In his latest webcast to DoubleLine investors and the general public, the “new bond king” Jeffrey Gundlach, who had taken a one month sabbatical from public appearances after warning (hyperbolically as he explained yesterday) to “Sell Everything, Nothing Here Looks Good“, said that the Fed is determined to show it is independent from market forces, and may hike rates even as investors bet they will not.
As a result, Gundlach said it’s time for fixed-income investors to prepare for rising rates and higher inflation by reducing the duration of their positions, moving money into cash and protecting against volatility. In his presentation titled appropriately “Turning Points” (presented below) Gundlach said that “this is a big, big moment,” predicting that “interest rates have bottomed. They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something and you’re supposed to be defensive.”
“They want to show that they are not guided by the markets,” Gundlach told Reuters in a telephone interview following the DoubleLine webcast. “The Fed wants to show, at some point, that they can’t be replaced by WIRP (World Interest Rate Probability). The only way they can do that is to tighten when WIRP is below 50.”
However, by trying to prove its independence from the WIRP, the Fed might be “blowing itself up,” Gundlach warned. The Fed will not hike in September if the WIRP is below 40 and the S&P 500 is below 2150, he said on the webcast, which we assume means that the market is in control after all.
Meanwhile, the economy continues to contract: Gundlach pointed out that the non-mfg ISM released earlier this week is at the lowest level since 2009, and it is almost on recession watch. “Clearly, it’s a bad environment to be raising rates,” yet some Fed members are talking about two rate hikes between now and the end of the year, Gundlach said. Gundlach said investors should get defensive with bonds, adding that he is sensing a “bond unfriendly turn” such as fiscal stimulus and that bond yields bottomed several years ago.
Quoted by Bloomberg, Gundlach cited a July low of 10-year Treasuries that didn’t hold as evidence interest rates have hit bottom. The fund manager said rates on the U.S. 10-year bond may surpass 2% by the end of 2016. If we are correct, and if Japan is about to unleash a 2003-like VaR shock, they may surpass 2% in a few days.
As a justification for his higher rates call, Gundlach stuck to his prediction that Republican Donald Trump will be elected the next U.S. president, and said both Trump and Democrat Hillary Clinton have advocated more spending on infrastructure, which would add fiscal stimulus to the economy, which as we have explained, simply means “more debt.”
“This idea that fiscal stimulus may be coming seems to be getting sniffed out by the bond market,” Gundlach said. More debt spending may increase the cost of government borrowing by adding supply and making investors demand higher yields, he said. “People say, ‘How can rates rise?”’ he said. “That’s how they can rise and they’re sort of rising already.”
Gundlach told Reuters this summer that his firm went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent. The 10-year now yields around 1.60 percent. All told, Gundlach said he turned short-term negative on gold and gold miners but has not sold any of his firm’s positions. He also said DoubleLine’s bet on emerging-market debt over high yield “junk” bonds have paid off, given that EM has posted returns of more than 15.2% so far this year.
Gundlach’s full presentation is below.