Jeffrey Gundlach and Felix Zulauf on Global Markets Amid Secular Change 12-12-22

Jeffrey Gundlach, CEO of DoubleLine Capital, and Felix Zulauf, CEO of Zulauf Consulting, share their outlooks for global markets, the likelihood of a global recession in 2023 and separation of the world into competing blocs pitting the U.S. and China-Russia against each other. (For more information on Zulauf Consulting, please visit www.felixzulauf.com.) The conversation was moderated Dec. 12, 2022, by DoubleLine Portfolio Manager Samuel Garza. Mr. Garza starts the dialogue (0:59) by asking Messrs. Gundlach and Zulauf for their most significant takeaways from 2022. Then they turn to inflation (9:50), which both expect to decline in 2023 and could well overshoot on the downside.

The discussion takes up the world’s shifting geopolitics (15:32). Mr. Gundlach expresses concern about the increasing belligerence from Washington with respect to its proxy war against Russia and, the U.S.’ massive deficits notwithstanding, pledges to defend Taiwan or at least supply it with weapon systems. Mr. Zulauf notes (17:19) that Saudi Arabia, a longtime U.S. ally, has shifted to align closely with China.

Mr. Gundlach notes (20:43) notes that in the U.S., the federal government is running a very large deficit “with unemployment at a low level. Usually, when you have this kind of deficit, it’s in response to recession. Sure, this started in response to the COVID recession, but we certainly haven’t gotten back to a fiscally sound situation.”

Messrs. Gundlach and Zulauf (23:11) share the view that the U.S. dollar is headed for a decline, which Zulauf sees lasting into 2024. With the decline of the dollar, emerging and other non-U.S. markets will become interesting. In the face of recession, Mr. Garza asks (34:53) if the world could again see widespread negative bond yields. Gundlach won’t rule out such an outcome, saying, “The tools are so blunt and limited. They’ve got negative interest rates and free money. And they’ve shown every indication to use them more brazenly every time it’s needed.” Mr. Zulauf says the odds of negative yields are “very low” at least in the next few years.

After “decades of unidirectional moves,” including a decline of bond yields from 14% to 1%, Mr. Gundlach says (42:02) the markets are seeing and will continue to see “complete reversals” of megatrends. Growth outperformance versus value and Nasdaq 100 outperformance versus the S&P 500 have already reversed. Mr. Gundlach thinks U.S. stocks’ outperformance versus foreign stocks might have already ended.

Mr. Zulauf says that after a 20% rally, European stocks are likely to head lower (45:14), offering a better buying opportunity in the first half of 2023. Among European stocks, he favors multinationals with the ability to outsource production outside Europe due to high energy costs on the Continent.

Mr. Garza asks (46:58) how decision-makers of monetary policy will respond to the “central bank dilemma” when recession takes hold: fight inflation or stimulate growth? Mr. Zulauf says in the face of inflation, the central banks will capitulate and stimulate. However, as occurred earlier this year in the U.K., if central banks think they can go back to printing “as much money as needed” to pay for sovereign debt issuance, Mr. Zulauf warns, “That will backfire very badly. That game is over.” In the case of the Federal Reserve (52:06), Mr. Gundlach thinks “the odds are probably greater than 75% that there’s a rate cut in 2023. The way these things work – Felix is right – is they talk tough on fighting inflation, but the minute something starts to change on the ground in the economy, we’ve seen some pretty epic pivots just in the last few years.”

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