Market Recap: DoubleLine Founder and CEO Jeffrey Gundlach

Original News:

My Transcript:

  1. Review 2019 market, and the driver in 2020?
    • All asset classes are strong, gold, stock, bond, bitcoin, but it came from a very low baseline, a deep dent in 2018 year end.
    • In a broader context, market is turning around: 10 year yield is 2%, S&P/DJ at peak but other stock markets outside of US are still below what they were at 1/16/2018. China stock crashed on 1/16/2018, and the same as US stock on 2/5/2018.
    • The really big help of 2019 is the massive U-turn from Fed reserve. One year ago (Dec 18) that Fed believe in the automatic QT, that they will be on automatically QT no matter what data said. Also, there will be sequential rate hike in 2019 and 2020, and the market tank immediately. Followed by a series market tanking, the Fed not only stop the QT (quantitative tightening) but start to trigger the fourth round QE (quantitative easing) using some semantic to hide the truth :). And that’s (expanding the balance sheet) the reason that settling back-down H2 this year because of the QE this year.
    • Repo market’s dust up raise the concern as well, the Fed is manipulating the market to the level of the market doesn’t really accept. Because if you cannot float the overnight money at the level of fed fund’s rate, it means the demand is not there. It reinforce my thesis that the next recession absence of fed doing massive monetary purchases, the interest rate of long side of the curve will probably go up because of supply issue (liquidity).
    • The growth of national debt is substantially bigger than the growth of GDP, which means US economy growth is driven by debt.
    • 2019 become the easiest year for investors since you can make 15-20% anywhere in the world. The pattern of united states has leading the world economy has reached to its end.
    • For historic cases:
      • Japan Nikki was invincible in 1980s but the recession came in 1990, and the Nikki got wiped out completely and never come back to its peak.
      • EU shines in late 1990, due to the euro and EU. However, similar things happened again and EU never came back to the level again.
      • Then you have the EM, (China), and when recession came, they got destroyed and never came back. 
      • So where we are right now? US is leading the other market by over 100% in the past ten years, and I believe the pattern will happened again, which means that US stock will not be able to go back to current level again in the short term.
    • The dollar is remarkable stable this year, but the next recession, the dollar will depreciate. And there will be the trend of rotating the investment from US market to other markets.
  2. What’s the probability of recession in 2020?
    • 40%. Aug./early Sep. the data is pretty bad in 2019, and ISM looks bad in Nov. We need to watch for the consumer’s confidence declining because that’s almost definitional cause of recession. And we see retail stock getting weaker as well, even though we can still see some support of market sentiment. The leading indicator need to go negative from close to zero before the recession, so roughly the prob. Is ~40%.
    • Yield curve is not inverted, but Jeffrey holds a different opinion that the yield curve always de-inverted before the financial recession. So the yield curve turns to positive slope is suggesting rather than averting the recession in the next 12 months.
    • This prediction follows the conscientious of US economists.
  3. 2020 election
    • It is all about economy. If the economy holds until the election, Trump will win. Democrats candidates are pretty weak and you can see a favor of month things among democrats candidate.
    • Trump runs based on braggadocio language, and if the GDP turns negative, he cannot braggadocios. Fed’s three rate cut will lag for a while, and Trump may have the weapon to remove the tariff if he want to boost the economy when he wants. Also, there may be a tax cut 2.0 on payroll tax for middle class which will super-boost the middle class expenditure.
    • All in all, the baseline is Trump will win as long as the economy pass through.
  4. Assess Jay Powell and Fed’s performance.
    • He showed he had his own idea Q4 2018 but unfortunately the market really didn’t accept it. He couldn’t put back to back press conference together with consistent message. Every press conference from Dec. to Jun. are completely different message with the one before, and increasingly dovish.
    • C- because Fed really lost the ways with his peers and aimlessly follow the bond market. You have to go back to Volcker that you really see the Fed that is indifferent to the message from the market, and driving the market rather than driven by the market.
    • Powell is leading the way for cheer leading the inflation higher. There is an amazing quote from Lael Brainard today, she said the reason underneath that the fed want the inflation hot is complicated, too complicated that can be explained to the public. Jeffrey thinks the national debt is compounding in an alarming rate. And the central bank worldwide seems to have a tonic policy of wanting inflation to be higher than interest rate. It is kind of understand if you have tremendous debt, it is helpful to stripe out the compounding problem if you put interest rate below the inflation rate. Because with that way, you are slowly debasing the debit, and it seems to be the motivation of the policy.
    • Fed said they need to make up the inflation for the past below 2% levels. It doesn’t make sense for Jeffrey that any difference between 1.5% inflation rate and 2% inflation rate. It is more gabble to hide the real reason.
  5. Glowing of negative interest worldwide, why it is problematic?
    • It is fatal for financial institution in the long run by having negative interest rate. If you look at the banks and insurance company in Europe, they are significantly underperform because they cannot make money by providing positive interest rate product under a negative interest rate environment.
