by Wolf Richter, Wolf Street:
Bond bull Gundlach U-turns, goes “maximum negative” on Treasuries
Stock investors have entered a “world of uber complacency,” Jeffrey Gundlach, CEO of DoubleLine Capital in Los Angeles, explained – we assume with some bafflement.
On Friday, the S&P 500 hit another all-time high, after it was reported that the US economy grew at a painfully slow rate of 1.2% annualized in the second quarter, after a first quarter of 0.8% growth, which produced a first-half growth of 0.9% annualized, the worst in four years.
Even “adjusted” ex-bad-items earnings of S&P 500 companies have declined on a year-over-year basis for four quarters in a row. Total business sales in the US have declined since mid-2014. Defaults of companies rated by Standard & Poor’s have jumped to the highest level since the Financial Crisis. Overall business bankruptcies are soaring. Yet, stocks march higher.
So Gundlach told Reuters in a telephone interview: “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good.”
“The stock markets should be down massively, but investors seem to have been hypnotized that nothing can go wrong,” he said.
And his firm went “maximum negative” on Treasuries on July 6, he said. That day, the 10-year Treasury yield fell to 1.32%, taking out the low of 2012. “We never short in our mainline strategies,” he added. “We also never go to zero Treasuries. We went to lower weightings and change the duration.”
On Friday, the 10-year yield was at 1.45%. So at the moment, his timing was right. Money was being lost in Treasuries; prices fall as yields rise.
Grundlach’s “maximum negative” on Treasuries is a U-turn. For years, he’d been out there telling astonished listeners that yields would fall further from their already ludicrously low levels.
For example, on January 14, 2014, he shocked Wall Street and the media when he predicted that the 10-year Treasury yield would fall as low as 2.5% in the near-term. It was a ridiculous prediction. At the time, the 10-year yield was at around 3.0%, and Wall Street predicted that it would climb to 3.4%.
By mid-May, 2014, the yield hit 2.5%.
Then on December 9, 2014, he went way out on a limb and predicted that 10-year Treasuries would gain even more in 2015, and that the 10-year yield could plunge as low as 1%.
“Why not?” he told Reuters at the time. “The European rates are at 1%. France is below 1% right now,” he said. People laughed at him. QE Infinity had ended. The Fed had begun flip-flopping about rate increases. At the time, the 10-year yield was around 2.2% and couldn’t possibly go lower.
“If oil goes to $40, something is very wrong with the world,” he said in the same interview. Nonsense, people said. Oil will never drop this far.
In January 2016, WTI fell below $30 a barrel! The 10-year Treasury yield hasn’t quite made it to 1%, but got close: On July 6, 2016, it fell to 1.36%.
That was the day he turned “maximum negative” on Treasuries, which should give Treasury bulls the chills.
“The yield on the 10-year may reverse and go lower again, but I am not interested,” he said. “You don’t make any money. The risk-reward is horrific,” he said. “There is no upside” in Treasury prices.
But it’s not just stocks and Treasuries that are in for a haircut. Grundlach pointed out that, as Reuters put it, “many asset classes look frothy,” though DoubleLine continues to hold gold, which he predicted will reach $1,400 (from $1,349 on Friday). And it continues to hold gold-miners.
Which shows how subverted the theory of stocks, bonds, and “safe havens” has become. Central-bank market manipulations have inflated the safe havens to absurd levels, and they’re no longer “safe” havens. About $13 trillion of government bonds globally have negative yields, and some corporate bonds are hovering nearby. Investors used to buy them to get income. Now they buy them in the hope of even more negative rates so that they can sell the bonds and benefit from capital gains, because holding these “safe-haven” bonds to maturity produces no income but is associated with guaranteed losses.
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