"What Will We Be Talking About This Time Next Year" - Here Is Jeff Gundlach's Answer

Tyler Durden's picture

Over the weekend, Barron's published its annual roundtable in which prominent investors previewed what they expect out of 2017: "a year of seismic shifts for the markets and, quite possibly, the world. Or, as Goldman Sachs strategist Abby Joseph Cohen said at this year’s Barron’s Roundtable, “We are breaking a lot of trends.” As Barron's dubbed it, "this could be the year the movie runs backward: Inflation awakens. Bond yields reboot. Stocks stumble. Active management rules. And we haven’t even touched on the coming regime change in Washington, which will usher tax cutters and regulatory reformers back to power after an eight-year absence."

While there were many insightful observations by the group of participants - whose sentiment was decidedly more bearish than during last year's event - which included Scott Black, Felix Zulauf, Mario Gabelli, Meryl Witmer, Brian Rogers, Oscar Schafer, and Abby Cohen, we will focus on the predictions of Jeffrey Gundlach, if only due to his track record from the similar Barron's roundtable one year earlier, in which he turned out to be far more prescient than most of his peers, not least of all because he "made the greatest prediction at last year’s Roundtable—that Trump would win the presidency."

The first question posed to Gundlach was also the broadest one: what are you predicting now?

People have forgotten the mood regarding stocks and bonds in the middle of 2016. Investors embraced the idea that zero interest rates and negative rates would be with us for a very long time. People said on TV that you should buy stocks for income and bonds for capital gains. This is when 10-year Treasuries were yielding 1.32%. Someone actually said rates would never rise again. When you hear “never” in this business, that usually means what could “never” happen is about to happen. I told our asset-allocation team in early July that this was the worst setup I’d seen in my entire career for U.S. bonds. It occurred to me that the bond-market rally was probably very near an end, and fiscal stimulus would soon become the order of the day.

 

Based on a comparison in July of nominal Treasuries to Treasury Inflation-Protected Securities, or TIPS, the bond market was predicting an inflation rate of 1.5%, plus or minus, for the next 30 years. Now, that is implausible, and kind of proves the efficient-market hypothesis is wrong. More likely, the inflation rate would increase not in five or 10 years, but one year, because commodity prices had already bottomed. The Federal Reserve Bank of Atlanta’s wage-growth tracker is now up 4%, year over year. Oil prices have doubled since January 2016, to around $52 a barrel, which likely means that headline CPI [the consumer-price index] will be pushing 3% in April.

 

I expect the history books will say that interest rates bottomed in July 2012, and double-bottomed in July 2016. At some point, the backup in rates will create competition for stocks. Bonds could rally in the short term, but once the yield on the 10-year Treasury tops 3%, which could happen this year, the valuation argument for equities becomes problematic. When the long bond [the 30-year Treasury] was at 2%, bonds had a P/E of 50. Compared with that, a P/E of 20 on stocks didn’t look all that bad. But if the 10-year yield hits 3%, you could be talking about 4% on the 30-year, which implies a P/E of 25.

 

Something else happened in 2016: The Fed capitulated, as I predicted a year ago. The Fed gave up on its forecast for higher interest rates and lowered its dot projections for 2017, just when it might have been right. [The Fed’s so-called dot plot shows the interest-rate projections of the individual members of its policy-setting committee.] In December, the Fed had to reverse itself and raise rates.

Is an inflationary spike possible?

Fed Chair Janet Yellen suggested a few months ago that running a “hot” economy might not be such a bad idea. But when unemployment is low, wages are rising, and significant fiscal stimulus is likely, inflation could exceed consensus expectations. Jim Grant, the founder of Grant’s Interest Rate Observer, wrote a fantastic article a few years ago likening the current environment to the 1940s and ’50s. Short-term interest rates were at 3/8s in the late 1940s, and long rates were around 2%-2.5%. Inflation was running at 2%. Everyone had been predicting higher inflation rates, but after a long period of 2%, they gave up. Then inflation spiked to 8%. It came out of the blue.

His take on the strong dollar:

 A strong dollar keeps inflation lower. It is helpful to the bond market. A weak dollar isn’t helpful to the bond market. However, I brought along a quote from President-elect Trump today because it makes me think. He said, “While there are certain benefits to a strong dollar, it sounds better to have a strong dollar than it actually is.” Is it really a given that Trump will bring us a strong dollar if he is supposed to be helping the forgotten middle class?

His view on market risk at this moment

People are underestimating the risk of loss right now.

On Germany being the big winner currently in Europe:

The German population doesn’t quite understand this. According to ,a poll by Pew Research Center, 38% of Germans disapprove of the EU’s handling of economic issues. In France and Italy, two-thirds-plus of the population are dissatisfied with the EU. In polling terms, that is enormous. Those countries have almost maxed out on dissatisfaction.

