When last we checked in on bond king for the post-Gross world, exposer of WSJ conspiracies, and man who showed up at Sohn dressed in a Jack Nicholson Joker costume, Jeff Gundlach, the DoubleLine boss was hanging out on Twitter shouting about the possibility that stretched spec positioning in Treasurys could lead to an epic short squeeze.
Massive increase this week in short positions against 10 &30 yr UST mkts. Highest for both in history, by far. Could cause quite a squeeze.
— Jeffrey Gundlach (@TruthGundlach) August 17, 2018
That one tweet has been the subject of vociferous debate over the past month, which is absurd for any number of reasons.
Anyway, prior to that tweet, Jeff spent about two solid months telling anyone who would listen about how simultaneously raising rates and ballooning the deficit is a “suicide mission” and a “death wish“. The “suicide mission” line was delivered during a June webcast, while the “death wish” warning came during a July interview with Barron’s. Although he’s exactly right in his assessment of the U.S. fiscal path in the context of monetary policy, it wasn’t immediately clear whether Jeff realized that he needn’t come up with a new analogy, considering that anyone who goes on a “suicide mission” by definition has a “death wish.”
During that same interview with Barron’s, Gundlach quite literally demanded that you “respect” the yield curve. Here are the relevant quotes:
There’s a narrative out there that says the flattening yield curve isn’t sending any message about a recession, and that couldn’t be more wrong. In fact, with rates so low, the yield curve signal is even stronger than usual.
We are getting closer to a recession. When the curve goes flat from the two-year Treasury to the 10-year, the recession risk is at least a year away. Recently, that spread was 28 basis points, which is pretty close to being flat. It is flashing yellow. It needs to be respected.
Well on Tuesday, Jeff held another one of his webcasts and predictably, he’s doubling down on his recent warnings and implicitly calling everyone else morons.
First, let’s get to where he’s unequivocally right. On Tuesday, he called the debt-financed U.S. deficits “miracle grow” and warned that the benefits will prove ephemeral. Here’s the first slide of his presentation:
And here’s his “Voila” chart:
As usual, no arguments there and no arguments on Gundlach’s subsequent observation that real wage growth is negative and that Trump’s economic renaissance might be a bit overstated.
Moving on, Jeff doesn’t like is the stretched long in the dollar. Although spec positioning came off for the second week in a row through last Tuesday (the net long was trimmed by $2.6 billion), folks are still the most bullish since January 2017 when “long USD” was one of the consensus trades (a trade that would subsequently go awry, by the way):
(Goldman)
As noted, Jeff’s not feelin’ that. “Speculative positioning is way long the dollar and now they’re wrong,” he said on Tuesday, before making the following “bold” prediction:
I don’t think we’ll have new highs in the dollar without first seeing new moves to the downside.
Got that? Jeff doesn’t “think” the dollar will make news highs without “first seeing” some “new moves” lower. If you’re sitting there scratching your head and wondering how that qualifies as a “prediction”, you’re not alone.
(Bloomberg dollar index)
“It seems”, Jeff continued, “that the U.S. president wants a weaker dollar.” There’s another characteristically insightful observation for you. After all, there’s no way you could have surmised that without Jeff’s help…
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…
— Donald J. Trump (@realDonaldTrump) July 20, 2018
Gundlach continued his latest state-the-obvious-a-thon by noting that if the burgeoning crisis in emerging markets worsens, it “could be a global market problem.” He, like everyone else, doesn’t think this is sustainable:
A weaker dollar would help, he added.
Jeff of course addressed his Treasury short squeeze tweet. Specifically, he’s not convinced that 10Y yields will fall to 2.25% (nobody else is either, considering that’s a full 72bps lower than where we are now), but if you’re wondering how we could “get there”, Gundlach has this to offer:
What could get you there is a monumental short squeeze, because the speculative short positioning in the 10-year is off the charts.
By “off the charts”, he just means it’s sitting near a record. It’s not literally “off the charts” because, well, because here’s a chart of the short in the 10Y:
(Bloomberg)
He used that “monumental” short squeeze theory to reiterate the threat of a curve inversion, which he said could be the result if that position does in fact get squeezed.
As far as why nobody has been squeezed yet, Jeff has a simple answer:
Because it’s not moving.
Right.
And while he acknowledges that there is no written rule that says yields have to fall just because specs are short, anything that sparks a rally in Treasurys could start tipping dominos or, as Jeff puts it, “if something’s a catalyst to get a rally, you can just imagine the stampede to cover those shorts”.
Yes, “just imagine” that. If a bunch of people are short, and the market moves against them, they might have to cover. Again, penetrating insight.
For what it’s worth, what Jeff (and everyone else) thinks they’re seeing in that short position might not in fact be what they’re actually seeing. We talked about this on Monday evening, citing several recent notes from Deutsche Bank in “What’s Really Going On With That ‘Massive’ Treasury Short?”
In any event, you get the idea. Jeff is still a bit perturbed at U.S. fiscal policy, he’s sticking with the short squeeze call on Treasurys, he thinks that prospective squeeze could take 10Y yields all the way down to 2.25% on the way to inverting the curve and he thinks the dollar might have peaked for the time being. Here are the summary bullets:
Take all of that for what it’s worth, and just remember, if you’ve got some fake Bordeaux sitting around, you can probably sell it to Jeff with no questions asked.
