Morningstar Advisor - April/May 2009 - 48

Morningstar Conversation Gundlach: Yes, denial and hope, when they get dashed, lead to despair, and you will not see a bottoming in any important financial market—the equity market, the credit market—until this veneer of hope is replaced with despair, and it’s not even close to happening yet. As you correctly point out, Bob, using the example of the auto companies, the idea that you’re going to resuscitate them and get the genie back in the bottle is clearly not going to work. But the first attempt, based upon this veneer of hope, is to try to make that happen. Rodriguez: We’re still early in this crisis. Gundlach: I agree. Until that changes, the investment decisions that have been the successful ones so far in the credit crisis will continue to be, which argues for conservatism. Bob, you talk about preserving purchasing power. There’s a real risk that you have major debasement of the dollar currency. Rodriguez: Jeffrey, I call it the ugly contest. Who looks the least ugly of the currencies out there, and there are some debatable points on that right now between, let’s say, U.S. and Europe … . Gundlach: And pound. They’re all ugly. Rodriguez: They’re all ugly, and what you can say is that even though you referred to the commodity area of not showing inflation, there is one commodity that is doing very well, vis-à-vis all other currencies … . Gundlach: That’s gold. But that’s why I say industrial commodities when I talk about commodities, because gold obviously is simply an anti-dollar play. Rodriguez: I would say it has been an You will not see a bottoming in any important financial market—the equity market, the credit market—until this veneer of hope is replaced with despair, and it’s not even close to happening yet. Jeffrey Gundlach the opposite variables that they’re accustomed to dealing with. Some of the decisions that would be made in a knee-jerk way under the old paradigm will take you in exactly the wrong direction. Rodriguez: In this stimulus plan, they talked They put money into GMAC at 8%, and what does GMAC do? They go out and start making loans, so GM can sell cars at 0% to 2.9%. They lowered their FICO score from 720 down to 621, one point above subprime! Gundlach: And if you go to the left in the Y, restarting consumption and lending. I’ve got a news flash: It was excessive consumption and excessive credit growth that got us into this mess! I’ve termed it in my e-mail this morning: We’ve come to a Y. We can go to the left, which is doing the stimulus, more consumption, more borrowing, etc. Or we go to the right and take a direction that has a totally different set of responses and policies. Look at what the key issue was right at year-end—how do we avoid bankruptcy in the automotive companies. what you’re going to find is that that road is actually a circle that takes you right back to the Y again. You ultimately have to go to the right. Rodriguez: Eventually, but until then, as they waste time and resources going to the left on the Y, GDP is substandard, subgrowth, frustrated, and nothing gets real traction. Gundlach: That’s exactly right. The government anti-dollar play. Whether it is now becoming an anti-fiat currency play is another question. Gundlach: Oh, I think it is, and I think it will so far is still in the hope phase of … Rodriguez: and denial. continue to be. We’re going to see investors 48 Morningstar Advisor April/May 2009

Morningstar Advisor - April/May 2009

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