Jeff Gundlach Live Webcast: State Of The Market

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Just days after his latest appearance on CNBC and the Ira Sohn conference, where he revealed his top trade for 2019, Double Line CEO Jeffrey Gundlach is holding his latest periodic live webcast with investors.

Readers can listen to the webcast live by clicking on the slide below or the click on this link (registration required).

As usual we will update this post with the key highlights from the presentation, which starts with one of Gundlach’s favorite charts, the one showing global quantitative tightening, where he made his observation that the world could survive only so very briefly when liquidity was tightening.

Next, the DoubleLine CEO highlights a divergence which first emerged in mid-2018, that of the S&P’s dramatic outperformance relative to the rest of the world.

One of the reasons for non-US underperformance according to Gundlach, is Europe’s “Basket case” banks, namely Deutsche Bank and Credit Suisse, whose stocks have plunged to all time lows mostly as a result of Europe’s negative rates.

Which is not to say that the US is doing that great: as Jeff points out in the next chart, nominal GDP has been less impressive than Real, which in turn is reliant on a drop in the GDP deflator. Which is why Gundlach predicts that next quarter, Real GDP will be much more disappointing as prices rebound in Q2.

There is another reason why there may be less than meets the eye to US GDP: it is all on the back of massive credit creation. Such credit expansion is increasingly losing its potency, and it now costs several dollars in debt to create one dollar in GDP.

And the related punchline, Nominal GDP would have been negative if the US hadn’t added trillions in debt – as the below chart shows, in the past 5 years, Nominal GDP rose by 4.3%, but total public debt rose by 4.7%, or more than GDP. 

As debt rises, so does interest expense, and a chart which we showcased two weeks ago is starting to scare Gundlach, namely the soaring US debt interest expense as a % of GDP.

But the real red flag, as we discussed two weeks ago, is that starting in 2024, when the primary deficit drops to zero according to the latest projections, all US debt issuance will be used to fund the US net interest expense, which depending on the prevailing interest rate between now and then will be anywhere between $700 billion and $1.2 trillion or more.

Going back to the state of the US economy, Gundlach points out a remarkable divergence, one between the YoY change in US GDP and the Citi US Econ Surprise index – according to Gundlach, if the econ index is accurate, GDP is set to plunge.

While the rest of the presentation was a recap of points made recently, one outstanding slide is the one shown below. It needs no explanation.

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