“Sell the house, sell the car, sell the kids—sell everything!”Trevor Gerszt
Did you ever wake up with dread in the pit of your stomach? Sun’s shining, birds are chirping, everybody looks normal and everything seems all right…yet you just know something bad’s going to happen?
It sounds like Jeffrey Gundlach is having that day for all of us.
Chief executive of DoubleLine Capital, which oversees more $100 billion in assets, Gundlach looks at the recent record highs in the stock market—and he’s not having it. In an interview Friday with Reuters he said with lackluster growth, low-to-negative interest rates worldwide, and the Fed’s persistent failure to lead, “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”
Gundlach is so concerned about the direction we’re headed, both in the U.S. and abroad, he says, “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good.”
Like a killjoy home inspector, the cracks he points out in the market foundation are familiar to anyone following the financial news. Our GDP growth is anemic and corporate earnings are weak. But even as earnings fade, corporate debt is soaring; it’s estimated to reach $62 trillion, a number that’s hard to even visualize, by 2020.
That’s setting up what some analysts are dubbing an “inevitable credit correction” but most of us might call the bursting of the corporate debt bubble. How did it happen? Because CEOs gorged themselves on what were essentially no-cost loans from banks. While the Fed held down interest rates in the hopes corporations would build, expand and hire, they’ve instead used all that cash to buy back stock, artificially inflating their stock prices, and consequently padding investor dividends and executive bonuses. So much for the record stock market.
When the bill comes due, and companies have to pay all that borrowed money back out of earnings, the result will be earnings drought that could last for years. An extended bear market, it should be noted, is the best-case scenario.
Global Destruct Sequence
Another crack Gundlach points out is the ongoing negative interest rate policies in Japan (and Europe). As he notes, ripping Japan for sticking with below-zero rates, “”You can’t save your economy by destroying your financial system.” Piling on are the tenuous asset values at Deutsche Bank. While corporate debt might be the powder keg, broader systemic weakness is what could light the fuse. It’s sometimes not one weak link that trips off economic disaster but a combination of things coming together in a disastrous chain reaction.
Heading for a Safe Haven
So where does Gundlach see safety in these treacherous waters? While he won’t completely eliminate them, the man once known as the “King of Bonds” has decided to go “maximum negative” on Treasurys last month, as yields bottomed out. So what is the man who says “Sell everything!” holding onto?
“Things are shaky and feeling dangerous…I am not selling [my] gold.”