Mr. Gundlach, who is the founder of DoubleLine Capital, which manages over $70, billion in assets recently had a December 8, 2015 presentation titled “Tick, Tick, Tick…” He said US stocks are “whistling through the graveyard”. Mr. Gundlach’s DoubleLine Total Return Bond Fund has consistently been ranked #1 or #2 by Morningstar over the past one, three and five years easily beating its peers.
Jeffrey Gundlach followed up his December 2015 bearish presentation in January where he became even more bearish. The thing is that Mr. Gundlach was almost dead-on with his January 2015 predictions; a collapse in oil prices, Treasuries would not change much, inflation wouldn’t be a problem and junk bond debt would have difficulties with lower energy and commodity prices. In January Gundlach noted that “this is a capital-preservation market, not a money-making environment”, he also noted that “I think we’re going to take out the September (2015) low of the S&P500.” His 2016 predictions are for a difficult first quarter in the markets if the Federal Reserve keeps talking about raising rates and possible recession later if the service sector doesn’t hold up. He has no clear read on the direction of Treasuries and plans to adjust his strategy with the movement of the market. He feels oil may have bottomed, but even a 50% increase in the price from $30 to $45 will not save highly leveraged energy firms which will result in more bond defaults. He also notes that oil at this level creates more political instability in the Middle East. He notes that we could see a rally in the markets later this year depending on how the first part of the year shakes out (a hat tip to Tyler Durden of Zerohedge.com for the summary of parts of the above information).
Some of Gundlach’s key points in his December 2015 “Tick, Tick, Tick” presentation (expounded upon by me):
Why did the Federal Reserve raise interest rates in December at such a bad time?
- The Federal Reserve has never started interest rate hikes when Gross Domestic Product (GDP) – the economy – was as low as it is today, which is approximately half the level that it has been at the start of other interest rate hikes.
- High Yield Bond credit spreads (spread between high yield or junk bonds and higher quality bonds) has never been this high when the Federal Reserve started hiking interest rates.
- If history is a guide from the start of interest rate hikes to the start of lowering interest rates, the Federal Reserve will have to start to cut rates in early 2017.
- The question is how much can they cut rates if they can’t continue to raise rates based on economic conditions? The Federal Reserve is not looking too brilliant which is not instilling confidence in the markets. Unfortunately the markets look to the Federal Reserve for guidance when they don’t have a clue.
Bad Economy
Corporate profit margins have decreased 0.60%; this has always been predictive of recessions.
Higher or wider High Yield Bond interest rate spreads (difference between interest rate of higher and lower quality bonds) signal trouble in the credit markets. This shows a risk of recession and higher defaults in a bad economy.
The interest rate spread between high and low quality bonds tends to be low after a long economic advance and high in bad economic times (currently the spread is high which is predictive of poor economic developments)
US Treasury/Government Cash Poor
- US government debt has spiked to 18.2 trillion at the same time we are projecting budget deficits for as far as we can see. Entitlement payment obligations (Social Security and Medicare) are spiking for the foreseeable future. In addition a majority of US Treasury bond holdings are set to mature (need cash to pay back bond holders or create more bonds probably/possibly at much higher interest rates)
- The combination of the current high US Debt plus future budget deficits, Social Security and Medicare funding requirements, and repayment of US Treasury bonds maturing is a perfect cash crunch/bad storm. This could translate into higher US Treasury bond interest rates in order to attract money. It all depends on the rest of the world and how bad off they are and how competitive our interest rates are.
- Due to the above factors US Treasury bonds will become more risky which equates to higher interest rates that the US Government will have to pay.
World Economies, Stock Markets and Commodity prices are all down.
Energy Sector and oil and gas prices are reeling
Bottom line is it is not a good time to be “all-in” in the financial markets.
We will continue to watch things closely for risks AND opportunities and keep you posted.
“If everyone is thinking alike, then no one is thinking.” – Benjamin Franklin
*Past Performance is not indicative of future results.