Gundlach: Stocks Will Drop Below The March Lows

Update: with everyone opining on whether the March 20 quad-witching dump in the S&P500 was the low for the market for this cycle, Jeff Gundlach took advantage of his latest DoubleLine webcast to make it clear on what side of the argument he stands: "I think we’re going to get something that resembles that panicky feeling again during the month of April," Gundlach said as economic uncertainty in April will rise further.

He also said stock won’t hit their recent highs for a long time: “It won’t be back to where it was prior for a long time to come,” he said, “particularly on a real basis.”

The DoubleLne CEO also predicted that the U.S. is likely to follow Japan, Europe and emerging economy stock markets that haven’t rebounded to highs reached more than a decade ago, according to Gundlach, and suggested that the US stock market may follow the path of the Nikkei after the BOJ launched every bazooka it had.

Looking into his economic crystal ball, Gundlach said it will take time and for the U.S. economy to recover. "We will get back to a better place, but it’s just not going to bounce back in a V-shape back to January of 2020."

As noted below in the real-time comments from his webcast, he also said:

  • The current economy resembles a “depression.”
  • Projections that the U.S. economy will enjoy a V-shaped recovery are too optimistic.
  • U.S. economic and monetary stimulus will probably reach $10 trillion, which is not too far from where we are now.
  • Unemployment will rise to 10%.
  • The dollar is likely to weaken as U.S. debt mushrooms.

* * *

There is so much turmoil in markets that whatever Jeff Gundlach said on his last call with Doubleline investrs just two weeks ago is already outdated. Which is probably why, for the first time ever, the bond king is holding a second live webcast with DoubleLine investors and everyone else, which as he himself declared yesterday, "will be of the “Just Markets” variety.  The title is “A Tale of Two Sinks” which, as always, contains many layers of meaning."

As usual, readers can register for the free webcast at the following link or by clicking on the image below.

We hope to bring you the key highlights as the call goes on.

* * *

Gundlach starts with the big picture, showing the collapse in GDP forecasts for the rest of the year, a slide he has used recently on several occasions.

He next lays out the latest development in the coronavirus pandemic, which as most readers know is generally under control (allegedly) in Japan and South Korea, but rampant in Europe and the US.

Gundlach then mocked Bernanke's take that the coronacrisis is "closer to a major snowstorm" than the Great Depression, saying that having grown up in Buffalo, snow storms last a week and are far less exciting.

The DoubleLine CEO then showed the impact of the pandemic on LA traffic and pollution, with congestion and smog both apparently gone thanks to the virus.

Gundlach then reveals the source of today's presentation title: the two sinks are the i) Fed's kitchen sink and ii) the Treasury's kitchen sink, which so far are barely keeping risk assets in check, and already the Treasury is contemplating another kitchen sink in the form of Phase IV which Trump hinted today could be $2 trillion and geared at infrastructure.

Going back to the economy, Gundlach looks at one of his favorite charts, namely the surge in initial claims which he shows on a 4 week average basis to normalize the outlier of last week's massive surge.

How bad could it get? Gundlach shows a chart of "low quality jobs" which will be the first to go, and could be as large as 35 million.

Going back to GDP forecasts (which exclude Goldman's latest -34% GDP drop), Gundlach compiles the latest big bank predictions and shows that Q2 will be nothing short of a depression.

Of course, no discussion of a US depression would be complete without a chart of the Fed's exploding balance sheet so here it is:

And the mandatory comparison to Japan, where Gundlach makes it clear that this will not work as you can't "pull yourself up by your bootstraps" - just look at what is going on in Japan. And once the Fed gets in trouble and faith in the dollar is impaired, "who will bail out the bailouters?"

Alas any comparisons to Japan probably should include this chart...

... and not just Japan: the truth is that the US has seen it all before.

But the biggest problem is shown in the chart below: after being the biggest buyer of stocks in the past decade, buybacks are now dead for the foreseeable future.

What does it all mean for the economy and markets? Here are the five key take aways:

  • GUNDLACH: $10T FISCAL AND MONETARY STIMULUS SEEMS CONSERVATIVE
  • GUNDLACH: NOT PLAUSIBLE Q3 WILL REVERSE 2Q ECONOMIC DROP
  • GUNDLACH: STOCK MARKET'S MARCH LOW IS LIKELY TO GET TAKEN OUT
  • GUNDLACH: BANK PROJECTIONS ON RECOVERY TOO OPTIMISTIC
  • GUNDLACH: U.S. WILL COME OUT OF THIS STRONGER IN THE END

The full presentation can be read below: