“I’m really turning more bearish,” Jeffrey Gundlach, CEO of DoubleLine, told CNBC on Wednesday, after the Federal Reserve raised rates by another 25 basis points to the highest level since 2007.
“It just seems to me that deposits are going to keep drifting out,” Gundlach told the business network. “I don’t think this is the last chapter in this regional banking problem.”
Read: The costs of helping banks alleviate deposit stress don’t come cheap
Gundlach’s views contrasted with the reassuring message offered by Fed Chairman Jerome Powell on Wednesday, who looked to calm nerves about the U.S. banking system after the failure of First Republic Bank earlier in the week, and its subsequent takeover by JPMorgan Chase & Co.
JPM,
“ “I’m really turning more bearish.” ”
Gundlach, who was dubbed a “rock star” bond-trader by Business Insider in 2010, said current banking stress “harkens back” to the savings-and-loan crisis of the 1980s, when high inflation and a spike in interest rates caused customers to flee with their deposits, and left many smaller lenders reeling from losses on their mortgage holdings.
The S&L crisis gave rise to the Resolution Trust Corp., which helped distressed debt investors sop up soured real-estate loans from banks at steep discounts, while also giving rise to the modern-day securitization business, where Wall Street packages up consumer and real-estate loans into bond deals.
“This is kind of the same phenomena, and I don’t really see what’s going to make it stop, unless the Fed is going to cut interest rates, which there’s no inclination of cutting interest rates at the next meeting,” Gundlach said.
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While traders still expect rate cuts by the end of 2023, Gundlach doesn’t think that will happen. He’s instead bracing for defaults to rise in the high-yield
HYG,
or “junk bond”
JNK,
market in the fourth quarter, and for pain to emerge in other risky parts of the market.
“When high-yield bonds are suffering, it’s hard to make the case for equities,” he said, adding that stocks get wiped out before corporate debt if a company collapses.
Stocks closed near the session’s low on Wednesday, with the Dow Jones Industrial Average
DJIA,
down 270 points, or 0.8%, the S&P 500 index
SPX,
falling 0.7% and the Nasdaq Composite Index
COMP,
0.5% lower.
Other than Treasurys, assets Gundlach likes are higher-quality commercial mortgage-backed securities, even though mentioning it “makes people break out in hives,” he said.
Gundlach also sees the U.S. dollar
DXY,
as likely to go lower this year. He bought gold
GC00,
at $1,800 an ounce, and said it looks like it could go higher as the dollar takes a leg lower, and that emerging-market equities outside of China look interesting.
Read: Why it’s silver’s time to shine
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