“Bill Gross Is Early”: Jeff Gundlach’s Complete Presentation Highlights

On Tuesday afternoon, Jeff Gundlach held one of his more exhaustive "Just Markets" calls with investors.

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Among the numerous discussion points touched upon, the "bond king" who alone predicted Donald Trump's victory one year before the election, had several more bold contrarian calls, key among which was his observation that while stocks are now in an "accelerating phase", his 2018 prediction is that the S&P would post a negative rate of return, which arguably is a more complex way of saying the S&P would be red for the year.

A main catalyst for Gundlach's bearishness - for both bonds and stocks - is that we are now entering an era of quantitative tightening, i.e., accelerating balance sheet unwind from all the major central banks, which will lead to eventual derisking as yields first rise and stocks ultimately sell on the news.

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Another reason why Gundlach is very bearish on the rates complex is that as BofA and JPM calculated last year, in 2018 there could be a $1 trillion bond supply deficit, a number which rises to $1.9 trillion in 2019 according to Gundlach.

Additionally, Gundlach is confident that a "more hawkish ECB" is not priced into the market. To be sure, last night's quasi-tapering by the suddenly hawkish BOJ certainly lit a flame under long-dated yields today, sending the 10Y surging to 2.55%, breaking out above 2.5% for the first time since Marh 2017.

Going back to quantitative tightening, Gundlach also says that shrinking balance sheets are also not priced by the market, and in this context his bogey is June of 2018, at which point the net liquidity injection by central banks turns negative, or as he calls it, the point of "shrinkage."

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Which is not to say that Gundlach predicts a recession: far from it. Observing some of the main economic indicators that DoubleLine follows, Gundlach finds no recession risk in either the Leading Economic Indicators...

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... nor in his favorite recession indicator, the US unemployment rate vs its 12 month simple moving average (a metric which looks at upward inflection points in the unemployment rate)...

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... PMIs looks troubling, and would repeat prior recession behavior "only if they start falling next month"...

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... meanwhile small business confidence, which today printed just shy of a record print, remains pristine, and indicates "no recessionary caution signal at all."

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... and the same can be observed with both consumer and CEO confidence, which - like the market - are surging higher.

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But most importantly, Gundlach finds no wobbles in the junk bond market, where spreads, for now at least, appear unfazed by anything, or as he put it, "we're not looking for little rocks here, we're looking for big rocks. And a big rock is something like a 200 basis point widening so if a recession is going to be six months from today, junk spreads better start widening this week or else this is not a useful indicator." For now, the coast is clear.

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Yet while Gundlach does not expect a recession, he is far less sanguine about the stock market, where - echoing what we warned some time ago - he noted that "every indicator is at all-time cycle highs." And, as a result, Gundlach said that he's "gonna put it out there right now", and state that despite stocks being in an "accelerating phase" and that it is "very unlikely for a market in its present condition to go down, my prediction for 2018 is the S&P 500 will have a negative rate of return."

"All recession indicators are flashing no recession, which means it’s priced in," Gundlach said. "This is why I say S&P 500 down after a pretty decent run early in 2018."

And, as the chart below shows, after 9 up years it's finally time...

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To further make his point, Gundlach also noted the unprecedented calm in the market now, confirmed by the near-record number of days without a 5% correction...

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... and the nosebleeding Shiller PE ratio of the S&P.

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Meanwhile, Gundlach also touched on the market "melt-up" point brought up last week by Jeremy Grantham, which he showed in the following divergence between junk bond prices and stocks. Still, Gundlach countered to Grantham's point saying that it doesn't seem likely that the only thing that can surprise us are positives. In fact, Gundlach goes so far as to predict that "a downside surprise is more likely than an upside surprise."

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Gundlach also highlighted a "stunning" Citi chart  we first showed back in November, which shows the unprecedented number of VIX days with a sub-10 close in a rolling 6 month window.

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Gundlach couldn't resist and briefly addressed bitcoin, joining so many others in predicting that "he'll go out on a limb and predict that the high for bitcoin is in" and then took a swipe at the "people who go on TV and say they are bitcoin experts, and I don't know what what means." Gundlach went out on an even bigger limb predicting that "if you short bitcoin today, you'll make money." Of course, you may lose a lot of money in the process too...

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In short, he is not a buyer of bitcoin. So what does his like? Well, he made his choice for the best asset of 2018 very clear when he said that "one of the best investments for 2018 will be commodities"...

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... which he believes are poised for a breakout.

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... and he certainly does not see commodities implying a recession any time soon.

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And while he likes commodities, he is certainly not a fan of European stocks, which he said "remain a value trap."

But the one asset class he hates the most is anything rates-related. Here Gundlach did not mince his words and said "it is a horrible time to buy corporate bonds" adding that "I don't like corporate bonds at all." In light of the recent Steinhoff fiasco and the subsequent ECB liquidation, he may be on to something.

Gundlach also does not like Treasurys, noting that a 2.50% 2-Year Treasury could be in the offing, and predicting that the 10-year would hit 6% by 2021. And before everyone complains loudly, he also said that he does not not think "a 6% yield on the 10-year would cause everyone to die."

