Thread by @DLineCap

DoubleLine CEO-CIO Jeffrey Gundlach shares insights into the economy and financial markets in his annual Just Markets webcast, Tuesday, January 14, 2024. Register now!



#stocks #bonds #inflation #macro #Fed #jobs event.webcasts.com/starthere.jsp?…

Jeffrey Gundlach begins Just Markets, titled "Man Leaving a Bus: What Does It Mean?"

Gundlach: I feel like we're leaving the bus in the Fourth Turning described in Neil Howe's book.

Gundlach: This year's DoubleLine Round Table Prime debuts Jan. 20.

Gundlach: The S&P 500 was up 25% in 2024, but gold actually outperformed.

Gundlach: Risk assets in the U.S. did quite well.

Gundlach: In fixed income, the 10-year Treasury had a negative return, the Agg underperformed T-bills.

Agency CMBS up 7%

Bank loans slightly outperformed fixed rate high yield corporate bonds.

Gundlach: Commodities is a story of gold.

Gundlach: I always characterize bitcoin as gold on massive leverage.

Since first rate cut, bitcoin up 58%.

Mr. Gundlach: The S&P 500 and component sectors at historical high in terms of valuation.

Gundlach: In fixed income, mortgage spreads to Treasuries are cheap relative to history. The only value opportunity vs. history in fixed income.

Gundlach: For the past 25 years, gold is the outperformer.

Gundlach: Over the long term, I think commodities and T-bills should have similar returns.

Gundlach: Commodities are under constant pressure with the advancement of technology.

DoubleLine CEO Jeffrey Gundlach: All of the things we thought we knew may have been informed by changes in secular trends, including the end of falling interest rates.

Gundlach: As a result, some techniques and patterns which worked in the past no longer appear to work. For example, the copper-gold ratio no longer predicts changes in the direction of the 10-year Treasury yield.

Gundlach: We have the tightest spreads ever on corporate bonds. That has something to do with fears of size of the federal deficit and implications for Treasuries.

Gundlach: See my article in The Economist on the U.S.'s impossible debt trajectory.

doubleline.com/wp-content/upl…

Gundlach: 2s10s spread has de-inverted. That usually marks imminent recession.

Gundlach: Another indicator that has not worked is the LEI.

This is mostly because of the handoff of the manufacturing to the services sector of the economy.

Gundlach: Housing affordability is terrible. Interest rates up 100 basis points over just the last four months

Gundlach: Credit card writeoffs have risen dramatically.

That's something to look out for.

Gundlach: Since early October, it became obvious Trump was going to win. That's when small business optimism skyrockets.

People are just mapping 2016-2017 onto today.

Gundlach: Households expect their financial situation to improve.

Gundlach: In October, the consensus forecasts for GDP widened in dispersion between Europe (worse) and the U.S. (better). Surprising given the strength of the U.S. dollar.

Gundlach: Consumer expectations have been shooting higher. That is not bullish given today's valuations.

Jeffrey Gundlach: The market has gone from an aggressive assumption of Fed cuts to just one cut in 2025.

Gundlach: Developed market central banks with exception of Japan are all in lock step in reducing rates.

Gundlach: Fed Funds rate vs. Fed Funds futures: the gap has narrowed substantially since before the first Fed cut.

Gundlach: The Fed is now in sync with the market, and the market is not given further signals for a change. That is consistent with the Fed slowing down its change of monetary policy.

That's one of the reasons why the stock market has not been happy in recent weeks.

Gundlach: The 10-year U.S. Treasury in Fed cutting cycles: we've never seen the 10-year Treasury rate go up while the Fed cuts. Now it has by 100 basis points.

Something is different this time.

Gundlach: The 2-year Treasury peaked out at 5.22.

The 10-year Treasury seems to almost be back to 5%.

We're within spitting distance of the high in 2023 for the yield on the 30-year Treasury.

Gundlach: The Economic Surprise Index is going down, but the 10-year Treasury yield is going up.

Gundlach: 10-year Treasury vs. China 30-year: Chinese yields have collapsed, while the 10-year yield has headed higher. This suggests problems in China.

Gundlach: The copper-gold ratio is just not working. It says the 10-year Treasury yield should be at 1.5%

The reason is heavy gold buying, notably by central banks.

People are seeing safety in gold. I agree.

DoubleLine CEO Jeffrey Gundlach: These wildfires in Los Angeles: nobody prepared for this. @GavinNewsom said California is good at rebuilding. We should be good at not needing to rebuild.

Gundlach: Crude oil - WTI - and the 10-year yield move together, with the Treasury yield leading.

Gundlach: Even Japan, the lowest yielder in the world forever, now yields more than China.

Gundlach: PCE Deflator and the Core PCE Deflator seem to be flattening out. Not alarming. But the Core level is no longer falling.

Gundlach: CPI is still higher than what the Fed supposedly wants. It's stalled out at a level that is too high for the Fed's commitment to 2%.

3.3% is not 2%.

Gundlach: Core and headline PPI exactly same. 3.11%. Also too high for the Fed. The direction of the headline PPI is pretty bad for the Fed.

