CREFW-Winter2016

CRE Finance World Winter 2016

CREFC Exclusive Interview with

Jeffrey Gundlach

CRE Finance World

magazine is pleased to have the opportunity

to interview Jeffrey Gundlach, CEO and chief investment officer

of DoubleLine Capital, for its feature cover article. Mr. Gundlach

is widely recognized as one of the foremost experts in fixed

income investments. He is referred to by many as “The New King

of Bonds” — taking the mantle from former PIMCO manager Bill

Gross. DoubleLine’s assets under management are over $76 billion.

This includes significant allocations to commercial mortgages

and CMBS B-pieces. Mr. Gundlach shares with us his analysis

and insight into the reality of the markets, world economies, and

monetary and fiscal policy. We are deeply appreciative to Mr. Gundlach

for sharing his thoughts with us. The interview took place on

December 7, 2015.

Stephen Renna: Thank you for joining us. I appreciate your

taking the time to talk with us about your market outlooks and

insights into managing risk and generating return.

Jeffrey Gundlach:

Happy to do so.

Stephen Renna: The United States’ economy has been growing

modestly. Europe and Asia are near recession. What is your

outlook generally for these economies and their relationship

to today’s investment environment?

Jeffrey Gundlach:

The trend has been solidly in place now for the

last few years. Entering each new year, global economic growth

forecasts have come in higher than actual growth ends up by

year-end. That pattern is so persistent that it’s starting to become

almost comical.

Every year, if you go back to what the guess was for 2013, back when

the guess was made in 2012, the global economy was supposed

to grow at like a four and three quarter number, and it came in a

percent and a half lower than that. And then 2013’s–2014’s guess

started out a little bit less optimistic. It was downgraded by the

same amount when it was finally realized, and that continues to

be the pattern.

What’s different is every year, the guess or the hope for the coming

year keeps coming down, and yet as that year unfolds, you get still

the same type of downward revisions. So we’ve already started

with the guessing for 2016, and the estimates have already been

downgraded even before the year has started. So we’re looking

at a global economic growth rate which is obviously lower than

people wish for or are accustomed to.

This slower growth rate is being driven partially by demographics,

which are powerfully negative in parts of Europe such as Spain and

Italy, and in Asia. For example, Japan, which has suffered negative

for years, now is being joined by China. And Russia has horrific

demographics, actually worse than anyone else in the world.

These demographic headwinds overlay an over-stimulated economy

encumbered with tremendous debt growth over the past multiple-

year timeframe. Very stimulative interest rate policies in the

developed world have served only to bring investment returns

and economic growth forward. Bringing growth forward means

borrowing it from future economic possibilities. This is why economic

growth keeps suffering downgrades with the passage of time. And,

obviously, the area that has been of maximum scrutiny for the last

few years as a candidate for underperformance has been China.

Now rather than being a worry, economic underperformance is

an observed reality in China. Why? Because the investment-based

boom that was used to always stabilize the Chinese growth rate

at a very high level like 8% is no longer practical. The magnitude

of infrastructure development has been so vast. Today, with the

Chinese population no longer growing as the consequence of a

generation or two- of one-child policies, China doesn’t need to

build more airports or cities or roads.

And so, understandably and appropriately, the Chinese officials have

decided they need to transform the economy from this investment-

based boom into a consumption-based economy. But not surprisingly,

this transition is difficult to execute properly, and certainly it cannot

be done perfectly. And so, after an enormous boom drove the

Shanghai composite 2,000 to 5,000-plus over about an eight-

month period, the whole edifice came crashing down.

I think global economic growth is unlikely to get kick-started

because so much of this growth was borrowed from the future

with aggressive stimulus and indebtedness. The durable result is a

global growth rate which is so low that the dispersion of individual

countries’ growth around the mean results in significant economies

now being negative. Take the example of the largest economy in

South America: Brazil has been running for three quarters in a

row of substantially negative year-over-year GDP growth, and the

forecast is for more of the same. And in countries suffering from

shrinking economic output, not surprisingly there are calls from

the local populations to do something. Unfortunately, there’s not

enough global economic growth to go around. So “do something”

ends up meaning currency devaluations around the world. And the

currency that everybody is devaluing against is the dollar — and

everything that is pegged to the dollar.

The dollar has appreciated 25% on a trade-weighted type basis

since the middle of 2014. We are facing the consequences of that.

Specifically, the United States has been importing disinflation while

other countries implement currency-debasing policies in an effort

Jeffrey Gundlach

Chief Executive Officer &

Chief Investment Officer

DoubleLine Capital

Stephen M. Renna

President & CEO

CRE Finance Council