Gundlach: Market Unwind Will Be "Turbulent, Not Just A Few Days"

Doubleline CEO Jeffrey Gundlach echoed earlier calls by analysts from SocGen and Morgan Stanley, saying that the "low rate-low volatility" market environment went on for so long that now "the unwind will be turbulent and not over in a couple of days." In other words, don't buy the dip.

Speaking to Reuters' Jennifer Ablan, Gundlach also said that bitcoin was the "lead horse" of risk assets and its recent plunge has had a cascading effect on other risk assets. Incidentally, last Friday we highlighted the oddly close correlation between bitcoin (inverted) and the VIX, when we asked if the VIX "tail" is wagging the Bitcoin "dog." 

Two weeks ago, Deutsche Bank's Masao Muraki also discussed this peculiar relationship:

First, implied volatility. Implied volatility is an index calculated from the price of a derivative product (options) of an underlying marketable security. However, we now have a “tail wagging the dog” situation where the price of the derivative product is feeding back into the price of the underling marketable security.

Next, cryptocurrencies. Cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets. Although institutional investors recognize that stocks and other asset valuations may have entered bubble territory (US equities’ average P/E is around 20x), they cannot help but continue their risk-taking. Now, a growing number of institutional investors are watching cryptocurrencies as the frontier of risk-taking to evaluate the sustainability of asset prices. The result is that institutional investors, who are supposed to value assets using their sophisticated financial literacy, analysis, and information-gathering strengths, are actually seeking feedback about the market from cryptocurrency prices (which are mainly formed by retail investors).  

Which explains why, unwittingly, bitcoin may have become a systematically important asset class: if it were to crash too far, too fast, the reverse feedback loops would cascade into traditional risk assets, although the cause-effect direction is still up for debate.

One thing that is clear, however, is that the recent dramatic plunge in bitcoin roughly coincided with the biggest point drop in the DJIA and the biggest jump in the VIX on record. It is this coincidence that is clearly troubling to Gundlach.

In addition to his discussion of bitcoin and volatility, Gundlach also touched on what many agree was the proximal catalyst for last Friday's market plunge which in turn triggered this week's vol eruption: "Clearly, the market gets shaky when the 10-year hits 2.85 percent,” Gundlach told Reuters.  “Just look at this week, and today. Makes one consider what could be coming if 10s push over 3 and 30s (30-year Treasury bond) over 3.22 percent.

During his January webcast, Gundlach correctly predicted that if the 10-year U.S. Treasury note yield went above 2.63%, U.S. stock investors would be spooked. The 10-year yield is currently trading around 2.84%, and its spike today on the heels of the "deficit-busting" Senate agreement which would lift spending caps by $300 billion above current levels, sent the markets into the red after an impressive morning rally.

In little comfort for equity bulls, Gundlach said it is “hard to love bonds at even a 3 percent” yield. "Rising interest rates are a problem and the U.S. is in debt and there is massive bond supply."

Well, if the Senate passes its bipartisan spending deal, which has been blessed by Trump, it is virtually certain that the 10-year is going above 3%, and stocks will not like it, prompting more angry outbursts from Trump who wants both the spending deal and daily all time highs in the S&P, which - absent a new Golden Age for US economic productivity - looks virtually impossible.


takeaction Wed, 02/07/2018 - 19:49 Permalink

Who cares any more...This gov't is going to spend another $200 Billion on garbage....debt and deficit are words the average American can't even explain..and anytime Shumer and McConnel are in agreement...we get screwed.  This shit show will NEVER end.  Markets will be propped...FED controls it all.  Hillary still walks...and SETH RICH died for NOTHING.  

Anonymous (not verified) Wed, 02/07/2018 - 19:50 Permalink

I predict that people like me are irrelevant to history, and will likely die in a labor camp sometime in 2027 ... once the new "bad debt payment laws for serfs" is passed. Of course, for serfs only ... the crony-wealthy will harvest our organs.

(that's my prediction)

east of eden shankster Wed, 02/07/2018 - 20:35 Permalink

So, here is the problem. The US, is bankrupt. Friends would refer to it as 'insolvent', but it really doesn't matter. You current debt plus future liabilities is now over 250 Trillion dollars and I fail to see where you think you are going to come by that amount in the next 20 years.

I think most people know, by now, that if a sovereign state exceeds 130% debt to GDP, then mathematically, the debt is impossible to repay. Since your nominal debt will get to that point before the end of Trump's first term, what, exactly, are you intending to do about it?

