DoubleLine Capital CEO Jeffrey Gundlach says the U.S. economy has about a 90% chance of recession this year, up from about 80% last week, as the negative impact of the coronavirus expands.
“When you decimate the restaurant industry, the travel industry, the hotel industry, the airline industry [and] … the cruise line industry, obviously you’re going to take a huge divot out of economic activity,” he said Tuesday during a webcast.
The bond exec shared his view on a number of economic indicators that support his reading of the current situation.
“What you have to watch out for is when [consumer confidence] goes from an elevated feel-good position to a free fall. That means there’s a recession,” Gundlach said.
“I would bet you dollars to donuts that this is going to be in a free fall when we get the updated data in the next month, certainly for the month of March, when it comes out,” he said. “That will start to have the look of a recession.”
Consumer confidence matters, Gundlach added, “because it’s basically tied to jobs.”
The DoubleLine team also tracks when the level of jobless claims goes above the average belief in the economy (as measured by the Bloomberg Comfort Index) “and the comfort index deteriorates,” he said. “That’s what we will look at.”
Also, the job openings rate is pointing to slower growth. It was “already deteriorating pretty sharply going into 2020 and then things got steadily worse in the last few months in job openings, but that wasn’t being reflected in unemployment claims [yet].”
There’s a “crazy lack of order at certain moments in the day in the corporate bond market, and even today in the Treasury bond market with an 11-point down day on the long bond,” Gundlach said.
Traders might, say, put a BB-rated corporate bond out for bid and “then they hear what the bid is vs. the quote [they had] last night and go, ‘that price is right?’” he said.
Prices “are moving all over the place and there’s about a 40 basis-point bid-ask spread in parts of the commercial paper market,” he added.
“And that’s why the [Federal Reserve] is showing up … and they haven’t fully implemented their facility yet …,” Gundlach explained. “We have not seen this type of action since that last global financial crisis recession.”
‘Less Negative’ on Stocks
As for what investors should be thinking about, “I think you’re supposed to be staying liquid, I think you’re supposed to be waiting for opportunities,” he said.
“We all know that the stock market is down a lot … ,” Gundlach said. “Will the market snap back? Of course it will.”
He says that although it’s a good time to “be keeping powder dry … I’ve actually been getting less negative on the stock market since Friday. He adds that he’s been “basically in a net short position, but I’m [now] taking some of that off.”
Looking at the gold miners, they were “trashed and treated as stocks in the stock selloff” and are “extremely volatile,” he said. Meanwhile, gold had hit new highs recently in all currencies but the U.S. dollar, he said.
“I have been a bit neutral on gold,” Gundlach said, explaining the push-me, pull-me dynamic it has with the greenback. “There’s been a huge dollar bid … drawing [the U.S. currency] higher.”
In general, “there’s a lot of money moving around,” he explained, “with a lot of redemptions and a lot of liquidations, and that’s led to the dollar getting stronger, and then gold sold off a bit.”
But gold’s ability to stay “at a reasonably good level in the 1,500s means it has flight-to-quality demand and should ultimately go to another high but is in a consolidation mood now.”
— Check out Gary Shilling Forecasts a ‘Major Global Recession’ on ThinkAdvisor.