Jeffrey Gundlach replays the recession narrative, which is out of lockstep with Fed Chair Powell’s Goldilocks view of the state of the US economy.
US unemployment is near its 52-year record low, according to The Bureau of Statistics. But so is the US labour participation rate at 62%.
In this Goldilocks economy, 38% of the working-age population has dropped out, which doesn’t tally with the reality of needing a job to pay for necessities. Has 38% of the working-age population stopped needing food, shelter, clothes, transport, energy, hygiene products and medicines?
Another anomaly with the Goldilocks economy view is that the auto repossession rate was up by 20.4% in December, which has surpassed levels of the 2008 Great Recession.
A recent study by Fitch Ratings found that more subprime borrowers were 60 days or more behind on their car payments than at any other time on record.
In this so-called robust economy, cash-strapped consumers can not make auto loan payments. In the US, unlike Europe, with a densely packed population, private transport is a necessity.
“In this Goldilocks economy, 38% of the working-age population has dropped out, which doesn’t tally with the reality of needing a job to pay for necessities”
WEALTH TRAINING COMPANY
Fairy tale statistics, Goldilocks economy Jeffrey Gundlach replays the recession narrative
So Jeffrey Gundlach’s DoubleLine is doubling down on a recession.
He believes a recession is still likely to occur in 2024, along with a higher unemployment rate.
Indeed, the list of US companies slashing staff this year, from UPS to Google and Microsoft in Pinocchio’s Goldilocks economy, echoes past the 2008 Great Recession.
But perhaps the recession started in the second half of 2023 as the fallout from minuscule rate hikes in a highly leveraged economy finally blew the wheels off the auto loans market.
Autobond investors bleed heavily in 2023, as the Fed kept hiking, and the Repo man left scratching his head worrying where he would find adequate storage space to keep all those repossessed autos.
“the list of US companies slashing staff this year, from UPS to Google and Microsoft in Pinocchio’s Goldilocks economy, echoes past the 2008 Great Recession”
WEALTH TRAINING COMPANY
Demand destruction, Jeffrey Gundlach replays the recession narrative
“We know that inflation is going to come down,” Gundlach said. “For now, we think there will be a stall in the inflation rate coming down. This means the market is not going to get the Goldilocks picture that it was euphoric about a couple of weeks ago,” said Gundlach.
Gundlach also criticized the Fed’s ‘higher-for-longer’ strategy, saying it posed a negative risk to future growth.
The longer the Fed stays at what is going to be about a 200 or 300 basis points real interest rate on Fed funds, there is risk to economic growth as we move into this year,” he said in his latest interview.
“There is still plenty of anecdotal evidence to give credence to the belief the urban and commercial real estate market is in a debacle” – Jeffrey Gundlach
The current Fed fund rate stresses bank liquidity as Jeffrey Gundlach replays the recession narrative
Unrealised losses on treasury bond portfolios, which bankrupted five known banks in 2023, have not disappeared. Bank’s believed the Fed, that inflation was temporary, transitory and piled into long-maturity treasury bonds. Investors were led to believe inflation was going down to 2%, so they thought a treasury yielding above that was a good deal. To get more bang for their buck these investors doubled down and leveraged their bet on long bond treasuries.
But it was a story of, yet again, buying the Fed’s words and being fed to the wolves.
Inflation was neither temporary nor transitory but entrenched.
In an attempt to tackle inflation, a 24-fold increase in interest rates from O.25 to 5% in a little more than a year triggered the worst treasury bond market crash in history, worse than the Great Depression of the 30s.
The 2023 bond market crash is a potential systemic crisis for banks in 2024. In other words, the five bank failures in 2023 may not be an isolated case, assuming the Fed’s hawkish stance is no bluff.
A debt-laden system is unlikely to shoulder the Fed fund rates at the current rate without further shocks.
Gundlach said higher rates continue to threaten the banking system, and he could be bang on the money.
“There is still plenty of anecdotal evidence to give credence to the belief the urban and commercial real estate market is in a debacle,” he added.
A recession could trigger capital flows into treasury bonds, which might be what the Fed wants.
“Black Swan author Nassim Nicholas Taleb warned earlier in Miami that the world’s biggest economy faces a “death spiral” of swelling debt”
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Jeffrey Gundlach replays the recession narrative but remains bullish based on pending Fed rate cuts
Wars and investors scramble into US paper.
Jeffrey Gundlach said there’s no real sign that the soaring US debt poses a problem for markets or the US government.
But the world’s largest bond investor obviously would not be panicking on the stage even if privately he is having nightmares about the situation.
So here is another view. Black Swan author Nassim Nicholas Taleb warned earlier in Miami that the world’s biggest economy faces a “death spiral” of swelling debt, adding to recent alarms sounded by former US Treasury Secretary Robert Rubin earlier this month.
He’s equally sanguine on equities, despite the parallels some perceive between today’s market and the dot-com bubble era.
Share of the top 10 stocks in the MSCI USA Index, including the Magnificent Seven, has climbed to 29.3% as of the end of December, just shy of the 33.2% peak seen in June 2000, sparking comparisons to the last days of the tech bubble.
So Jeffrey Gundlach replays the recession narrative as the death spiral of swelling debt worsens in a backdrop of escalating wars and a melt up in tech stocks. Frankly, if that doesn’t spin your head like the exodos, we don’t know what will.