Selected Slides from Jeffrey Gundlach's Webinar entitled "A Tale of Two Sinks"
Date of webinar: March 31, 2020.
By way of context, US stocks as represented by the S&P 500 peaked at 3,393.52 on Feb. 19 and then went on to crash by -36% before rallying by +18%. SPX now stands at 2,584.59 as of the close for March 31, 2020. This level is -24% below the Feb. 19th peak, meaning that 1/3 of the -36% loss has been retraced. Note that this is a month-end close, so I think it is biased on the upside.
The state with the largest manufacturing sector is Indiana. The one with the smallest is Washington DC. Gundlach believes that the coronavirus pandemic can lead to a revival of US manufacturing.
In the past ~10 days, US Congress did $2 trillion of fiscal stimulus, the Fed did $4 trillion of monetary easing and reduced interest rates by 1% (on a Sunday). As a result, the Fed's balance sheet now stands at 30% of GDP, up from the 19% figure at the right edge of the chart below. The US still has a long way to go before becoming like Japan. Gundlach believes "there's another stimulus package coming," which would raise the charted figure to 50%. (Note that US GDP in 2019 was $21.4 trillion.) The "30%" and "50%" figures are figures quoted by Gundlach in his webinar. The "$2tn" and "$4tn" figures are from my own recollection.
The Fed's $4 trillion monetary easing caused the latest snapback (black line) in bonds. The big drop prior to it coincides with the stock market crash from Feb. 19 to March 23.
The recent "violence" in the corporate bond market resembles the 2008 moves. Along with 2008, these are the only times since 1998 (22 years) that we've seen such large moves. The current turmoil shouldn't be taken lightly, coronavirus or no coronavirus.
The current cross-sectional view of the bond market is as follows, expressed in terms of year-to-date returns. The reason that Investment Grade AA bonds are flat (first item on the left) is because of the $4tn monetary easing of the past ~10 days.
This is how municipal bonds got decimated in the past month. Gundlach commented that "the Fed will need to send money to the states." That's how bad of a shape they will soon find themselves in. Declining revenues from sales and income taxes.
We now turn to some fundamentals which form the underpinnings for the above charts as well as the future.
Jobless claims & Unemployment. Last week's initial jobless claims number was 3.2 million. This week's is expected to be even larger. The most recent 4-week average (charted below) is the highest ever in the past 52 years (since 1968).
US Budget Deficit and Unemployment Rate. As unemployment increases (see previous chart), federal tax revenues will decrease. This will put upward pressure on the Federal Budget Deficit. Furthermore, this deficit is already at an elevated level relative to the business cycle -- we're not even in a post-recession period! This all means that more Treasury bonds will need to be issued. So the question is, what happens to long term government bond yields? This factor taken in isolation by itself means upward pressure on yields because a higher interest rate has to be offered to clear a larger supply of bonds. (However, there are other confounding factors such as flight to safety, lack of other attractive alternatives, low economic growth, and Fed intervention which all put downward pressure on these yields.)
Afterthought (3/31/2020): To the extent that markets are free, my prognosis is that government bond yields will rise. To the extent that they're controlled, they will fall or remain low.
The Dollar and Twin Deficits. The "twin deficits" refer to the Federal Budget Deficit and the Current Account Deficit; see here. The chart below shows that they tend to track and forecast the Dollar with a 2-year lead. As an isolated single factor, because the Twin Deficits are expected to increase -- they are trending down in the chart below (red line) -- and as suggested by the previous chart, they will put downward pressure on the Dollar. (However, there are other confounding factors such as flight to safety and global dollar liquidity shortage which put upward pressure on the Dollar.)
Afterthought (3/31/2020): To the extent that markets behave orderly, my prognosis is that the dollar will fall. To the extent that they behave chaotically, the dollar will rise. Looking at ~30 years of history (above chart) may not be enough for drawing the right conclusion given the current state of affairs globally.
Banking sector. European banks are in worse shape than American banks, and have been so since 2008. However, neither is in as bad of a shape as Japanese banks. Japan has been conducting easy monetary policy including an ultra low interest rate policy since 2008 (see 2nd chart from the top).
Other charts:
- Comparison of current stock market crash to previous ones. Covers snap-back and time until trough.
- 2020 US GDP forecasts. Shows that the US will most likely experience recession this year.
- Crude oil (WTI) is at $20 /barrel. The 2016 low has been taken out. Saudi Arabia decided to increase production after failing to reach an agreement with Russia. This will decimate the US shale oil industry, especially those with leverage.
- Gold is bounding around. Gold miners are a mixed bag; they will go up because of their correlation with gold; they will go down because of their correlation with stocks. Gundlach is bearish gold miners.
- Gold is "real money". That's why it makes sense to look at the SPY:GOLD ratio.
- Copper:Gold ratio tracks the 10-year Treasury yield pretty well. There are fundamental reasons for this. Copper is correlated with economic growth. Gold is inversely correlated with real yields.
- List of "agency" and "non-agency" REITs:
- Agency: NLY, AGNC
- Non-agency: NRZ, CIM, TWO, MFA
- Stock market: If "normal" is January 2020, we will "never" go back to that level. Those were Gundlach's words.
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