Jeffrey Gundlach’s Macro and Market Views at mid-2023-6-6
· 10.06.2023 · 00:23:51 ··· ··· Saturday ·· 6 (6)
DoubleLine Capital In a June 6, 2023, webcast, DoubleLine Capital CEO and founder Jeffrey Gundlach starts (1:16) by exploring the “dust in the crevices of our financial institutions here in the United States and perhaps the general global world order.” Exhibits No. 1 and No. 2 that the country is heading for a dust-up (2:06) are the federal debt and the United States’ increasingly vulnerable mechanism of finance, debt-financed federal budget deficits. He notes that the federal government is already running deficits as a percentage of GDP that “should be scary relative to past recessions, and we’re not even in a recession yet.” This is the situation as Mr. Gundlach will show a recession appears likely later this year or in 2024.
The “real kicker” of this thesis (6:13), Mr. Gundlach says, is the amount of interest being paid on federal debt. In the wake of Federal Reserve increases of 525 basis points (bps) in official short-term rates and many rates along the Treasury curve up 400 bps, the burden of debt service has surged higher in dollar terms and as a percentage of GDP. Interest expense, Mr. Gundlach warns, “is going to swallow all of the tax receipts in the next few years if we stay on this track.” He predicts that the need for fiscal reform, including raising taxes and perhaps restructuring entitlement programs, is “going to become a political issue as part of the 2024 presidential campaign.”
Turning to the probability of recession in the U.S. (9:02), Mr. Gundlach reviews a range of indicators. Consumer expectations of the future, one of his favorite indicators, is one of the few indicators not to have given up the ghost. A broad range of other metrics, however, are flashing red. The year-over-year and sixth-month annualized change in the Leading Economic Index is “full-on recessionary.” Another recessionary indicator is the U.S. Treasury yield curve (10:51). The curve’s inversion indicates a recession likely is ahead. Mr. Gundlach is waiting for the curve to begin de-inverting, which might have begun, as a sign that the leading edge of recession is imminent.
In a sign of the onset of the last two recessions, Mr. Gundlach observes, the U.S. unemployment rate (15:15) exceeded its 12-month moving average. “That has happened now, but only by 4 bps. I don’t think we can call this a crossover in a really definitive way, but it does put us on watch.” This indicator (15:56) sometimes flashes false alerts. So DoubleLine also looks for confirmation in the form of a crossover of the unemployment rate’s 36-month moving average by its three-month moving average. That indicator still reads green.
Mr. Gundlach points to (17:23) a Federal Reserve survey showing a large increase in adults reporting deterioration in their financial situation versus a decrease in those reporting improvement in their financial condition. A study by Bank of America of households receiving unemployment benefits shows unemployment rising faster among higher-income groups than low- and middle-income groups, confirming Mr. Gundlach’s prediction of deterioration in middle-management jobs. Citing the same BofA study, he notices higher-income groups now are experiencing negative wage growth. Wage growth for the other two cohorts remains positive but is declining.
Banks have been tightening lending standards for business loans (20:26), a phenomenon that curbs loan growth and leads recessions. Interest paid on short-term loans to small businesses has doubled from the lows in 2020. As one of the reasons behind recent bank failures, Mr. Gundlach points out that “loan growth is contracting, and also the interest rate paid on short-term loans for small business has, thanks to the Fed’s actions, clearly exploded higher.” In 2023, bank failures, while limited to “only a couple of banks,” have occurred at large institutions, to the point that their combined asset value is slightly above 2% of GDP (20:23). Over the last century, when bank failures exceeded that level, they preceded the Great Depression, the savings and loan crisis “in the late 1980s and early ’90s, and then the Global Financial Crisis. We’re pretty close to the level as a percentage of GDP as those past two experiences that led to financial distress and, of course, significant recessions.”...among other topics.
To see the full description on the DoubleLine.com website, click here: https://doubleline.com/markets-insights/tr-webcast-macro-mid-2023-6-6/
· 01.01.1970 · 01:00:00 ···
0**##
· 01.01.1970 · 01:00:00 ···
# · 01.01.1970 · 01:00:00 ···
* · 01.01.1970 · 01:00:00 ···
* · 01.01.1970 · 01:00:00 ···
********
