Back on December 8, in a post laying out what we then thought was "Jeff Gundlach's Most Bearish presentation yet [14]" titled, appropriately enough, "Tick, Tick, Tick", the DoubleLine founder was at a loss for words trying to explain just why Yellen is hell bent to hike rates in one week, just when the global economy is not only clearly not in the required shape, but warning that the outcome from a Fed rate hike will lead to a dramatic repricing (lower) across all asset classes.
The presentation capped a year in which Gundlach (whose $52.3 billion DoubleLine Total Return Bond Fund beat 94% of its Bloomberg peers last year) predicted not only the blow out in junk bonds but the collapse of oil even as most other experts predicted time and again a solid rebound into the year end, one which never materialized.
However, in his follow up, and inaugural for 2016, presentation from last night Gundlach may have been even more bearish, and as Bloomberg summarized [15]it "one of the market’s biggest bears says there’s more bad news ahead."
In light of the recent global financial turmoil, his core focus was understandable: China, the same wildcard as Kyle Bass is so intently focused on, and where Gundlach likewise expects more devaluation despite the PBOC's recurring promises to the contrary.
"Falling commodity prices are signs of China’s weakening economy, which will lead to more destabilizing devaluations of the yuan, Jeffrey Gundlach said Tuesday during a market outlook webcast. Moves by the Federal Reserve to raise interest rates are fighting non-existent inflation and hurting gross domestic product growth, he said, adding that stocks are going to follow high-yield bonds down and low oil prices may lead to political instability."
His comprehensive warning about the year ahead is that "this is a capital-preservation market, not a money-making environment", adding that "I think we're going to take out the September low of the S&P500."
Gundlach also said he is not yet buying junk bonds at current prices and that for economic growth, "2016 is not looking all that great."
Among his other notable warnings was that global growth might slow to 1.9% this year with U.S. manufacturing already in a recession, putting the odds of a recession at about 50 percent if the services sector falls more.
Echoing JPM's caution that there has been a major shift in market dynamics and that rallies are to be sold, Gundlach said that the market is likely to keep struggling early in 2016 before a “buying opportunity” arises later in the year, Gundlach said. High-yield bonds also probably will fall more in the first part of this year as redemptions increase at hedge funds that used leverage to invest in them.
“We could be looking at a really ugly situation during the first quarter of 2016,” he said. “It’s particularly more likely to happen if the Fed keeps banging this drum of raising interest rates against falling inflation.”
However, while Gundlach was clearly not excited by the S&P's prospects, not even he has a firm grip on Treasurys: "rather than try to get out in front of the market for long-term debt, Gundlach said Tuesday that he plans to wait and see whether the 10-year Treasury rate goes up or down. “You don’t have to try to call a direction right now,” he said. “If it’s going to move, it’s going to move big and we’re going to play a go-with-it strategy.”
In light of ongoing liquidation by offshore reserve managers (who seem to be selling US paper in the secondary market as they bid up Treasurys at auction), this is understandable, although according to several sellside rates strategists, should the 10Y dip below 2.00% it will only accelerate buying as calls for a deflationary recession will become deafening.
But while Gundlach's opinion on equity and rates is always important, his most notable call yesterday was his sense that oil may have bottomed "for the short-term" although even a 50% bounce from $30 would hardly be enough to save the most indebted shale producers:
Oil prices, which fell to 12-year lows in the last week, seemed to hit a floor Tuesday and may climb back to $45 a barrel, Gundlach said. Such a price rebound still wouldn’t be enough to save highly leveraged energy firms, which will lead to more credit defaults, according to Gundlach.
But while defaults may spike, a bigger consequence from low oil prices will be even greater geopolitical uncertainty as Petrodollars become Petro Pennies (to borrow a term coined by RBS' Alberto Gallo [16]).
Low oil prices are likely to lead to more political instability in regions such as the Middle East, Gundlach said on Tuesday’s call. “Oil goes below $40, it’s frightening for geopolitical behavior,” he said. “Guess what, folks? It’s below $40 and this frightening political behavior is upon us. And, also, compounding the problem is that we have a lame-duck president, who I think will do absolutely nothing in response to military activity or other bad actors out there.”
Yes, but does "improve his golf handicap" constitute as absolutely nothing?
To summarize, here is Gundlach's 2015 track record - in January of last year, Gundlach accurately predicted that oil prices would fall, Treasuries would be little changed, inflation wouldn’t materialize and high-yield debt would face headwinds from lower commodity and energy prices. His only incorrect prediction one year ago was that gold would jump. Perhaps it is time for Gundlach to be correct on the yellow commodity forecast as well: yesterday, Gundlach said he expects gold to reach $1,400 an ounce.
Gundlach's full January 12 presentation below:
