It’s the start of January, which means it’s time for Jeff Gundlach’s much anticipated “Just Markets” webcast, previewing what he and his DoubleLine fund expect from the capital markets. And if last year’s January webcast is any indication, this one is not to be missed considering just how many predictions Gundlach made one year ago that eventually came true.
Courtesy of Bloomberg, here is a summary of what he predicted would happen last January, and the outcome as of Dec 31.
- Call: Expect a run-up early in 2018, but an eventual reversal that would leave the market down for the year.
- Outcome: The S&P 500 Index peaked on Sept. 20 and finished with a loss of 4.4 percent, including dividends.
- Call: Not a great time for traders to be buying, but long-term investors may benefit from attractive valuations relative to the U.S.
- Outcome: The MSCI EM Index did worse than the S&P 500, dropping 14 percent on a total-return basis; price-earnings ratios still favor emerging markets.
- Call: A value trap.
- Outcome: The Euro Stoxx 50 Index lost 16 percent after dividends in dollar terms.
- Call: Two-year notes could exceed 2.5 percent, but they’re “actually a pretty no-brainer investment” because they offer positive returns if held to maturity, when other assets may be reasonably priced.
- Outcome: Yields stayed above 2.5 percent from June 11 to Dec. 28 and short-term bond funds generated positive returns.
- Call: If rates on the 10-year surpass 3 percent, “then it’s truly, truly game over for the ancient bond bull market.”
- Outcome: Rates closed above 3 percent on Sept. 18 and climbed to 3.24 percent Nov. 8, but then crept back down as investors seeking a haven pushed up bond prices.
- Call: It’s a bad time to buy corporate bonds because “almost all the juice is out of the orange.”
- Outcome: The Bloomberg Barclays US Corporate Bond Index lost 2.5 percent.
- Call: A short-term rally, but the big move will be to the downside.
- Outcome: The dollar spot index hit a year-low on Feb. 15 before climbing to a 12-month high on Nov. 12. It’s still above the Jan. 9, 2018, level.
- Call: No signs of a recession among leading indicators.
- Outcome: While some warning signals are flashing now, the economy is still growing.
Considering that unlike most of his Wall Street penguins conformist peers, who dread to voice any contrarian call and always follow the safety of the herd (Wall Street has never forecast a decline in the S&P on a year over year basis for example) the majority of Gundlach’s predictions came out true, in many cases surprisingly so, it is probably a good idea to listen to what he will have to say at 4:15pm ET today.
Readers can log into his webcast here; we will highlight any of his key slides below.
In the first chart, Gundlach recalls why he was optimistic the global economy at the start of 2018, and has grown more pessimistic one year later, courtesy of the key proxy, the Kospi stock index, a bellwether for global trade and commerce, for the export-heavy South Korean economy.
Sure enough, Citi’s economic data change index has hit troughs not seen in many years for most regions, and especially Europe.
The bond king then reposts the popular chart from DB showing that nobody made any money in 2018 and claims that key culprit for this predicament is that the consolidated central bank balance sheet has been shrinking, resulting in MSCI World weakness.
Looking at the Wu Xia Shadow Fed Funds model, Gundlach then calculates that $1 trillion in QE is roughly equivalent to 100 bps, a key topic for markets now especially when it remains unclear if the Fed is – or isn’t – on autopilot when it comes to the Fed’s balance sheet.
Going back to the economic slowdown, Gundlach understandably focuses on the recent collapse in the Mfg ISM, which tumbled by the most in a decade, and sent stocks plunging last week amid a spike in recession fears. Why focus on sentiment surveys? Because according to Gundlach, they are “worth following for a sense of where the market will go from here.”
A better economic report card can be found in various measures of business and consumer sentiment, which are still relatively solid and a ways away from hinting at a recession, even if they are starting to “flash yellow” for recession.
Additionally, while recession concerns have been all the buzz on Wall Street in recent weeks, another chart showing that there is little imminent contraction on the horizon is the following chart showing how junk bond spreads have acted 6 months ahead of recessions (those in 2001 and 2007), although as Gundlach does note, the risk of a recession by the red line does suggest that the recession risk is rising, even if it is still relatively early.
Still, something to be concerned about is that US T-Bill yields have now surpassed bond market yields; and as the following BofA chart reference by Gundlach shows, every time this inversion has happened a period of market volatility has followed.
Looking at markets, Gundlach highlights the recent outperformance of Emerging Markets, which is likely due to the ongoing weakness in the dollar. Predictably, Gundlach says that if the dollar continue sto weaken, EM will outperform the S&P.
Gundlach also highlights the divergence between the S&P and the rest of the world, where the “amazing thing” was the decoupling in the early summer, yet in December we saw a sharp convergence between the two key markets once the dollar started to slide. Even so, Gundlach still sees Europe as a value trap, especially if the Euro gets stronger, and adds that if we see dollar weakness, that could be a “harbinger of change.”
Next, Gundlach looks at the difference in rate hike expectations between the Fed via the “dots” and the market, and highlights the dramatic drop in market-implied rate hike odds following the Fed’s recent dovish relents.
Commenting on the Fed earlier, Gundlach said that Powell staged a “full capitulation” on Friday with comments that policy makers are “listening carefully” to markets, where he “went from pragmatic Powell to Powell put and the markets have been throwing a party since then.” And so, with the market rebounding, Gundlach is “sure that Jay Powell and the Fed are feeling better about where they stand and their plans to do quantitative tightening further.”
Meanwhile, a clear theme that has emerged is that for Gundlach the biggest variable in the market as we enter 2019 is the (declining) strength of the dollar, and looking at the following Fib and relative strength index, Gundlach has spotted a peak and cautions that should the 38 Fib retracement be breached, “I would not be surprised to see us moving quickly to 94 in the DXY” (he adds that for those who don’t like to focus on technicals, you can “cover your ears and hum”.)
And here a surprising trade reco: Gundlach believes that bitcoin could easily go to $5000, or a 25% gain, even as he warns to “get the heck away from bitcoin.”
The bond king then focuses on one of his favorite relationships – that of the 10Y TSY vs the Copper/Gold ratio, which to Gundlach suggests that the 10Y yield is going lower. Rhetorically, he asks “Why don’t we just follow this all the time?”
And yet, looking ahead at what he expects to happen to the bond market, Gundlach says that contrary to conventional wisdom, he expects the bond curve to steepen.
There can not be a Gundlach presentation with the requisite warning about the growing leverage in the system, and sure enough here it is, looking at the surge in the national debt in the past decade. “If you tuned out, now tune back in,” Gundlach prefaced the following chart, and reminds listeners that in fiscal 2018 total US debt by a whopping $1.4 trillion, far above the roughly $900 billion budget deficit. “This is a completely horrific situation” Gundlach exclaims…
… and asks “are we growing at all or is it just the increase in debt”, then showing that the change in public debt debt is nearly 50% higher than the change in the official budget deficit.
Gundlach then referenced the book titled “Bankruptcy 1995: The Coming Collapse of America and How to Stop It” by Harry E. Figgie, noting that while it was hyperbole at the time, “some of those tables kind of look like they’ll happen in the next few years,” and warning that “we could be on the tipping point of this debt compounding cycle.” The chart below showing soaring interest expense projections, he notes “is from the CBO, not one of those doomers.”
Next, Gundlach focuses on a chart he has presented before, showing the significant risk of downgrades in the BBB space, as corporate leverage is “very bad” and has risen near record highs…
… warning not only that the US stock market is becoming a “CDO Residual” as companies shave taken on too much debt, but urges listeners to use the recent strength in the junk bond market “as a gift and get out of them.”
Source: Zero Hedge