Jeff Gundlach Warns "The Fed Is About To Make A Big Mistake" (& That's Why Bond Yields Are Crashing)Submitted by Tyler Durden on 01/28/2015 22:06 -0500
Since The FOMC's "hawkish" statement, bond yields have utterly cratered as near-record speculative short positioning in bonds unwind the long-end (and worries about international problems - "and readings on financial and international developments"). However, fundamentally speaking, DoubleLine's Jeff Gundlach explains, the Federal Reserve is on the brink of making a big mistake simply put, "if Fed Chair Janet Yellen goes ahead with this plan (to raise rates for 'philosophical reasons'), she runs the risk of having to quickly reverse course and cut interest rates."
It has been a rough start to a new year as all of the gains following the end of the Federal Reserve's flagship "QE-3" campaign have been erased. There is currently little concern by the majority of Wall Street analysts that anything is currently wrong with the markets. While earnings estimates are rapidly being guided down, it is likely only a temporary issue due to plunging oil prices. However, not to worry, the economy is set to continue its upward growth trajectory. Maybe that is the case. But as investors we should always have a watchful eye on the things that could possibly go wrong that could lead to a rapid decline in investment capital.
Our question is this: if indeed the shale boom is now turning to bust, and if indeed the vast majority of jobs created were thanks to the shale revolution (which is about to go in reverse), what happens to the primary source of high-paying jobs: the energy sector? Before you answer, take a look at the following chart, courtesy of the Dallas Fed.
- U.S. Index Futures Decline on Commodities Slump, Growth Concerns (BBG)
- Al Qaeda claims French attack, derides Paris rally (Reuters)
- Charlie Hebdo With Muhammad Cover on Sale With Heavy Security Precautions (BBG)
- How an Obscure Tax Loophole Brought Down Obama's Treasury Nominee (BBG)
- ECB’s bond plan is legal ‘in principle’ (FT)
- Charlie Hebdo fallout: Specter of fascist past haunts European nationalism (Reuters)
- DRW to acquire smaller rival Chopper Trading (FT)
- Oil fall could lead to capex collapse: DoubleLine's Gundlach (Reuters)
By now, it is no secret that the one state that conventional wisdom expects to suffer the most as a result of the crude collapse is the one state that through the Great Recession was the primary provider of (well-paying) job creation, the same state which is now expected to enter into a full-blown recession. But is it really Texas that will be impacted the most? The answer, at least according to a recent Pew report, is a resounding no.
With Bill Gross still in cross-asset limbo, it appears the undisputed fixed income crown, for now, goes to DoubleLine's Jeffrey Gundlach who recently opined, "something is not right." Shortly, the monarch of money markets will be discussing the economy, the markets and his outlook 2015, in his latest webcast titled, rather ominously, "V". Given Gundlach's concerns about the "health of the economy and financial system," we suspect the V-for-Vendetta climax anology may well be more what he had in mind... Full presentation below
"Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying."
"Something Is Not Right" Jeff Gundlach Is "Concerned About Health Of The Economy & Financial System"Submitted by Tyler Durden on 01/05/2015 20:30 -0500
Having warned of the "terrifying consequences" of oil prices staying this low, DoubleLine's Jeffrey Gundlach, in an extensive interview with Finanz und Wirtschaft, warns he is "beginning to see signs of investor concern around the edges about the health of the economy and about the financial system. Historically, when junk bonds give up the ghost and treasuries remain firm, it is a signal that something is not right." Touching on everything from a string dollar to Indian stocks, and from Oil to bonds, and The Fed, Gundlach concludes, "the only places where there is inflation is in places that are painful. Raising interest rates against that backdrop seems like a poor idea. So I just hope the Fed thinks carefully about what it is doing." Boxed-in much?
WTI crude oil prices are now down almost 55% from the June highs, the impossible just happened... WTI Crude broke into the $40s... the 6-month plunge is the largest since the pre-Lehman plunge and 2nd biggest plunge in 28 years.
'... assuming equity prices rise by 10% this year, for their bond allocation to stay at 37% (same as of Q3 2014), US pension funds and insurance companies would have to buy $550bn of bonds in 2015."
Having totally and utterly failed in 2014, the consensus for 2015 is once again higher rates (well they can't go any lower right?) with year-end 2015 expectations of 3.006% currently (having already plunged from over 3.65% in July). However, at the other end of the spectrum, DoubleLine's Jeff Gundlach told Barron's this weekend, the 10-yr Treasury yield may test the 2012 low of 1.38% as the Fed’s short-term rate increase is poised to trigger "surprising flattening" of yield curve.
Despite the authorities' best efforts to keep everything orderly, we know how this global Game of Geopolitical Tetris ends: "Players lose a typical game of Tetris when they can no longer keep up with the increasing speed, and the Tetriminos stack up to the top of the playing field. This is commonly referred to as topping out."
"I’m tired of being outraged!"
Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."
As an investor, it is simply your job to step away from your "emotions" for a moment and look objectively at the market around you. Is it currently dominated by "greed" or "fear?" Your long-term returns will depend greatly not only on how you answer that question, but to manage the inherent risk. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” - Benjamin Graham
There can be only one bond king. And with Gross in cross-asset limbo, that means that the undisputed fixed income crown, for now, goes to the one true monrach Jeffrey Gundlach. And in a few moments, said fixed income royal will be discussing the economy, the markets and his outlook for what he believes may be the best investment strategies and sector allocations, in his latest webcast titled, to borrow Barron's latest headline, "This Time It's Different."