A few days after Jeff Gundlach took a 22% profit on his "top trade of 2019", revealed exactly one month prior, which was a bet on a spike in bond volatility....
TLT put/call straddle idea at Sohn up 22% in the month since. Rare instant gratification. If you put it on, taking it off now makes sense.— Jeffrey Gundlach (@TruthGundlach) June 6, 2019
... the DoubleLine CEO is holding his latest public webcast. As Bloomberg notes, plenty has changed since Gundlach last spoke to his investors: the U.S.-China tariff face-off has intensified and so has the sense that if it isn't resolved we will tip into a recession.
As usual we will focus on the key slides in his presentation, titled this time "YouTube university." Readers can log into the call by clicking on the image below (or click here).
The presentation begins with Gundlach slamming Deutsche Bank's imploding stock...
... and the record negative yields in German 10Y bunds...
... which among other things reflect collapsing European export orders.
As we have done in the past, Gundlach also brings up South Korea's market as a canary in the coalmine for the global economy. Needless to say, the chart is not pointing int he right direction.
From there we segue to the US-China trade war, and since China is now an equal to the US in terms of total merchandise, it is "getting complicated" especially as we are now starting to see the effect of tariff wars, warning that people are underestimating the "length and frictions of tariff wars."
One thing China does have going for it, according to Gundlach, is the largest number of STEM graduates in the world.
As an aside, Gundlach says that he is worried "that it can look like Trump folded on his tariff threat against Mexico and that'll embolden China to feel like they can play a game of chicken as well."
From there, Gundlach segues into the topic of a recession, which he now warns that "Several indicators suggest a recession could take place within 1 year."
He also notes the duration of the current expansion, and that it is on verge to become the longest in history.
Gundlach's favorite indicator, the consumer confidence expectations less current conditions spread is near all time lows.
And since Gundlach now believes it is "extremely probable" the Fed will cut rates, even as the Fed's own dots still anticipate only hikes...
... he has also revised his recession rate odds, and now sees a 40%-45% chance of a recession in the next six months, and 65% in the next year.
Speaking of the dots, Gundlach says "I can't imagine what they're going to do with the dots," adding that it would be odd if they put a cut in the dot plot and don't immediately deliver one. He also notes that he has a hard time believing the median 2020 dot will imply a hike.
Looking at indicators, Gundlach glosses over the 2s10s which has yet to invert, and instead says that the bull-steepening of the 3m10y yield curve is what should really scare people, as it often happens right before recessions, something else we have discussed extensively.
So if the Fed cuts, will it be a 25bps to 50bps initial rate cut: Gundlach reminds us that the last two easing cycles both started with a 50bps cut.
Whatever the answer, don't look for it during next week's FOMC meeting where Powell "will try to say as little as possible" as the Fed simply has no idea what will happen next.
Still, Gundlach does not expect a rate cut in June, as "you only know with hindsight whether something's an insurance cut." He does predict that in September there may be a double, 50bps rate cut.
An interesting market observation: Gundlach points out that prior to each of the last 3 recessions, one major market group peaked - first Japan, then Europe, then the EM. Is it the turn of the US now?
From there Gundlach turns to his favorite topic, the US deficit - which he warns that it is consistently understated based on the accounting method one uses, and notes that US government debt to revenue is over 530%.
Naturally, Gundlach could not possibly avoid mentioning touch other most sensitive topic - the soaring US debt interest as % of GDP, which is expected to hit an all time high despite near record low rates.
And then there is US entitlement and mandatory spending, which at last check was over $2.5 trillion.
Stepping away from the woeful state of the US, Gundlach then goes back to his favorite market indicators, among which the copper/gold ratio and the 10Y, which suggest all is in alignment, and are where they should be...
... and the same goes for Gundlach's preferred treasury "fair value" indicator where the 10Y yield is compared to the average of the US nominal GDP and the German 10Y (which is negative). Here too, there are no surprises.
Gundlach also notes the gradual decline in bids-to-cover in 10Y Treasury auctions, but objects to the narrative that foreigners are inverting the yield curve, as "no one's doing that." Specifically, as he showed in a chart, foreign holdings are concentrated far more at the front of the curve, so "they're helping to steepen it." In other words, if the Fed is worried about the inverted yield curve, it should just dump its own holdings.
His market punchline: so far 2019 has been the opposite of 2018, as gold, bitcoin, stocks, bonds are all making money.
Finally, some select Q&A:
- On his famous bond yield prediction made in 2016: If the Fed wasn't manipulating bond yields, the 10-year would go to 6% by 2021.
- On rates: "The Fed is strongly signaling they're open to the idea of manipulating rates down."
- On rate cuts: "July rate cut is a pretty good possibility, and a cut by September is basically a lock... The start of a rate-cut cycle would be the Fed capitulating to the bond market, not Trump."
- On Joe Biden: "We won't learn any new information on "Jurassic Joe"- he's run for president for 32 years. I don't think he will be the Democratic nominee"
- On the price of oil: "It's a demand issue; it's suggestive that the global growth slowdown is real."
- On bitcoin vs gold: "I'd rather own gold than bitcoin. I'm just interest in bitcoin."