If the US collapses, regardless of trade treaties, or printing presses or anything else, it will basically induce the collapse of the entire global banking system. And worse, the US is actively provoking wars, all over the globe, AGAIN.

When are you stupid fuckers going to wake up?

In reply to by shankster

Kprime east of eden Wed, 02/07/2018 - 22:46 Permalink

in fact we are awake.  we are just not getting out of bed until it's worth getting out of bed for.  this .gov is never going to stop stealing, raping and murdering. the US .gov ceased to be by the people and for the people over a century ago. US citizens are just like the citizens of any other shithole on this planet; we are here solely to be bankrupted, raped and murdered by the US .gov.  So, when there are enough folks without food or a roof, then it will come down to spilling .gov blood and destroying the institutions.  Until then, relax, take a nap.  the citizens are just not ready, but there is no way the .gov is ever going to curb it's forward acceleration into hell.

like dark energy in the universe, the debt is expanding at an accelerating rate and will continue to do so until the nation flies apart citizen by citizen and the infrastructure disintegrates atom by atom.  just pray we don't accidentally supernova and take out the rest of the planet.

In reply to by east of eden

Food Loaf Junkie Wed, 02/07/2018 - 19:57 Permalink

There is soo much at stake in keeping the equity market inflated that it will be all hands on deck from here on.  How much longer they can keep the whole thing taped together is anyone's guess.  I have prepped and done all I can to warn those who will listen, the rest I gave up on long ago.  I just hope we can hold it together until spring, disruption of fuel sources and electricity this far north at -20 will be a trial.

east of eden hoist the bs flag Wed, 02/07/2018 - 20:39 Permalink

Yes because of a nuke strike. You currently have 1/3 of your entire sea fleet parked off the coast of NK. Vladivostok is less than 40 Km's from the border with NK. Do you really think that the Russians, or the Chinese for that matter, are going to let you boyz run your destruction routine, threaten their very cores, and not react?

Better get some BC Bud, and try to clear your mind.

In reply to by hoist the bs flag

khnum Wed, 02/07/2018 - 20:02 Permalink

Everyone here hates Hillary but the real spider in the webs centre was Obama and the closer things get to him the more chaotic things seem to be markets,wars,Russia gate has gone exponential since his FBI implication.

taketheredpill Wed, 02/07/2018 - 20:10 Permalink

Ask yourself "are bond yields as low as they are BECAUSE of the FED or DESPITE the FED"?

Because every round of QE was great for Stocks and...surprise...not great for Bonds.  When the Fed was buying Bonds, Bond prices tended to fall.

Also ask "If the Fed had never done any QE, just taken rates to Zero and said ' That's all, Folks', where would rates have gone"?

Every strategist and manager out there assumes that bond rates will keep rising because...what?  Inflation??

What if Equities and Credit are the over-valued asset class that is about to collapse?

Taking US 10s back to which point the Fed does what it does worst and steps in to "save the world".

Then you'll get your inflation.  Bye Bye Dollar.  So long Treasuries.  Hello Commodities and Real Estate.

Just thinking out loud.

CNONC taketheredpill Wed, 02/07/2018 - 21:52 Permalink

QE was not great for bonds?  Rates fell throughout the QE period. Rates are likely to rise because the FED purchases slowed and are now reversing.  I don't see where Fed buying was correlated with bond prices falling.

That said, your original question is the one which must be answered.  Rephrased, are low rates a result of intentional financial repression, or are they a reflection of the underlying growth rate of the economy?  I suspect the rates  of the post GFC period reflected the real growth potential of the economy, but that that potential was impaired by the very actions of the central bank intended to boost growth. 

In reply to by taketheredpill

east of eden hoist the bs flag Wed, 02/07/2018 - 20:41 Permalink

OK. We all know, by now, that your central bank can, and will produce hundreds of millions of pound of greenies.

And at what point do you think that the world is just going to say, fuck you? Is your hubris so intense that you really believe that you can do anything, to anybody, anywhere, at any time, without consequences?

Probably. Because, after all, you are mostly stupid, illiterate British prison scum.

In reply to by hoist the bs flag

east of eden Wed, 02/07/2018 - 20:25 Permalink

Just look at this week, and today. Makes one consider what could be coming if 10s push over 3 and 30s (30-year Treasury bond) over 3.22 percent.

I think that those levels are almost a given, if not more.

RealistDuJour Wed, 02/07/2018 - 20:27 Permalink

So ummm... yahhh.... isnt this the guy who's been preaching theres tonnes of value left in bonds for the last year??  Yah... dont think I'll be heeding anything this mouthbreather has to say.