Have we Hit the Bottom?

Have we Hit the Bottom?

Gundlach: Why “The Worst Is Yet to Come”

APRIL 1, 2020 • CHRISTOPHER ROBBINS

The economy and financial markets will never be the same, and the worst is yet to come, said DoubleLine Capital CEO Jeffrey Gundlach.

The selloff caused by the COVID-19 outbreak has further to go, and U.S. financial markets are not likely to see a bottom until later in April, said Gundlach in a webcast yesterday.

“The low we hit in the middle of March, I would bet dollars to donuts that low will get taken out,” Gundlach said.

Gundlach also cautioned that the “v-shaped” recovery being forecast by many analysts appears to be unlikely, instead comparing this year’s market declines to the 1929 stock market crash, where the financial markets held their low levels for nearly a year before worsening again.

Bank analysts in particular are being too optimistic, said Gundlach, who pointed to the difficulties Japan’s Nikkei 200, emerging market indexes and European stock indexes have had returning to their all-time highs over the past 30 years as evidence that there are no guarantees equities will be able to reverse their declines.

“I don’t think it will be back to where it was prior for a long time, particularly on a real basis,” he said.

Referring to Goldman Sachs’ recent estimate that U.S. GDP will fall by 3.1% for the year, Gundlach said that he would “take the under.”

At some point in April, the “panicky feeling” that drove frenzied selling in mid-March should return, he said. In March, the S&P lost more than 12.5%, its largest monthly decline since October 2008, capping off one of the worst quarters in market history.

Gundlach argued that financial markets are behaving dysfunctional, in part because of the ongoing effect of monetary and fiscal stimulus packages.

Fixed income is not functioning as a safe haven in the current environment, said Gundlach, as the amount of distressed bonds quadrupled in less than a week to nearly $1 trillion.

Gundlach argued that the U.S. economy “looks like a depression scenario,” with up to 35 million lower-paying jobs at risk of evaporating entirely. Unemployment is likely to rise to at least 10%, he said, referring to a St. Louis Fed estimate that total job losses could total 47 million, which would represent a 32% unemployment rate.

While the economy may begin to post positive growth again in the third quarter of 2020, it’s simply “not plausible” that GDP will return to its previous levels in the near term, said Gundlach.

But in time, the U.S. economy may actually be in a “better place” as the recovery is likely to focus on a more resilient economy with more manufacturing and self-sufficiency in the U.S. and less emphasis on the American consumer, he said.

"The biggest winner out of all of this may be the American economy once we get past a rough patch," Gundlach said.

Gundlach’s presentation, titled “A Tale Of 2 Sinks,” referred to the “kitchen sink” approach to stimulus taken by fiscal policy makers and the Fed. Gundlach said that the Fed’s monetary stimulus has already eclipsed all of its accommodative interest rate and quantitative easing polices used during the 2008-2009 global financial crisis and “Great Recession,” while Congress’s $2.2 trillion fiscal stimulus is equally unprecedented.

Fiscal and monetary policy makers will each need to find a “second sink,” at the very least, to cope with the crisis, said Gundlach, and the total stimulus is likely to reach $10 trillion, which he called a “conservative” estimate.

The Fed’s monetary stimulus is choosing “winners and losers” in fixed-income markets, creating irrational disparities in performance between different asset classes, and at some point “another sink” will be necessary to restore some rationality to financial markets, said Gundlach.

Gundlach added that though the bill recently signed into law by President Donald Trump offers airlines $50 billion in relief, none of the stimulus should go to airlines that were responsible for $45.5 billion of stock buybacks over the past decade.

“Let them go bankrupt. The planes are not going to disappear,” he said.

Gundlach also warned about “paper gold” in gold futures and certain ETFs where there is no physical gold backing the financial instrument. There is not enough physical gold to cover all of these assets, he said.

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