What worries, and excites, Gundlach about 2017:

The shift in sentiment to positive from negative, regarding the efficacy of Trump is one of the biggest I’ve seen in my career. I wonder if sentiment can swing just as quickly the other way. Many people who voted for him think something is going to change for them. They expect their wages to rise, and America to be “great again.” What will happen by July or August if nothing has changed? Put that together with the timing of an interest-rate rise, and we potentially could see a very different psychological environment.

Are bonds in a bubble:

People say bonds are in a bubble, that they are over-owned. I agree with that. But anything that is momentum-driven is in a bubble. This passive stuff is in a bubble.

On portfolio construction for the next 12 months, and what may be the "best trade" of the year:

Some things should be avoided in a major way because they have risk without rewards. One of the greatest trades of the year could be shorting German Bunds... Portfolios need to diversify away from deflation-oriented trades, which worked for a long time.

On the trajectory of the stock market over the course of the year.

Zulauf: Stocks could easily rise another 10% into the middle of the year. But after a soft period, bond yields will rise again, with the 10-year Treasury yield hitting 3% or going a little above it. That will trigger a big correction in equities, just when everyone is fully invested after buying into the Trump rally. I expect the S&P 500 to be slightly negative for the full year.

 

Gundlach: Did I give you my notes? That is almost exactly my view.

Where will the S&P close the year?

Gundlach: GDP growth has been unbelievably stable at 2% for the past six or seven years, despite quantitative easing and other nutty interest-rate policies. At last year’s Roundtable, I said the easiest forecast was that the Fed wouldn’t raise interest rates four times during the year. We are going to break out of the land of stability this year, and certainly by 2018, and there will be an inflation surprise. That isn’t going to be helpful for equity valuations.

 

I look for the stock market to make new highs in the first part of the year, but when rising interest rates bite, stocks will fall. I see a single-digit decline for the full year.

Finally, Gundlach was asked "what will we be talking about this time next year." His simple answer: "Trouble in the euro zone."

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navy62802's picture

This time next year, we will be trying to figure out how to recover from the biggest political crisis in American history after the Clinton Foundation scandal unwinds.

knukles's picture

Right alongside the financial, economic and political ramifications of the Obama dog biting a young underage defenseless white Comet Pizza delivery girl in the face.

http://www.tmz.com/2017/01/12/obamas-dog-sunny-bites-guest-face-white-ho...

DownWithYogaPants's picture

It's all BS.  Obama the Magic Negro was President in 2016 so the Fed kept interest rates down.

Now that Trump will be president they are set to sabotage mode.

SilverRhino's picture

This time next year we will be up to our necks in worldwife shame when so many pedophiles are found and prosecuted.

Both sides of the aisle, hollywood, england, this shit is EVERYWHERE 

#PIZZAGATE

new game's picture

two comments-sick motherfucking humans and the fed is wrong. the fed is behind the curve as usual. inflation is coming and they will be raising rates. a coiled spring. trump will unleash growth and inflation and watch the deficets grow. tump and bean stalk...

one mutherfuking mess...

so many idiots to blame...

24 years of bad politics and money.

uhland62's picture

I hope not. Talking about Clintons is not productive. The less we talk about them the better we can move forward. Podesta and Madeleine McCann is another matter. 

stocker84's picture

Nobody cares in a year

Your prediction is and will be proven wrong.

You didn't even read the article.

You just needed to post something

And it was a waste

And i suspect you were kinda drunk when you posted it.
No? Then you're just dense.

Thanks for nothing

JamesBond's picture

This time next year, we will be trying to find cans of dog food to eat.

 

OfAllElaboratePlans's picture
OfAllElaboratePlans (not verified) Jan 16, 2017 8:27 PM

I'll make 2 WILD GUESSES (no, 3...)

 

1. About this time next year we'll be talking about... drumroll... JEWS

2. About this time next year, the narrative will be along the lines of the SPOTLIGHT being altered AWAY FROM... jews...

3. About this time next year, I'll have been forced to change ny ZH username, at least, 3x... I'm running out of 'STRIPES' & 'IDIOCRACY', & 'MONTY PYTHON' names, so, it'll have to be something obtuse...

 

4. This is a semi-predictive BONUS ~ This comment will get deleted by the all truth telling Tylers (& has a better than 50-50 shot at being my last comment EVER with this username, &/or get junked mercilessly by the sheckel paid MOSSAD agents whose job is to troll this site like the FLASH junker above ~ or was that just Jim in MN?, cause HE HATE ME). ~ lol

 

5. Semi-predictive BONUS#2... AFTER I get kicked off 3x... again (which is MATHEMATICALLY predictable based upon the fact that I've been kicked off 24x in 8 years so far for comments such as this)... & whereby ordinary sermon preachers like Jim in MN are proud of themselves for contributing to that... And all the, whatever s**t happens worldwide in 2017... & after all the threads on ZH during that period... & notwithstanding whether I'm here with a username to comment on anything... We'll still be b talking about... next year... at this time... as with EVERY YEAR... IS...  DRUMROLL... JEWS... (if you're not convinced about that, just look at the last dozen or so threads & what the TIE THAT BINDS them)... Look at it ANY DAY for that matter because it's always the same...

