DoubleLine CEO Jeffrey Gundlach admits he is constantly asked whether the U.S. economy is strong enough to handle a 6 percent yield on the 30-year Treasury.
In a webcast earlier this week, he asked that question rhetorically and then responded without certitude, saying, “Maybe, maybe not.”
But at least for now, it’s right on track to get there in 2021. Nonetheless, Gundlach agrees with most mainstream money managers and economists that growth should significantly moderate in 2019.
On the positive side, none of the numerous recession indicators DoubleLine tracks are flashing. Small business and confidence levels are at or near record highs, and amazingly enough, even homebuilder confidence is robust, despite the fact that their stocks are down more 40 percent.
Already, there are signs that the interest-rate sensitive part of the economy is starting to suffer. At the start of 2018, Gundlach was stunned that many talking heads were bullish on housing. As rates rise, housing affordability is becoming an issue. The investor widely considered to know the mortgage market as well as anyone also said the inventory of homes “is piling up in many parts of the country.”
In a wide-ranging discussion of global financial markets, Gundlach voiced concerns about deterioration in the corporate bond market. At present, the triple-B market, one level above junk, is twice the size of the actual junk bond market.
Consequently, it wouldn’t take a huge percentage of triple-B downgrades to cause the junk bond market to balloon. In fact, Gundlach noted that if the bond rating agencies used their old-fashioned leverage ratios, as much as 45 percent of the investment-grade bond market could be downgraded to junk.
Gundlach also detects strange signals when examining the way various market are interacting. Since the stock market started showing distress in early October, the 30-year Treasury did not go down. That in itself in very unusual.
Most troubling is the combination of rising deficits and rising interest rates. The reason growth has popped up in the last year is primarily the increase in deficit spending, Gundlach noted.
Normally, nations try to moderate fiscal policies late in the cycle so they can keep some powder dry for the next recession. Today, deficits are soaring and most measures don’t count hundreds of billions being borrowed to pay people’s Social Security, billions which Gundlach said would never be repaid.