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Billionaire bond investor Jeffrey Gundlach recently spoke with Yahoo Finance’s Julia La Roche, and reiterated a similar message from his DoubleLine Total Return Bond Fund webcast in June, of how the Federal Reserve, through extraordinary measures, is propping up the economy – distorting market signals. 

Gundlach, the CEO of $135 billion DoubleLine Capital, told La Roche the Federal Reserve’s “most incredible fiscal lending” is the largest policymakers have ever deployed, even dating back to the financial crisis of 2007–2008.

 

He said since the pandemic began, the central bank has printed trillions of dollars to prevent the economy from crashing further – by purchasing corporate bonds – which managed to suppress volatility. In the process, the Fed’s balance sheet swelled to a mind-boggling $7 trillion. 

Gundlach said the Fed has “decided that they want to pull out all the stops to reduce market and economic volatility,” via unprecedented money printing. “‘What they’re doing is really a bridge further than they have ever gone before.”

He said the Fed was motivated to keep “throwing things” at the market to rein in volatility across multiple asset classes. In his 35-years of market experience, he said the disruptions in credit markets were “far worse” than the financial crisis a decade ago. 

“That led to what looked like was going to be some very substantial bankruptcies in some of the leveraged pools like mortgage-related REITs and other types of investments,” he explained.

Similar to the latest DoubleLine webcast, Gundlach said the Fed’s backstopping of the corporate debt markets is a violation of its charter. 

“The Fed figured desperate times…require desperate measures, and the went all the way into buying corporate bonds,” Gundlach said.

In the next downturn, he said the Fed “could go even further” in its ability to unleash an arsenal of tools to provide liquidity to markets. 

Gundlach noted the weakest portion of the corporate bond market is low-tier investment-grade debt, commonly known as BBB, which, if re-rated to junk, could cause significant losses for investors who would have to dump into illiquid markets. 

“There’s been so much issuance of corporate bonds. The prices have been propped up to levels where I think the owners that own them at these levels will end up losing principal on a basket of these assets,” he said.

Gundlach said the Fed’s money printing is “delaying the inevitable. In the meantime, they have a lot of wherewithal to continue delaying because they are spraying money all over the place and buying all these assets.”

He said, “the price of corporate bonds isn’t really real. There’s no price discovery mechanism that’s being pegged. There’s no message; there’s just a target price that the Fed has been doing, and that led to a pop-up in corporate bonds.” 

He cautioned against buying LQD exchange-traded-fund:

“It’s about the interest rate risk of the 10-year Treasury and the yield-to-no losses is about 2.25. There’s not a lot of reward there, and there’s a lot of risk if the bonds get downgraded because the yields on junk bonds are far higher today than the yields on BBB corporate,” he said.

“So, if they get downgraded, we know the pricing is going to suffer very significantly.” 

Watch the full interview

Gundlach’s message over the last month has stayed about the same. He believes the Fed’s easy money policies have only delayed the crisis, BBBs are the most significant risk in corporate debt markets and remains skeptical of the stock market rally. 

Authored by Seth Holm via FreightWaves.com,

Volumes have continued to burst all around the country this week. Carriers are rejecting loads at rates only seen during the March panic-buying spree buildup. Spot rates have been bid up above 2019 levels in many markets around the country, but it is unlikely that this trend continues given there is typically a significant drop-off in outbound volume after the Fourth. However, volumes are so high currently that even a significant decline could still keep OTVI above 2018/2019 comparables. 

Outbound tender volumes continued to gush in many regions around the country this week. The Outbound Tender Volume Index (OTVI) is now almost at 13,000 for only the second time in its three-year history, with the first coming just three months ago during the March panic-induced buying spree.

The current volume of freight flowing in the U.S. cannot be overstated — besides the March demand spike, there has not been freight demand like this in recent history. 2018 was considered a banner year for freight volume and OTVI currently sits more than 14% above the 2018 high point. 

There is typically a surge in volumes leading up to Independence Day as shippers try to clear as much inventory as possible before the close of the second quarter. After a lost April and depressed May, we believe shippers are particularly focused on pushing freight to paint the second quarter as rosy as possible. Independence Day often marks the beginning of the midsummer slowdown that drags on throughout July and August before picking up at the edge of autumn. If 2020 is to follow historical patterns, we should expect this extremely high volume level to last only a few more days. That said, 2020 has followed very few historical patterns, so there is a great deal of uncertainty about where demand will be in the third quarter. 

