Jeff Gundlach On The Fiscal Cliff Circus And Why Investors Should Hold Cash Through 2013

Tyler Durden's picture

From the sheer hypocrisy of a fight over a few billion dollars when faced with trillion dollar deficits and the eventual austerity that will be forced upon the US, DoubleLine's Jeff Gundlach expounds on his growing concerns at markets where fundamentals "are trumped by policy decisions," and while he does not believe that bond markets are bubbly at the moment, the impact of an inevitable recession could be devastating given valuations. His subtle suggestion to keep powder dry through 2013 and into 2014 (as deploying money at that future point will make all the difference), follows from his view that he does not see much value in US equities and suggests great care be taken in US bond markets (focusing on low volatility funds) as he looks at Japan's dismal record (and hyperinflationary possibilities) and reflects on the US that "the issue isn't the fiscal cliff. The issue is the fiscal crisis that the United States has been looking at for the past several years."


Gundlach on how to invest in this environment:

"One thing is clear that this is the beginning of an attempt to bring the fiscal deficit under control or at least start to address it. When you raise taxes and when you cut spending, whatever the combination is going to be, you will have headwinds for the economy. The economy is really being supported--this isn't just in the United States, it's in Japan, the ECB and Britain--the economy is being supported by quantitative easing that is allowing for a massive budget deficit and money printing exercises to go on...


As you address the fiscal problems, you are going to have weak economic growth. What that means is that you are in an environment that is going to have further trouble in terms of investment returns that are in areas that are based on economic growth and areas that do relatively well like bonds... Broadly speaking, I think that investors should be looking for lower prices on most risk assets in these developed countries with the exception of Japan…Investors should be looking for the potential inflationary consequences of all this money printing exercise and the place to look for that is Japan..."

On whether Japan is foreshadowing for what will happen in the U.S.:

"Possibly... I certainly think that Japan is the pace car here. They started out 20 years ago with their zombie bank problem and they've tried various things to get the economy going. Now there's some political change afoot in Japan and they are definitely in the place to look. Japan is in a uniquely bad position. The United States is not in as bad as a position as Japan."


"Ultimately, when you start to look at all this money printing which may continue, Ben Bernanke has said forever basically that yes, at some point, one has to worry about inflationary consequences. I've been saying for years though, that investors who are focusing on the near-term on inflation are way too early and that's still the case in the U.S."

On whether investors should get more disciplined and look at fundamentals:

"The fundamentals are always important but it does get trumped by policy decisions when policy decisions are so radical as has been the case in recent years... There seems to be diminishing returns on the various rounds of quantitative easing. It's almost like a half-life of a radioactive particle. The first quantitative easing brought 50%, the second brought a little more than half of that, the third half again, the fourth less than half again.


It just seems that the idea of a Pavlovian reaction when you see quantitative easing that you should go out and buy risk assets--it has worked four times, but it doesn't seem like you are getting much bang for your buck any more... I would point out that gold, for example, hasn't done much of anything in the last couple of rounds of quantitative easing. It seems that the fundamentals are starting to exert themselves more powerfully against the backdrop of endless quantitative easing, so it's possible that the market support is close to finding its limit. This is why I think that investors should be holding cash and buying risk assets at lower prices once the fundamentals assert themselves."

On whether we're in a credit bubble:

"I don't think there is a credit bubble at this point in time actually. The most powerful fundamental, which is really artificial thanks to the central banks, is that there is a zero interest rate in place in this massive market of government guaranteed securities and therefor by extension, very high quality bonds. It pushes people by necessity into other investments. I don't believe that until there are cracks in the credit quality structure of the credit system that you are going to see a substantial selloff in the credit markets for high yield bonds, non-guaranteed mortgage securities, emerging market debt, so I don't really expect that is going to happen."


