Fans of the New England Patriots aren’t the only ones doing some Monday morning quarterbacking.
Jeffrey Gundlach, CEO and chief investment officer of DoubleLine Capital, did a bit of it himself at the Inside ETFs 2016 conference in Hollywood, Florida. He focused on the Federal Reserve and the state of the economy.
First, he asked the audience of 2,000-plus advisors and other financial professionals “What the heck is the Fed doing?”
But then he stated his own view, “I’ve said earlier that the aftermath of Fed policies [to raise rates] is going to come back to haunt us, and we see this is happening [now].”
Next, the fixed-income guru — who unsuccessfully tried to buy a minority stake in the Buffalo Bills in 2014 through a partnership with former Bills quarterback Jim Kelly — focused on the football analogies, after saying he thought the Patriots-Broncos game on Sunday was a good one.
“Frankly, I was surprised the Patriots were still in it with six minutes left,” he said.
Then came a slide with two side-by-side photos of Seattle Seahawks Coach Pete Carroll with a scowl on his face and Fed Chairwoman Janet Yellen with a less-than-pleasant expression.
“Yellen called a Pete Carroll audible with the recent rate hike,” explained Gundlach, noting that Carroll “made what could be considered the worst call in football history” in Super Bowl XLIX by having quarterback Russell Wilson pass the ball rather than hand it to running back Marshawn Lynch.
In Yellen’s case, he said, “She said back in September 2014 that the Fed was going to raise rates. Then it didn’t, but it did so in September 2015.”
As a consequence of these moves, “The markets are collapsing, and the Fed idiotically is saying it is going to [raise rates] eight times by 2017. It’s got to dial this back or the markets are going to deteriorate … and be humiliated by the Fed,” Gundlach stated.
After these remarks, Gundlach reviewed updated charts and data that he highlighted on a recent call with investors.
Pessimism and More Pessimism
“The Fed is frozen in its thinking,” he said. “The bond market signs are saying that the Fed is only going to get half of the planned hike level.”
Describing a slide with the latest GDP data that shows the U.S. growing 2.2% per year and Europe expanding 1.6%, Gundlach asked, “Why is the U.S. raising rates when the European Central Bank is cutting them? The difference is pathetic, almost nonexistent.”
He then pointed to “a real issue: high-yield spreads for corporate bonds, which are doing very poorly at 4% vs. Treasuries.”
As for junk bonds, they have a spread of 800 basis points, or 8%, “and this level is associated with financial stress,” Gundlach said.
Even with a 200 basis-point uptick in rates, “Inflation is still going to go to 2%, [but] they must think there is a massive inflation issue. Again, the Fed is frozen in its thinking,” he explained. While some other developed markets have higher inflation, “The bond market says that inflation is falling over the long-term horizon,” the DoubleLine executive said.
“The inflation we do have is all in shelter,” he added.
Returning to a discussion of economic growth, Gundlach took another aim at the Fed’s decision to raise rates. “It’s the triumph of hope over experience with the Fed, like a second marriage! Let’s not do the rate hikes and let the economy grow a bit more,” he stated.
The World Bank’s latest estimates for global GDP growth in 2016 are 2.9%, down from an earlier 3.3%, “and the World Bank is not known for pessimism,” he said.
Meanwhile, the Atlanta Fed’s GDP Now indicator “is now at almost zero,” said the fixed-income specialist. “Every year we get an optimistic 3%, but it never happens.”
He went on to describe manufacturing and service-sector date, which he described as “disconcerting and declining.”
“I am leery of arguments that say we should ignore the bad stuff. The service economy is also falling, and if it goes down a couple points further, we could be in a recession.”
He sees much more weakness in junk bonds. In fact, Gundlach says issuance in this group “is going to collapse, … and that means 1% of GDP will disappear.”
Emerging markets are poised to drop another 40%, he argues. “The correlation between commodities and the emerging market ETF is quite high.” He advises investors to short these equities. “It’s horrific, and there is room for them to go down,” Gundlach said.
“The bond market is not expected to tank,” he explained, “but watch the five-year yield. It has been very range-bound since 2013. When it breaks out, there will be massive consolidation.”
As for the U.S. stock market, “I am skeptical and am whistling through the graveyard of the S&P, as I’ve said earlier,” Gundlach added. “It’s like in 2000 and ‘07 with the highs. There are obvious sell signals.”
Profit margins are at recession levels and could fall further due to wage gains, he says.
“The dollar has to rally with the tighten? No, you are wrong. Historically, the dollar goes sideways … when you hear [the opposite] on CNBC put it on mute.”