It appears highly unlikely for volumes to continue in this range after the Fourth. In each of the past two years, OTVI has averaged roughly 10,200. A major retraction in tender volumes would need to take place for the index to average similar levels as the previous two years. 

SONAR: OTVIW.USA

On the positive side, nine of the 15 of the major freight markets FreightWaves tracks were positive on a week-over-week basis. This ratio has been consistently high in recent weeks. The markets with the largest gains this week in OTVI.USA were Laredo, Texas (11.33%), Los Angeles (8.57%) and Dallas (6.93%). The markets with the largest declines this week in OTVI.USA were Cleveland (-10.68%), Memphis (-2.63%) and Indianapolis (-2.42%).

SONAR: OTVI.USA

SONAR: OTVIY.USA

Tender rejections continue to soar with volumes, now at 16%

Carriers continued for a second week rejecting loads at a much higher rate this week that at any time since the panic-buying spree. The Outbound Tender Rejection Index (OTRI) jumped an additional 500 bps over the past week after running up more than 400 bps last week. The last two weeks have been among the more volatile weeks for OTRI in its three-year history. 

We wrote during late May and early June that we believed capacity had been slow to adjust to the volume levels, but last week that changed. Volumes have remained elevated since Memorial Day, but carriers have been slow to reject freight. This was likely an attempt to make up for those “lost” months of April and May. 

SONAR: OTRI.USA

Much like volumes, tender rejections tend to trend higher in the week(s) leading up to a national holiday. However, this spike is unlike those of any leading up to a summer holiday in the past few years. This change in rejections may not only stem from holiday disruption, but also from carriers looking for other opportunities in this time of freight abundance. This level of tender rejections indicates upward pressure on rates and carriers have begun to test the waters. 

Once the money helicopter takes off, it can never again land. It’s also why once a country is on the road to socialist utopia, also known as Venezuela or CHOP, and “free money for everyone” has been unleashed, there usually are no detours until financial ruin for everyone is finally achieved.

And while the road to hell may or may not be paved with good intentions, it certainly is lined with Magic Money Trees, and all around them are clueless socialist Keynesian economists who fail to grasp (or perhaps grasp all too well) that the current situation is no longer fixable, and their only policy recommendation is to do even more of what led the world to the edge of financial ruin.

According to Reuters, a group of 153 “left-leaning” economists have signed a letter calling on US policymakers to keep providing direct cash payments to Americans until the economy is stronger. And since the economy will never get stronger as long as tens of millions receive hundreds of dollars in government checks, listening to these clueless morons is the surest way to achieve Putin’s and Xi’s vision of destroying America from within, without ever firing a shot.

The group of “mostly left-leaning” economists said in an open letter organized by the Economic Security Project and The Justice Collaborative that direct cash payments can improve financial security, boost consumer spending and may speed up the recovery. Of course, direct cash payments tend to achieve just the opposite, but let’s not bother the “left-leaning” economists with such trivial as reality and facts.

“The first round of economic impact payments were a lifeline that helped some get by for a few weeks,” the economists wrote. “Even after businesses start to re-open and jobs begin to come back, there will be significant economic fallout, and demand will continue to lag if people don’t have money to spend.”

The letter was signed by 153 economists who have directly or indirectly contributed to the economic collapse of the United States, including Jason Furman, who chaired the Council of Economic Advisers during the Obama Administration; Claudia Sahm, a former Fed economist; Darrick Hamilton from the Kirwan Institute for the Study of Race and Ethnicity at The Ohio State University; and Indivar Dutta-Gupta, co-executive director at the Georgetown Center on Poverty and Inequality.

Naturally, some of the signatories are advising the campaign of presumptive Democratic presidential nominee Joe Biden according to Reuters.

Why now? Because the $600 supplement Congress added to weekly unemployment benefits – which has demotivated millions of Americans from seeking a job as they instead take more money home thanks to government welfare – are set to expire at the end of the month, leaving jobless Americans at risk of facing a cash cliff while jobs are still scarce.

Congressional lawmakers are on a two-week recess and will face pressure to make decisions when they reconvene in late July. And since money is now literally being printed and then immediately used to plug the record US budget deficit, even if it means a debt chart that is hilariously parabolic…

… we expect Congress to promptly approve trillions more in handouts because we are now at a point when the mere suggestion that a government backstop is gone – whether for capital markets, for corporate bond issuers, or for individual welfare checks – could be enough to spark a revolution.