"The real killer is going to be the next recession. And there will be one. The policymakers are trying hard to have it both ways... Ultimately as you address the fiscal situation, you're going to run the risk of a recession.  When the next recession comes, it's going to be a real killer because what exactly is going to be the policy response.  It will be policies in terms of raising taxes and cutting spending that help to bring on the next recession I think, so I don't think it's very plausible that you're going to just turn around and go back to the old method of pumping up the economy with debt... Next recession comes.  So the next recession probably is going to be somewhat cleansing, which means that you're going to see things repriced lower."

On where to put your money if not prepared to do short-term trading:

"You've got to survive with virtually no return if that's the way you look at things. I actually recommend that for many investors. I think the small amount of money that you might make by trying to push it here as we get closer and closer to the end game where this thing might tail out--the amount of money you might make will be dwarfed by the amount of money you might lose when things reprice lower.


Put it another way, if you just stay in cash and earn a small return or stay in a low risk investment and earn a middling single digit return--the money you might be able to make as we move into late 2013 or early 2014 with repricing, the amount of money you might make if you are able to deploy the money at that point will make all the difference. People always want investments to go up like a line... That's just not reality. You make 80% of your money in 20% of the time in investing and you have to be patient…I see some values in some of these foreign markets. I don't see a lot of value in the U.S. stock market and I think you have to play it safe in the U.S. bond market with funds that are really dedicated to having low volatility."

On fiscal cliff talks:

"Something is going to get done, it looks like, between John Boehner who has now blinked a little bit going with the million dollar tax bracket and the president going with the $400,000 tax bracket. They're getting close, but this is all just a big circus really. We have a $3.6 trillion spending going on at the federal government and they're taking in $2.3 trillion dollars. So the shortfall is $1.3 trillion and what we are talking about with the million dollar increase is about $20 billion of revenue that would be brought in. At the $400,000, you're talking about maybe $35 billion. So this is just masking a huge fiscal issue. The issue isn't the fiscal cliff. The issue is the fiscal crisis that the United States has been looking at for the past several years and this is sort of a down payment on finally some fiscal reform." 

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Pharming's picture

Why do I have this thought in my head (after reading your post) of a WWII pilot diving his P-51 that's shot up on fire screaming, "Fuck you Bernank!!!!" as the plane tears a huge whole in the Japanese carrier?

Dr. Engali's picture

Three observations. 1) it was funny to see how fast they cut him off when he mention the tea party and out of control spending.
2) Of course a bond guy is not going to see a credit bubble... He has bonds to sell you. The way I see it everybody is buying bonds right now... nobody (enmass) is buying gold. I think I know where the bubble is. Which leads me to... 3) a paper pushers comments on inflationary pressures and gold. As a debt junky gold is even more destructive to him than it is to an equity junky, so I take those comments with a grain of salt. They can pressure the paper price of gold all they want, but eventually reality will overtake fantasy and the paper markets will have one price while the physical will be another story entirely.

jimmyjames's picture


You're right--gold has never- at least up until to this point been about the $/printing-same for the bond market-there was no printing or QE until the 08 crash and yet gold/bonds weare on a tear and other than noise-they still are-


xtop23's picture

I'll pass on holding FRN's, thanks. Seeing as how TPTB has seen fit to provide me with an attractive entry point today, I put those worthless faces to work.

Hohum's picture

If the Fed can keep the interest rate declining throughout 2013 (for example, the Freddie Mac primary mortgage market survey is now 3.32% and was near 4% at the beginning of the year), the year will be ok.  If rates stop declining, the financial climate will change rapidly.

Kreditanstalt's picture

For the better!  The manipulations will have to end...

Pharming's picture

How many licks does it take to get to the depression center of a recession Tootsie Roll Pop.  The world may never know...

Big Slick's picture

The answer's THREE.  A cartoon owl told me so.

infinity8's picture

best line: "bolstered by guardrails of debt".

Kreditanstalt's picture

When you raise taxes and when you cut spending, whatever the combination is going to be, you will have headwinds for the economy.

Ridiculous.  Every dollar saved from the clutches of government via tax cuts, and every dollar NOT spent by the same bodies, is one more dollar released to the real economy. 

