How Great Would It Be If Jeff Gundlach Shorted Stocks Just Before The Fed Starts Buying Them?

“Actually I did just put a short on the S&P at 2,863”, Jeff Gundlach told CNBC on Monday.

He was chatting with Scott Wapner on the network’s “Halftime Report”.

Gundlach interviews with Wapner are like obligatory check-in calls with your grandparents: Something you have to suffer through once every two months until one of you dies.

“Is that now off the table… because of the Fed?”, Wapner asked, referencing Gundlach’s contention that US equities could retest the March lows.

“No, it’s not at all”, Jeff said. “In fact, I think we take out the lows”.

Late last month, during a webcast called “A Tale Of Two Sinks” (a title Gundlach described as “contain[ing] many layers of meaning”), the usurper of Bill Gross’s throne said the following:

The low we hit in the middle of March, I bet that low will get taken out. The market has really made it back to a resistance zone and continues to act somewhat dysfunctionally in my opinion. Take out the low of March and then we’ll get a more enduring low.

It’s a fair point. And regular readers know that the fun I have at Jeff’s expense is (mostly) well-meaning. He can take it, I’m sure.

Historically, during very bad routs, things do get worse before they ultimately resolve. Here’s the simple chart Gundlach used in his webcast:

The problem (as Wapner alludes to) is that now, Jerome Powell isn’t just buying Treasurys and MBS, he’s buying IG corporates, fallen angels and credit ETFs. On top of that, you can now fund pretty much anything you want to fund with the Fed – there’s a liquidity facility for damn near everything.

Gundlach doesn’t ultimately think that’s going to stop stocks from making new lows or, if that’s too strong, we can say he doesn’t think it precludes such an outcome. Here’s the somewhat “heads-I-win-tails-you-lose-ish” assessment he regaled CNBC viewers with on Monday:

At this level, I think the upside and downside is very poor. I don’t think [the S&P 500] could make it to 3,000, but it could. I think downside easily to the lows or beyond … I’m not nearly where I was in February when I was very, very short.

That leaves a lot of room for interpretation. Gundlach was unequivocally correct, though, when he said, during the same interview, that “people don’t understand the magnitude of … the social unease… that’s going to happen when … 26 million-plus people have lost their job”.

No argument there.

But in what could end up being one of the most cited interviews in the history of markets if the Fed ever does take the plunge into equities, Steve Mnuchin on Tuesday told CNBC it’s “highly unlikely” the Fed will buy stocks.

Asked by Andrew Ross Sorkin about what he calls a “raucous debate” around prospective Fed stock buying, Mnuchin said “I’m not going to specifically comment on what the Federal Reserve should or shouldn’t do in the future, but I would say that’s highly unlikely”.

Forgive me, but that’s not a very convincing answer.

This is one of those situations where, if it’s not possible and/or it hasn’t been discussed, you dismiss it out of hand – especially if you’re the Treasury Secretary who, in fact, would have some say in a situation where Powell wanted to go down that road. Put simply, if it were “highly unlikely”, then you’d probably just say “no”.

Think of it this way. It’s not impossible that an asteroid NASA missed will wipe out humanity this weekend. But it is “highly unlikely”. So, if you were to ask a scientist at the Near-Earth Object Observations Program, that person’s knee-jerk response would probably just be “no”. It would be strange (not to mention terrifying) if, when asked about the prospect of apocalypse-by-asteroid on Saturday, a government official were to say: “I’m not going to specifically comment on what asteroids will or won’t do in the future, but I would say that’s highly unlikely”.

If you ask me (or Janet Yellen), it may be “unlikely” that the Fed will move to implement an outright equity buying program under conditions as they exist currently, but it is by no means out of the question that the Fed would get into the business of overtly supporting stocks through some manner of ETF facility should things take another turn for the worse over the next six or 12 months.

And therein lies the rub for someone like Jeff Gundlach who (by his own account) has at least some money betting on a move lower. If you’re right, the chances of the Fed cutting you off at the knees increase (because presumably, something would have gone “wrong” with the virus, giving the Fed the cover they need to take even more extreme measures). If you’re wrong, you’re just wrong.

“I doubt I am the only person frustrated by National-Debt-financed bailouts of companies that leveraged up large to buy back stock to levitate share prices to enrich shareholders and company executives”, Gundlach said, in a Monday evening tweet.

Just imagine how “frustrated” he would be if he didn’t cover whatever shorts he has on before a theoretical Fed SPY buying initiative.

Gundlach is a whale. But he’d look like a minnow in the face of that bid.