Last week, in an abrupt shift to his bullish posture, Bank of America strategist Michael Hartnett laid out how he envisioned the transition from the current "Icarus" rally to what he dubbed the market's "Great Fall" - or "Humpty Dumpty" trade - which he expected to take place in the second half of the year, and which he said would be precipitated by another downward inflection in EPS, but more importantly, a more hawkish Fed. Specifically, he showed a chart which revealed that historically, once the Fed starts tightening, it keeps tightening until there is a “financial event.”
Overnight, in his latest webcast to DoubleLine investors, Jeffrey Gundlach echoed Hartnett, when he said that he expects the Federal Reserve to begin a campaign of "old school" sequential interest rate hikes until "something breaks," such as a U.S. recession. As we noted yesterday, Gundlach - who does not believe a recession is imminent - said that U.S. economic data support a rate increase as soon as the next Fed policy meeting next Wednesday, and further rises this year after a series of false starts in 2015 and 2016, .
"Confidence in the Fed has really changed a lot," Gundlach said on an investor webcast quoted by Reuters. "The Fed has gotten a lot of respect with the bond market listening to the Fed" now that economic data support the tough rhetoric from Fed officials.
As Reuters notes, it was not so much Yellen but Dudley who gave markets an initial jolt last week when in a television interview he said that "animal spirits had been unleashed." Dudley also said the case for tightening monetary policy "has become a lot more compelling" since the election of President Donald Trump and a Republican-controlled Congress.
To validate the Fed's upcoming decision, which faces just one hurdle this week in the face of the February payrolls report on Friday, Gundlach said on the webcast that inflationary pressures are increasing as well as business confidence, which will translate into a stock market that will "grind higher." But Gundlach, who previously was far more skeptical on stocks, repeated his warning Tuesday that U.S. stocks are not cheap, and added that he holds Treasury inflation-protected securities and gold against this economic backdrop.
The bond king also said that a short position on German 10-year bunds was "a hell of a lot smarter than going long" the securities , joining several fellow hedge fund managers who are likewise bearish on German paper. As for financial stocks, Gundlach told Reuters in an interview that he sold his stake in bank and financial shares because "the easy money has been made."
Finally, for those who missed the highlights from his latest webcast, here are some of the key charts:
While Gundlach notes this is one of the most synchronized upturns in
the global economy in years, he is still expecting the 10Y will first
dip to 2.25% before moving to 3.0%.
German vs French unemployment: "watch out for Le Pen"
Gundlach on soaring Business Confidence: "unlike the Byrds, it is not aloof and detached."
Optimism is surging, but it is mostly "the republicans who are really feeling it."
Curious how unemployment does under republican presidents: this should answer it.
The Leading indicator has moved up again - Gundlach does not see a recession in the near term.
The market vs the Fed's balance sheet; Gundlach quotes Jim Bianco who
correctly observes that while the Fed may not be buying assets, all the
other central banks are.
On Trump making reflation great again, Trump shows a fun chart on reflation vs deflation chart from BofA:
Real time prices, via PriceStats, are about to overtake their previous 2011 highs:
An curious divergence in the trend of actual average hourly earnings vs stated expectations to raise worker compensation via the NFIB. Maybe it is time to lower those expectations again.
On S&P growth expectations: maybe this time will be different
Market is very richly valued as the Shiller CAPE chart shows:
... and as the Price/Sales ratio confirms:
Margin Debt predictably at record highs:
... As Libor continues to rise:
Meanwhile, the copper/gold ratio vs the 10Y suggests that more downside in 10Y yields:
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