- Jeff Gundlach, the chief executive and chief investment officer of DoubleLine Capital, said in his annual “Just Markets” webcast that the US is still in a recession.
- The so-called bond king broke down the two risks facing investors in an environment of mass money printing and rampant debt accumulation.
- He also shared the “winning formula” of a barbell asset allocation that consists of four types of asset classes to protect investors in both inflationary and deflationary environments.
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Wall Street is bullish about the year ahead, but bond king Jeff Gundlach thinks the US is still in a recession.
“I don’t believe that we’ve really left the recession yet,” the chief executive and chief investment officer of DoubleLine Capital said in his annual “Just Markets” webcast on Tuesday.
“My viewpoint is you can’t just have a couple of quarters of positive performance, you need to fully reverse the negative performance,” he said. “It is sort of like saying if a stock goes from $50 a share to $20 a share, and then goes up to $25, you can say that stock is performing well because it’s up 25% off its lows, but the stock is still seriously down.”
Gundlach explained this dynamic via the chart on US economic trend growth below. He said the blue dotted line represents US GDP trend growth since 2016, which had been about 2.5% until the $2 trillion GDP plunge during the COVID-19 crisis.
“We’ve seen the bounce back but we’re still light by nearly a trillion dollars from where we were,” Gundlach said. “So I will agree with the consensus terminology that we are out of the recession if we go above that $19.3 trillion GDP.”
With the development and distribution of vaccines, hopes for a V-shaped economic recovery are strong. But Gundlach is not sure about the sustainability of the recovery either.
“I think if you do get vaccines, there will be a short-term economic positive response,” he said. “The question is… is it really a true economic growth or is it you’re floating based upon stimulus and a little bit of pent-up demand but ultimately are going to be drowned by the weight of the consequences, ultimately of the policies that we already embarked on and are likely to ramp up further.”
2 risks ahead for investors
The extremely accommodative fiscal and monetary policies adopted by the US government and Federal Reserve to support the economy and financial markets during the pandemic have gotten out of control, Gundlach said.
That presents two dominating risks for investors ahead — inflation and deflation.
Based on core CPI data that track a basket of consumer goods and services in the US, inflation has not reached 3% for over 25 years, Gundlach said.
“This has been an incredible, stable inflation regime,” he said. “And the really big question is will this continue? I think definitively the answer is no.”
“Will we devolve into deflation because we have so much debt? Maybe. Will we devolve into inflation because of massive amounts of money printing? Maybe,” he added. “I think both of those risks need to be respected.”
4 components of a barbell asset allocation
To prepare for both inflationary and deflationary environments, investors would need a barbell asset allocation in their portfolios.
Half of these portfolios should be cash and long-term US Treasury bonds to protect against deflation.,
“I actually think you’re going to lose money on long-term Treasury bonds in the near term, but they will serve as a ballast to your portfolio volatility.”
To hedge against inflation, investors would need the other half of their portfolios in equities and real assets.
“The 25% in equities should probably be heavily in emerging market and Asian emerging market if you’re a low-risk person,” he said. “And then you would have 25% in some sort of real asset whether it’s real estate or [bitcoin] if you’re a speculator and you caught the bitcoin bug.”
Gundlach, who was positive on bitcoin a year ago, turned neutral on the digital asset when it reached $23,000.
“I remain neutral simply because this really looks like a dangerous market with a lot of volatility,” he said. “And I just don’t like having to worry if I’m going to lose 20% in an hour on just things that are this volatile.”
Investors who are wary of bitcoin’s volatility like Gundlach can also look towards gold or another type of commodity strategy, he said.
Interestingly, Gundlach also turned neutral on gold.
“Gold appears to be not in what I would call a good trade location for buying,” he said. “I was bullish on gold all the way from back in 2018 all the way up to about $1,800 to $1,900 this year. And so far all I’m doing is not worrying about it as it flops around, not making any progress.”
On the equities side, Gundlach recommended that investors focus on Asian and Latin American equities.
“Latin America is the primary beneficiary, I think, in these emerging markets and global markets, from the potential for vaccines given their inferior health care systems,” he said. “It’s a great thing if they could not have to worry about the ravages of the pandemic.”
Within Asia, he pointed out that Korean stocks have performed particularly well since last year.
“The Korean stock market was up something like 35% last year. And obviously, it’s more than doubled since its bottom back in March,” he said.
The four components of Gundlach’s barbell asset allocation should work like “a real life vest” when the market drowns in the treacherous waters of inflation or deflation.
“I know that it’s worked very well for the past year,” Gundlach said of the portfolio. “And I think it’s a winning formula given the perils that we face.”