Submitted by Damon Coley
Gundlach Says the Fed Might Regret Raising Rates
Jeffrey Gundlach, whose $51.3 billion DoubleLine Total Return
Bond Fund has outperformed 99 percent of peers over the past five years, said
the Federal Reserve may come to regret raising U.S. interest rates amid signs
of a fragile economy and a crumbling credit market.
The Fed is likely to find itself in a “conundrum” in a year or
two if it raises rates amid economic trouble, Gundlach, chief executive officer
of Los Angeles-based DoubleLine Capital, which manages about $80 billion, said
during a webcast Tuesday. The central bankers appear “hell-bent” on lifting
rates despite weak economic signals such as gross domestic product, he said.
“We’re looking at some real carnage in the junk-bond market,”
Gundlach said. “This is a little bit disconcerting that we’re talking about
raising interest rates with the credit markets in corporate credit absolutely
tanking. They’re falling apart.”
Gundlach cited several danger signs in the U.S. economy that he argued
make it a bad time to raise rates. Manufacturing has slowed as the dollar
strengthened. Corporate profit margins have plateaued. High-yield bond spreads
have widened and an exchange-traded fund of junk bonds had its lowest close
today in more than six years.
“It’s possible the Fed pulls another Lucy and the football,” he
said, referring to the “Peanuts” cartoon character who yanks the ball from
would-be kicker Charlie Brown. If the Fed does act next week, a quarter-point
increase is likely, according to Gundlach.
Fed Odds
Traders place an 80 percent probability that the Federal Reserve
will raise rates next week for the first time since June 2006, according to
data compiled by Bloomberg. U.S. bond yields are expected to climb as much as 1
percentage point by the end of 2016, with longer-term bond yields rising less
rapidly, forecasts compiled by Bloomberg show.
Fed Chair Janet Yellen said last week that a rate increase this
month was “a live option” because the U.S. economy is doing well. Employers
added 211,000 jobs in November, more than forecast, the Labor Department
reported on Dec. 4.
While other bond fund managers, such as Janus Capital Group Inc.’s
Bill Gross, have urged the Fed to raise rates to reward savers and avoid asset
bubbles, Gundlach has warned for months that the U.S. economy is still too
fragile to withstand an increase.
He’s not the only one sounding alarms.
Meridee Moore, who is returning client money in her $1 billion
hedge-fund firm Watershed Asset Management and converting it to a family
office, cited the difficulty in finding good investments in distressed
companies.
‘Grinding Declines’
“The last eighteen months have seen grinding declines in
stressed and distressed credit and special situations equities,” she wrote in a
letter to clients. “But even though market prices are lower, we have not been
able to find new liquid credit investments with attractive returns and a margin
of safety.”
Oaktree Capital Group LLC, the world’s biggest distressed-debt
investor, has the most investment opportunities since Lehman Brothers Holdings
Inc. collapsed, according to co-Chairman Howard Marks.
“Post Lehman there was too much to do, and now there is again,”
Marks said Tuesday, referring to the financial crisis that followed the
collapse of the investment bank in September 2008. “For the credit investor we
have our first opportunities in several years. It’s been a long, long
time."
Gundlach, who has said he doesn’t want his Total Return fund to
become too big to maneuver, said he’s “open minded” about a soft close to new
money in the fund next year.
“What we’re interested in is performing,” Gundlach said. “We
feel very comfortable with our ability to manage” the fund.
