All these factors are reasons why Gundlach believes the initial move in interest rates will be up, not down as normally happens when the next recession strikes. Then the Fed is likely to engage in asset purchases and other manipulative moves.
However, Gundlach had more kind words for Jay Powell than he has had in the past. Powell realizes that if the U.S. were to join Germany and Japan and move to a negative interest rate regime, the global financial system “couldn’t survive.” At the same time, the Fed chairman has said he won’t raise interest rates until inflation appears in a significant and persistent way.
The topic of the webcast was the investment company’s flagship DoubleLine Total Return fund. Gundlach pointedly noted that the $54 billion fund holds no corporate bonds, and that’s no accident.
“The quality of the corporate bond market has collapsed” over the last 50 years, he said. About half the world’s junk bonds and total corporate debt resides in America. When the next recession comes many more bonds are likely to get downgraded to junk status. “When bonds get downgraded, their prices do not go up,” he added.
Already, a quick scan of how different classes of bonds performed in 2019 reveals some strange signs are surfacing. For example, bonds rated double B have outperformed those rated triple C by a wide margin. The last two times this happened were in 1994 and 2001, both years when the equity markets struggled. This is “telling us something” and could be “the first robin of spring.”
It's not the only canary chirping in the coalmine. Back in September, rates in the overnight Repo market topped 2% when the 10-year Treasury was yielding 1.7%. Something there clearly isn't right.
The 2020 Election: Hillary?
Four years ago, Gundlach earned a reputation as a clairvoyant amateur political pundit, predicting President Trump would win the election one year before it was held. This year he isn’t nearly as certain.
Former Vice President Joe Biden seems “to have no chance,” even though he remains stuck in first place at 28%, the bond manager said. The way Biden struggles “to formulate paragraphs in debates” is sad. And at 28% he should be rising, not flatlining.
Massachusetts Senator Elizabeth Warren “has completely petered out,” Gundlach observed. Only a few months ago, betting markets gave her a 52% chance of winning the nomination, now she is at 15%, down 70%. “Once you take a dive like that,” she's toast, Gundlach says.
Vermont Senator Bernie Sanders seems to be enjoying a rebound at Warren’s expense. But Gundlach thinks that, as the details of left-wing Democrats’ plans to socialize much of the economy sink in, victory-starved Democrats will look elsewhere.