In the wake of the massive earthquake in Japan, markets have driven stocks there to prices that are clearly “cheap,” according to Doubleline’s Jeffery Gundlach, who said that Japanese stocks are “a lot cheaper than they were a week ago, when they were already undervalued.”
Gundlach spoke on March 15 via a conference call with his investors regarding the launch of Doubleline’s Multi-Asset Growth Fund (DMLIX).
Japan faces a long struggle to rebuild its already depressed economy, Gundlach said. He dismissed arguments that say that Japan’s adversity will lead to a boom of activity as it rebuilds its economic capacity.
“When you destroy factories or homes, clearly, the wealth of the nation has been reduced and not increased,” he said. “You can't rely on natural disasters as your way to success. “
Gundlach also commented on conditions in the municipal bond and junk bond markets, but let’s first turn to his forecast for U.S. equities, where he corrected errors that appeared elsewhere in the media.
Can the S&P go to 500?
In an interview that appeared in Barron’s in February, Gundlach was quoted as saying the S&P 500 “will hit 500 in the next couple of years.”
The problem is that he never said that.
According to Gundlach, what he said was, “if deflation truly wins, then the S&P 500 would go down to 500 or lower.”
Gundlach’s bearish forecast for equities was conditioned on the contingency of deflation winning out, and no winner is emerging in the tug-of-war between inflation and deflation. He said the conflict now between inflation and deflation is like a humidifier and a dehumidifier operating in the same room, and it is not clear which will prevail.
In August of last year, he was so concerned about the threat of inflation that he took the duration on his hedge fund down to one. But in February deflation fears prevailed, and he took the duration of that fund to 10. Now, he said, deflation forces may be slightly stronger, but not pervasively so.
Gundlach said he was also incorrectly quoted in Barron’s as saying that prices of closed-end municipal bond funds would decline to 40% of their net asset value.
What he actually said was that in September and October of 2008, some closed-end funds briefly went down to 40% of their net asset value. That was not a prediction, but a historical observation of a “hyperbolic outcome” that resulted from the panic surrounding the near collapse of the global banking system, he said.
