Gundlach Warns of ‘Carnage’ in Post Rate-Hike World

DoubleLine Funds CEO  says a hike in interest rates by the Federal Reserve is nearly certain next Wednesday, and that means crazy days are coming for investors, advisors, traders and others.

“It’s a different world when the Fed is raising interest rates,” the so-called Bond King said late-Tuesday during a webinar. “Everybody needs to unwind trades at the same time, and it is a completely different environment for the market.”

Gundlach says the markets are pricing in an 80% chance of a hike — most likely of 0.25% — while one survey says 100% of economists think this move should indeed happen.

“We’ve had shaky markets since September. It will be interesting to see if markets deteriorate further,” he explained.

Unlike Bill Gross of Janus Capital Group, the DoubleLine chief is against such a move given troubles in the market for junk bonds — down 6% so far this year as measured by the JNK ETF — and leveraged loans.

“We’re looking at some real carnage in the junk-bond market,” he said. “This is a little bit disconcerting that we’re talking about raising interest rates with the credit markets in corporate credit absolutely tanking. They’re falling apart.”

Other signs that it is not an optimal time to raise rates include low inflation, weak manufacturing data and a slowdown in profit margins.

While Gundlach says it’s possible that the Fed will “pull another Lucy and the football,” referring to the Peanuts cartoon character who yanks the ball from would-be kicker Charlie Brown, he thinks it is more likely that Fed will go ahead with the rate hike.

“It’s like a George W. Bush [in Iraq] and ‘Mission Accomplished.’ It’s a bit premature … but the Fed wants to put up the banner. And very soon after, if they do it, we will have chatter about the next hike,” he explained.

“Within the Fed’s logic — and they’ve said it’s enough — the [stock] market is still close to its highs, and the dollar is moving sideways. So, the coast is clear to do it,” Gundlach said. “And while the [stock] market [overall] is not freaked out that much yet, there are plenty [of market indicators] that are.”

What would cause the Fed to keep rates steady? “There’s a chance they won’t raise, and it’s completely dependent on the markets,” Gundlach said.

Foreign equity and overall credit markets have “deteriorated in substantial ways,” Gundlach said. LIBOR, for instance, has moved up about 15 basis points in recent weeks “anticipating a Fed rate move,” he adds.

Watch out for the Federal Open Market Committee to announce its decision next Wednesday, Gundlach cautioned: “Almost certainly, we are going to see a lot of movement in the markets.”

Fed Conundrum