Jeffrey Gundlach’s Market Worries

 DoubleLine Capital CEO Jeffrey Gundlach, who “sounded alarms about housing in 2006” doesn’t see any disasters in the offing, according to a recent article in Barron’s. “But that’s no reason to relax,” the article adds.

The article outlines comments from an interview with the celebrated bond-fund manager. Here are some highlights:

  • “Periodically,” says Gundlach, “the world is afflicted by mass psychosis,” alluding to the subprime mortgage crisis and the dot com bubble. He cites the cryptocurrency market as another example of “a similar sort of magical thinking.”
  • Another “mania of sorts,” says Gundlach, has emerged in betting against market volatility through the sale of VIX futures. “This trade went bad when stocks corrected in February and volatility spiked.” The common denominator, he says, is a “quantitative trading strategy that seems foolproof and becomes widespread”—citing the 1998 example of Long Term Capital’s bets that “historical patterns in the relationship of certain assets would persist, and leveraged positions by more than 25 to 1. When those patterns changed, everything went south.”
  • Today, Gundlach argues, the Fed’s commitment to raising rates four times during the year “even if the data don’t change” could be dangerous when the Fed is also engaged in quantitative tightening.
  • Gundlach expects the stock market to be down by year-end. “The bond market and the dollar got oversold,” he says, but neither is showing signs of rallying, “which isn’t a good sign. It suggests the dollar’s next move will be down and the next move in rates will be higher.”