    • 97% of negative yield debt are owned by central banks and financial institution that regulated or required to own the negative rate debt. So nobody really own negative yield bond. Typical example of negative interest rate with banks is: DB stock always bounce back when interest rate goes up. When Germany rate is -70bps, the DB stock is 6 something.
    • Jay Powell states US won’t take negative interest rate and Jeffrey strongly applaud this. Because if united states interest rate go negative along with Europe and Japan, it would be fatal for global banking system and it would be no where for global capital to go. Since US is a tremendously large market, at least capital can come to US if Japan and Europe are not attractive. That’s also one of the reason why US dollar is strong in the past few years.
  6. Talk about the forth turning, the next one after financial crisis?
    • Fourth turning, which we are right now is, the public rejecting the institution. Means of production will changes people’s life innovatively, and lots of unskilled workers will be left behind after the revolution of means of production. While the property relations have to do with how the wealth get split out. However, they change very slow, not in revolutionary way or even resist changing in a evolutionary way. Because the people benefit from the property relation and have the power, they don’t want to give it up. So what they do pretend they can somehow keep things together even though there is a tension between means of production and property relation. Look around how things are out of sinks right now: people running for presidency trying to say billionaire are illegal and we should eliminate all billionaires. We should put free money to the people who are displaced by the revolution of means of production. People who are in charge, called deep state, establishment or churches… what what need to be happened is a new set of property relations, that’s absolutely the kernel beneath the changes of political system in the United States that Trump dial in to. US democrats are not a party anymore, more like a socialist party. While John Baden or MB are doing something but none of they can get major support. So, we need to have some revoluational change in property relation.
    • Historically what’s the forth turning led to? Turmoil, civil war… doesn’t have to be violate like a war, but have to be a reshuffle. Think about pre and post civil war, that’s huge change. We will have very substantial political change. I was a leading democrats that were not run for office said, if bill of rights ( the first ten amendments of constitution) voted today, significant franchise will be voted down. So the level of tension is high..  Where we are in terms of disunity is remarkable compare to what we are 20 years ago.
  7. From investor perspectives, how those things playing out, what will happen?
    • We are battling tooth and nails for the next recession, Fed, central banks and others. You should play defense right now, even in 2018. Though you have a good 2019 but that’s a better reason that you should play defense right now. The next opportunity will be in corporate credit, you never have the same crisis twice. If you look at the growth of corporate bond market, it is twice of the size of 2006. If you recall 2006, people already mentioned that the corporate debt is ridiculous high that we should not let it happen. Now there are lots of zombie company that are allowed to keep going because of artificial low interest rate. Corporate bond market probably significantly overrated, the leverage ratio of corporate bond markets suggest that nearly a third of corporate bond should be rated as junk bond right now. Lots of them like AT&T get a passed and said we will deal with that later but when recession come, no one will remember addressing the leverage ratio, it will get worse. You will see massive downgrading across the bond market and the market will not go up but go down when the BBB bonds drop down to B. So the corporate bond should be absolutely minimal level. Non-US exposure should be ramp up to maximum level for people allocate their money globally. Jeffery said bond you make money slowly but lose money quickly.
  8. Doubleline Capital 10 year anniversary. What’s the culture?
    • Share success mentality, no competing internally …
    • No responsibility without authority, and no authority without responsibility.
    • I never yell anybody
    • Intellectual honesty
  9. Prolonged bond bear market influence people’s feeling, like young professionals.
    • The fact of people never experience bond bear market has colored their thinking. But I look at it a little differently, the really moment that shape people’s idea fundamentally is early 1980. From world war II to early 80s, there is no growth on debt to GDP ratio, that’s real GDP growth. Then Reagen showed up, start deficit spending. The data prior 1980s are irrelevant, because it is a different regime of economy growth. Since 1980s it is all debt based economic growth. I think the real risk that people not familiar with is what happen if we cannot keep the debt base growth going. If we have shrinkage of debt, it would be very very difficult market.
  10. What do you think of MMT
    • It is not real… basically what they were saying is, as long as the interest rate is below the growth of economy, it is ok..
    • If GDP turns negative, the MMT will blows up. It is illogical.
  11. What would you say to millennium generation?
    • Please create good institution for the first turning.
    • Lots of people hate the baby boom because people create a ridiculous idea that everyone need to go to college. The cost exploded and student loans problem.
    • There are two things survive bankruptcy field, tax and student loans.  
    • Social security system, completely not sustainable, need to be fixed, just like the forth turning concept.
  12. Outlook for the next 10 years.
    • 1920s are super boom time
    • While 2020s are real turmoil, we have to face SSN, health care, debt spending, and interest paying and all these, because of the compounding,

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