DoubleLine CEO Jeffrey Gundlach said Tuesday that he sees change coming to the U.S. dollar and emphasized how inexpensive commodities are relative to equities.
"The dollar for the short term has bottomed," he said.
It’s been at its worst level since 1985, he explained during a conference call with investors titled "Wack-O Season," and is ”overdue for a countertrend rally” before likely falling below 90.
The U.S. dollar index (DXY) hit a two-year low of about 91 last week. But, on Wednesday, in fact, the dollar rose the for third day and was trading near 92.5.
Gundlach sees the dollar index poised to rise to 96 or 97. "But I don't think it's going to endure," he added.
Though he called the currency’s rally overdue, the greenback “does not trade well,” he added.
The recent change in the dollar’s direction also has the bond king somewhat concerned about emerging markets, which are negatively affected by a rise in the U.S. currency.
“I am really not that fond of emerging markets in the short term because I don’t think the dollar is going to keep falling, but I do like EM a lot on a long-term basis,” the DoubleLine executive said.
A wider market trend to watch, of course, is what the central banks do. An end to quantitative easing, Gundlach pointed out during the webinar, could affect equities and other assets.
We could “see the first change in dynamic in years,” he said, when the Fed stops reinvesting interest and principal in the bond market.
The reversal of QE could “suggests a little more trouble in 2018,” Gundlach said, perhaps midyear.
As for fixed income, "I think this a very poor time to be taking a lot of risk in bond funds," he said.
Given how low commodity prices are vs. stocks, though, investors might benefit from "long-term secular timing," by giving this asset class a look. The group is "incredibly cheap."
Other Items to Watch
"Something to keep an eye on,” the DoubleLine executive said, is falling year-over-year U.S. loan growth.
Loan growth is weakening, which "doesn't look good," he notes, though rebuilding efforts tied to recent hurricanes might could affect this.
He also pointed to the percentage of S&P 500 firms trading above their 200-day moving average, which he labeled “really weak.”
This situation could signal “potential trouble on the index broadly. Not really that scary yet, but these are one of the things that we have to watch,” Gundlach explained.
Speaking one day after JPMorgan Chase CEO Jamie Dimon called Bitcoin a “fraud,” Gundlach said he is letting “this mania go on without me."
Describing his concerns with the cryptocurrency, “I philosophically don’t believe that it’s unhackable,” he explained. “I’ve had a lot of really smart 20-somethings argue with me on this that it really is completely safe.”
--- Check out Treasury Yields Top Gundlach’s ‘Critical Level’ on ThinkAdvisor.