As Bill Clinton once famously stated; "What is....is" and while the current market "IS" within a bullish trend currently, it doesn't mean that this will always be the case. This is why, as investors, we must modify Clinton's line to: "What is...is...until it isn't." That thought is the foundation of this weekend's "Things To Ponder." In order to recognize when market dynamics have changed for the worse, we must be aware of the risks that are currently mounting.
The global crisis that began in 2007/8 has unmasked many unsustainable economic dispositions. Unfortunately, the proper conclusions have still not been arrived at, as evidenced by the fact that the same old Keynesian recipes that have failed over and over again are being implemented on an even grander scale. One must not be misled by the claims of 'austerity' being imposed, as this has evidently little bearing on government spending as such, but is rather an attempt to squeeze more blood out of an already shriveled turnip, namely what remains of the private sector. Puerto Rico seems – at least so far – not any different in that respect.
The default cycle that should have occurred, given historical patterns of issuance cycles, has morphed (thanks to the Fed) into a refinancing cycle; but while DoubleLine's Jeff Gundlach suggests that fundamentals are supportive, "the valuation of junk bonds as a category is at its all-time overvalued versus long-time treasury bonds." So despite Yellen exclaiming that she sees no bubbles, one of the world's largest bond fund managers has never seen corporate bonds (investment grade and high yield) more expensive. Gundlach goes on to note he has sold some Apple (but believes it will remain range-bound), is baffled by the valuation of Chipotle, and sees 10Y Treasury yields dropping to 2.5% or lower.
Back in the years just before the previous housing bubble burst (not to be confused with the current, even more acute one), one person did the math on subprime, realized that the housing - and credit bubble - collapse was imminent, and warned anyone who cared to listen - almost nobody did. That man was Kyle Bass, and because he had the guts to put the money where his mouth was, he made a lot of money. Fast forward to 2014 when subprime is all the rage again and the subprime bubble is bigger than ever: it may comes as a surprise to some that in 2013, subprime debt was one of the best performing fixed income instruments, returning a whopping 17% in a year when most other debt instruments generated negative returns. And this time, while Kyle Bass is busy - collecting nickels (each costing a dime) perhaps - it is someone else who has stepped into Bass' Cassandra shoes: that someone is Jeff Gundlach. “These properties are rotting away,”
Jeff Gundlach recently warned that the trade that could inflict the most pain to the most people is a significant move down in yields (and potential bull flattening to the yield curve). Citi's FX Technicals group laid out numerous reasons why this is entirely possible (technically and fundamentally) but despite this, investors remain entirely enamored with stocks and, as the following chart shows, Treasury Bond sentiment now stands at 20-year extremes of bearishness.
On the heels of his less-than-optimistic presentation, DoubleLine's Jeff Gundlach tells Europe's Finanz und Wirtschaft "he's concerned about the growing amount of speculation" and draws a parallel between today’s markets and the dot-com boom of the late Nineties. This excellent interview takes the themes of his recent conference call and extends them as he warns "In the over thirty years I’ve been in the financial investment industry, I don’t recall a single year where I saw the year begin with the consensus being so solidified in its thinking across virtually every asset class." His biggest worry (for investors, as opposed to his funds), "the most unthinkable things happen this year and that is a basic pain trade that forces people into treasury bonds."
"Bond King" Bill Gross may not have had a good year following over $40 billion in redemptions from his $250 billion Total Return Fund, but another aspirational Bond King, DoubleLine's Jeff Gundlach, had an even worse year on an relative basis, when his Total Return Bond Fund saw $6 billion in redemptions ending the year at $30.9 billion in AUM following seven consecutive months of withdrawals. So in his attempt to start the new year on better footing, here is his first webcast (as usual open to the public), titled "Let the Race Begin! 2014 Markets: Year of the Horse", in which as usual Jeff will discuss the economy, the markets and his outlook for the best investment strategiest of 2014. Let's hope that for bond fund manager, that 2014 is not just another "year of the donkey", as was the case in the past year which everyone managing duration would rather forget.
At 4:15 pm Eastern, DoubleLine's Jeff Gundlach will be discussing the economy, the markets and his outlook for the future. Readers can register for the webcast at the following link, while for those stuck with phones can dial-in at (877) 407-6050 or (201) 689-8022 international.
Reflecting on the collapse of the USD, the surge in gold, the Chinese ratings agency downgrade, and the groundhog-day-like world in which the US government (and markets) live, DoubleLine's Jeff Gundlach warns that "America's credibility is slowly eroding." In his typical manner, Gundlach rapidly and efficiently covers a lot of ground in these brief clips; from the growing skepticism of the rest of the world towards the US' full faith and credit, to no end in sight for QE and reignition of bond inflows under an even more interventionist Yellen, to his views on Tesla, Google, and Apple.
Today at 4:15 pm Eastern, Doubleline's Jeff Gundlach will be sharing his latest outlook on the markets via an audio-only webcast, and as usual addressing what he believes are the best investment strategies. The audio for this webcast can be accessed at the link below (link to register here). Phone lines are be available for dial-in at (877) 407-1869 or for international calls (201) 689-8044.
At 1615ET, DoubleLine's Jeff Gundlach will begin his firm's latest presentation of his market views. We already know his views on the potential for higher rates and the inevitability of the taper, "the 10Y Yield may go up to as highs as 3.1% by year-end," because "investors have switched from "I don't care about volatility, I want income" to "I don't care about income, I dont want volatility." While he previously noted he "sees no sign of that changing...", we wonder if the title of his always full of charts presentation sets up for some change - "what if?" Full presentation to follow...
It would appear that the new normal's Bond gurus are struggling with the weight of the 'Taper'-ing, deleveraging, 'special-repo'-ing, government-repress-ing, EM-crisis-ing world of extreme fast money flows that the Fed has thrust upon us. Just 3 short months ago, Jeff Gundlach said that he "expects the absolute highest for the 10-year yield this year is 2.4%, but he expects it to stay closer to 2%." However, as the 10Y yield presses up towards 3.0%, he told CNBC (in this brief but insightful clip on world flows and how he sees markets playing out) that "the 10Y Yield may go up to as highs as 3.1% by year-end," because "investors have switched from "I don't care about volatility, I want income" to "I don't care about income, I dont want volatility." He sees no sign of that changing...
Jeff Gundlach may not be present at today's DoubleLine live webcast titled ominously enough "The End of QE as We Know It", which will be led by the firm's Jeffrey Sherman, but the firm is sure to provide some guidance on how the recent bond rout has impacted bond funds, and what the future of risk duration is in a time when Bernanke seems hell bent on pushing everyone out of bonds and into stocks.
A month ago DoubleLine's Jeff Gundlach laid out his most recent chartapalooza view of the world and a lot has clearly changed in that brief period. In light of his comments this morning on CNBC that "the liquidation cycle appears to have run its course with Emerging Market bonds, US junk bonds, Munis, and MBS - all of which substantially underperformed Treasuries during the rate rise... July will not be a repeat of May/June in the rate market." We expect to hear more color for this market call during his discussion starting at 1615ET.
The answer is no as higher rates on developed world debt would crush their economies. And it would hurt less indebted emerging markets too.