Jeffrey Gundlach: Time For Investors To Prepare For A Substantial Softening In The US Economy

Tyler Durden's picture

While presenting his view on this morning's S&P warning to Reuters, in addition to expressing his now "well-accepted" contrarian outlook to that of Bill Gross via-a-vis the US Treasury response to the end of QE2, DoubleLine's Jeff Gundlach (his latest complete presentation was posted here first) had some very cautionary words for both the economy and for stocks.

Gundlach said Treasuries, whose major holders include foreign investors, will be in high demand as the U.S. economy will "soften substantially" with no monetary stimulus in the pipeline.

The S&P warning, which cited a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit, is "good for Treasuries and bad for the economy and stocks," Gundlach, who oversees $9.8 billion at the Los Angeles-based firm, told Reuters.

So while Gross and Gundlach disagree over the future of yields ("U.S. Treasuries will perform well following a downgrade by Standard & Poor's on Monday of the rating agency's credit outlook for the United States, DoubleLine Chief Executive Officer Jeffrey Gundlach said on Monday"), both essentially agree that equities are now substantially overvalued... At least until such time as more monetary stimulus is injected now that any fiscal injection is pretty much a non-starter until 2013.

The only question remaining is when will the rest of the market, which continues to ignore sanity and is on persistent robotic autopilot, grasp this simple math.

Last week on an investor conference call, he said: "By now it's getting relatively close to June 30 and it's about time for the markets to start discounting the end of QE2 and a weaker economy."

Oddly enough, as today's S&P action, which was certainly inspired by Wall Street itself to no small degree, demonstrated, even the street itself is doing all it can to precipitate a sell off and thus set the stage for more monetary loosening, yet manages at most a 1% or so drop in risk assets. Which is why while many joke about the market, calling the reflexive upward climb of stocks SkyNet-like, one wonders: does even Wall Street now scratch its head over how to control the ETF, HFT and POMO-inspired relentless climb in stocks?

Is SkyNet now truly self-aware?