper and Commodities: Copper is still trading at 40% above the marginal cost of production so there is still risk to these prices. Commodities (other than gold) have been terrible over the last three years. Since September 19th 2008 through this week, the DJ UBS Excess Return Commodity Index is down 18.4%, it was up 12.72% during QE1 and 6.73% during QE2.
On Barry's Book Bailout Nation and My Upcoming Book: "It's raining books with you guys!" Jeffrey mentioned that he is meeting with Michael Lewis (Liar's Poker, The Big Short) this week about being the subject of a book (Gundlach's long-term track record and battle with ex-employer TCW would be fascinating). Let's all pray that this happens, you guys.
On Government Bonds: The big winner this year in asset classes is Government Bonds, up 9% year-to-date.
On Duration: Basically he says 'No, thank you." to anything with a yield under 1% - "this glass of water is more worthwhile than a government bond under 5-year duration". DoubleLine had been loading up on long-dated Treasurys since March in anticipation of the end of QE2. The trade is working right now obviously. Markets don't wait for some publicly known date and then adjust to something, they anticipate and game it in advance, which is what the end of QE2 trade was about. People looking at the 30-year bond lamenting the low yield forget that it is the price action that made the trade work - the long bond's price can move 20%. Says the 30-year has not yet "punched through" to the yield lows of 2008 although the 5 and 10-year bonds have. It definitely could but is short-term overbought.
On Corporate Bonds: Investment grade corporates have done extremely well but the below investment grade (junk) market "has absolutely fallen apart". Junk bonds will really hit the wall and face serious wave of defaults beginning in 2012 as all the refinancings of 2009 and 2010 vintage come due. Many of these companies have improved cash flow by lowering their interest expense with refis but they haven't reduced their indebtedness overall. That said, pension funds are still underfunded and will be forced to use investment grade corporates to make their assumptions, this will keep a "technical bid" beneath that market.
On Muni Bonds: "They've done well but can this market really stand up to a wealth tax" imposed on the income?
On Money Market Funds: Why would anyone own a non-government money market fund? "This is what we call 'Reward-Free Risk'."
On the Next Fund: Tomorrow DoubleLine is introducing a brand new fund to the stable, Jeffrey says he can't say much but that it will be a money market fund surrogate with yields approaching 2%.
On Housing: Way too high ownership level still - "Home ownership rate at 70% is still absurdly high". More foreclosures - five years worth - unavoidable and politically speaking no one is going to be bold before the election with any kind of sweeping forgivable or modification plan. The existing programs are all one-by-one which is why they are not helping at all. Expect more malaise in housing. he is very bullish on rental property for the foreseeable future.
On Mortgage Bonds and the Big Trade: This is where Jeffrey began his career and what he knows best. ratings agencies don't understand how to rate securitized mortgage pools and he takes advantage of what the the repayment risk that they misperceive as credit risk. He is pairing mispriced GNMA bonds with long-dated treasurys to put together a risk-offsetting bond position that offers both interest rate-risk protection and a higher yield than the other total return bond funds. There is no repayment of capital or leverage involved in getting a higher yield, just a better constructed trade than the next guy.
On Emerging Markets Fixed Income: "A secular improving credit story". G7 countries have 4 times the debt-to-GDP ratio of EM nations. He is blown away that EM Debt trades at "twice the yield of developed country debt and triple the fundamentals"
Two Final Rules:
- "The Bloodless Verdict of the Market" - In the end, he who gets it right wins, there are no points awarded for being smart but wrong - I love this.
- "Never, ever take counterparty risk." - It is the one risk you are almost never rewarded for taking. Unless you are running $800 billion dollars, there is no need to use swaps, synthetics or baskets - trade cash markets and avoid any trades that require a counterparty.
***
Anyway, hope you guys got something out of this post, will do it again as I attend other events if you find it valuable. - Josh
Full Disclosure: I am not currently an investor or actively recommending any DoubleLine funds to clients. This may change in the future. The above was not an endorsement or a solicitation of any investment product or strategy, please do your own homework before making any investments.
Tags: $USDX $GLD $TLT $TBT $EEM $SPY
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