“Bond King” Not Bullish on US Government Bonds; He’s Looking at Gold

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by Peter Schiff, Schiff Gold:

He’s been dubbed the “Bond King,” but Jeffery Gundlach isn’t particularly bullish on bonds right now – at least not US government bonds. And he’s certainly not bullish on stocks. Gundlach has his eyes on gold.

Gundlach heads DoubleLine Capital, overseeing some $119 billion in assets. During a speech at the 2018 Sohn Investment Conference last week, he said an “explosive, potential energy” of a huge “head-and-shoulders bottom” base was signaling a move of $1,000 in gold prices.

I’m not predicting it … I’m letting the market prove itself.”

Gundlach said US Treasuries are not attractive right now, despite the yield on the 10-year cracking through the 3% level. He said the rising inflation level will hurt the price of government bonds. Gundlach pointed to the Federal Reserve’s quantitative tightening as a big factor in rising yields. He said the uptrend will continue as foreigners become adverse to purchasing Treasuries due to hedging costs.

As the Fed tries to shrink its balance sheet through quantitative tightening, it isn’t in the market to buy Treasuries. Meanwhile, the US government plans to auction off around $1.4 trillion in bonds this year. And it won’t end there. The Treasury Department expects that pace of borrowing to continue over the next several years. That raises the important question: Who is going to buy all of this US government debt?

The US government depends heavily on three major buyers to finance its debt – China, Japan and the Federal Reserve. All of them are pretty much out of the market right now. As we reported last month, China may slow or even stop its purchase of US Treasuries. In other words, there may well be a glut of Treasuries out there in the marketplace. This means falling prices and rising yields, just as Gundlach suggests.

Gundlach has been bearish on the stock market for months. Early last month, he said the era of low volatility is over and it’s stock market investors who will have to pay, adding that, “The stock market can’t take higher bond yields.”

During his speech last week, Gundlach said he didn’t think the Jerome Powell-led Fed would be quick to bail out the markets unless there is a really big problem.

The stock market peaked the last day of Janet Yellen’s tenure, as Federal Reserve chairperson, literally … I’ve nicknamed her Lucky. Lucky Yellen. I mean, can you imagine? Leaving on the top day of the stock market? And the very next day, here comes Jay Powell. I don’t think that’s a coincidence. I think that’s when people realized that Powell has been vocal about not having this desire to have this 2017-type of stock market where we are going to come in and ‘help me out every time it drops 2%.’”

But we could be looking at a stock market plunge far beyond 2% If it does, Powell will almost certainly face intense political pressure to step in and rescue the stock market. Trump has claimed ownership of and taken credit for rising stock prices. This despite calling the stock market a “big, fat, ugly bubble” during the campaign. Whatever his personal inclinations might be, the Trump-appointed Fed chair may have a hard time sitting back doing nothing if/when the market really starts to tank.

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