Where it might be spent prudently and do some good.

Big Slick's picture

I'm telling you, this Gundlach guy reminds me of The Sphynx


dark pools of soros's picture

right but money is like water... it can get stuck in the clouds and leave people to panic on the ground

there will be pain



ZeroAvatar's picture

I wish to thank the silverdoctor link to the ThunderRoad December report.  Gundlach is stating the same thing, in far fewer words.  The gist of the report, is that this is a "Speculative bubble like no other" (This link is to the also-referenced Kurt Richebach report of the same name.)


This is a bubble of 'Money', itself.  A quote of Rober Rubin puts it all in perspective: (Rubin, Former Clinton Sec. of Treasury, Ex-Goldman Sachs/Citi,

Bilderberger, Co-Chair COUNCIL ON FOREIGN RELATIONS!) (paraphrasing) " I have a disproportionate amount of my assets in 'cash', and should allocate more away from $$$.  It is 'absolutely prudent' to PREPARE FOR THE WORST(!)


My interpretation is to allocate more towards P.M.s.  Gundlach sees the coming hyperinflationary-depression shitstorm , and is making at least a prudent recommendation (GET OUT OF THE MARKET!)


But to be 'holding cash' through 2013 into 2014 may end up being disastrous.

(Note: Myself, along with another poster today, believe Silver will drop to low $20's.)It MAY, at THIS time, be prudent to wait for 'the collapse', in order to profit from the drop.  In that aspect, I agree with Gundlach.  Basically, if you're IN SILVER now, just hold.  IF YOU"RE LOOKING TO BUY,

'ease' in, dollar average (down?)  (I actually DO have a crystal ball, but have not as of yet been able to 'activate' it.)

Non Passaran's picture

I'm with you on PM's: I'll hold onto what I have (as collapse can happen any time) and the cash I've saved I'll use to buy more if prices drop 10+ pct.

GittyUP's picture

Printing isn't working so well... No risk on signals since qe4. Deflationary recession coming to a theatre near you.

All risk assets including gold will plunge. Bonds rally. USD rally.

The trigger will be minor slowdown caused by tax hikes and spending cuts.

It won't crash but a Japanese multi year contraction. Corporate balance sheets are strong so they can hang on for a long time but equities will slowly price in contraction. Also there will be many bright spots still as energy prices come down helping consumers and corporations. But still not enough to overcome the government macro deleveraging.

Definitely tough time to invest. I'd stick with ultra cheap income real estate 10% caps+ so even if rents lower still making 7% unlevered. Much much more levered. Also private mortgage market is prob pretty good if you do your own underwriting. China is going to be the buy of the century on next big leg down on global macro concerns as they will emerge more consumer driven.

otto skorzeny's picture

+1. outside of food(which I am not noticing that big of a jump in) everything seems to point to the Fed's arch-enemy DEFLATION

DosZap's picture

+1. outside of food(which I am not noticing that big of a jump in)  

Where u live?, ANY meats, grains, and products that use them are OFF the charts.

And I live in Texas. Oatmeal has gone up 27% in the last 6 months, Meat(any kind), has doubled,and contiures higher.

Utilities are up, water is up, all basic needs and services are going up, and I do not mean 5-10%.

Gasoline is the only thing dropping, in my AO.

Assetman's picture

You are correct in that money printing isn't have the desired effect on economic growth.  

At the same time, I'm convinced Ben Bernanke invents new 'desired outcomes' for the next round of QE-- just to see if he can fool the rest of us.

Do you know what QE1 was intended to do?  Bernenke flatly stated it was initiated to get banks lending again.  Yeah, that's a real laugher.

The one real economic effect from QE is that it has allowed the housing sector to 'recover'.  One wonders, though, whether directing tons of money in a sector that was overlevered, overbuilt and overpriced only a few years ago is the best place to pour massive amounts of capital today?

Yeah, probably not.  But at least housing prices have stabilized and structually dislocated mortgage processors and builders can get their temporary jobs back.

