Have you heard of Jeffrey Gundlach? The name might ring a bell. He’s known as the ‘Bond King’.
Gundlach founded Double Line Capital — the world’s largest bond fund — in 2009. Double Line Capital manages US$116 billion in mostly bonds.
In 2012, Gundlach was included in Bloomberg Markets Magazine’s 50 Most Influential list. So when the Bond King spoke over the weekend, people listened. He told Vanity Fair’s Establishment Summit:
‘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.’
I’m not surprised by his view. The government bond market is on life-support, propped up by central banks. The moment central banks outside of the US move away from printing money, bonds are in trouble. I strongly believe that, if you own any governemnt bonds, you’re going to lose a lot of capital one day.
In my view, commodities — and resource stocks — are a far better long-term investment. Plus, if you pick the right stocks, you could potentially make a handsome gain or two in the short term.
As I see it, it’s a no-brainer where to park your money…
The writing is on the wall
The Bond King probably agrees. Vanity Fair reported his view on 20 October:
‘…the returns on bonds have been anaemic at best for the past seven years or so. While the Dow Jones Industrial Average has nearly quadrupled since March 2009, returns on bonds have averaged something like 2.5 percent for treasuries and something like 8.5 percent for riskier “junk” bonds.’
Gundlach urged investors to be ‘light’ on bonds. That might sound ironic, given where he’s mostly invested. But Vanity Fair continued:
‘“I’m stuck in it,” he said of his massive bond portfolio. He said interest rates have bottomed out and been rising gradually for the past six years. (Rising interest rates hurt the value of the bonds you own, as bonds trade in inverse proportion to their yield. Snore…)
‘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.”’
The movie won’t end well. The US Fed is looking towards raising interest rates. As interest rates move higher, bond prices will move lower. Remember that bond prices and interest rates have an inverse relationship. That’s likely to attract more capital into the US stock market as bonds become less attractive.
Inflation has also skyrocketed across the UK. That’s put pressure on the Bank of England to lift interest rates. When that happens, punters are likely to sell bonds at a rapid rate.
The Bank of Japan, on the other hand, remains dovish. The BOJ pushed back its inflation timing target into 2020–21. The central bank probably won’t end its money-printing program soon. That’s seen as good news for the Japanese yen. Punters gets to borrow yen at near-zero interest rates for longer and invest the money elsewhere.
Meanwhile, the European Central Bank (ECB) is nearing the end of its money-printing program. ECB President Mario Draghi said he would discuss potential changes to the program this week. If Draghi reverses course, it may trigger a minor 10–15% stock market correction. It would be a big change in policy, which could make markets nervous.
I wouldn’t worry about a stock market correction, though. Bonds are the riskiest asset class. Stocks are likely to bounce back for that reason. That’s why you should focus your attention on resource stocks. I believe commodities are the best asset class from which to make money.
The experts agree
Jeffrey Sherman, DoubleLine Capital’s deputy Chief Investment Officer, is a massive commodities bull. Sherman works alongside Jeffrey Gundlach; albeit, rather than focusing on bonds, he manages the DoubleLine Strategic Commodity Fund.
Sherman told Yahoo Finance on Monday:
‘It’s amazing to see actually the coordinated growth. I keep using this phrase. But if you take what’s called the OECD, the developed world, and you combine that with the top ten emerging markets by GDP, they are all growing right now. We haven’t had this coordinated growth since ’04, ’05, and ’06. There’s usually someone that’s exhibiting some sort of recessionary behaviour.’
I believe Sherman is in the right sector. But he’s bullish for the wrong reason. Commodities aren’t moving higher because of ‘coordinated growth’. China has started cleaning up its environment.
China wants to make its skies blue again. It’s cutting back capacity to improve air control. That’s put a rocket under most commodity prices. And last week, China’s President Xi Jinping said he would deepen supply-side reforms. Bloomberg reported on 17 October:
‘China’s economy has shifted to a period where high quality is sought, moving away from its fast-growth era, Xi said during his opening remarks at the twice-a-decade National Congress of the Communist Party of China in Beijing. China will continue with its plan to deleverage and cut capacity, Xi said.’
If you’re not considering resource stocks today, in my view, you’re missing out. Here’s a snippet of the last four stocks I’ve tipped inside Resource Speculator, my advisory service:
[Click to open in new window]
There’s money to be made in the resources sector. But if you back the right stocks, you could potentially make really big money in a short amount of time. Don’t miss out on the next stock to surge higher. It could happen any day now.
For more details, go here.
Editor, Resource Speculator