One of Warren Buffett’s more pungent observations holds that when the tide goes out, we’ll find out who is wearing a bathing suit. DoubleLine CIO Jeffrey Gundlach told advisors on Tuesday that when the next economic downturn arrives, more than a few corporate bonds could find themselves dangerously exposed on some variant of Buffett’s proverbial “nude beach.”
Conventional wisdom contends that the U.S. economy is the envy of the world, growing at or near 3 percent with unemployment at the lowest level since Neil Armstrong walked on the moon in 1969. But both Gundlach and economic consultant Danielle DiMartino Booth believe there are numerous problems lurking beneath the surface of the American business climate.
Both experts were interviewed by DoubleLine deputy CIO Jeffrey Sherman, who asked Booth about her take on the U.S. economy and whether anything had changed in the last four months when markets were spooked about a looming global slowdown. The big change, she said, was “liquidity, liquidity, liquidity.”
Worried about a serious deterioration in growth, China’s leaders decided to “throw gasoline on the fire” with new stimulus, she said. That sent a signal to American CEOs that they could revert to their default strategies for capital allocation—the stock buybacks that have fueled this decade-long bull market run.
Policymakers, in Booth’s view, are being “prodded and pushed” to keep the party going. Back in September 2017, Booth noted the U.S. auto industry was in a recession. Then fiscal stimulus and other factors managed to maintain sales at a reasonable level. But over the last nine months, Booth argued the economy has seen corporate layoffs increasing, while activity in the auto and rail sectors are moderating and prices in the big oil rig market “are crashing.” None of this has stopped the U.S. stock market from staging “the most violent, rapid rebound” in history since Christmas Eve.
From Gundlach’s perspective, it seems like we “are living in a twilight zone.” A key Citibank measure tracking changes in monthly data and comparing them to 12-month moving averages has “cratered since the beginning of 2018.” This index tends to lead GDP.
Still, Gundlach pointedly did not predict a recession. But the conversation on the economy is approaching the absurd, he argued. Last Friday, Vice President Mike Pence spoke in glowing terms about the roaring economy and then called upon the Federal Reserve to reduce the Fed funds rate by 100 basis points.
Gundlach called the vice president's performance "embarrassing." Others have also noted the incongruous disconnect between the Trump administration’s constant calls for lower interest rates and simultaneous boasts that the current economy is the greatest in history. Statistics indicate that the U.S. created more jobs in the 26 months before Trump took office than it has since in the 26 months since January 2017.
What about the roaring bull market in equities? It “hasn’t gone anywhere in 15 months,” observed Gundlach, who did not back away from an earlier prediction that the S&P 500 would fall below the 2,350 level of Christmas Eve.
Gundlach noted that his favorite equity market index, the NYSE Composite, peaked in January 2018 and failed to return to its high last October or in recent weeks, when certain other indexes did set new highs. Like Booth, he believes the volatility global markets experienced in the fourth quarter were strongly related to China slowing and stimulating.