Blurring the lines between conference and festival, this year’s Future Proof brought thousands of attendees to the summery shores of Huntington Beach in Los Angeles. Beyond a long row of brightly colored tents and bold branding, past food trucks and craft beer and DIY candle-making classes, Jeffrey Gundlach took to the main stage and sat down for a candid conversation with CNBC’s Scott Wapner.
In classic Gundlach fashion, he proceeded to air a list of gripes and grievances concerning the U.S. government, the economy, and beyond. Gundlach said he expected a quarter-point trim from the Federal Reserve in November, followed by another 50 basis point cut in December. But he said the Fed had already stayed too tight for too long.
“Now we have a serious chance of a deflationary situation … and layoffs that are coming, which may lead to zero wage growth,” Gundlach said. “I think the Fed is well behind the curve and should get their act together.”
Recession: Ready or Not, Here It Comes
Despite all the handwringing over a soft-landing scenario, Gundlach believes the U.S. has already entered recession territory. He pointed to the "unemployment rate":https://www.advisorperspectives.com/dshort/updates/2024/09/06/employment-report-142k-jobs-added-in-august-less-than-expected hovering definitively above its 36-month moving average as a key recession indicator (known as the Sahm rule). He also alluded to a string of downward revisions on nonfarm payroll reports despite initially strong headline numbers.
“Leading indicators have been terrible for two years,” he added. “The average hourly average workweek is shrinking in a very convincing way. First, they cut the hours, then they cut the bodies.”
Gundlach likened the current housing market to that of 2005-2006 – citing sky-high median home prices relative to disposable income. “The waves of potential problems are crashing on the shore,” he opined. “And I think you’re going to see a very substantial decline in economic growth over the next six months.”
Going Longer? Think Again
The sensible move following the first rate cut in three years would be to extend duration and scoop up longer-term Treasuries. But Gundlach said the risk-reward was still better on the short end than on the long end and warned investors to be extremely careful.
“It isn’t that you’re losing money on long-term Treasuries right now,” he explained. “But you’re making much more money on a duration-adjusted basis, on the short-term bonds. And that’s the way we’re positioning.”
Earlier this year, he had taken his longest-ever position on long-term Treasuries but said he began to pare back that position a few weeks ago and will continue to do so. Having anticipated a dis-inversion of the yield curve, Gundlach opted to essentially short long bonds and buy two- to five-year Treasuries instead.
The iShares 20+ Year Treasury Bond ETF (TLT ) has been the posterchild for sentiment toward the long end. The fund has amassed north of $10 billion in inflows year-to-date but has seen modest outflows over the past month. The Vanguard Long-Term Treasury ETF (VGLT ) has also seen a solid haul — nearly $4 billion.
On the shorter side of things, the PIMCO Enhanced Short Maturity Active ETF (MINT ), the Vanguard Short-Term Bond ETF (BSV ), and the Dimensional Short-Duration Fixed Income ETF (DFSD ) have all seen north of $1 billion this year. Short duration might be a prudent trade for investors looking to prioritize capital preservation. But it hasn’t been a particularly popular trade over the past month amid rising reinvestment risk.
Gundlach added that the U.S. was on the verge of a credit crisis, but more specifically, a fiscal crisis — one where the government will not be able to afford its debts. To that end, he likened the country to a “deadbeat consumer who is maxed out on a credit card and making the minimum payment by borrowing money on another credit card.”
Gold to Retain Its Luster
Gundlach said the precious metal will continue to do well not only as a hedge against what he calls a looming fiscal crisis but also because investors simply don’t trust the system anymore. “Maybe they’re buying [gold] because they don’t trust the collapse of the institutions,” he said. “People don’t have faith in the Constitution, the Congress, the FBI, the CIA, the Supreme Court, the electoral system. This all needs to be replaced.”
The price of gold has risen 30% this year, though gold ETFs have been slower to take in substantial flows. The SPDR Gold Shares Trust (GLD) has seen $1.3 billion in inflows over the past month. The SPDR Gold MiniShares Trust (GLDM ) is still topping the flow charts, rallying in tandem with bullion prices. The VanEck Merk Gold ETF (OUNZ ) has also been gaining traction. Even the iShares Gold Trust (IAU ) is finally turning a corner and seeing inflows in the past month.
Crowded Trades: Private Credit and AI
Two of the hottest-button topics at the conference were AI and private credit, both of which Gundlach said he was skeptical. He said private credit was getting overinvested – meaning, those reaching for it may not be getting paid for it – and noted university endowment funds like Harvard and Stanford were too locked up in illiquids to pay their bills. “Private credit gets overinvested when public markets look to be overvalued,” he said, adding that the S&P 500 was indeed overvalued relative to its own internal pricing dynamics.
Gundlach disdainfully called out SPACs (special purpose acquisition vehicles), or blank check acquisition companies, as symbols of excess capital searching for a home, and predicted liquidity issues in the next 18 months due to poor policy decisions.
As for AI, he said data center demand was getting too hot for the nation’s power grid to handle and likened the recent fervor to the dotcom bubble of 1999. “Where are we going to get all the electricity?” he asked incredulously.
Doubling Down on India
Lastly, Gundlach stuck to his guns on investing in India, calling it the strongest economy in the world. Earlier in June, he said, “If I had to own one market in the world and leave it alone for 30 years, I’d buy India.” He still stands by that thesis. Meanwhile, he’s steering clear of China amid the nation’s deflationary spiral.
Ways to Play It
Those who, like Gundlach, find themselves in the recession camp may want to consider pockets of the market that have traditionally shown resilience in times of economic stress, beyond just the bond ETFs mentioned above. On the equity front, health care, utilities and consumer staples stocks typically hold up well given their defensive tilt – as do large-cap quality and dividend plays.
The Consumer Staples Select Sector SPDR Fund (XLP) has accrued $1.6 billion in net inflows this year, with the bulk of that coming in the last four weeks. The Global X U.S. Infrastructure Development ETF (PAVE) and VanEck Pharmaceutical ETF (PPH) have been the most popular utilities and health care ETFs, respectively.
For a fund that encompasses all of these sectors, the BondBloxx U.S. High Yield Consumer Non-Cyclicals Sector ETF (XHYD ) offers precise exposure to consumer goods, discount stores, food and drug retail and utilities. On the dividend front, the Schwab U.S. Dividend Equity ETF (SCHD ) and Capital Group Dividend Value ETF (CGDV ) have also both seen great success.
Meanwhile, fellow India bulls may look to the iShares MSCI India ETF (INDA ) or the WisdomTree India Earnings Fund (EPI ) — both of which have seen more than $1 billion in new money this year — or the Franklin FTSE India ETF (FLIN ), which has raked in more than $900 million. All three funds are up 19%-21% on a NAV basis.
For more news, information, and analysis, visit VettaFi | ETFDB.
