In his 13th annual “Just Markets” webcast, recorded Jan. 10, 2023, DoubleLine Capital CEO and Chief Investment Officer Jeffrey Gundlach gives his views of “What’s Going On,” and what might lie ahead across the market, monetary and macro landscapes. The webcast title (1:56) is in homage to the great singer-songwriter Marvin Gaye, whose song “What’s Going On” topped the R&B charts and album by the same name was ranked in 2020 by Rolling Stone as No. 1 of the 500 greatest albums of all time.
Mr. Gundlach begins (4:29) with a review of equity, bond, currency and credit performance through the end of 2022, by far the worst year for bonds by many basis points. However, he observes that once the Federal Reserve “got into gear with their multiple 75 basis point hikes,” the bond market actually stabilized while the rally in commodities faded. The U.S. Treasury yield curve and market expectations for the Fed’s monetary policy (8:45), Mr. Gundlach says, demonstrate the Fed will not make good on its rhetoric of further aggressive tightening of the federal funds rate. Investors, he says, take what the bond market says more seriously than Fedspeak, noting a two-year Treasury yield at 4.24% means the fed funds rate is not going to make it to 5%.
Reviewing fiscal responses to recessions since the Great Financial Crisis (13:21), Mr. Gundlach notes the Fed’s balance sheet has progressively expanded by ever greater magnitudes with each new bout of quantitative easing (QE). As the Fed has sought to reverse QE and raise interest rates, the interest bill on the U.S. government’s debt has surged.
The federal government’s finances have not been alone in depending on QE and central bank balance-sheet expansion. Mr. Gundlach points out (16:27) the positive correlation between rallies between the S&P 500 Index with Fed QE and the even closer correlation between FANG+ stocks and the balance sheets of the largest global central banks.
A raft of data series points to a weakening U.S. economy and a reversal in the Fed’s tightening campaign. These include declining ISM manufacturing supplier delivery delays, suggestive of declining demand (18:14); a collapse in housing affordability (18:45) and household savings rates (21:36); and low readings in consumer sentiment (24:06). The labor market (24:23), Mr. Gundlach says, is “one of the last men standing” on the economy. He says the U-3 unemployment rate might surpass its 12-month moving average in the next few months, meaning the onset of recession. Other data series indicating recession is imminent are the Conference Board Leading Economic Index, the ISM Purchasing Managers Index and a deeply inverted yield curve..On the inflation front (33:18), Mr. Gundlach foresees inflation headed lower, but he takes issue with expectations that the CPI will fall to 2% and then go dead sideways. That’s not going to happen. If the Fed gets inflation down to 2% by December 2023, he says inflation will fall below 2% and probably will go negative on a year-over-year basis. Buttressing the case for inflation coming in below 2% is the lowest level of M-2 money growth since 1970.Commodity prices (40:43) have been falling for the past 10 months. Mr. Gundlach advises against buying commodities until the Bloomberg Commodity Index climbs convincingly above its 200-day moving average. That might happen, he says, on a weakening U.S. dollar. That said, he thinks it’s a reasonable time to buy and own gold (41:47).
A number of long-term trends in the equities markets have broken down. The Nasdaq 100 Index (46:35), after a protracted outperformance of the S&P 500, has been lagging. Likewise, U.S. equities’ reign as a world beater has ended, noting breakdowns in trendlines for U.S. stocks versus the rest of the world and the S&P 500 versus the MSCI Europe Index.
Turning to currencies (50:44), Mr. Gundlach says the dollar is headed lower. Supporting that view, he notes the bond market says the Fed is going to ease, while the U.S. will enter recession with an already high federal deficit, both negative for the dollar.
After a survey of Treasury yields (55:21), Mr. Gundlach turns to the copper-gold ratio, which he says “is screaming” the 10-year Treasury yield is headed lower. Looking into corporate credit (59:31), he says the CCC-BB spread differential kind of got to recession levels in 2022, an occurrence that has been predictive of defaults in the lower tiers of credit quality in below-investment-grade corporate credit.
For areas of the bond market that look attractive (1:02:05), Mr. Gundlach singles out Agency mortgage-backed securities, where mortgages are not refinanceable, and the securities are trading at discounts while offering excess yield versus Treasuries. He also points out parts of commercial mortgage-backed securities and collateralized loan obligations that appear attractive relative to corporate bonds.
Mr. Gundlach is CEO of DoubleLine. In 2011, he appeared on the cover of Barron's as "The New Bond King." In 2013, Institutional Investor named him "Money Manager of the Year." In 2012, 2015 and 2016, he was named one of "The Fifty Most Influential" in Bloomberg Markets. In 2017, he was inducted into the FIASI Fixed Income Hall of Fame. Mr. Gundlach is a summa cum laude graduate of Dartmouth College, with degrees in Mathematics and Philosophy.