THE
WORST IS YET TO COME
'No market for old
men,' TCW investment strategist warns in gloomy forecast
Jeffrey
Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW
Group Inc., told clients on a conference call late Wednesday that the crisis in
credit and housing may not abate for several years and is actually getting
worse. In the deteriorating climate he sees
unfolding, Gundlach said, the Standard & Poor's 500 Index (SPX: S&P 500 Index
( "This is no market for old men,"
said Gundlach, who also manages TCW's flagship Total Return Bond Fund (TGLMX: .
"This is no market for old-school thinking." Gundlach based his assessment on a belief
that housing prices still face several more years of decline, a protracted
slump, he said, not seen since the Great Depression. Moreover, Gundlach said
it's possible that home prices could be sluggish until 2022. "If it's like the Depression
experience -- and it sure is shaping up that way -- it could take several
years. Maybe we won't see a bottom in home prices until 2014," he said. Write-offs could top $1 trillion As a forecaster, Gundlach didn't just
climb aboard the gloom-and-doom wagon. He was early to spot the cracks that
subprime loans were making in the financial system, and among the first to warn
that an era of easy money would come to a bad end. "The subprime market is a total
unmitigated disaster and it's going to get worse," Gundlach told money
managers and financial advisers at an investment conference in June 2007. See
full story. And Gundlach has put his shareholders'
money where his mouth is, shunning derivatives and counterparty risk in his
bond fund portfolio. That defensive posture should offer
protection in the continuing credit storm that Gundlach foresees. In this bleak
scenario, an unprecedented -- and growing -- number of home foreclosures, along
with mortgage loans that are under water as soon as they're originated and a
glaring lack of buyers for even modestly risky assets keeps the financial
system under enormous stress. Expect loan default rates to rise,
Gundlach said, not just in the subprime market, but among the top-drawer prime
borrowers as well. The prime default rate could approach 10% from a current 2%
before the carnage is over, he said. "The current environment is maybe a
little worse that what was experienced in the Depression in terms of the
housing market," Gundlach said. More troubles ahead Accordingly, financial institutions may
suffer write-offs that could surpass $1 trillion before conditions improve, he
said. As of late August, credit losses and writedowns at the world's
100-largest banks and brokerages topped $506 billion, he noted. Among the casualties, Gundlach said, is
Citigroup. The company's balance sheet problems could be on a scale similar to
that of insurer American International Group, which the U.S. bailed out this
week. "I would give a very meaningful
probability to the biggest, next AIG-size debacle being Citigroup," the
strategist said. "I would definitely not be a buyer of
Citigroup stock," Gundlach said. "If I were going to buy financial
market stocks," he added, "I would be a buyer of Wells Fargo (WFC: Other financial giants also won't escape
the crisis unscathed, Gundlach said. "I don't see how Wachovia can make it
as a stand alone," he said. He expressed the same sentiment about Morgan
Stanley. Indeed, late Wednesday the New York Times
reported that Morgan Stanley was exploring a merger with Wachovia or another
bank. See
full story. Europe's financial giants are in similar
or even worse shape than their U.S. counterparts, Gundlach said, with
"substantial exposures to assets which U.S. banks are now getting taken to
the woodshed over. I would rate all European banks as not a buy." The breakdown will take a further toll on
U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said,
about 35% below its 1156 close on Wednesday. Said Gundlach: "None of us have ever
seen this, and it's no market for old men, but risk aversion is the order of
the day." Jonathan Burton is an assistant personal
finance editor for MarketWatch, based in San Francisco. 
SPX 1,156.39,
-57.21,
-4.7%)
could fall another 30%, giant Citigroup (C) could
become an "AIG-sized debacle," Morgan Stanley (MS) would merge with a
banking company, Wachovia (WB)won't
be able to stand alone, default rates on even prime mortgages could soar, and
European banks' woes are just beginning.