I think the Fed is committed (as in, they ought to be committed) to insure that inflation should be a positive number-- and they really don't care if they overshoot by 600 basis points.  The rationale (employment) is just a ruse-- because when inflation expectations are already at the high end of a 5 year range-- and the Fed introduces ANOTHER round of unsteilized asset purchses, well... you really can't use price stability as a rational mandate anymore.

That doesn't mean that inflation expectations cannot head directly back to zero.  It has over the past 5 years-- and the Fed has responded aggressively with even more easing.  But since this fall, the Fed is playing a totally different game.  It's one of ensuring positive nominal GDP growth at all costs-- even if real GDP growth is negative.  In another sense, if the Fed needs to finance even higher governement deficits to offset private sector deleveraging (the big deflationary headwind) - they will expand the balance sheet with as much QE as is entirely necessary to meet their "growth" goals.

QE-infinity is no laughing matter to this FOMC.  If $85 billion in monthly asset purchases doesn't convince you that the Fed is going all-in (after 3 years of money printing already), they can easily go higher.

And they will.  You might get +2% nominal GDP growth and -3% real GDP-- but this is a desired outcome.  I think the bigger risk is if real growth is +3%, because that might well translate into inflationary pressures that cannot be contained.  I don't see that happening until 2015 at the earliest.  There is too much private sector debt to unwind.

All I am really doing here is following the Fed.  Rest assured, it's going to take a very long time for unemployment to get to that 6.5% threshold.  With an employment to population ratio so low, the Feds can invent any higher unemployment rate number they want.  Employment is really the only remaining mandate they have left.  Luckily, it can be fudged.


SamuelMaverick's picture

Downside of real estate is that you become a fixed target at the whims of local government as a source of income as they deem 'necessary'.  A couple of property tax increases and you are SOL.

otto skorzeny's picture

I'm noticing all of the cash I'm getting from my bank/ATM (and I mean ALL of it) is seemingly crisp and uncirculated(like the kind that you have to count 2x to make sure they are not stuck together) and this has happened within the last 2 months. is this cash that has sat uncirculated in vaults for years and maybe recently there is a much larger demand for physical money-almost like a mini bank run?

David99's picture

ZH is only doing good job and reporting correctly. Tyler is a real true person though I have never met him. FED+BOE+ECB+BOJ are the biggest manipulators and JPM +GS +20PD's act on their behalf in this Ponzi Casino. It is all rigged Ponzi Casino. JPM & GS do maximum manipulations from London as no regulators are looking what is going on daily. London is the best place to manipulate Ponzi Casino as no regulators as they are watching porno. Manipulations of highest order without any regulations as every one has been purchased and regulators watching porno. In last 10 trading days, Rio Tinto manipulated by +25% gain and regulators watching porno. JPM doing it. It is just Casino and nothing else. Regulators are watching porno, don't know how Rio Tinto is manipulating daily. On LSE, there is no checks and balances and maximum manipulations daily by Rio Tinto. The market is Casino and the biggest manipulated stock is Rio Tinto and JPM is pulling up daily and no regulations for Rio Tinto in London

David99's picture

Don't buy any thing at these high levels as crash is coming. FED, ECB, BOE, BOJ are just pumping but for how long?


smart.  why is he not on the gov payroll?

Sovereignbeing's picture

Regardless of the giddiness on financial TV about economic recovery and a rising stock market along with the diversion of the Fiscal Cliff, the debt continues to grow. Nobody can now stop it. It is constant talk, drivel, chatter and illusion all day long. At the end of the day NOTHING changes the trajectory that we are on. The solution for us is simple: just keep on stacking and make sure you have a full pantry.

brokesville's picture

1. stay out of debt and you may survive


I can't rememeber, are we supposed to buy this guys funds or not?

I am a Man I am Forty's picture

yeah, just hang in cash with bernanke at the printing press, great idea

walküre's picture

Meanwhile in LaLaLand .. S&P RAISES ratings on Greek sovereigns SIX NOTCHES to B-

Say what? You can't make this shit up.

