DoubleLine Funds CEO Jeff Gundlach says it’s time to be defensive on bonds.
On Thursday, Gundlach gave his quarterly webcast on markets and the economy titled “Turning Points.”
He believes that interest rates have bottomed. And while he declined to give a specific forecast for the 10-year yield at the end of 2016, he said it would likely be higher.
On corporate credit, Gundlach said recession and default risks make them an unattractive asset class. An investor looking to take credit risk would be better off in emerging markets, he said.
The idea here, Gundlach said, is that like the sunset, the regime people are taking for granted -- that we are forever in a quantitative-easing and negative-interest-rate world -- is getting very old.
The proportion of global GDP governed by central banks with negative interest rates has recently exploded.
To be sure, rates are still positive in the US.
But for all the 'crazy experiments' from central banks, it's interesting that global GDP has been very stable to steadily declining in recent years, he said.
Corporate bonds are 'highly overvalued' in this environment, given the tightening in spreads earlier this year.
But it's low because inflation is also low compared to past recession periods.
Economists have sharply downgraded their forecasts for 2016 GDP (the black line) in particular. Forecasts are now lower than at any time since 2009.
In this scenario, the Fed is 'stuck in a situation of tightening.'
Gundlach thinks the Fed is irritated with the World Interest Rate Probability, a Bloomberg terminal function that reflects futures traders' bets for interest rates.
'The Fed is going to say 'we are not controlled by the WIRP, we are not controlled by the market. We are going to tighten even if the WIRP is below 50,'' Gundlach said. On Thursday, the WIRP reflected a 28% chance of a hike in September, and 59.3% chance in December.
By trying to prove its independence from the WIRP, the Fed might be blowing itself up, Gundlach said. The Fed won't hike in September if the WIRP below 40 and the S&P 500 is below 2150, he said.
The ISM non-manufacturing PMI released earlier this week is at the lowest level since 2009, and it's almost on recession watch.
'Clearly, it's a bad environment to be raising rates,' yet some Fed members are talking about two rate hikes between now and the end of the year, Gundlach said.
Negative rates have not helped Germany's DAX or Japan's Nikkei rally.
One of these days, the evidence is going to overwhelmingly show that negative rates don't help, he said.
Analysts have been consistently too optimistic about company earnings.
'I put this (chart) up for entertainment value,' Gundlach said. It's 'the triumph of hope over experience, just like a second marriage.'
There's never been a recession with the unemployment rate below its 12-month average. One uptick would make a recession possible, Gundlach said.
This shows that the quarterly moving average is much further below the unemployment rate.
Gundlach has a big problem with some forecasters.
With oil, for example, analysts were trying to 'out-predict' each other with forecasts for when prices would bottom. Most of them were wrong.
Another example is when he hears a 1% forecast for the 10-year yield, which is a guess driven by round-number bias.
And some advise: 'when you hear the word 'never'' in the investing world, 'it means it's about to happen.'
However, this isn't the start of a huge trend, Gundlach said. That's partly because shelter, and rent, still contributes to most of the core consumer price index. And that has deflationary consequences, as people reduce spending in other areas to take care of the necessity.
The bond market seems to be sniffing out that there's a longer-term secular shift towards inflation.
Gundlach sees gold returning to $1,400 per ounce. He hasn't sold any this year.
Gundlach sees little evidence that Fed rate hikes boost the dollar.
This seems like a 'mass psychosis' given that interest rates are so low.
'Drive through Midtown Manhattan and you'll see some of the crumbling that's going on.'
The biggest driver is the restructuring of the money-market industry, Gundlach said.
Gundlach declined to forecast where the 10-year yield would be by year-end.
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