Gundlach also commented on the flattening curve, where he said that it appears that "the 2s10s relationship has stopped flattening. And right now, it doesn't look like anything near what we'd need to see for a recession." And "so we've run the table: no recession indicators are flashing yellow, which means it's priced in."

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Then, focusing on just the benchmark, Gundlach said that a 3.25% on the 10Y is "plausible sometime in 2018."

Reminding his audience of the rivalry between himself and Bill Gross, Gundlach disagreed with the former bond king, who made headlines today with his statement that the bond bull market is over, and said that "Gross is too early with his TSY bear market call." What is the catalyst for Gundlach? As he explained, one "needs to see the 30Y at 2.99% or above for the trendline to break."

 

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Then, during the Q&A Gundlach was asked an interesting question, regarding what yield on the 10Y would be high enough to finally pressure stocks into selling off. For Gundlach the answer came with two significant digits of precision: "if the 10Year goes to 2.63% stocks will be negatively impacted." However, he also added that if the 10Y TSY passes 2.63%, it will head well higher, likely pushing toward 3%, and since he expects a 3.25% print on the 10Y in 2018, it is clear why Gundlach is not too keen on stocks.

Finally, Gundlach said that while not imminent he expects a recession in the next 2 years. Here, he made another interesting observation: he said that in the next recession we won't see a bid for safety out of stocks and into bonds. In other words "we won't see a bond market rally."

Of course, if that is indeed the case, then US capital markets in particular, and classical economics and fractional reserve banking in general will have some very substantial problems in the coming 24 months...

Comments

YUNOSELL natronic Tue, 01/09/2018 - 19:17 Permalink

My real question is what if the Quantitative Tightening the FED claims is really just jawboning and forward direction to achieve an intended effect. They can extend out the raising of 25 basis points for a long time with a myriad of excuses (CPI too low, job growth too slow, etc). 

This is my feeling of what will actually happen. Please correct me why this line of thinking would be incorrect.....

In reply to by natronic

MozartIII natronic Tue, 01/09/2018 - 19:27 Permalink

Nope! More doom porn. Europe falling apart will push huge amounts of money into our markets. Won't all happen this year but will continue the trend. China is not a safe alternative as they still manipulate shit to much. Non of the EM's are an option.

 

To summarize all of the experts! You all belong to us! Listen to us as we are taking positions against all of our public announcements!

The best fucking investment advise to give someone would be as follows: Listen to Goldman Saks, JPM & all the other big name trading desk banks. Do the opposite of what they say to the public. You will beat the market by 40% easy!

In reply to by natronic

GotGalt Tue, 01/09/2018 - 19:12 Permalink

'But most importantly, Gundlach finds no wobbles in the junk bond market'

 

Well I've been noticing a lot of weakness in the BDC (business development company) sector.  They basically loan money to junky companies in return for a high yield.  Most of them are trading at/near 52-week lows even as money keeps getting thrown at all other risk assets.

MarcusAurelius Tue, 01/09/2018 - 19:20 Permalink

The charts mean shit with central banks rigging the markets. Commodities are a pretty good bet ONLY if the Dollar falls hard. Yes they are a screaming buy. However to have them ramp is to invite disaster for completely "all in consumers with debt instruments". Would a ramp in the cost of living (which has been occurring for a few decades) be a good thing??? Uhhh no. Unless they have figured out how to do QE with gas and food prices? Would I bet against stocks at the moment? No. I would believe him more if he had positions with stops. 

mrjinx007 Tue, 01/09/2018 - 19:57 Permalink

All this money printing should create one heck of an inflation and my main indicator is oil at this point.  I have a little investment in DBA and COW for now and will add to them until the second quarter of this year.  Main reason is, if we are entering a solar minimum cycle, most crop prices are going to rise.  If grain prices go up, so will meat prices; but hey, everyone's 401-k has doubled and tax cuts might cushion some of the pain associated with higher commodities price tag.  

alphasammae Tue, 01/09/2018 - 20:06 Permalink

Gundlach, is he not the same expert recommending to sell GBTC to short bitcoin and make killing futures profit in bitcoin?

Wall Street institutional groups of hedge funds now seem to be starting to move the trillions in fiat cash in Cayman Island and other British offshore accounts averting corporate taxes and that some of that money may end up going over for SEC approved ETFs to target the blockchain (btc, xrp. eth, etc) and clean up the decentralized chains.

 

taketheredpill Tue, 01/09/2018 - 22:57 Permalink

QE is responsible for rise in Stocks:  Yes / No

If Yes, then will QT lead to drop in Stocks: Yes / No

If Yes, then the impact on Bonds is pretty hard to call.  If the Equity market corrects Bond prices have only one way to go.

Also don't forget that during the giddy "risk on" days of QE1 and QE2 Bond prices fell at the same time the Fed was buying.

The_merovingian Wed, 01/10/2018 - 04:18 Permalink

he made another interesting observation: he said that in the next recession we won't see a bid for safety out of stocks and into bonds. In other words "we won't see a bond market rally."

And where will all that money go is the Trillion dollar question.