Last Thursday, when Deutsche Bank was flailing ahead of the now confirmed fake report of a reduced settlement with the DOJ, Reuters spoke to Jeff Gundlach about his thoughts regarding the German lender, his advice was simple: don't touch it. "I would just stay away. It's un-analyzable," Gundlach said about Deutsche Bank shares and debt. "It's too binary." Gundlach said investors who are betting against shares in Deutsche Bank might find it futile. Maybe, but not if they cover their shorts before the max pain point, something which the market - where equity/CDS pair trades now allow a "go for default" strategy - will actively seek out.
"The market is going to push down Deutsche Bank until there is some recognition of support. They will get assistance, if need be."
What happens then? "One day, Deutsche Bank shares will go up 40 percent. And it will be the day the government bails them out. That jump will happen in a minute," Gundlach said. "It is about an event which is completely out of your control."
The very next day his forecast was proven largely accurate, when DB soared some 25% from its overnight lows on, if not a bailout, then a report of a potentiel reprieve, even if the report ultimately ended up being wrong.
Then, earlier today, during the Grant's Fall 2016 investment conference, Gundlach once again discussed the troubled German bank and said that “you cannot save your faltering economy by killing your financial system and one of the clear poster children for this is Deutsche Bank’s stock price,” Gundlach, 56, said at Grant’s Fall 2016 Investment Conference on Tuesday in New York. “If you keep these negative interest rate policies for a sufficient future period of time you are going to bankrupt these banks.”
Europe’s banks have seen their value shrink by about $280 billion this year, with Deutsche Bank losing almost half its market value. Germany’s largest lender extended losses after the U.S. Department of Justice last month requested $14 billion to settle a probe into residential mortgage-backed securities, sparking concerns that it will have to raise capital.
Repeating what he said one week ago, Gundlach added that while the Frankfurt-based bank would ultimately be rescued by the German government if needed, other banks in the region wouldn’t be able to count on such support, Gundlach said.
“Deutsche Bank will be supported by Germany if push comes to shove,” he said. “But what about Credit Suisse, which has shown a similar decline in stock price? Who’s there to bail them out?”
As Bloomberg notes, having been largely forgotten in the din surrounding DB, Credit Suisse has lost about 40 percent of its value this year. The Swiss bank raised about $6 billion of capital last year under new Chief Executive Officer Tidjane Thiam to help fund a restructuring plan.
Joining the "other" bond king who earlier today railed against unorthodox monetary policies, Gundlach warned again that negative rates risk undermining the proper functioning of capital markets, and blamed European banking's woes on the ECB's policies.
However, what is a trapped central bank to do: Gundlach pointed out that even the Federal Reserve, which has not cut rates below zero, is seeing signs that its policies aren’t working. Gundlach has said that interest rates bottomed in July and that the market is looking for signs of fiscal stimulus and accelerating inflation. He’s predicting that rates on the U.S. 10-year bond may surpass 2 percent by the end of 2016. Which may explain why Gundlach told the Grant's confernce audience that for the first time in years, he favored TIPS, which he has in the CORE fund, over nominal Treasuries.
"For the first time in years, I am long TIPS," he said.
In a separate interview with Reuters, Gundlach added: "Implied future inflation priced into TIPS is low, too low for the environment likely to unfold over the next decade. Nominal Treasuries are likely to underperform TIPs over an institutional investment horizon."
While his inflationary bet may be premature, investors don't seem to think so: DoubleLine posted a net inflow of $444.4 million into its open-end mutual funds in September, marking the Los Angeles-based firm's 32nd consecutive month of inflows, while the $61.8 billion DoubleLine Total Return Bond Fund, the largest fund by total assets of the DoubleLine Funds, had a net inflow of $190.9 million in September, for a year-to-date net inflow of $8.3 billion.