DoubleLine's Jeff Gundlach says Fed won't cut rates, markets overpriced

Bond king Jeffrey Gundlach, CEO of Los Angeles-based money manager DoubleLine Capital, said the bond market is getting increasingly "grabby" and stocks are overvalued.

In a Jan. 24 Twitter/X interview with Pensions & Investments Editor-in-Chief Jennifer Ablan, Gundlach said that since the Federal Reserve stopped raising rates and pivoted to a dovish stance last fall, "Everything went up. Blue chips started rallying ... and became overvalued. The Magnificent Seven (stocks) aren't outperforming the S&P 500; they're keeping up but not beating" the index.

In the commercial real estate sector, Gundlach said his research team noted that just a few months ago, "the market was priced like the world was coming to an end. Then everything rallied with the Fed pivot," despite the fact that consumer delinquencies are getting worse, he said.

"We call this a grabby market. It's an industry phrase; people suddenly lift every offer. There's new issues coming out and they're oversubscribed 20 or 25 times. There's more demand than there is supply of new issues. This is a lazy, complacent market," that reminds him of the period just before the year 2000, he said.

Earnings growth in 2023 rose just 1%, and "yet the entire stock market move is based on momentum and rising valuations relative to present earnings. That has a lot to do with why markets overvalued. Its hard to push it higher from these valuations."

The Fed "is not going to change rates" at the next meeting, Gundlach added.

"They've raised aggressively, about 525 basis points and inflation has come down. And the inflation rate is quite likely to go down with oil where it is today. If Middle East war can't spike oil (prices) I don't know what can."

Regarding the U.S. government's budget deficit, he said: "We've taken national debt to $34 trillion. Our liabilities are bigger than assets."

"We're a hedge fund that's dreading a margin call. We can't meet the margin call. We could always restructure our liabilities. We're going to have that conversation, but it's difficult."

With rising interest rates, the U.S. is also paying an increasing amount for debt service on its obligations.

Even at current levels, "if they leave Fed funds where it is now, the cost of servicing Treasury debt will go up to huge percentage of tax receipts."

Gundlach predicts a recession in the U.S. economy in the middle of this year. And "for sure we see 3,200 on the S&P 500" after the recession hits, he said.

Gundlach called China "a disaster" and said he wouldn't "invest a penny" in Chinese securities.

China's problems may also explain why oil prices haven't surged despite geopolitical risks.

"That's bleeding over into emerging markets broadly. We have hot wars, we've got Red Sea problems and oil doesn't go up. Why? Demand must be low. The global economy can't be all that great."

China's largest problem is demographics: "They're losing people in the labor force. They'll try to inflate, or they might decide they need more people, and get aggressive like (Russian President Vladimir) Putin. Taiwan is obviously the sitting duck. I'd say if China tries to annex Taiwan it shows they're in desperate conditions."

Gundlach also said he's looking at building up cash in portfolios because he expects a sell-off.

"There's going to be a lot of opportunities" and 20% to 25% in cash is appropriate. "Stuff's going to get cheaper."

He also is bullish on gold, and says "I have no interest in bitcoin. I like gold because economic systems are in bad shape. The response in the developed world is to take rates to zero and give people money."

He expects the U.S. to have to restructure its liabilities and cut some entitlement programs, noting that 70% of current government outlays is on "so-called mandatory spending."

Gundlach predicts that Donald Trump will win the GOP nomination and "could win outright. But to what extent will states be allowed to interfere in the election by banning people from ballots?"

PredictIt betting market has President Joe Biden and Trump roughly neck and neck, he said.

"I find it hard to believe Biden will run for re-election. Everyone knows he can't debate" and has lost stamina, Gundlach said.

Finally, Gundlach said he's most bullish on the long-term prospects for India.

"I'm as bullish as ever," he said. India has "fantastic demographics, way better than China. Yes there's corruption in legal system, but that's why you buy junk bonds. It can get better. It can improve. Triple-A bonds only go in one direction."

"If I had to own one market in the world, and leave it alone for 30 years — I'd buy India."