Channel 11: Where’s the Recession?

After his May review of equities (0:40), the dollar and commodities (2:12) and Treasury yields (3:26) DoubleLine Portfolio Manager Ken Shinoda on June 8 eyes the yield landscape across the major fixed income asset classes (4:42) and finds investors still have time to enter these sectors and take advantage of attractive income propositions relative to interest rate and credit risk. Mr. Shinoda then reviews the expectations for the terminal rate on federal funds interest rate (6:09) and inflation expectations, with the market pricing a pause by Fed in June and a hike in July.

For the central theme of this episode of Channel 11, Mr. Shinoda asks (7:46), “Where is the recession that we've all been waiting for, that everyone has been forecasting?” Among the key reasons for the absence of recession in the U.S., he thinks, is the unprecedented level of fiscal stimulus, exceeding 30% of GDP, in 2020. “I think some of that money is still out there, and it's extending out when that recession may hit.” However, he warns that money is finite and running out.

Consumer spending represents two thirds of the U.S. economy. Citing a forecast by Deutsch Bank’s Jim Reid, Mr. Shinoda points out that household excess savings is on track to run out by the end of 2023 or in early 2024. Meanwhile, a variety of metrics point to slowing or contracting growth (10:47), including ISM PSM manufacturing and services surveys, the Leading Economic Indicator (of 10 leading indicators), ISM New Orders, tightening bank lending standards, weaker loan demand and surging interest rates on business loans. “I try not to be so dramatic about it,” but he advises thinking “about positioning. If we're going to go into recession, you want to own some longer-duration bonds, you want to maybe underweight certain parts of the risk markets.”

Turning to “what looks cheap” in terms of fixed income spreads vs. history (16:21), Mr. Shinoda points to AAA commercial mortgage-backed securities (CMBS) and Agency residential mortgage-backed securities (Agency MBS). On the shorter end of the yield curve, Ken Shinoda sees investment grade bonds that are yielding 6%-7%. Just seems really good time to kind of lock those yields in case the Fed ever cuts and the gift of the T-bill is gone.”