Gundlach: "People Are Starting To Believe That Stimulus Is Permanent"
It's time for Jeff Gundlach to regale DoubleLine fund investors and assorted hangers on with his views of the economy, the stock market and everything else. The title of the latest webcast is "Looking Backward" although we expect a substantial does of forward looking views and hot takes, including Gundlach's inaugural assessment of the US economy.
Readers can listen to the webcast by clising on the following link or the image below.
The last time we heard from Gundlach, financials were just starting to take off thanks to surging yields. But that was a much smaller move compared to the action we’ve seen since the start of February. Back then, Gundlach pulled up a chart saying U.S. banks are wearing a “normal scuba vest” whereas their Japanese and European counterparts act as if they have an “aqualung vest.” Why? He says negative interest rates. As we noted earlier, US banks may be forced to adopt negative rates as soon as April 1.
As Bloomberg also reminds us, last month Gundlach tweeted that he had been a long-term gold bull and U.S. dollar bear, but has turned neutral on both. Bitcoin may well be the “Stimulus Asset,” he said, a reference to the cryptocurrency’s rally amid a wave of cash pumped into the financial system during the pandemic.
More recently, he noted the divergence below, with Bitcoin rapidly outpacing both gold and the S&P 500’s gains over the past year, adding ominously, “Great dispersions often precede great reversions.” So will Gundlach announce his full-blown endorsement of the cryptocurrency? Stay tuned to find out.
We'll update this post with periodic highlights from the webcast.
Gundlach explains the title of today's webcast “Looking Backward”, which is a nod to a novel written in 1888, and where the protagonist of Edward Bellamy’s socialist-utopian novel goes into a trance in 1887 and awakens in 2000. Gundlach says the novel resembles situations in society today. In the novel the protagonist finds a year 2000 described as having shorter working weeks and equal distribution of goods. In the book, Boston is part of a totally changed world in which the U.S. has been transformed to a socialist utopia, which includes internet and full-benefits retirement at 45.
"So think about this as we go through some of the slides" Gundlach said.
Gundlach starts by showing a chart breaking down the US economy between Nominal GDP, Employment and market cap, with Technology "monopolies" clearly dominating.
He then shows a chart of US economic growth, saying that despite all the stimulus, the US won't be fully out of the recession until we regain the economic growth rate.
The DoubleLine CEO then shows just how much bigger the stimulus at $6.1TN is compared to the Great recession's $1.8TN.
Gundlach then uses one of our favorite charts, the one showing that government accounts for a whopping 27% of all personal income.
Of course, this socialism won't come cheap and the US budget deficit has now hit a record 16.2% of GDP.
Echoing one of our favorite lines, Gundlach says that “80% of the budget is borrowing, so why bother with taxes at all?”
Next, touching on his views on the dollar, Gundlach says that while he has been bullish in recent months, he expects the next move in the dollar to be down after a brief bounce.
Gundlach, who is jumping around like crazy from topic to topic, then slams the "phony" 6.2% unemployment rate pointing to the true US unemployment which is far greater than the official 6MM print, as a result of more than 18MM people receiving various forms of unemployment benefits, more than 10% of the entire US labor force.
Going back to the stock market, Gundlach mentions the “super six” tech stocks again and says it's amazing how high these stocks are valued versus pre-pandemic levels. He then shows surging P/E ratios, saying forward P/E ratios are elevated at 19 but not as high as 1999. Noting that Joe Biden is talking about increased corporate tax rates, Gundlach says P/E ratios could go even higher once that legislation is folded into the valuations.
Which brings us to one of of Gundlach's most bombastic comments so far. Looking at the tremendous outperformance of mega caps relative to micro caps...
... and the tremendous gains in the Nasdaq vs SPX, which recently just took out the dot com higher...
... Gundlach warns that the Nasdaq may see a decline like in 2000-2003 and makes a shocking prediction that "The VIX will go over a 100 during the next downturn."
What could cause such a crash? Perhaps inflation - Gundlach notes that he expects headline inflation to be over 3% for a few months this summer on the back of base effect and stimulus.
It could get worse: Gundlach compares CPI to ISM Prices Paid and says that one could plausibly predict headline inflation could rise above 4%. "That would really spook the bond market."
As a tangent, Gundlach points out something we have frequently noted, namely that buy purchasing massive amounts of TIPS, the Fed is skewing the TIPS and thus breakevens market.
Gundlach then switches to Gold, and referring to yesterday's plunge in the price of gold to $1,680 he says that that could be the low for gold for this cycle.
He then rapidly shifts to bonds, and saying that while according to German yields, the 10Y is priced correctly...
... the gold/copper ratio suggests that the 10Y should be at 3%.
Gundlach then looks at the "bloodbath" in the long end, and specifically the move in the 30Y, saying it was the largest drawdown since the GFC (charted below), and echoing David Tepper, Gundlach says that "I’d expect a modest or moderate decline in yields on the long-end. It’s overextended sentiment-wise."
The DoubleLine CEO then said what most people know, namely that the only marginal buyer of Treasuries in the past couple of years has been the Fed as Foreigners continue to sell Treasury bonds. Gundlach talks about a “lack of robust, organic demand,” and points to the recent catastrophic seven-year Treasury auction as further evidence.
In short, the "Magic" in "Magic Money Tree" (or MMT) is and has always been the Fed.
Gundlach concludes on a dismal note, criticizing stimulus programs for giving people who make $150,000 a year a pile of money, and extending his criticism to broader debt monetization saying while bemoaning what he says is a reliance on stimulus programs for growth.
Warning that people may be starting to believe stimulus is permanent, he says that “The biggest problem is we’ve become totally addicted to these stimulus programs” adding that while "people may be starting to believe that stimulus is permanent", he worries that "we can see some real need for endless stimulus."
And yet, in a world where a quarter of all personal income comes from the government, stimulus programs need to be kept going because consumers have been “trained” to rely on them. Hammering the point that people could become dependent on these stimulus programs, he said that this is something that tends to be associated more with Europe than the U.S, and warns that we could be seeing a “neverending” aid regime stateside.
Welcome to socialism with American characteristics - perpetual universal basic income for everyone, courtesy of a reserve currency... while it lasts. Because as Gundlach warns, China is doing everything in its power (both economic and military) to replace the US as a global hegemon.
One final point Gundlach made is that while bond vigilantes can overcome the Fed's effort to keep yields low, the central bank would then launch Yield Curve Control. That said, the Fed isn’t yet at the point where it would implement YCC: “There’s a pretty good shot that they’ll let the 10-year yield go above 2% before they do anything about it."
And in response to a question of what is the world's cheapest asset right now, his answer: farmland.
Gundlach's full presentation below.
