Wednesday, March 9, 2011

[Video] Doubleline's Jeff Gundlach Returns to CNBC, Joins Chrorus Warning on Muni Bonds - Loosely Compares the Situation to Subprime Bonds

While nowhere as famous (or promotional) as PIMCO's Bill Gross, Doubleline's Jeff Gundlach would be considered among the top handful of bond investors in the country.   (He previously worked at TCW before a spectacular exit)  I've only seem him on CNBC once before [Jan 19, 2011:  Gundlach Visits CNBC] and he has made a return today, focusing on muni bonds.  With all due respect to Meredith Whitney, I would expect when Gundlach talks muni bonds, bond investors will be taking a much closer listen.

In this interview he offers that investors are complacent about the muni bonds, just as they were in the mortgage market in 2006 because after all housing prices could never fall nationally so why worry?   The key here is psychological - munis are supposed to be extremely safe, and they rarely default.  So if the ball gets rolling and we see a wave of defaults in 2012-2013, the hit to investor psyche could be an important event. 
  • "I don't think you need to know what the default rates are going to be, or need to know how low low is, munis are going to go down. There are going to be other shoes to drop. There might be so many it looks like Imelda Marcos' closet when all the shoes drop because all the states have to deal with this stuff.... Between here and the endgame lies the valley and the valley is full of fear. And I think the muni market is going to go down by at least 15 to 20%. At least." 
  • "It gets scary when the prices start to drop. The fear factor here is going to be palpable." 
While I don't expect states to default ("too big to fail"), the issue is going to be local government.   There will not be a real rebound in housing for years (ex Washington D.C. & Manhattan), hence a huge source of tax revenue shall remain depressed ....although expect CNBC and the uber bulls to start celebrating the 4th annual "housing rebound" we see EVERY spring, in the coming few months. We'll see how it plays out in the next few years - some of us are already speculating the Fed will ride into the rescue during QE4?5? even though Bernanke explicitly said it is not the Fed's role to buy muni bonds.  Ben's broken many rules the past few years.... guess who famously said this in fall 2007?
  • “It is not the responsibility of the Federal Reserve – nor would it be appropriate —  to protect lenders and investors from the consequences of their financial decisions."

If unfamiliar with Gundlach, Barron's had a cover story a few weeks ago titled 'The King of Bonds'.   If you really have some time to kill now that Charlie Sheen has left Two and a Half Men, for almost as good of a tale please see this Fortune story about the exit by Gundlach from TCW.  It's epic, indeed one could say full of tiger blood.

But back to business...

Video 1:  9 minutes video you can skip to minute 2 to begin the interview

Video 2 - more focus on munis here - 6 minutes

  • The municipal bond market will go down by "at least 15- to- 20 percent" in the long-term, Jeffrey Gundlach, CEO and CIO of the asset management firm DoubleLine Capital, told CNBC on Wednesday.
  • "The fear factor here is going to be palpable. People who own munis tend to own them for the tax benefit and they tend to own most of their assets, if not all of their assets, in the muni asset class. So when they get to fall, they get nervous," Gundlach said.
  • "You got a history of low defaults [within the muni market], which is comforting. But that kind of sounds like what subprime sounded like back in 2006. You had a AAA market that had never traded below par, the fundamentals were getting worse and it was owned for a technical reason," he added.
  • Gundlach pointed out that he is "agnostic" on whether there will be a muni crash, but says the fundamentals are bad and munis will go lower.

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