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Looking Back to 1968 and Forward to What Might Lie Ahead

In his June 11, 2024, webcast “1968,” DoubleLine Founder and CEO Jeffrey Gundlach likens that year of civil strife, labor strikes, political violence and war to today’s “multiplication of tensions around the world.” He begins with a retrospective (1:12) of milestone events in 1968. After that backdrop, Mr. Gundlach begins a broad review of macroeconomic and financial market readings, including an in-depth dive into inflation data and labor readings “on the brink of, but too early to declare, recession.” Among other issues, he highlights: (7:25) The highest ratio of rental housing units under construction versus single-family homes for purchase since 1968-70, a “lopsided ratio that probably has something to do with how unaffordable the mortgage payment is as a percentage of household income.” (9:12) Labor market conditions, including a yellow light for recession from the U-3 unemployment rate having exceeded its 12-month moving average, contradictory readings from the household and establishment surveys, and declining small-business hiring plans. (15:00) The problematic interconnected spirals in the federal budget deficit relative to U.S. GDP, total national debt outstanding and federal interest expense as a percentage of tax revenue. (17:13) The inversion of the U.S. Treasury yield curve, now at 101 consecutive weeks, placing that in context with an arguably longer if interrupted period of combined inversions in 1978-81 totaling 180 weeks. (18:22) “High volatility of economic response, both fiscal and monetary,” as the reason for recessionary indicators not working. (19:44) The state of the yield curve: “It looks kind of like the late ’70s, early 1980s. And we’re going to be waiting for this thing to go above zero before we really say this indicator is a real red-light caution for the market.” (22:40) A series of takes on the federal funds rate, including its market-pricing history and the rate’s history, in nine out of 11 cases, following the yield on the two-year Treasury note. (27:15) The likely reason why a recession has not occurred despite negative year-over-year growth of the M-2 money supply: The M2 still remains $2.6 trillion above its pre-pandemic trend growth. (25:34) The “amazing” stability of inflation breakevens as gauged by comparing 10- and 30-year TIPS to nominal 10- and 30-year Treasury yields. “If this actually changed, I think it would be a real game changer for markets.” (29:23) A battery of price gauges, including commodity prices, CPI, PPI, the cost of auto insurance, PCE, contributors to inflation, diverging CPI shelter inflation versus new-tenant rent inflation and export and import prices. (42:26): Fixed income market performance by sector, year-to-date, with outperformance by commercial mortgage-backed securities, collateralized loan obligations and bank debt and underperformance in investment grade securities. (45:16) The banking system, more specifically, the small banks, the “double-edged sword” of record deposits and their exposure to commercial real estate. (47:31) Attractiveness of securities in AAA CLOs.