Elevated volatility is also a symptom of a potential regime change in the markets.
Gundlach also noted that large- and mega-cap indexes like the S&P 500 and the Dow Jones Industrial Average are no longer outperforming small caps as represented by the Russell 20000.
“The Russell 2000 had a strong negative return for most of 2020, then reversed due to vaccines,” he said.
Gundlach named his presentation Aqualung after Jeff Koons’ cast-bronze sculpture of scuba apparatus—the message being that the very equipment that purports to support life could also weigh a person down to their death.
“It signifies survival, death defiance, triumph over nature and voyages into the unknown—an apropos metaphor for American society currently,” he said. “Aqualung is about life support and artificial means of survival, but despite the uplifting themes of survival and achievement, the sculptor ultimately reminds us that these states of being cannot exist without their counterparts: demise, degradation and death. This dual aspect recasts it in a startling new light, as a symbol of inevitable decline.”
In Gundlach’s metaphor, stimulus was the aqualung helping to keep financial markets alive in a dangerous environment, but it could also come to weigh these same markets down.
“We remain mired in a house of mirrors with all these policies,” he said, pointing out that thanks to fiscal stimulus, the consumption of goods has grown even as employment has declined: Consumption is no longer a significant driver of job growth.
While U.S. stocks are supported by low-interest-rate policy, expectations of rising inflation may also signal a regime change with rising correlations between stocks and bonds. But it might also signify danger, as inflation can create negative real interest rates, allowing “zombie companies” with liabilities greater than revenues to survive far longer than they otherwise would.
Clarifying comments made on CNBC earlier this week, Gundlach said that he remains neutral on Bitcoin, warning those who seek to use it as an inflation hedge that it is more volatile than gold and maybe greatly overvalued. In fact, he credits most of Bitcoin’s recent run to record highs on support from institutional investors like Paul Tudor Jones.
And Gundlach took a moment to rail against technology as a driver of widened economic inequality, pointing out that while technology represents 38% of the market capitalization of the GDP, it accounts for just 6% of U.S. GDP and 2% of employment.
Gundlach also echoed a prediction he made several times during 2020, that a second wave of layoffs and unemployment looms for middle-management as work-from-home becomes a permanent reality. December’s job losses may be the first sign of this second wave, he said.
“I’m wondering if [work from home] won’t have economic consequences,” he said. “At some point, business leaders will have to draw conclusions about whether they need to restructure their businesses in a more permanent way.”
Towards the end of his presentation, he repeated asset allocation advice he offered to investors in 2020: A barbell portfolio that hedges against both inflation and deflation, 25% in Treasurys, 25% in cash, 25% in equities (mostly emerging markets), and 25% in real assets.