According to Doubleline’s Jeffrey Gundlach, a single word explains the declines global capital markets experienced in June: deflation. Prices declined throughout the economy, including in equity and bond markets, consumer prices, commodities and wages.
“Prices have fallen, so it is a message of deflation,” Gundlach said last week.
With regard to interest rates, Gundlach’s explanation was very similar to that of PIMCO’s Bill Gross, who wrote last week that the bond market had reached a “tipping point” and was overdue for a correction. Gundlach described the fixed income market decline as a “garden-variety backup in rates.”
The benchmark 10-year Treasury note rose by 36 basis points in June, following a 43 basis point increase in May.
Gundlach spoke via conference call June 27. He set up the call earlier in the week, in response to concerns from investors about recent market action. He is the founder and chief investment officer of Los Angeles-based Doubleline Capital. Copies of the slides from his presentation are available here.
I’ll review Gundlach’s assessment of where opportunities now lie, particularly among asset classes that he said are attractive bets to rebound in the second half of the year. First, let’s look why he said deflation has been the driving force behind markets.
No signs of inflation
Inflation – or the anticipation of it – is typically the reason why interest rates spike. But that is not the case now.
“The selloff in bonds globally and in stocks globally has had nothing to do with inflation,” Gundlach said. Both the consumer price index and the personal consumption expenditures index – the Fed’s preferred metric – are at the lowest levels in the last half century. “There is no message of inflation in the markets,” he said.
Gold prices, which often increase in tandem with inflation fears, have fallen dramatically. Gundlach called gold the “weakest asset on the planet” and said he was glad he did not own it. But despite its “terrible” price chart, he said gold is worth thinking about as a contrarian investment.