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Gundlach: “2017 Was Easy. 2018 Is Payback Time”

Courtesy of ZeroHedge. View original post here.

In an interview with CNBC‘s Scott Wapner Wednesday afternoon, Jeff Gundlach, the market’s reigning “bond king” and CEO of DoubleLine Capital, the investor gloated about his accurate call that stocks would run into trouble once the 10-year yield crossed 2.63% and reiterated his call that stocks will likely end the year lower.

While most of Gundlach’s talking points were in line with what he’s been saying all year (he made many similar points during a February call) he appears to slowly becoming more bearish on the US economy. With trade tensions between the US and China flaring and the Fed raising interest rates, the odds of a policy mistake with sever implications for the US economy is climbing.

Gundlach: Well, I said that back in January. The thing is that – when the stock market was near the high of the year. But the thing is that the stock market can’t take higher bond yields. And the line in the sand that we talked about in the past was 2.63 on the ten-year. And I said if that we break above 2.63, it’s gonna be trouble for stocks. And boy is that right. The second we went above 263 is when stocks started to get wobbly and then we rocketed higher on the ten-year as we thought it would toward 3% once we broke above 2.63. We didn’t quite make it to 3, we made it to 2.95, but call me a liar for five basis points if you want to. But the 2.63 level was really problematic. And I think for stocks to really have a chance of regaining their footing, you need the ten-year to go below 2.63. And I really don’t think that will happen because we’re looking at a lot of leading inflation indicators, and none of them are scary exactly, but they all show that one should expect that we’ll see higher inflation from the CPI in the months ahead

Traders now are in a bind, Gundlach said. After the lazy boat ride that was 2017, eking out gains in 2018 will be significantly harder.

Yeah, the VIX can’t seem to settle down, so we’re in a volatility regime. This is completely obviously different from what we experienced in 2017. It’s payback time. 2017 was the easiest investment year of all time. The risk adjustment returns of the stock market were the best in history and of course this year as I’ve said before, we’re going to have a negative year in the stock market, in fact right now we have a negative year in just about everything except commodities. It’s the only thing that’s up.

And with all the market stressors that could potentially harm stocks, it’s understandable that Peter Navarro, one of President Trump’s top trade advisors, said the Fed should consider holding off on raising interest rates as the administration flirts with a trade war.

When he was in elementary and high school, Gundlach said he remembers learning that the Smoot Hawley Tariff Act helped lead to the “policy mistake” that triggered the Great Depression.

To be sure, the front end of the yield curve suggests the bond market is “copacetic” with the Fed raising interest rates three times this year, despite the risk of a policy error.

While Gundlach still doesn’t believe a recession will arrive this year, the odds of one happening before the end of Trump’s term are high, he said.

So here we are and we are raising interest rates, late in the cycle, we have a yield curve that is now inside of 50 basis points twos to tens which historically when you go through 50 twos tens you pretty much always end up going flatter inverted, which typically leads to. So we’ve got that going on. Ladle on top of that quantitative tightening, which in fiscal 2019, which starts in October, could be as much as $600 billion of quantitative tightening. And on top of that we’re now talking about tariffs. So one can put together a scenario that we’re making – stumbling through into a policy mistake and that is perhaps what Mr. Navarro was talking about, that maybe the feds shouldn’t raise interest rates three times this year.

…So it’s interesting how the bond market seems okay with this even though we have some indications on a historical precedent back to the 1930s that suggests that, you know, a trade war with the fed tightening, a quantitative tightening, maybe a recession will come during the trump administration, which of course, would be historically likely given the fact this is the second longest economic expansion in the post-war era.

…We could have something in the order of $2 trillion of treasury bonds being floated in fiscal 2019 potentially, with corporate bond mature starting to ramp up and all of this going on, right? So, what if there’s a recession on top of that?

Asked by Wapner about his positioning, Gundlach said he’s still short equities in his macro fund, which was painful in December and January, but has since paid off.

He added that “bitcoin is the dot com of our world today” and that the mania surrounding the virtual currency space is “so similar to where we were in 1999.”

Given the volatility witnessed since early February, the notion that being leveraged long equities is probably a bad idea probably doesn’t come as a surprise to most.

While Gundlach didn’t mention one of his favorite bond-yield indicators – namely, the copper-gold ratio – it would suggest that the 10-year yield is moving lower, supporting the idea that the 2s10s spread will continue to narrow – possibly causing the curve to invert – as Gundlach suggested.

CopperGold


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