No. of Recommendations: 2

I could enjoy an hour video of Jon Stewart running his riff, but not some cowboy bond trader I’ve never heard of. However, Gundlach cannot be dismissed for two reasons: He has a clear action plan, and he is making it work. What he’s been doing with MBSs is impressive. But rather than suffer through the video (the link didn’t work anyway), a faster way to get a sense of his thinking is the Barron’s interview.

I found these snippets interesting, because they parallel the prep work I’ve been doing for a couple months now, trying to learn the muni market, so I’ll be ready when the buying time comes.

He foresees a major collapse in the municipal-bond market, beyond the declines to date, given the parlous condition of both state and local government finances. He is preparing, he says, by having established a joint venture with the Chicago financial firm RiverNorth. Among other things, it expects to scoop up closed-end municipal-bond funds in the next year or so when the predicted apocalypse arrives, driving fund prices down, he says, to as little as 40% of net asset value.

What makes the $2.7 trillion muni market particularly vulnerable, Gundlach says, is its weak psychological underpinnings. Many investors in municipals are wealthy individuals who buy the securities purely because of their tax advantages and have little knowledge of the fundamentals of the paper they own. They tend to be "all-in" investors, owning little else, and thus will be prone to panic, he figures, in the face of surging defaults.

"Look, I don't know whether the market will suffer $10 billion or $30 billion in defaults, but the actual amount doesn't matter, Gundlach says. "There will be a panic at the margin, and muni bonds from the highest-rated on down will plummet, in part because other sorts of investors tend not to step in."
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