Legendary bond investor Jeffrey Gundlach talked to CNBC Wednesday. He shared his views on a few major asset classes and was surprisingly bearish on equities for 2018. I've summarized his statements, but you can watch the video below for yourself.
The 10-year yield at 2.78% seems sensible, he said. Gundlach doesn't view the economy as very strong. Recent economic data, especially retail sales, has been weak. There has been inventory building going on, which boosted data in the early part of the year. Inflation has been AWOL. A line model from DoubleLine, Gundlach's fund, showed the CPI will go up 2.6% in July and then moderate. There have been many false alarms, like the previous wage number. The Friday wage number is very important to get a sense of where inflation is going.
The price of gold has been off the radar. Gold, the dollar and the 10-year are all intertwined. All are consolidating sideways. It will be very interesting to see which way they will break, he said.
There's a connection between Bitcoin and the social mood. Where there was speculation before there is now more caution. Bitcoin is leading risk assets. Bitcoin is the poster child of animal spirits. Unfortunately, Bitcoin is at the low of the year.
We are in a new regime of volatility. Gundlach called for volatility to return. The VIX can't seem to settle down. This is obviously different from where we were. We are going to have a negative year in the stock market, he said. We are having a negative year in everything except commodities. The stock market just can't take higher bond yields. A 10-year above 2.63% is a big problem. For stocks to have a chance the 10-year needs to go below 2.63%. Leading inflation indicators (like real GDP, New York Fed underlying inflation gauge and PMIs are indicating inflation going up). Nothing scary, but the 10 year is not going under 2.63%.
The Dow Theory says that the transports get in sync, which is very important. There hasn't been a bearish signal from the Dow Theory. When the Dow Industrials and the transports take out their low together, that's very important.
When Gundlach was in elementary school he was taught how the Great Depression was caused and that it would never be repeated, except now we are raising interest rates late in the cycle, we have a yield curve that's very flat and usually goes flatter and gets inverted, quantitative easiny is going on and on top of that we are talking about tariffs.
We are stumbling our way through policy mistakes. Perhaps the Fed shouldn't raise rates three times. However, the bond market is saying it is OK for the Fed to do it. Interesting, given the historical precedents we have.
If we do get a recession, we need to think about how radically the worldview of people will change. There is a lot of government debt that needs financing as well as many corporate bonds maturing in the next few years.
There's a reason why 2018 is so volatile so far -- because 2017 was not volatile at all.
Gundlach is net short equities in his global macro fund. Returns will be negative for the year.
Disclosure: No positions.