We are now officially in the Twilight Zone. Any guesses how much longer it takes before EVERYONE wakes up and realizes the whole thing is so fucked up, it's going to collapse into one gigantic financial black hole?

Cash, PMs, livestock, canned goods, tools, fuel, friendly neighbors and a close knit network of trusted friends and family who see it my way.

David99's picture

Don't buy any stock at these high levels as crash is coming. FED, BOE, ECB, BOJ are pumping but for how long?

Mr. Hudson's picture

Interesting chart. If gold drops below 1662, where is its next resistance?

Number 156's picture

Whats the point? Even if you want to try to pick up the pennies in front of the steamroller, the algos will have already beaten you to it.

gwar5's picture

Inflation in US is still about 6%, which means GDP is also bullshit and is negative in real terms; and real unemployment is about 15%. All per Shadowstats.


We are not Jimmy Carter bad yet, but only because of invisible duct tape. Cash and USTs are just a false sense of security, IMHO.

The Asian Pac dump-the-USD movement is leaving the station fast. Obama's alternative plan a month ago to stop it was kicked to the curb and he was totally humiliated on his trip to Asia, all of which was blacked out "unexpectedly" by the MSM.  I don't remember ZH saying anything either, may have missed it.

Others adopting the A-P plan: Aus, NZ, S. Africa, Singapore, Malaysia, Thailand, Indonesia, and I think S. Korea or Japan. Among the others already know with the Chi-Coms -- India, Russia, Brazil, and Iran, et. al.

The world is choosing sides against Western banks. I don't trust USDs. Looks like the war has begun to sort it out.





Who is John Galt's picture

Gwar. Good post. I was not aware of the correlation.

Mr. Hudson's picture

It's fiat vs. gold. The Central Banks have the world's armies in their hip pocket. What will you do? Throw your gold bars at the military when they ban our guns? Cash will be scarce, and cash is legal tender. Gold may pay off in the long haul, but will take a serious hit when things get worse.

Rick Blaine's picture

Is this dude a robot?

ak_khanna's picture

Countries around the world are taking on more debt without any fruitful attempts to curb their expenditures. This has resulted in a much more fragile and artificially held up financial system which is on a much shaky ground than it was in 2008. In 2008 companies failed due to excessive leverage and debt and now countries are likely to default because they took on the same bad debt on themselves. 

There is no economic recovery because all the efforts of politicians, government, central banks etc are focused on saving banks instead of targeting job creation which is the only way economy can recover.

David99's picture

FED is the biggest criminal on this planet.

ZH is only doing good job and reporting correctly. Tyler is a real true person though I have never met him. FED+BOE+ECB+BOJ are the biggest manipulators and JPM +GS +20PD's act on their behalf in this Ponzi Casino. It is all rigged Ponzi Casino. JPM & GS do maximum manipulations from London as no regulators are looking what is going on daily. London is the best place to manipulate Ponzi Casino as no regulators as they are watching porno. Manipulations of highest order without any regulations as every one has been purchased and regulators watching porno. In last 10 trading days, Rio Tinto manipulated by +25% gain and regulators watching porno. JPM doing it. It is just Casino and nothing else. Regulators are watching porno, don't know how Rio Tinto is manipulating daily. On LSE, there is no checks and balances and maximum manipulations daily by Rio Tinto. The market is Casino and the biggest manipulated stock is Rio Tinto and JPM is pulling up daily and no regulations for Rio Tinto in London

Ian56's picture


In a breathtaking display of cynicism, Barack Obama more or less proposes Mitt Romney's platform to resolve the Fiscal Cliff.


He has demonstrated with absolute clarity that he is on the side of large Corporations and not on the side of ordinary Americans.



WASHINGTON -- President Barack Obama, with his latest fiscal cliff offer, proposes extending the Bush tax cuts for everyone earning less than $400,000 a year, and paying for it by increasing taxes on the middle class and cutting Social Security and Medicare.

