On My Radar - May 31, 2024: Gundlach's Investment Thesis - CMG

On My Radar: Gundlach's Investment Thesis - CMG

On My Radar: 

• Macro Masters Insights - Gundlach's Entire Investment Thesis
• S&P 500 and Oil
• The Hindenburg Omen
• Random Tweets
• Personal Note: New York and Dallas
• Trade Signals: May 29, 2024

Macro Masters Insights – Gundlach’s Entire Investment Thesis

“We are in the last mile of this debt fueled situation.”

-Jeffrey Gundlach

...In short, Gundlach sees a slowdown—a recession nearing—and believes the Fed will respond aggressively. Another round of inflation will follow, and it will be higher for longer. He believes we are in a debt trap, and some form of government yield curve control is probable.

• ...I think Jay Powell even said so in a kind of off-the-cuff in one of his press conferences (a couple of Fed meetings ago), that the Fed needs to reduce the Fed balance sheet so that they can get it back up again in the next recession.
• This indicates to me, sadly, that the response to the next economic downturn will be more money printing and inflationary policies.

...

• ...the interest expense problem is getting very real.
• We have trillions and trillions of dollars of treasury bonds that are maturing in this this calendar year in the next two calendar years or ~ $17 trillion. And many of them have coupons of 50 basis points or 25 basis points on 10-year treasuries. And these are coming due and if the debt is refinanced where interest rates are today, the interest expense is going to start turning into one of the largest budget items.
• It has already surpassed the official military spending and higher for longer means that these maturing bonds are going to be priced at 400 basis points or 300 basis points or 200 basis points higher than what’s rolling off.

• ...So they’re going to run out of money in the 2020s… if there’s a recession, which I certainly believe there will be by 2030 and the Medicaid Medicare trustees say they’re out of money in 2030. No recession.
• So out of money like before the next presidential election after this one.

What are we going to do? I’ve got a sort of radical idea, and I’m not predicting this, but it’s something that I’ve started to implement.

• So, I’ve got this crazy idea that I want to buy only the lowest coupon treasuries, zeros if possible. Because if I have a very low coupon treasury, I don’t have to worry about being restructured. I worry that the federal government might be forced to restructure the Treasury debt. People say that’s impossible… That it is a contract… It’s illegal.

...So, the fact that something is viewed as a contract doesn’t mean it won’t happen because it’s been happening with regularity over the last several years, so what if, and I’m not predicting this… What if the Treasury says, hey, we’ve got all these bonds out there, and some of them are quite old and some are paying 4%, 5%, 6%?

• They come out and say, “We’re in a jam.”
• What if the Fed then decides that they are going to cap the yield on all Treasury’s at 1%?
• If you own a 6% coupon, 20-year bond, and it gets reset down to 1%, I’m not predicting it’ll happen, but it might… If it does, you’ll lose at least 50% of your value.
• People haven’t figured this out. This is a real risk.

• ... the Fed may move to potentially running negative interest rates and causing more inflation.
• That’s why I think the dollar will go down in the next recession, not up.