Authored by Michael Snyder via TheMostImportantNews.com,

What we are witnessing all over the country right now is incredibly sad.  In the aftermath of the tragic death of George Floyd, it would have been wonderful to see the entire nation unite behind an effort to make our society less violent, more just and more peaceful.  But instead, we have seen a tremendous explosion of violence and lawlessness that doesn’t seem likely to end any time soon. 

Violent crime rates are surging in major city after major city, and the 4th of July weekend was particularly bad.  At least 41 people were hit by gunfire in New York City during the holiday weekend, and this continues a trend that we have seen throughout the first half of 2020.  Just check out these numbers…

According to figures released by the New York Police Department, for the first six months of this year, there were 176 murders, an increase of 23 percent on the 143 killed during the same period last year.

The number of shooting victims has gone up 51 percent to 616 this year. In June alone, there were 250 shootings compared to 97 in the same month last year. Month-on-month, burglaries are up 119 percent and car thefts up 48 percent.

I don’t know which one of those numbers is the worst, because they are all quite horrific.

A tremendous amount of money has been shifted away from the NYPD budget, and that certainly isn’t going to help matters.  For years, the hard work of the NYPD had helped to make New York safer than many of our other major cities, but now that is changing at a pace that is absolutely breathtaking.  In fact, one British news source is now referring to the city as “lawless New York”…

Two bullet-ridden bodies lay sprawled on bloodstained concrete steps. Alongside, relatives of the victims are wailing and collapse to the ground. In another part of the city, a gang of youths use spray paint to disable security cameras before robbing a corner store. Later, video footage captures police officers sitting helplessly in their patrol car as a baying crowd hurls glass bottles at them.

This is lawless New York – a city that was once America’s glittering crown jewel but which risks descending into mob rule.

Of course New York still has a long way to go if it wants to rival Chicago.  According to authorities, there are more than 100,000 gang members living in Chicago at this point, and the violence never seems to stop.

Sadly, the last couple of days have been particularly bad.  Over the 4th of July weekend, at least 67 people were hit by gunfire in the Windy City…

At least 67 people were shot, including 13 fatally, over the Independence Day weekend in Chicago, according to authorities.

Nine of the weekend’s victims were minors, and two children died, officials told Fox32. That includes 14-year-old boy who was among four people who were killed in the South Side neighborhood Englewood on Saturday evening.

But instead of blaming the criminals, the Chicago Sun-Times seem to think that “cutting funding for police could lead to a better and safer Chicago”.

Seriously?

Do people actually believe such nonsense?

Philadelphia is another major city that is seeing a massive increase in violent crime at the same time funding for the police is being cut back…

Shootings are up 67 percent. Victims of armed violence are up 29 percent. Homicides are up 25 percent. So of course it makes sense to defund the Philadelphia PD by $19 million.

Most Americans desperately want their neighborhoods to feel safe, and this could be the one issue that could rescue the Republicans from a potential disaster in the November election.

Right now, most Democrats are extremely hesitant to speak out against the violent protests that we have been witnessing all over the nation, and that is a huge mistake.

And we definitely witnessed more alarming violence during the political protests that were held over the past few days.  For example, protesters in Portland were launching projectiles and shooting fireworks at police officers in Portland for hours.  If Democrats want to win over independent voters, they cannot be seen as siding with such violence.

Law enforcement in downtown Portland have been under attack for hours at the federal courthouse by antifa extremists. They hurl projectile weapons at police & when officers respond, go on social media tagging politicians & lawyers claiming police brutality pic.twitter.com/K6I3sxw7jS

— Andy Ngô (@MrAndyNgo) July 3, 2020

By engaging in such utter lawlessness, these radical protesters are actually hurting their own cause, because it is only going to help President Trump.

The more violence that we see, the more the American people are going to want it to stop.  If tens of millions of voters believe that “Joe Biden’s America” is an America filled with rioting, looting and violence, that could potentially be enough to push Trump over the top in November.

So Joe Biden’s unwillingness to strongly call for law and order may turn out to be his Achilles heel.

The way national elections are won in America is by winning over the millions of confused people in the middle, and right now the images of these protests that those confused people are viewing on their television screens are definitely not helping Democrats.  For example, over the weekend protesters in New York were burning American flags as they chanted “America was never great”…

FAR left protesters have burned American flags outside Trump Tower and the White House.