Gundlach: Core CPI ex-Shelter is at the 2% sort of level: maybe gives Fed something to cling to. But Shelter is a huge piece of Core CPI. More than half.

Gundlach: The Fed is hoping that Owners Equivalent Rent will fall back to a pre-pandemic level.

Gundlach: CPI month-over-month change has got the Fed zig-zagging.

Gundlach: The Fed looks like Mr. Magoo, driving around, bumping into things. Then became systematic, got inflation to come down. But for the past 5 months we've had another rising trend. This has got the Fed back into short-termism. Reacting too much to short-term data, not being strategic.

Gundlach: My favorite inflation series - export and import prices - have stabilized at about 1%.

Gundlach: Quit Rate down to 2.1%.

Might give the Fed some comfort on the wage inflation front.

Gundlach: With all this illegal immigration entering the labor force, the labor statistics are really skewed.

Gundlach: The unemployment rate is exactly on the 36-moving average of the unemployment rate. Going above the moving average would be a recessionary signal.

Gundlach: Powell talks about the labor market being in balance. We've come back to that situation. He's probably with this.

Gundlach: I'm sure he doesn't like the budget deficit as a percentage of GDP. We're already at recessionary levels. 6 1/2% to 7% of GDP, although that leaves out a lot of things such as aid to Ukraine.

Jeffrey Gundlach: We should have a budget deficit of 0% GDP.

Gundlach: During recessions, the deficit goes up as percentage of GDP.

In a recession, the deficit could go up to $4 trillion. Pretty horrifying.

Gundlach: Federal interest expense as a % of federal revenue is rising rapidly.

Gundlach: This is a good entry point for S&P equal weight vs. market cap weight, and value vs. growth.

Gundlach: U.S. Equity vs. the Rest of World: the outperformance is ridiculously extended.

To reverse, we need the dollar to top out.

Gundlach: Same story with U.S. equities vs. emerging markets stocks.

Gundlach: Dollar Index (DXY) has been in a secular decline but in that context, a reversal higher since the Global Financial Crisis.

Gundlach: I'm watching DXY carefully. Doesn't look like it has topped out yet.

Gundlach: Another Trump moon shot: the dollar heading up.

Jeffrey Gundlach: Interesting the commodities prices have held up in the face of the strong dollar. That divergence is unusual. An interest paired trade would be to short the dollar and short commodities.

Gundlach: Gold, we at DoubleLine liked at the beginning of 2024. It did better than we expected.

Gundlach: IMF World Reserve Gold Holdings have been rising non-stop since the GFC.

Gundlach: Survying yields across fixed income sectors. Yields on Treasuries up a little bit.

On mortgages up a bit more.

Gundlach: Yields on HY bonds did not go up due to spread tightening.

That's not surprising. HY spreads are positively correlated with stock performance.

DoubleLine CEO Jeffrey Gundlach: There are some good yields out there. CLOs, emerging markets, but you have to careful, with good active management closely underwriting these securities.

Gundlach: Spreads tightened almost everywhere in 2024.

CMBS BBB tightened a lot but still some yield there.

Gundlach: 2024 was a good year for riskier bonds.

Gundlach: Huge yield curve steepening in December. All the tenors except the 2-year were down.

Gundlach: 30-year Treasury has not been a place to hide. Certainly not in December.

Mr. Gundlach: In 40 years we haven't had a recession that didn't include the long bond yield declining. Don't count on that now. This time is different. We have left the bus. We're in a new environment.

Gundlach: If the Fed stands pat on rates, vol should come down. Should be good for Agency MBS.

Gundlach: The current mortgage rate is about 7%. So no refinance risk in the MBS market.

Gundlach: Money market assets went way up with all the money printing from 2020.

Lured money out of banks.

Gundlach: We continue to advise against "T bill and chill" because of the reinvestment risk.

Gundlach: Shorter term high quality bond funds makes more sense.

Gundlach: Corporate CCC-BB spread differential: you're not getting much compensation now to own CCC.

Gundlach: Distressed exchanged, prepackaged exchanges in high yield and bank loans have been going up. Not alarming at this point.

Gundlach: JPM EMBI Global Diversified Spread to Worst has come down to 320. Tighter than it was in 2020-2021. Surprising given the strong dollar.

Gundlach: Let's take a few Q&A.

Gundlach: The dollar may be devalued to devalue the un-funded liabilities of the U.S. government. Or the government could restructure its commitments.

Gundlach: If you believe in yield curve control, you're saying the govt will issue bonds at artificially low rates. It's sort of quantitative easing. The Fed has said they want to get the balance sheet down, in order to be able to do QE again in the future.

Gundlach: Consequence of yield curve control, you create an eventual bear market in bonds. This happened after yield curve control in the 1940s. Got the bond bear market of the 1950s-to-80s.

Gundlach: TIPS look reasonably priced because I don't think the CPI is going to the 2s.

Gundlach: Yes, I live in a fire evacuation zone. There's very little support despite all the taxes paid to Los Angeles County.

DoubleLine CEO Jeffrey Gundlach: Let's make 2025 a better year than it started out to be. We're grateful for your support of DoubleLine. Stay safe if you're in California. Goodbye for now.