“We’re In The Twilight Zone” – Gundlach Warns About Risks Of Credit-Market Collapse
Jeff Gundlach has been a recurring presence in the financial press over the past couple of weeks due to his ninth consecutive appearance at Sohn, to an ensuing interview with CNBC, as well as his latest web presentation.
But if you’ve missed Gundlach’s last few appearances and are looking to catch up on the big themes, this interview published on DoubleLine Capital’s twitter feed would be a good place to start. During a recent DoubleLine event in New York, both Gundlach and Quill intelligence founder Danielle DiMartino Booth sat down for a talk moderated by Jeff Sherman, deputy CIO at Gundlach’s firm. The 90-minute discussion involved Gundlach’s warnings about the true magnitude of America’s unfunded liabilities, the prospect for a permanently wider deficit and the possibility that this could create serious problems for the American economy in the not-too-distant future, the risks inherent in the corporate bond market, the ‘brainwashing’ of Jerome Powell, the student-loan crisis, the prospects for an uptick in the MOVE index, and many other topics.
First, Gundlach and Sherman started the conversation with a remark about the modern markets landscape resembling ‘the Twilight Zone’ thanks to President Trump’s insistence on rate cuts.
“It’s like the Twilight Zone,” Gundlach said.
He then cited an interview with Mike Pence on CNBC earlier this month where the vice president praised the ‘roaring’ economy, before calling for 100 bps rate cut. But the fact that Trump has shifted to an ultra-dovish stance, from his once-hawkish campaign-era Fed bashing, is hardly surprising.
“When I predicted before the primary started in 2016 at Donald Trump was gonna win…But I also said that Donald Trump loves debt and he’s never paid back debt, I think, ever. And he’s gone bankrupt…so you can bet dollars to doughnuts that he’ll expand the deficit.”
Though the interview was filmed more than a week ago, when the latest bout of market volatility was still new, when explaining his market outlook, Gundlach warned that central banks have muddied the waters with their stimulus. Because of this, it has become just as easy to make the case for interest rates to soar as it is to make the case that they’ll sink.
He then moved on to reiterate his big trade recommendation from his latest Sohn appearance: That is, going long bond market volatility, following one of the most tranquil periods for Treasuries in recent memory.
“We’re in this really weird world where almost anything can happen. What you want to do is bet on this unstable situation finally devolving into one of the two outcomes, and volatility on equities and bonds (until recently) has been near all time lows. Where is this going to end? One of these binary outcomes has to happen, so I think this is the time to be betting pretty heavily – on stocks you’re two days late – but the MOVE Index (which tracks Treasury market volatility).”
Both Gundlach and Booth had some harsh words for the Fed, which has bowed to the White House’s wishes for more stimulus. What’s more, the formerly ‘free thinking’ Powell has been molded into another establishment central banker…at one point Booth described him as “basically Janet Yellen.”
“Jay Powell has been programmed to think the way central bankers think and that takes away from his ability to be a real person,” Booth said.
Moving on, the two speakers shared their views about another popular theme in Gundlach’s more recent remarks: risks emanating from the corporate bond market. The increasingly leveraged BBB companies could be on the verge of a destabilizing crash as ‘fallen angels’ drop out from investment-grade indexes after being downgraded once the ratings firms can no longer ignore their worsening leverage ratio.
To amplify the risk surrounding the corporate bond market, Dodd Frank banned proprietary trading, which it said could make it more difficult for brokers to offer some support for the market that could soften the blow of a selloff.
“I think Jay Powell has his eye on the credit markets…broker dealer balance sheets don’t have the cushion they used to have…there’s no capacity in the financial system for a run on bond ETFs,” Booth said.
“In the old days, when retail would sell…dealers would balloon up their balance sheets…it was actually a great money maker. They can’t do that anymore – this shock absorber has been destroyed,” Gundlach added.
For more Gundlach, check out his latest webcast.
Watch the full interview below: