Taps Coogan – January 8th, 2021

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Jeffery Gundlach, the founder of DoubleLine Capital and the manager of one of the largest funds in the world recently sat down with Yahoo Finance, for his first long format interview in a seemingly long time. In the discussion he warns that yield curve flattening is starting to signal recession risks for late 2022 or 2023 and, without hesitating, lists ‘the Fed’ as investors’ biggest risk. He also declares China “uninvestable” noting that he no longer trusts the data and worries about outright capital confiscation as relations between the US and China sour.

 

Jeffery Gundlach on what the biggest risk to investor is:

“The Fed. There has been a relationship that’s undeniable between the Fed’s activity, not just the Fed Funds rate but also the quantitative easing and the bond buying and the bond buying has every time supported equity markets. Weirdly, every time they do bond buying, yields go up… That has happened without exception… We’ve gone from completely dovish profile from the Fed… and suddenly when yields started to rise on the 2-year and the 5-year, of course, the Fed has to follow the bond market…”

On a yield curve recession signal and markets:

 “The yield curve is sending a bona fide recessionary signal. You have yields going up at the short end and going down on the long end. It’s not there yet, but it’s starting to get into the territory where you have to follow it very very closely… We are at a point of extremes…”

Ever since the rates peaked in the 80s, every single economic downturn has begun with the Fed funds level ever lower. It always breaks the economy at a lower level. The one that broke the economy in 2018 was about 2.5%. When you look at the yield curve, my guess is that… the yield curve may flatten significantly below 2%… Ever since the 30-year treasury yield kissed 2.5%, it seems like the Fed has been defending the long end of the bond market… Whenever it gets to 2%, weird things happen, it just stops… It almost looks like there is yield fixing going on, which is one way of explaining these negative real yields…”

“What’s odd about the situation is, however overvalued stocks are by historical comparisons using the S&P as a proxy, thanks to the meddling by the government they are actually cheap to bonds, so it’s a tough choice for investors…” 

“I think the bond market is showing enough of a recession indicator that by 2023 it seems pretty likely… I think the Fed only has to raise rates four times and you’re going to start seeing really a plethora of recessionary signals… I think the Fed is going to reverse again and this might be the last time. We might really finally be getting to the end game of this…”

On China:

“China is uninvestable in my opinion at this point. I’ve never invested in China long or short. I don’t trust the data. I don’t trust the relationship between the United State and China anymore. I think that investments in China could be confiscated, I think there is a risk of that. China’s ascendency has been in lock step weirdly with the deteriorating fiscal condition of the entitlement programs in the United States. I wonder if there is some causality in there. 

Enjoy the full interview above. 

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