Gundlach On Mortgages, Models, And "AAPL-To-NatGas" Monster Legs
Jeff Gundlach discussed mortgages, models, math, and moronic delusion with Tom Keene on Bloomberg TV this morning. Starting with why Europe matters to US Treasury and mortgage markets, the DoubleLine boss goes to address whether banks/hedge-funds have become too math-centric. "I don't believe in models" is how Gundlach begins his diatribe on the over-confidence in math and empirical relationships, adding that they use 'scenarios' or 'space-relations' and build portfolios as one would stack a dishwasher - piece by piece. He discusses the model-implications of JPM (and other hedge funds) as they seemed to ignorantly utilize and rely on correlations - which, unlike certain talking-heads who in a know-nothing manner discuss JPM's 'spread' trade incorrectly - leading to models-behaving-badly which are generally at the heart of most unexpected blow-ups.
Shifting gears to practical matters, Jeff believes there is no reason to hold any investment grade bonds that are inside of 3 years (and perhaps even 5 years) because they "just basically have no yield" and further, it is non-sensical to think that short-term interest rates are going up in the US. Even if you are worried about inflation - the Fed will still not allow interest rates to rise to implicitly suppress nominal GDP.
The new king of bonds also goes on to note that price action in bonds is almost everything nowadays as the old-school coupon-reinvestment-growth models no longer work since coupons are implicitly lower and lower in this new ZIRP world. This in our view means that prices will become more volatile as the coupon reinvestment flow becomes less of a smoothing effect - especially when the Fed tightens its liquidity spigot a little as it is now. As Socrates said, Gundlach echoes the fact that 'one should not try to know everything; but respect the things that one cannot know' - don't delude yourself - which seems like good advice for all those with such high convictions of sustained reality.
Towards the end he discusses his already-infamous short-AAPL, Long-Nattie trade - adding that the trade has 'monster legs' and the biggest mistake investors make is exiting winners too early.