Video shows the Stars and Stripes being burned just outside the White House as the demonstrators chanted “America was never great”.

Does anyone out there actually think that such stunts will make the confused people in the middle more likely to vote for Democrats?

Right now, Trump is way behind in the polls, but if he makes these protesters the central issue of the campaign over the next several months he may still have a chance of winning.

But no matter who wins in November, it appears that we have now entered a new era of violence and rioting in this country.

Many of our major cities already resemble war zones, and what we have experienced so far is just the beginning.

By our count it’s the sixth ‘mystery’ explosion in mere weeks. In the early morning hours of Tuesday two Iranians were killed and three injured in a blast at a factory south of Tehran, IRNA reported.

Like with other recent explosions and fires, including one at Iran’s underground nuclear development Natanz facility, official statements downplayed this latest blast as an accident. “Human error was the cause of the blast in a factory… Two people were killed and three others were injured,” said a local official.   

“The explosion that was caused by some workers’ negligent handling of oxygen tanks…. was so powerful that the walls of a factory nearby were also totally destroyed,” he added.

What is a mystery, however, is the latest spate of “random” explosions and fires at remote Iranian countryside areas and industrial zones known for being weapons and nuclear development sites, as we previously detailed.

Meanwhile, there’s been more and more scrutiny placed on Israel and its main foreign intelligence service Mossad: 

Israel was the culprit behind a fire that caused significant damage to an Iranian uranium enrichment facility, a Middle Eastern intelligence official has claimed.

The unnamed source told The New York Times that a powerful bomb caused the explosion at the Natanz nuclear facility last week.

Declared an accident by Iranian officials, the blast led to significant damage to the facility and could slow the production of centrifuges used to enrich uranium, according to the country’s atomic energy spokesperson.

Several mysterious fires and explosions have broken out at sites in Iran in recent weeks, including explosions at a weapons depot and medical facility, along with a fire at a power station.

The incidents are now coming with such frequency that the question of foreign sabotage is impossible to ignore, also considering Israeli leaders have over the past year vowed they’ll do anything to ensure the Islamic Republic can’t possibly develop a nuke.

“The incidents have sparked speculation that Iran is under attack, with some pointing to arch-foe Israel as the culprit behind the supposed attacks,” the New Arab report continues. Iran has said it will respond if it’s confirmed that Israel or the US are behind it, including via cyber-attacks. “Speaking on condition of anonymity, the Middle Eastern intelligence official told The New York Times that Israel was behind the Natanz blast but not any of the other incident.”

Asia Times has asked: are we witnessing the “the son of Stuxnet?”

Five recent explosions in Iran may have been caused by computer viruses similar to the Stuxnet virus that disabled Iranian centrifuges in 2010.

Two of the blasts took place at power plants, one at a missile research, development and production site, one at a new uranium enrichment centrifuge center, and the last (if it can be considered part of the attacks) in downtown Tehran at a medical facility that could have been a cover for nuclear operations such as a hidden command center.

All of this has prompted a response out of Israel, with Israeli Defense Minister Benny Gantz on Sunday issuing a partial and somewhat ambiguous denial.

“Not every incident that transpires in Iran necessarily has something to do with us… All those systems are complex, they have very high safety constraints and I’m not sure they always know how to maintain them,” he told Army Radio.

Iran suspects the US and Israel of trying to disrupt its nuke program. https://t.co/G2ueIH4JnV

— CNSNews (@cnsnews) July 6, 2020

“Everyone can be suspicious of us all the time,” Gantz said. “But not every incident that happens in Iran necessarily has something to do with us.”

Recall that just a year ago it was a long hot summer of ‘tanker wars’. And now it seems a sabotage war on Iranian soil, targeting weapons and nuclear development, despite Tehran claiming its nuclear facilities are for peaceful domestic energy purposes. 

Authored by Mike Shedlock via MishTalk,

A Chinese quant-trading firm made 108% this year by selling every stock bought the previous day.

As long as the Fed is willing to promote gambling, guess what? People will gamble. 

Please consider Quant Fund Gains 108% by Dumping China Stocks a Day After Buying

Zhang Ruiqi, the 34-year-old chairman of Shenzhen Qianhai United Fortune Fund Management Co., screens about a dozen mainland-listed stocks every day for their turnover, momentum and volatility. He then does it all over again the following day. That strategy, which he calls the “all-in-all-out” method, helped his flagship $5 million fund gain 108% this year through June, according to data provider Simuwang.com.

