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Jeffrey Gundlach on Fed Policy

Written By Brian Hicks

Posted September 12, 2013

Jeffrey Gundlach gave a brilliant presentation Tuesday that has received a lot of media attention. He attacked the Fed and brought the reality of its possible QE tapering to the front of everyone’s minds.

Jeffrey GundlachIf you missed it, don’t worry. We’ll give you a rundown of what he thinks about the Fed policy and the future of the global economy. You’ll even get his recommendation on where investors should start investing in light of the Fed’s tapering threats.

Jeffrey Gundlach is the manager of Doubeline Total Return Bond Fund, which is worth $36 billion. His fund is down 1.24 percent for 2013. So far, investors have backed out $2.9 billion, and that’s just in three months, according to Morningstar.

Why have investors been fleeing Gundlach’s fund? The Fed’s mention of tapering its quantitative easing (QE) is to blame.

What Does Jeffrey Gundlach Believe?

Gundlach believes the Fed is making a “big mistake” and flying by the “seat of the pants” with ending its QE. He thinks they should follow Japan and Europe’s lead of buying securities until targeted yields are achieved instead.

When the Fed decided to start QE, it wanted to solve fiscal problems. But by pulling the money back out, it will cause those problems to come back.

And the United States isn’t the only country that is in for it with the Fed’s tapering plan; emerging markets are at risk too, particularly India. This country is most likely headed toward an economic crisis, Gundlach believes, because its deficit budget comes from capital from outside markets.

Meanwhile, China and Russia aren’t vulnerable because they are insulated from the rest of the world when it comes to deficit financing.

Let’s turn back to America. Gundlach doesn’t believe interest rates will rise after tapering begins. This won’t happen until commodities start to rise more, which he doesn’t see happening for quite some time.

Where Gundlach Thinks You Should Invest

Where does this leave investors like you? Well, you can’t change what the Fed is going to do – not even Gundlach can do that – but you can work around it.

If you’re a fan of Gundlach – or just a believer in what he has presented – you may want to follow his lead with investing. Right now, he’s praising real estate investment trusts (REITs). He hasn’t always been happy with these investment options because of their valuations, but recently they have been looking a lot better.

He said, according to Barron’s:

The mortgage REITs look cheap now, just like closed-end bond funds look cheap… Prices are trading at about a 10% discount to book value. I think they represent value but I don’t think they’re going to go higher anytime soon…. I think I would focus on the agency REITs, I think they will outperform over a cycle.

Annaly Capital Management (NYSE: NLY) is his pick.

If you’re not loving REITs as much as Gundlach, you may want to go with his second recommendation: gold. From his view, gold isn’t as much of a safe haven as it used to be, but it’s still not a bad investment.

From Barron’s:

It was king of over-believed. Now, I kind of like gold. It’s definitely very non-correlated to other assets you may have in your portfolio, and it does seem sort of cheap.”

His choice for gold investing is Market Vectors Gold Miners ETF (NYSE: GDX).

Deciding What Is Best for You

You may look at people like Gundlach, see how successful they are, and want to follow any advice they give in hopes that you’ll end up with the same success. But always remember that it doesn’t always turn out that way.

Investing is risky business, and while experts have a good idea of what could happen, they don’t know for sure. Also, a good investment choice for them isn’t always a good one for you. Consider what Gundlach believes, and then do your own research to come up with your beliefs. It’s the only way you can come to the best decision for your portfolio.


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