‘Bond God’ Gundlach: Tick, Tick, Tick…
From Justin Dove, Editor, The Crux:
Famed bond investor Jeff Gundlach doesn’t think much of Janet Yellen and the Fed… or at least of the decision to raise rates last month.
Regular readers know that Gundlach, founder of DoubleLine Capital, is one of the most respected minds in finance. Forbes called him “The New Bond King” and others have dubbed him “The Bond God.” When he speaks, billionaires listen…
Last night, he presented at the Inside ETFs Conference in Hollywood, Florida. One of the highlights, as reported by Barron’s was his comparison of Yellen to Seattle Seahawks coach Pete Carroll:
What does football coach Pete Carroll share in common with Janet Yellen?
Well, rockstar bond investor Jeffrey Gundlach says that the Seattle Seahawks’ football boss and Federal Reserve chairwoman both made illogically terrible decisions when thinking on the fly.
Gundlach likened Yellen’s recent move to raise short-term interest rates for the first time in nearly a decade to Carroll’s last-second play call that fatefully lost last year’s Super Bowl. Gundlach made the remarks in a panel ominously titled, “Tick, Tick, Tick.” In it, he reiterated that the Fed’s move to unwind its extraordinary stimulus efforts will “come back to haunt” global investors.
Here are some other highlights of Gundlach’s comments, as reported by Sumit Roy at ETF.com:
No Need to Hike Rates
Gundlach hammered home the point that there is simply no reason for the Fed to tighten, and it risks repeating the mistake of other central banks that attempted to raise rates back in 2011 – such as Sweden’s Riksbank – but then had to reverse course as economic growth deteriorated.
In fact, the difference in growth rates between the U.S. and Europe is marginal at best – 2.2% versus 1.6% – yet the two regions “have diametrically opposite monetary policies,” with the Fed hiking while the European Central Bank loosens.
Moreover, the inflation rate in the U.S. is below much of the rest of the developed world, he says, further undermining the case for tighter monetary policy. “The only place there is inflation is in rents,” said Gundlach.
U.S. Recession Risks Growing
Why then is the Fed intent on hiking? It’s because wage growth is trending higher, according to Gundlach. But “what’s wrong with the middle class getting higher wages?” he asked rhetorically.
In Gundlach’s view, the Fed’s actions risk tipping the U.S. economy into a recession. He said that the ISM Manufacturing Index is already in recessionary territory, with the ISM Non-Manufacturing (Services) Index trending lower. If the latter falls a little more, the whole economy will likely be in contraction territory.
Junk Bonds and Emerging Markets Horrible Investments
When it came to the markets, Gundlach was as bearish as ever. He reiterated his negative stance on junk bonds. Despite yielding 800 basis points more than Treasurys, “do not buy a junk bond index fund,” he advised: “You’re going to end up selling it at a loss as they get more and more populated with distressed energy and mining issues.”
Gundlach was just as bearish on emerging markets… “If you’re going to do something in emerging market equities, my recommendation is to short them,” said Gundlach. “They may fall a further 40%.”
The one exception is perhaps India. Gundlach remains a staunch bull on that particular country due to the massive growth in its labor force. “When there’s blood in the streets, buy India,” he suggested. “Maybe you can buy it now if you have a really longtime horizon, but it may get caught in the broader emerging market sell-off.”
Bearish on the Dollar
Interestingly, Gundlach was bearish on the U.S. dollar. “Once the Fed backs off its rhetoric, the dollar will [likewise] back down.” He adds that even if the Fed tightens, it’s not necessarily a good thing for the greenback. With the exception of 1983, the dollar has gone sideways or has fallen during past Fed tightening cycles.