Obama's offer would allow the payroll tax holiday to expire, meaning middle class workers will see smaller paychecks in 2013. Economists have warned that the recovery is too fragile to risk a broad tax hike on workers. It would also gradually reduce Social Security, pension and disability benefits seniors are due to receive, taking a small bite up front, but building up to much larger cuts over time.


Obama's latest proposals to resolve the so called "fiscal cliff" sound more like Mitt Romney's platform every day.

N.B. The tax rates for those making more than $400,000 is a red herring. It affects a trivial amount of revenue.




HSBC settlement - a slap on the wrist shareholder penalty of 5 weeks of revenues.


William K Black quite rightly asks on Huffington Post "Why did Obama save a criminal enterprise like HSBC?"

Why didn't Obama take away HSBC's US banking license?

Why didn't he put some HSBC execs in jail?


Monsanto - why are about a dozen ex senior Monsanto employees are now in positions of influence in government?


Why is Monsanto getting carte blanche in the latest Agriculture Bill?

“The Farmers Assurance Provision” is the title of a rider, Section 733, inserted into the House of Representatives 2013 Agriculture Appropriations Bill. Somehow, as a farmer, I don’t feel the least bit assured. It allows carte blanche for Monsanto not to have to obtain FDA approval before planting."


Why aren't Joe Corzine and Jamie Dimon in jail over the MF Global theft from client segregated accounts and other frauds?


Why weren't Goldman Sachs executives prosecuted over the slam dunk case of lying to Congress?

Matt Taibi on the subject - plenty of evidence to prosecute Lloyd Blankfein CEO of Goldman


Money laundering by the big banks is endemic, there have been several cases.

Obama has quite clearly told the big banks that they are above the law. When you encourage bad behavior you will get more of it.


Continued at :-

Quinvarius's picture

There is only one thing that moves markets; easy money and easy credit.

Easy money is the 800 lb economic gorilla.  Pointing at the broken 2 wheeled tricycle, that our economy has become, which the gorilla is riding around on, is not going stop the gorilla.

Nobody's picture

To those who wish to know where to invest their hard earned funds, try agricultural land.
Depending on where you buy, the rate of return is somewhere between 2 and 7% before taxes.
Nearby, a teachers' pension fund just purchased 22,000 acres of prime Mississippi delta land for $5300/acre. Rental income $200/acre.
Downside, worldwide economic collapse or the Fed raising the rate (ala 1980).

hooligan2009's picture


C + G + I + (X-M)

is now

C + G + ...F... + I + (X-M)

where F is the amount of injection by the Fed, which is now net of foreign central bank intervention, like the Japanese Governments soon to be announced purchases of (to them) foreign bonds.

BoJ (on Mof) instructions will likely purchase a further US$20 billion a month (Y1,85 trillion) of Treasuries on top of the Fed's recently announced $40 billion a month.

This will facilitate the financing of US taxpayer profligacy.

Japan will crash first (bug will hit the windshield) and start repatriating proceeds from its US Tresuries, then the US will crash.

The same will happen with Japanese government holdings of European and Australasian government bonds.

shovelhead's picture

Taxpayers saving banks are doing "God's Work".

If you die for God, you go to heaven.

See? It all works out for the best.

So shut up, pay up, and let the theologians work out the details.




Khannea's picture

I see I see in my crystal ball a US totally transformed a few years down the road.  

I see a US hunting down tax revenues and progressive tax rates. I see millions of relatively rich trying to permigrate (permanent emigrate) , turning in their US passports in a record  race to the finish. I see a war on tax refugees as the US will try to plug a tens of trillion dollars a year defecit hole. I see the US disallowing Americans to turn in their passports.

I see US banking authorities grabbing foreign banks and nationalizing, willy nilly assets of 'tax traitors', tying up assets in many year court cases.

I see tax bills tied to electricity and internet - either pay your taxes due or they cut off your energy and internet.  

I see states seceding trying to crawl away from this collapse. 

Is Obama the 2.0 Gorbatsjov ?