“Our strategy allows us to make money from stocks that have the strongest market sentiment on a day-to-day basis — and that has turned out to be overwhelmingly successful so far this year,” said Zhang in a phone interview from his office in Shenzhen.

“As long as the trading volume remains above 400 billion yuan per day, this strategy will still be effective,” said Zhang, noting the upcoming revamp of the Shanghai Composite Index and ChiNext market reforms. “Volumes are unlikely to drop.”

Money’s Cheap, Why Not Gamble?

Hedge funds typically take 20% of the profits. 

If they can make 100% profits with Other People’s Money (OPM) everyone is happy. If and when these strategies blow up the founders still make their 20%. 

Attract $2 billion with these short term returns and the hedge fund just made $400 million off of OPM with no risk. 

Not Just Quant Funds

I have a friend who is now day trading options, and short term ones at that. He does not know what a straddle is or even what a limit order is. 

Day trading is inaccurate because the size of his account, under $25K, restricts him to a limited number of trades. 

So far, he has done OK with long bets on Apple and Tesla. But how long can this last?

I had a long talk with him this past weekend. He is out of a job and out of money.

No Other Choice

“I have no other choice he told me“. 

He wants to come by this week for me to explain more about options.

This is what the Fed has promoted. 

Capital expenditures, generally known as CapEx, are funds used to acquire, upgrade, and maintain physical assets. We can learn a lot about a company and how it is investing in existing and new fixed assets to sustain or expand its business. More importantly, CapEx is the critical driver of growth in the future.

With that being said, companies globally are slashing capital spending this year as the virus-induced recession has forced management teams to rein in costs. 

Refinitiv data (of nearly 4,000 firms) estimates 2020’s CapEx cut will be on average 12%, much larger than the 11.3% decline during the global financial crisis in 2008-09, or the largest in over a decade. 

“For many firms the near-death experience of the lockdown – where cash flows have simply dried up – will have a long-run effect on their willingness to take risks and invest,” said Keith Wade, the top economist at British asset manager Schroders.

Wade explains weaker business investments are typically associated with slower economic recovery, one that may not resemble Wall Street’s “V” but could look more like an “L” or “U.” 

“Weaker investment will also hamper a recovery in productivity and reinforce the outcome of slower GDP growth,” he said. 

By sector, energy (-25%), consumer discretionary (-23%) and real estate (-20%) had the largest capital expenditure cuts. 

CapEx cut by sector

Refinitiv showed Exxon Mobil and BP Plc, two major multinational oil and gas companies, have already told investors CapEx will be slashed by at least 20% this year.

This all suggests the market is widely misinterpreting the shape of the economic recovery – as it appears a steep reduction in global CapEx could result in a 2H bounce that underwhelms, leading to levels of GDP and earnings in 2021 to be lower than hoped for. 

CapEx serves as a guide, or better yet, a warning that US corporate profits will continue to fall. 

As to what happens next, we’ll let Gary Shilling, the president of A. Gary Shilling & Co., sum up his recent thoughts stated on CNBC, of where he believes Wall Street has the shape of the recovery entirely wrong and what is ahead could be a 1930-style decline in markets. 

CapEx weakness is suggesting the global recovery won’t resemble a “V” this year.

Another month, another double-record auction.

With the US ramping up coupon issuance to fund trillions and trillions in helicopter money deficits, moments ago the US Treasury sold a record $46 billion in 3Y treasuries at a new record low yield of just 0.190%, 9bps below last month’s 0.28% if fractionally tailing the 0.189% When Issued.

The bid to cover came at 2.44, slightly better than the 6-auction average of 2.429 if below June’s 2.55.

The internals were solid with Indirects taking down 54.3%, also above the recent average of 51.1, and above last month’s 53.3, and with Directs taking down 13.3%, or roughly their usual fare of 11.7%, Dealers were left holding 32.4%, slightly below the recent average of 37.2.

Overall, an remarkable auction in just how easy it was for the Treasury to sell another record amount of short-term debt despite a virtually non-existant yield, and in fact, if anything the only thing remarkable is that with yields rapidly approaching negative rates stocks remain so well bid even as the bond market is saying the odds of inflation have never been higher.