 

That's why I'm better than Grandalch (or whatever the fuck the wizard from the LORD OF THE RINGS sounding name is) at PREDICTIONS... Oh Wait!!! he's not JEWISH or anything? right?

 

lol

 

sincerely,

 

f_s

 

~~~and well, they even say so here so it must be TRUE (which is all the more reason I need to be BANNED from ZH)~~~

 

http://www.octafinance.com/why-jews-are-among-the-best-hedge-fund-manage...

 

Why Jews are Among the Best Hedge Fund Managers? David Tepper, George Soros, Leon Cooperman and More

 

Just look at at ALL STAR list!!!

 

I must [have] be[en] making things up as I go along for these past 8 years...!

 

Why Jews are Among the Best Hedge Fund Managers? David Tepper, George Soros, Leon Cooperman and More

05/19/2015 in Guru News

Jews are well-known for being entrepreneurs, traders and business-people who beat the market odds. Out of the best 25 money managers since the advent of American Capitalism, 17 are Jewish! It is something that leaves many people dumbfounded because its probability of occurring is almost zero therefore very difficult to compute. Some of these in top 25 are of course very famous names: George Soros, Steven Cohen, James Simon, David Tepper, John Paulson, Carl Icahn, Daniel Loeb, Leon Cooperman, Seth Klarman, Israel Englander, David Einhorn, Bruce Kovner.

Some of the Top Jewish Hedge Fund Managers Are

George Soros: the chairman and founder of Soros Fund Management, as well as the founder of Quantum Fund. He is reported to have returned 20%-plus annualized in the last four decades. What this means is that if $10 million was invested with his hedge fund 40 years ago and compounded at an annual rate of 20%, it would be worth a whopping $14 billion today! Can you image what 30% annualized compounded returns could make?

James Simon (who was raised in Jewish family) is the first in our hedge funds return rank with 35%+ annualized returns in 27 years. David Tepper is another hedge fund start with 27% annualized returns for 22 years active management.  Steven A. Cohen has achieved more than 30% annualized returns for 20+ years. All of them were also raised in Jewish families.

Other top hedge fund managers who are either wholly or partly Jewish include:

John Paulson (Jewish mother, non-Jewish father), who made 12% + return for 19 years. Carl Icahn (both parents ethnic Jews but father an atheist) returned 21% annualized for 15 years.

Others include Larry Robins, Daniel Loeb, Leon Cooperman, Eddie Lampert, Daniel Och, Nelson Peltz, Israel Englander, Seth Klarman, David Einhorn and Marc Lasry, Michael Steinhardt, Bruce Kovner.

 

I DESERVE to be kicked off of ZH for telling anybody the TRUTH (because as we all know ~ who the hell needs that)?

emersonreturn's picture

thanks, f_s, a great list of potential ZH usernames.

OfAllElaboratePlans's picture
OfAllElaboratePlans (not verified) emersonreturn Jan 16, 2017 9:02 PM

FYI~

 

Potemkin Village Idiot, Richard Parker, Hy Brasilian, Romney Wordsworth, Holy Hand Grenade of Antioch, Ow! My Balls, Thirst Mutilator, Vespasian, AIIB, and about 2 dozen others have already been used...

I can't even count anymore (because I guess I'm not as mathematically 'gifted' as some others.... &/or I don't run a money counterfeitting operation perpetuated by journalism, political activism, & fund managing)...

 

You see... If I were Jim in MN... I'd get an articloe published about my 'findings' & then get to do cool shit like imbed fotos in my comments... Sadly (or maybe for the better) ~ My instincts tell me that I wouldn't like the taste of @ss if I licked it, so I abstain from that...

ms8173's picture

WHat about gold/silver.... no comments on that?

wisehiney's picture

I predict that these predictions will prove just as accurate as nearly every other one these jagoffs have ever made.

alexcojones's picture

Hope we're talking about the Podesta Indictment / Convictions

uhland62's picture

... and their involvement in Portugal with Kleine-Brockhoff and Madeleine McCann.

alexcojones's picture

Then I hope we're talking about The Clinton / Sessions Investigations. 
Then I hope we're smiling about the REAL rapport between Russia and USA.

NEVER in my lifetime of 67 years has THAT happened before.

Sadly, we may be talking about the assassination of MAGA. 

Evil lurks everywhere and will take real effort to destroy - if possible

assistedliving's picture

what will we be talking about next year?  Scandal burnout

uhland62's picture

I think we'll be talking about what actually happened to the late President Trump?  

JailBanksters's picture

After great deliberation ...

Are we in a recession, it feels like a recession, no were coming out of a recession, no I think going into a depression, no I'm pretty what we have is deflation, no that can't be right we have Inflation. Your all wrong it's a Deflationary Recession with twist of Inflationary Depression. 

In other words, same as today.

Tom Green Swedish's picture

Not going to argue with any of these points, and would even go to say I would use his playbook.