Bond Gurus Jeff Gundlach of DoubleLine, and Bill Gross of PIMCO have started to make market calls that don’t directly have to do with the direction of interest rates or which type of bonds provide the most value. Rather, they have both started to make market calls based on their understanding of how central bank monetary policy (something that they follow closely as bond investors) will impact the pricing of assets other than bonds
Gundlach’s Investment Idea – Go long the Japanese Stocks, Short The Yen
Originally Announced: December 11th, 2012
What happened: The Japanese yen has lost about 20% of its value against the dollar and the Japanese stock market in dollar terms is up around 60%.
What does Gundlach currently think? In a May 15th interview with Reuters TV, Jeffrey Gundlach confirmed that he was still bullish on the Japanese stock market and predicted the Japanese equivalent of the S&P500, the Nikkei 225 would rise from 15,000 to 17,000.
His exact words:
“There’s ample evidence that there’s a correlation between equity strength in recent quarters and quantitative easing, but if that’s the reason why you’re playing the stock market, go to Japan because that’s where they’re doing QE full force.”
How can one participate in this trade idea? These WisdomTree Japanese Hedged Equity Trade (SYMBOL:DXJ) tracks the Nikkei 225 hedging out the exposure to the Japanese yen. In other words, if the Nikkei rises by 10%, you will be up close to 10% regardless of what is happening to yen.
Bill Gross’s Investment Idea – Buy Gold
Originally Announced: January 21st, 2013
What happened: Gold was trading around $1600 per ounce when the trade was announced. Its since tumbled about 15% to below $1400 per ounce.
What does Gross think now?
How can one play this trade idea: Bill Gross specifically recommends buying SPDR GOLD Trust ETF (GLD).
Understanding The Thinking Behind The Ideas of Jeff Gundlach and Bill Gross
Jeff Gundlach’s trade idea is very simple. When a central bank starts aggressively printing money, their currency should weaken and their stock market will tend to rise. This is supported by both basic macroeconomic theory and recent experience.
When a central bank “prints money” in reality, they are buying bonds with their cash reserves. This does two things in the short run: it decreases the amount of bonds available to be owned and increases the amount of cash in the hands of investors. Some of that cash goes into the stock market pushing up the prices of shares and some of it leaves the country pushing down the value of its currency.
The first major central bank to start aggressively printing money was the US Federal Reserve. On November 25th, 2008, the Fed announced its first money printing aka QE1. Since then there has been QE2 and QE3. Both QE1 and QE2, were limited short-term initiatives. The big difference with QE3 was its open ended nature. Basically with QE3, the Federal Reserve has said they are going to keep printing money until the US economy gets better.
Since November 25th, 2008 the US stock market has been on a tear. The S&P has risen from around 900 to 1650, an all time high. This is right in line with economic theory. During this time, the US dollar has been topsy-turvy against the Euro. However, as theory would suggest, the dollar has gained tremendously against yen going until Japan started its money printing.
While the US started printing money five years ago, Japan has only started within the last year, really the last six months. Gundlach has every reason to believe that what has happened in the US will happen in Japan. In fact, its even more true for Japan because a weaker currency caused by printing money has major economic benefits for Japanese companies whom will now be able export more.
The gold trade recommended by Bill Gross is also based in economic theory. Printing “excessive” amounts of money should cause inflation. The classic example is pre-World War II Germany where the government literally printed money to pay it bills. As a result, Germans would see the prices that they paid for basic items like bread change during the course of a day. While inflation over the last few years has been very mild in the US, hovering around 2% per year, Bill Gross has been predicting that there will be major inflation over the next several decades. During periods of rapid inflation, Gold tends to rise in value, keeping up with or even outpacing inflation.