Jeff Gundlach just wrapped up his latest webcast on the markets and the economy.
The big takeaways:
- There is no reason to be bullish on oil over the long term.
- Interest rates could move higher but 2016 is a year to “wait and see” and then react to the markets rather than make a bold call.
- The dollar’s rally is probably done for now, especially in light of how consensus says the dollar is continuing to rally.
- Wages are going up and profits are going to remain under pressure.
Over the last year Gundlach has gotten a lot of attention for his views on oil. In December 2014, Gundlach said oil falling to $40 a barrel would indicate considerable geopolitical tensions building in the world. On Tuesday, crude oil was trading at $30 and Gundlach said — as he did in December — that there are problems in the world.
Scroll through the slides and commentary below for an overview of some of the key topics Gundlach covered.
Gundlach says the image on this title slide is a metaphor for the Fed keeping rates near 0% for a long time, which pulls return forward and markets are now having a hard time keeping up with these returns.
'It was a hard time making money last year,' Gundlach says, noting that 2015 was the worst year since 1937 for the 'best' asset an investor could've owned.
Gundlach adds that this is a preserving-money not a making-money environment right now. Gundlach also expects pressure in junk bonds and notes that Tuesday's announcement from the S&P that the downgrade/upgrade ratio for corporate debt will be higher than it's been.
On the Fed, Gundlach thinks it needs to dial down its rhetoric regarding rate hikes because he doesn't think there's going to be a window to raise rates up to four times in 2016.
The market thinks the Fed will raise rates just once or twice this year, while the Fed thinks they're going to raise rates four times.
Given the current stock market chaos -- which was a catalyst for the Fed holding off on raising rates, Gundlach notes -- it appears that the market is the early leader.
Gundlach says that it seems we could be headed to a point where the US and Europe have the same GDP, but the European Central Bank remains easy and the Fed is raising rates.
'What's wrong with average hourly earnings going up a little bit? What's wrong with the middle class getting higher earnings after a little bit?'
Gundlach seems to think that the Fed doesn't want that, given that raising rates is a move that is, in theory, designed to cool off an economic cycle rather than push it forward.
Gundlach says that he still thinks gold is going to $1,400 and says the current chart pattern is indicative of a bottom.
This call, however, was one Gundlach got wrong in 2015.
'Taking away quantitative easing tightened the Fed Funds rate by 300 basis points. No wonder the stock market is selling off.'
'The middle class hasn't had a gain in their real income, and yet rents are going up.'
Gundlach asks why a little bit of wage growth would be a bad thing, then.
'If the Atlanta Fed is right, then the Fed's hope to 2.25% growth in 2015 isn't gonna happen.'
'We all know that the manufacturing economy, both internationally and in the United States, is in recession.'
Gundlach says that he gets pushback on the idea that manufacturing isn't that important, but says that if the services sector falls further, the odds of recession have to be approaching 50%.
'Those that say the manufacturing index isn't really a good indicator anymore need to explain why GDP and ISM manufacturing is such a good fit.'
'What's scary to me is that the red line is a predictor of GDP growth,' Gundlach adds.
'If nominal GDP is heading to where this red line is heading, then the 10-year Treasury yield looks about right to me.'
There's almost nothing Gundlach likes about emerging-market stocks at this point, and that thinks this collapse in commodities almost makes it look like they're leading stocks lower.
Gundlach thinks that once there's 'blood in the streets' -- i.e., a 40% decline in emerging-market stocks -- it might be time to buy India.
Gundlach thinks the two-year Treasury doubts the Fed is going to raise rates four times this year, and thinks that this message cannot be ignored by a Fed that still seems set on raising rates steadily.
Overall, Gundlach thinks investors should avoid having a strong view on rates in 2016 until markets really start to move, citing the five-year Treasury -- which has been in a range for a while -- and says that if the yield rises from around 1.6% to 1.8%, it could shoot well into the 2%-plus range.
'My personal view -- and I have very little conviction in this -- is that the 10-year will break to the upside. I think it goes along with my view that the dollar is not going to strengthen further, and since I don't think the dollar is going up, it's one of the reasons I think oil might have put in a short-term bottom.'
Gundlach says his conviction in the 10-year going higher is maybe 55/45.
So, not a huge call, but a call that at least goes against what he's said in recent years.
'We're going to play a 'Go with it' strategy for managing interest-rate risk this year.'
'It's below $40 and frightening geopolitical behaviour is upon us,' Gundlach says.
Gundlach says that he doesn't think US President Barack Obama will be compelled to do much militarily in his final years and thinks that this is a time for bad actors, geopolitically, to get in place.
Gundlach says that while junk bonds have stabilised, there could be turmoil yet when hedge fund redemptions come in.
This chart is what inspired Gundlach's comment in December that stocks were 'Whistling through the graveyard.'
'As I said before, the S&P 500 has got to drop or else credit has got to rally. Either they have got to meet each other at high levels, which is against history, or at low levels, which is much more in step with what has happened in the past,' Gundlach says.
'We could be looking at a real ugly situation in the first quarter of 2016.'
Gundlach says that if the Fed continues to bang the drum on raising rates, the situation will only be worse for markets.
Gundlach says that the main reason you hear the dollar is going higher is that the Fed is tightening and that, when the Fed tightens, the dollar goes higher.
'WRONG! WRONG! WRONG!' Gundlach said.
Gundlach added that this is a crowded trade and doesn't see anymore legs in a dollar rally -- at least, not right now.
'As is often the case, these general-consensus viewpoints don't respect history.'