DoubleLine Capital CEO and Chief Investment Officer Jeffrey Gundlach says the effects of low oil prices will “ripple through the U.S. economy” in 2015 and could have a “sinister” impact on jobs and spending.
“Thirty-five percent of the S&P 500’s [capital expenditure] is energy,” Gundlach explained during a webcast Tuesday. “If we stay as we are, capex will likely fall to zero” in that sector.
In other words, the fixed income expert stressed, the economy could likely see "a true collapse in capital expenditures and certainly a collapse in hiring … in certain regions of the country” if the price of oil stays at its current level of $45 a barrel oil or lower.
“All of the job growth” since 2007, Gundlach added, “can really be attributed to the shale oil fracking situation and the energy renaissance. Other than in regions like Texas and North Dakota, “We have not added any jobs.”
With oil at or around $45, “We clearly are going to see some leveraged energy companies go bankrupt. When there are huge shocks to the system … [it] usually leads to a rippling effect,” he explained.
On the positive side, Gundlach noted, low oil prices are generally seen as a way to boost GDP by about 0.7%. “The consumer gets more money in the pocket … buy more burritos or something, or save up and buy another car,” he said.
(On Wednesday, West Texas Intermediate for February delivery rose slightly to trade near $46 a barrel, after slipping to about $45.90 on Tuesday, which was its lowest close since April 2009.)
While the fixed-income expert sees U.S. equities as a safer bet than their counterparts in many other regions of the world, he notes they are “starting to get a little bit extended.”
“They can outperform, but it’s almost impossible for the great gains from June of 2014 to be repeated,” Gundlach explained. “They’ve got to decelerate.”
While investors “can always say this time is different,” Gundlach shared several arguments that make for a bearish scenario. “Equities have never risen for seven years in a row,” Gundlach said.
On the fixed income side, “It’s rare for the bond market to go up more than three years in a row, in terms of price, with yields going down. And with the S&P 500, the headwinds are staring at us again, probably with a further Fed rate increase. If it corrects or goes into bear market, there were a bunch of historical indicators that were flashing signals,” such as the current weakness in junk bonds.
When it comes to prices on 10-year Treasuries, he sees an upward movement as the Fed fund rate moves up 100 basis points in 2015. As of Jan. 7, Gundlach says he forecast “a rise of 50 basis points this quarter, another 25 in the third and in the fourth quarter.”
“What lies ahead is that bond yields are moving lower. At $40 oil, it will get below 2% ... and it's possible the 10-year will dip below 1.38%, though it will quickly bounce back. Another [trend] is the price of oil …” he explained. “I bet you dollars to doughnuts, oil doesn’t go up.”
“The consensus last year and this year has been for the dollar to be strong, and sometime consensus is right,” Gundlach said. “We have been positive on it since 2011.”
The euro is now trading at $1.17, which is the level it traded when introduced in January 1999. “It rallied to $1.60 and has come all the way back. What a long, strange trip it’s been,” said the CEO, borrowing a line from a Grateful Dead tune.
Investors may feel “nervous” betting on the U.S. dollar, “but stick with the big picture,” he advised. “Currency trends go on for longer than other trends. It looks like the dollar is going higher. Yes, it’s a crowded trade, but currency trends are persistent and long-lived.”
The Federal Reserve “wants to raise rates, if the employment level stays constant … And that’s another reason bond fundamentals are so good,” Gundlach said.
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