Jeffrey Gundlach has run the DoubleLine Total Return Bond (MUTF:DBLTX) to perfection in a difficult year. If you don’t know him, here my verdict: He’s good. Maybe the best there is right now.

He was buying mortgage-backed bonds at a discount last year when everyone else was throwing them away and made a small fortune on them. He was buying Treasuries in the spring when one-time bond king Bill Gross said he was shunning them or going short, and Gundlach made a fortune on that call as well.

He’s arrogant, he’s egotistical, he’s independent and he’s brazen. Not always the best qualities in a friend, but if you’re good, these are fine qualities for managers of bonds — a world in which you would think that everything is well known but you quickly learn has a million shades of nuance. (Click here to see a prickly video of him during the TCW trial under way now in Los Angeles. Click here to see Los Angeles Times coverage of that moment in the trial.)

Late last week, Gundlach sat down with a Gil Weinreich of AdvisorOne, a fund management trade publication, and gave his assessment of the current market. It’s grim. Here are nine highlights from the conversation, excerpted:

1. Gunlach counsels investors to ”stay conservative,” adding they should not make the mistake of thinking swooning markets represent an opportunity to buy.

2. He considers the volatility of late the result of the ”undeniable problems in Europe which keep
escalating. It seems likely that given the price action of bank stocks in Europe there is the serious possibility of a global banking panic.”

3. He says ”the time is ripe” for another AIG or Lehman-level collapse ”based upon the growing lack of confidence in the growing debt of Spain, Italy, Greece, Portugal, Ireland and ultimately of France.” Adding to the danger is the fact that European financial institutions, particularly French banks. own these toxic assets. The result will be a ”restructured default” unless the Germans are ”going to pay the debts of everybody in Europe,” something Gundlach says is extremely unlikely.

4. European banking stocks fell 6.7% on Thursday, but that loss is of lesser importance to Gundlach than the trend, which is not just down, but ”accelerating on the downside.” What makes global banking fears realistic is that ”they’re all tied together with swap contracts. This is just like 2008, he said, citing the ”knock-on effects” on other financial institutions of a weakened AIG.

5. The fund manager told investors in a conference call Wednesday that global banking problems have flipped into a DEFCON spiral, referring to the highest level of military alert before the outbreak of war.

6. Following S&P’s downgrade of the United States, Gundlach had advised selling stocks when the S&P reached above 1,200, a level he does not expect the index to reach again for several quarters, and he noted that rally provided the last opportunity for investors to do so. The DoubleLine manager was emphatic that acceleration of the global banking crisis is the real problem as opposed to other problems that might get more headlines. Main Street looks at unemployment and housing, he said, but those problems have been with us for some time.

7. Gunlach noted that domestic problems feed a depressed psychology. Most Americans aren’t reading Bloomberg, he said, but when they see potholes go unrepaired and services cut, they are
increasingly convinced we are in a depression. Gundlach expects economic difficulties in the U.S. to intensify because of a withdrawal of stimulus at a time of anemic growth. The lesson of the debt ceiling drama in Washington is that ”it just doesn’t seem likely we’ll throw another couple of trillion dollars to get temporary growth.”

8. Longer-term, Washington’s deficit spending has distorted the economy, he said, comparing fiscal policy to the plant-stimulating product, Miracle-Gro. You put it on the plant and it looks beautiful for a while, he said, but ”you’ve got it on a steroid. You need mulch and compost in the soil. You don’t just spray an amphetamine on the plant. That’s what happens when the government deficit spends,” he said.

9. Gundlach’s bottom line: ”Stay in low-risk. Do not think a small drop in risk assets is a tremendous buy opportunity.”

For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage.