CNBC's full interview with Jeffrey Gundlach

[00:00:00] Speaker 1: As I look at it right now, 92 basis points. What's your reaction to what we've seen in the bond market? [00:00:06] Speaker 2: Well, the bond market is rallying because the Fed has reacted to the seizure in the corporate bond market, which is not getting enough attention. I mean, the junk bond market widened out about the same as it did in the fourth quarter of 2018, and it's widening out massively again today. And Jay Powell has a background not as a theoretical economist, but as a private equity person. And his actions on short rates have been pretty much in reaction, ever since he started the easing cycle, pretty much in reaction to problems in the corporate bond market, which are really worth paying attention to because obviously the stock market has benefited a lot from buybacks. And as the corporate bond market is weakening, now that it's over a $10 trillion milestone, amazingly, $10 trillion of corporate bonds. As corporate bond yields are going up just as rapidly as treasury rates are falling, it's kind of problematic for that buyback aspect of the market. So the Fed has cut rates at the 50 basis point, intermediating, panic, emergency cut in reaction to even the investment grade bond market being shut down for seven business days. And so if we look at history, once the Fed does a panic, intermediating rate cut, particularly when it's 50 basis points, which is usually what it is when they have to panic, they typically cut pretty quickly again, even at the very next meeting. So I'm in the camp that the Fed is going to cut rates again, perhaps even in two weeks, and that we will see short rates headed towards zero. I agree with Jim Bianco, who's been talking about that. I'm not sure I agree with him that they're going to cut to zero immediately, but I think we have another rate cut coming. In the meantime, treasury bonds are not really a place to make money anymore. They're a place to not lose money. And that's what's happening. I mean, at 90 basis points-ish on the 10-year, even if they go to zero, you're not even looking at a 10% rate of return over a one-year time period. [00:02:05] Speaker 1: You use the word panic when describing what the Fed did. Why do you use that word? Why wasn't it justified what they did? Because they're worried about maybe a consumer panic. Maybe they're also worried about what could be a very real freeze-up of business in this country, especially on the mechanism that makes this economy work, and that's the service side. [00:02:30] Speaker 2: Yeah, well, I don't disagree with that. When I say panic, it doesn't mean it's not justified. I mean, sometimes panic is justified. If someone's breaking in your house through the window, I think you're supposed to panic. And business activity is pretty likely to contract. I mean, the anecdotal evidence is getting pretty powerful. I received multiple emails today of clients that were planning on visits to DoubleLine saying we're canceling them. And I'm sure I'm not alone in that. And obviously, the airlines are in free fall for good reason. And small business activity is going to contract. I think it's foolhardy to think anything other than this is going to take a major hit to short-term economic growth. So do you think the Fed... Maybe grocery store sales will go up on a short-term spike, but all other kind of social activity is grinding to a standstill. And so it's not surprising at all. Forgive me, Jeffrey. Do you think the Fed made the right move? I think cutting rates was justified for sure. I mean, I don't like the way sort of in which it was done. It feels like, you know, they were between a rock and a hard place. I mean, the Fed, I think when I say panic, the Fed in their most recent press conference took a victory lap talking about how they had finally reached a stable place in policy and that they could be on hold for the foreseeable future, maybe even the entire world, that we were in a good place, that policy rates were appropriate. And I don't know. I thought that that was a little bit of hubris at the time. But the data set has certainly changed to the point where the Fed was between a rock and a hard place. If they don't cut rates, you know, it's a real problem. The stock market is tanking or was tanking last week, and now it's a huge roller coaster ride. And the bond market activity, as I said earlier, with high yield spreads just blowing out while Treasury rates are falling just as fast as high yields are going up. It's I think it's you can't blame the Fed for cutting the rates 50. They're just probably going to have to do it again because this situation doesn't seem to be doing anything but continuing. And, you know, you see the press conference with the president and the and the physicians on top of this coronavirus situation. And they're saying that, you know, they might have a vaccine in like a year, year and a half. So nobody knows what's happening here. And so caution [00:04:53] Speaker 1: is appropriate. So Scott Miner told me the other day, the tenure could go to 25 basis points. I mentioned right now we're at 91. We could test 90, which is the record. Where do you how low do they [00:05:06] Speaker 2: go in your mind? I think we're pretty near the low right now. I mean, maybe we get to 80 basis points on a tenure. I don't really believe in the 25 basis point tenure. I think that's just extrapolating the move that's already happened. I mean, I think that the short rates are definitely going lower. There's absolutely no upward pressure on short rates, but we're starting to see a steepening yield curve in a way that's that's noticeable. Not today exactly, although it's moving around. But we've now have 100 basis points spread between the two year and the 30 year and 90 basis points spread between the five year and the 30 year. And these are levels that we haven't seen in quite a while. So I think we're getting to the point where fiscal stimulus is going to be more talked about. In fact, I think we're going to be hearing that is a narrative that's quite common in the days ahead. And it's difficult to see why you would have a demand for a 160 long bond or a 150 long bond or an 80 basis point tenure if all the supply is coming. But I don't really think calling the direction of interest rates is all that meaningful right now. I mean, you don't make any money regardless. I think you're just better off staying in cash really than an owning a 10 year treasury because the profit potential, even if you're absolutely right, and you do get lower tenure rates, you just don't make any money. You're starting. It's a place where you just have return free risk. But you can understand you can understand [00:06:36] Speaker 1: why some people are looking at the tenure, for example, and saying, and we've discussed it on this program multiple times. As long as the 10 year note yield keeps falling, it's hard to be confident [00:06:47] Speaker 2: about a stock market bottoming. I agree with that. I think the thing you're supposed to own, and I've talked about this for almost two years now, is gold. I mean, I turned bullish on gold in the summer of 2018 on my total return webcast when it was at 11.90. And it seems to me, as I talked about my Just Markets webcast, which is up on DoubleLine.com on a replay, that the dollar is going to get weaker. And the dollar getting weaker, it seems to be almost a policy. And the Fed cutting rates, slashing rates, is clearly going to be dollar negative. And that means that gold is going to go higher. Gold is doing super well, even with the dollar unchanged over the past really 14 months or so. And gold is at a record high in terms of euro and many other currencies. And I feel like it's almost a certainty that gold is going to go to an all-time high versus the dollar as well. And the gold is really performing well. Gold miners have not done well at all. I mean, they're probably up today, but they haven't done much year to date. And so I think you have to look at alternative assets to financial assets in this present environment. And gold is an anti-dollar play that I think will continue to be profitable. So I'm not really thinking about buying the 10-year to make money. You're making a lot more [00:08:07] Speaker 1: money in other things. What's the one thing you're looking at in the market across all asset classes, or even, you know, within the stock market that is guiding you in the direction you think things may go? You know, we see the transports are in a bear market. As we're speaking now, they've dipped there. What is the one thing that someone says to you, "What should I be watching more than anything else?" [00:08:33] Speaker 2: Well, I think we have to watch. It's not a market thing. It's an economic data thing. And that's initial claims for unemployment, which are very low and are the one thing that makes the economy seem like it has been holding up. But if this situation with travel and leisure and non-social activity continues, you just wonder if you can keep initial claims down near 200,000 per week. The five-year moving average of initial claims is around 243,000. And one of the most predictive aspects of economic statistics for recession is when you get unemployment claims on the weekly basis. I use the four-week moving average because they're so volatile. But if they go above their five-year moving average, you're done. You can just put a fork in the economy. It's almost definitional. And so I think you have to watch the unemployment situation. If this slowdown of small business and travel and leisure and the like sustains, it probably will lead to higher unemployment. And that's just a really big problem for the economy. Also, consumer confidence, which is tied into unemployment. Consumer confidence in the present has been very resilient and at historically high levels. However, interestingly, for the past 18 months or more, the consumer view of 12 months into the future has been quite dismal. And that setup usually puts you on notice that you've got to watch the view of the current situation for consumer confidence because they've been dismal about the future for some time. And historically, it's when the view of the future joins the view of -- sorry, the view of the present joins the view of the future in weakening, that is also sort of definitional of a recession. So these are things we have to watch out for. Certainly, the movement in the bond market is very similar, and the movement by the Fed is very similar to past massive slowdowns. And I want to say one more thing about employment, and that is the jolts figures that don't get enough attention have been very weak. They're basically as weak as they were going in the global financial crisis, which maybe is foreshadowing an uptick in unemployment claims, which would really kind of be the endgame of this economic expansion. So that's what I'm watching out for in terms of economic statistics. In terms of markets, I mean, I just think that the two sectors that are just falling knives are financials and transports. And I don't see anything that's going to reverse that until we get through the other side of this valley of this sort of travel shutdown. And financials, of course, are getting trashed thanks to the low interest rates. I sent you some charts last night. I don't know if you have them. But one of the charts I think is very interesting is a chart of financial market performance comparing Japan, Europe, and the United States going back to 1995. And if you look at it, the Japanese financial sector of the stock market is down like 80 percent since 1995. It didn't rally at all going into after the global financial crisis or going into the global financial crisis. It just stayed very, very depressed. And why was that? Well, that's because Japan had zero interest rates. And when you have zero interest rates, banks can't make any money. After the global financial crisis, Europe and the United States -- sorry, going into the global financial crisis and after the global financial crisis, Europe and the United States stocks -- there it is on the screen now -- they rallied similarly. You see the orange line and the blue line rallying exactly the same out of the recession of the dot-com bust. And then you see that they both collapsed in the global financial crisis. And after that, the European stock market hasn't really been -- the financial sector hasn't been able to recover. The U.S. financial sector went to match its highs of 2007 incredibly. But now the financial sector is underperforming tremendously because we're headed towards, again, zero interest rates from the Fed. And when we have zero interest rates from the Fed and low 10-year rates, banks can't make any money. So right now, I think you stay away from those sectors. [00:12:40] Speaker 1: We're looking at the charts, but we're also looking at a market that's deteriorating a little bit further. The Dow right now is at the lows of the day, down by about 920 points. So we're keeping our eye everywhere. You now have a 10-year yield at 90 basis points, .904. So let's talk about credit. There's a suggestion that there are going to be some sorts of quote-unquote credit events, right, as as fundamentals deteriorate in certain areas. And we've talked about them already, travel and leisure and things like that. But credit's available. I mean, you know, banks are lending and businesses have access to credit. There's no freeze up to make people nervous to the levels that they started to get in '08, right? We can agree with that. Are you at all concerned about what may take place from a credit standpoint that we need to keep our eyes on? Yes, absolutely. I've been talking about this for [00:13:45] Speaker 2: at least a year and a half. And that is when the next recession comes, and we certainly are looking at a risk of recession, at least negative, at least negative quarter and coming up on GDP, that in the next recession, you're going to have the downside of this long period of credit expansion, Fed stimulus, you know, the longest expansions in the post-war period, although not the strongest expansion. And the credit market has just been lulled to sleep out of complacency with the size that it's grown to and the leverage ratio in the corporate economy being so high. Then the next recession, you're going to see the epicenter of trouble in the markets will be the corporate bond market. You're starting to see that now. I mean, the stock market, as you say, is down to 1,000 points or so today, but it was up 1,000 points yesterday and it's moving 1,000 points every day. It's just a different sign, plus sign or minus sign, every other day. But the high yield bond market is now back out to the wides. It's been reasonably orderly. And that's interesting because usually when you start having these types of mega moves in the stock market, you start to see a real seizure in the corporate bond market. And that really has not happened, which is one thing that is holding things together. But the corporate bond market in this recession will not hold together. Maybe the Fed cut has helped that. Well, the Fed cut certainly helped. The investment grade corporate bond market was not able to issue a new issue bond for seven days, which I think led to part of the motivation for the Fed to cut rates. As I said earlier, Jay Powell cares a lot about corporate credit. He knows a lot about corporate credit. Being from a private equity background, in 2018, there was like two months in a row that you couldn't issue a high yield corporate bond. And that finally led to the big Powell pivot that powered the market in 2019. We had seven days in the investment grade corporate bond market here, where you couldn't issue a bond. And I think that had a lot to do with the Fed cutting rates. And clearly, the Fed cutting rates helped the market. Clearly, it helped the liquidity in the corporate bond market. But now, it's almost like today, with the stock market dropping and the high yield bond spread going back to its wide, it's almost like the market is kind of pounding on the door again, that the Fed act in line with the history of the last 20 years, when after they do an intermeeting emergency cut, at the next meeting, they cut again. And I think that has become the base case. [00:16:19] Speaker 1: What makes the best sense from the fiscal side? You're not the only one who suggests that that's what's needed. A conversation I had with the CEO of a very large investment firm the other night suggested to me that the reason the market didn't like what the Fed did is because that's all that it got that it that it needs something else from the fiscal side for all of the reasons that we've discussed. What makes the most sense? What do you think will happen? [00:16:44] Speaker 2: Well, in terms of the market not getting much out of the 50 basis point cut, that's only because the bond market had tremendously already priced in that cut. I mean, the bond market was really looking for three rate cuts when the Fed did two. So no wonder that there wasn't a big bump out of risk assets because the market already priced it in. From a fiscal perspective, what makes sense? Well, frankly, fiscal stimulus doesn't make any sense at all in the long term because we're already running national debt growth at over 6% of GDP, which is higher than nominal GDP. Sure. That's really a question of, do you want to deal with the short term or do you want to deal with the long term? Well, desperate times call for short term, then fiscal makes sense. Well, okay, if you want to deal with the short term, then you want to cut middle class taxes. That's what you want to do. And you might even do a George W. Bush situation where they wired money to people. We've actually done free money to the middle class before. They did it twice in response to the global financial crisis. It wasn't a lot of money. I think they gave something like $500. But, you know, that's one of these things that could happen again. And that would be a fiscal stimulus. And that clearly goes directly into spending or at least or perhaps paying down debt, depending how scared people are. But fiscal stimulus would be [00:18:05] Speaker 1: most effective at the middle class level. So let me ask you this, then, since we're talking about that, you mentioned it sort of takes us into the political spectrum. Super Tuesday is done. Biden had a huge win. You've spoken about the risks to the market of Bernie Sanders. You know, Biden's gotten this big lift now. Elizabeth Warren is out as we speak. Yesterday, was that all a Biden bounce, if you will, from Super Tuesday? And now how do you size up the political [00:18:34] Speaker 2: landscape? Well, it's really fascinating, isn't it, that after the midterm elections, the two leading candidates in the polls were Joe Biden and Bernie Sanders for the Democrats. Then, all of a sudden, we had about 30 more show up. And we went through all of this trouble and all of this money and all of this energy to end up with right back where we were after the midterms with Joe Biden, Bernie Sanders. And it's pretty remarkable how well the Democratic establishment engineered Super Tuesday. Bernie Sanders was looking pretty good. And they really changed things by encouraging Buttigieg and Klobuchar to drop out and throw their support behind Biden. And they even trotted out Beto O'Rourke to do it. And it was pretty darn effective. And even kept Elizabeth Warren in the race for Super Tuesday to further SAP support from Bernie Sanders. And it was tremendously effective. So it looks like they've engineered a Joe Biden candidacy nomination. Unfortunately, Joe Biden is the same as Jeb Bush. I mean, the Republicans could have done this maybe back in 2016 with Jeb Bush. And if they had done that, you would have gotten Hillary Clinton as president. Instead, they let the free fall, the free for all continue. And he ended up with President Trump. But now they've anointed Joe Biden. And I think Joe Biden is completely unelectable. I mean, one of the reasons that Bernie Sanders didn't do well on Super Tuesday was that he unfortunately appeals to voters that don't vote. He appeals to low turnout segment of the population, the young people and the younger people just didn't show up on Super Tuesday. I've got a feeling that if the younger people that support Bernie Sanders didn't show up for Bernie Sanders, that they're extremely unlikely to show up for Joe Biden. But I think one thing that's going to happen, it's not going to be so much that the market is scared of Bernie Sanders, because it looks to me like he's pretty much done. But I think the market is going to have to be scared of Joe Biden starting to move to the left because he needs to consolidate support as he can to try to woo back or woo in the Bernie supporters who probably are pretty upset by the move by the DNC to basically [00:20:49] Speaker 1: once again take it away from Bernie. If nothing else, you're going to get a zeroing in, if you will, on Biden's policies more closely than perhaps you have in the past, if truly he is the presumptive nominee and what his policies would mean for the stock market. I've got Steve Weiss wants to ask you a question, Jeffrey, and we don't have that much time left, so I want to try and get a couple of those in, if I may. [00:21:09] Speaker 3: All right, Jeffrey, so just with the understanding that nobody really knows, what's your baseline case for how long the situation goes on with the coronavirus? Because I assume that's underpinning your projections on the economy. And then, unlike prior recessions, the Fed doesn't have that much room with the rates to do anything. So do we have an administration able to get things done to pull [00:21:34] Speaker 2: us out? Two questions. Well, what was the first question again? What's your baseline case in terms [00:21:41] Speaker 1: of the timing? On the virus. We want you to put your epidemiology hat on, which you don't have to do if you don't want to, but you can take a stab at it. I have no [00:21:50] Speaker 2: I have no expertise in that area, but I'm just looking at the situation and I just believe that this is going to be a bigger problem than people thought for sure. I was meeting with a client of mine a couple of weeks ago. One of my biggest clients, they came in and it was the day that they announced that they had recalculated the virus count and it had exploded higher that day. And I think it was, I don't remember the numbers, but it was a huge upgrade. It was just that they hadn't tested them right or something, or they hadn't qualified them correctly. And suddenly there was a much bigger number. And my client asked me, you know, are you risk managing around this virus at all? And I said, you know, it's just today that I started to think that there was something here. And it just keeps getting worse and worse. And I have been reading notes from people that do have expertise in these areas. And they definitely are highly cautious about things. So I think that you have to be risk managing around this virus situation for sure. And obviously the market is taking that into account. And I just, I believe that whatever the consensus is about the situation, I think it's worse. That's kind of where I am on it. What was part two of your question? The second question is, [00:23:07] Speaker 3: with rates so low, the Fed doesn't have their typical toolbox where they were, according to a paper I read from the prior Fed, that it's typically a 5% spread that they have to lower rates. We don't have that. So does Trump have the wherewithal because the election is, because the market is so important to him, it's his scorecard, self-annoyed scorecard. What will the Fed actually do other than 500 bucks from the administration if they can do that without passing it? Does that concern you, [00:23:36] Speaker 2: in other words? Does it lengthen the recession? Well, you're right that the Fed has very little to do on the monetary policy side, obviously. I mean, they're already down. I mean, they're down so low and they're going to go lower. So what they've said they would do, and I take them at their word because I don't think they have any options. Jay Powell has said in plain English repeatedly that he doesn't really like negative interest rates. He'd rather do large-scale asset purchases, which is obviously quantitative easing. They've been expanding their balance sheet over the last six months in response to the repo crisis. That has slowed down. The balance sheet is not expanding in recent weeks, and you'll notice that the stock market is not doing well. It's amazing how highly correlated the Fed's balance sheet is to the S&P 500. It's exactly, it's almost a constant. And now that the Fed is not expanding their balance sheet, we see that the stock market is now basically unchanged over the past 25 months. So there is no progress being made in the stock market whatsoever over the past two years. So the Fed will do large-scale asset purchases, which means that they will help with the fiscal stimulus, in my opinion, that will help, you know, will probably be trotted out in response to the [00:24:46] Speaker 1: economic weakness that we're confronting. I forgot what number that brings us to in terms of QE, [00:24:51] Speaker 2: whether it's QE 5, 6, or 7. Well, it's QE 3. We've done really about five QEs. We did QE 1, 2, and 3 that were termed that. We also had Operation Twist in there, and now we have the repo facility that Jay Powell swears up and down is not QE. I guess he means QE means buying long bonds. So technically, if that's the definition, then we're not doing QE. But it would be QE 4. And I think it would be pretty big because it would need to finance not only the fiscal stimulus, but also the emerging weakness in the corporate bond market, which may need some addressing too. Because the corporate bond market weakening would be absolutely problematic for the entire United States economy. No question [00:25:35] Speaker 1: about that. And I know people are watching that closely. So in the two minutes I have left, I got a couple of quick things I want to put a fine point on, if I may. You said the Fed's going to cut again. March 17th, 18th, that's the next meeting. So they cut there? Yes or no? And by how much? [00:25:52] Speaker 2: I think they cut 50 at the next meeting in just two weeks. I think that's going to happen. Okay. Do you think we go to negative rates? No, I don't think we go to negative rates. I think Jay Powell understands that negative rates are fatal to the global financial system. If we go to negative rates, there will be capital destruction en masse. We can withstand negative rates in Japan. We can withstand negative rates in Europe because we've got the United States where you don't have negative rates. We talked about earlier how the banking system in Japan has been decimated since 1995 with zero interest rates. We've seen how the banking system in Europe has been decimated in the aftermath of the global financial crisis thanks to negative interest rates. Jay Powell, I applaud him loudly, seems to understand that negative interest rates in the United States would be a complete disaster for the financial system and he's not going to go there, I don't think. Although Ben Bernanke and Janet Yellen have been trying to change his mind in kind of in the news wires. But I applaud Jay Powell and I believe he will not go to negative [00:26:55] Speaker 1: interest rates. Jeffrey, I so much appreciate the time. I know our viewers do as well. These are amazing times we're living through and talking about. We'll talk to you again soon. What a difference two weeks makes, right? What a difference two weeks makes. That's right. I certainly agree with that. We will talk to you again soon. Thanks so much. All right, Judge.