Gundlach Calls Gross A “Second Tier Bond Manager” And Other Highlights From His Presentation
While Gundlach spoke for an hour and a half in his first webcast of 2017, perhaps his longest presentation to the broader public yet, and covered many areas in the presentation titled “Just Markets“, one line will be remembered: his direct attack at Bill Gross, whom he called a “second tier bond manager” for calling 2.6% on the 10 Year an important level.
As a reminder, earlier today Bill Gross issued his monthly outlook in which he suggested that 10Y yields rising above 2.60% would spell the end for the bond bull market, and would likely have further dramatic consequences on asset prices:
“This is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.”
Gundlach, obviously, disagreed noting “the last line in the sand is 3 percent on the 10-year. That will define the end of the bond bull market from a classic-chart perspective, not 2.60%” as Gross suggested. He then added that “almost for sure we’re going to take a look at 3 percent on the 10-year during 2017, and if we take out 3 percent in 2017, it’s bye-bye bond bull market. Rest in peace.” Such a jump would would have “a real impact on market liquidity in corporate bonds and junk bonds.”
It would also hit stocks, as 3% on the 10 Year would spell “trouble for equity markets.” He also said that “a 10-year above 3%, with the 30-year yield approaching 4%, would also be trouble for the equity market because they would start to look like ‘real’ yields to investors.” Previously Goldman reached the same conclusion, however when looking at 2.75% as the selloff bogey.
Gundlach said it’s not radical to forecast a 6% yield on the 10-year by 2020.
However, that won’t come quick: in predicting the next steps for the benchmark Treasury, Gundlach said “I think the 10-year Treasury will go below 2.25 percent … not below 2 percent” before once again starting to rise.
It is unclear how such a move in rates would impact Gundlach’s own DoubleLine, which at the end of December had $101 billion in AUM: as reported previously, in December DoubleLine’s Total Return Bond Fund suffered a $3.5 billion net outflow, its biggest one month redemption in history.
Repeating a claim he has made before, and reiterating a theme voiced previously by Morgan Stanley which said to “Sell the Inauguration”, Gundlach warned of a sell-off in the stock market around inauguration day as investors grasp that “Trump doesn’t have a magic wand to implement the growth plans they are optimistic about.”
Previewing the Fed’s rate hikes in 2017, Gundlach said that “all things being equal, the Fed will hike in June” and said that he expects two hikes this year, with three possible.
Regarding the Trump presidency, Gundlach said there are two major risks regarding Trump’s presidency: shrinking global trade and Trump’s temperament, as Reuters reported.
Additionally, in a follow up interview with Fox Business, Trump had varioous other observations which he did not discuss during his webcast, first among which his dire forecast for the future of the Eurozone, which he predicted could face grave danger as early as this year.
“It was a bull market idea. A group hug of sorts but when push comes to shove, I knew Paris wouldn’t take orders from Brussels, Italy is a disaster, there are countries that will never pay their debts. I’d put a 35 to 40 percent bet that something could even happen this year. (In the upcoming French elections) Marie Le-Pen could win. She’s said she’d put France’s membership up to a referendum and if that happens… I’d be surprised if it survive another 5 years,” he said.
Some other observations, first on a future trade war with China:
“I don’t see it. The possible happy scenario is that Donald Trump’s just a deal guy. He strikes deals. China doesn’t want a trade war so Trump dangles it out there and then softens his position on China in exchange for something. China has some control over North Korea. Maybe he strikes a deal to back off a trade war in exchange for China keeping a lid on North Korea (and its nuclear ambitions). But to start a trade war only makes things like apparel more expensive for consumers. Why would you want to do that?”
Trump’s effect on business sentiment and his attacks on U.S. companies doing business overseas:
“It’s incredible. We’ve seen a complete 180 degree change in sentiment since he was elected. Trump is symbolic guy. He picks symbols like Carrier and Ford. They’re very small issues but he makes them seem very big. His pushing them leads to incredible optimism. Did you see uptick in Small Business sentiment?
On forcing businesses to keep plants in America:
“(Trump) can impose tariffs, he can promise that America will get a bigger share of the pie. But that’s about it. Companies might stay here but they’ll use more robots. The robots won’t go away. Dark factories? It’s already happening. There’s a massive technology shift and you can’t stop it.”
On President Obama’s relationship with business owners:
“That was the most frustrating thing. People don’t want to be lectured to for being entrepreneurs. When Obama said in 2012, ‘If you’ve got a business, you didn’t build that, you didn’t create those jobs,’ I can tell you I’ve created 200 jobs. So I didn’t appreciate that.”
On Trump’s plan to cut taxes and spend on infrastructure:
“It’s a very bad time to launch a deficit explosion. It’s like drinking a ton of coffee in the morning. You’ll feel pretty good for awhile but in the afternoon, you’re gonna crash hard.”
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Some of his more notable charts:
A recap of 2016:
Where do bond yields go next? “I certainly expect that 2017 will be a third year of rising bond yields.”
A particularly notable chart, Gundlach pointed out the divergence between the stronger dollar (inverted axis) and inflation expectations as shown by 10 year inflation swaps. A strong dollar should be disinflationary, but it isn’t.
The demographic and social challenges faced by Trump and Americans:
The trouble with US debt, and rising rates: “I do think we are going to see a deficit expansion.”
Gundlach does not think a recession is coming as none of his favorite indicators signal that way:
Some advice for investors: shift from financial into real assets. “If you’re all financial assets and no real assets, you might want to peel off a piece and put into something that’s a real asset.”
Why is Gundlach expecting markets to reverse their post-election moves? This chart:
And so on.
His full presentation is below