During a December 17, 2018 interview, Gundlach discussed why various events occurred in 2018 and the implications for investors. Here are some of the key takeaways:¹

• The year kicked off with the end of Bitcoin mania. He commented that cryptocurrencies ultimately may or may not work; however, the way Bitcoin was being treated in 2017 was a mania. Over the course of 2018, Bitcoin traded down around 85% from its high.
• He believes market sentiment is currently bearish. Markets in general, and bear markets specifically, have two legs down. This means that the market rolls over, then recovers a bit, and then rolls over again. The second leg down is generally more severe.
• He expects this bear market to continue for quite some time. We are in a situation he calls a “suicide mission of policy.” We are increasing our budget deficit while raising interest rates and reducing the Fed’s balance sheet. The official budget deficit, which never captures the total amount spent, is annualized at about $1.62 trillion dollars.
• There may actually be no economic growth if you remove budget deficit spending, a significant piece of the GDP equation. He is very concerned with deficit spending spinning out of control, especially now that we are in the latter part of the market cycle.
• Over the next five years, around $7 trillion worth of Treasuries will be maturing. The average coupon on those Treasuries sits at around 2%. Because of Fed tightening, the rate will be much higher (possibly 3% or more) when those Treasuries roll over. If that’s the case, the government’s interest expense may go up by as much as $140 billion.
• A death cross occurs when the 50-day moving average falls below the 200-day moving average. Currently, about 80% of the countries in the MSCI World Index are in a death cross, the highest level in the history of the data going all the way back to 1901.
• The current problem is that the Fed shouldn’t have kept rates as low as they did for so long. Now, they have to raise rates while the U.S. budget deficit expands, which has never happened before. Additionally, the European Central Bank shouldn’t have maintained negative rates and QE for so long.
• He believes we’re in a debt-based economy and gave this example: Suppose you meet a friend from college who says, “I am doing well. I have a huge mortgage, a second on top of that, and I have four credit cards maxed out and a brand new watch.” Compare that to someone who just paid off their mortgage, has a million dollars saved up, and has no credit card debt. Which person is actually doing better in this scenario? Gundlach believes that the first person is most of America right now, and that all of the growth is coming from debt expansion.
• We can’t blame CEOs for taking advantage of monetary policy that created a zero interest rate environment. That environment collapsed yield spreads and made them narrower than at any time in history, which encouraged risk taking. Of course CEOs leveraged up and bought back stock because they were able to do so very inexpensively.

Source:

1) https://www.youtube.com/watch?v=hA_kg_nMGNU&t=320s

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