As we noted yesterday, in his latest webcast to DoubleLine investors, Jeff Gundlach confirmed the key points from his weekend Barrons which summarized his outlook that "things will get worse in the future, not better." But while Gundlach's skeptical bent has been well-known, we also learned that Gundlach has been actively adding to shorts as the market breaks out to new record highs. Cited by Reuters, the new bond king said that there is "big money" to be made on the "short side."
Gundlach added that he has been selectively betting against shares in the Standard & Poor's 500 index and continues to favor emerging market bonds over high-yield "junk" debt. Comparing the price action in the S&P to recent moves in treasuries, Gundlach said that “a minor new high in the S&P might be rejected, which is what happened with U.S. Treasuries." On Tuesday, the S&P 500 closed at a new record high for the second day in a row, closing at 2152.14.
As much as he dislikes equities, Gundlach is just as skeptical about bonds, warning investors that the yield on the 10-year Treasury note at around 1.38% to 1.39% "is a terrible trade location. It is the worst trade location in the history of the 10-year Treasury."
This warning was followed by the biggest two-day spike in 10Y yields in 5 years. Gundlach said on Tuesday's webcast that he sees the yield on the 10-year Treasury settling around 1.7 percent as a near-term base case.
The new bond king has repeatedly said gold is the better alternative to Treasuries and equities against the backdrop of "a banking system in Europe, which is in a state of heading toward insolvency." Gundlach said on Tuesday's webcast that investors become fearful and nervous when banking shares begin to trade in the single digits, as could happen with Deutsche Bank AG, whose value has nearly halved since the beginning of the year.
"They know single digits is like a fire alarm," Gundlach said in an interview. Deutsche closed on Tuesday at $12.79 per share.
Confirming a point we first made here in March, Gundlach also discussed junk bonds, which came under severe selling pressure earlier this year before recovering, saying these are "dangerous because of their declining recovery rates," Gundlach said. He added it was the "right" decision to purchase emerging market debt over junk bonds. Emerging market debt has posted returns of roughly 11% so far this year, compared with 11.21 percent for junk bonds.
For those who missed it, his full presentation is below.