“The narrative that developed is that you want to buy what the Fed’s buying. No, you don’t,” said Gundlach. “The results are telling,” with the LQD up around 0.5% since April 9, and the Bloomberg Barclay’s Aggregate Bond Index up about 1%, while emerging market bond ETFs are up 8%. A flood of new issuance at near-zero rates has been met with a market with little liquidity available, he said.
He also critized the Fed’s purchase of high-yield bonds and ETFs as a violation of the Federal Reserve Act of 1913.
Kryptonite
Gundlach sounded a stern warning against negative rates, which could act as a “kryptonite” to Powell’s Superman. Rising budget deficits might also act as economic kryptonite, he said, as well as a massive number of BBB-rated corporate bonds being downgraded to junk status.
“There are more BBBs than junk bonds,” he said. “You could see the junk market getting completely overwhelmed if a significant fraction of BBBs get downgraded, and you have to believe that a significant chunk of BBBs will get downgraded.”
While Gundlach was cautious on gold in prior pandemic-era webcasts, yesterday he changed course, taking a more bullish view.
“Gold has come up to a big resistance point that it hit in 2011-2012 in dollar terms,” said Gundlach. “In terms of other currencies, gold went to a record high. There are two ways of thinking about this: that gold in dollar terms has to catch up so we see new highs, or that this is a divergence. I turned neutral on gold a couple of months ago as I thought it was extended, but it hasn’t done anything since then, and you ought to be rewarded by accumulating gold. It certainly doesn’t seem to have a downside in it.”
Gundlach also expects that the dollar will weaken against other global currencies.
“Sure, the U.S. is running up debt like crazy, but so is everybody else,” said Gundlach. “Who are you going to devalue against? Maybe against everybody,” as the U.S. has become a huge outlier among the developed world in its outsized response to the Covid-19 crisis.
In fact, rising unemployment and a potentially more harmful second wave of job losses are applying new deflationary pressures to the economy, he said. While inflation should remain nearly non-existent in the near term, Gundlach also warned listeners to watch out for rising inflation expectations in the mid-term, noting that when economists begin warning about potential inflation it can become a self-fulfilling prophecy.
Politics also got a mention in Gundlach’s presentation. He argued that a win by Democratic candidate Joe Biden over President Donald Trump in November would likely lead to an increase in corporate taxes, which would slow any economic recovery from the pandemic-caused recession and exacerbate job losses.