DoubleLine Capital CEO Jeffrey Gundlach is warning that investors holding trillions of dollars in US assets could soon reallocate capital overseas.
In a new interview with Bloomberg, Gundlach says recent behavior in the stock market, the dollar and the Treasury market appears “strange” to him, hinting at deeper concerns that are unsettling investors in US assets.
According to Gundlach, investors are beginning to sniff out the looming risks tied to the US government’s unsustainable fiscal trajectory.
“In the last 15 years, there has been a number of corrections on the S&P 500, and in every single one of them, when the S&P goes down by more than 10%, the trade-weighted dollar index goes up. This time, the dollar went down when the S&P 500 went down by almost 20%. That’s strange, things are behaving differently.
Usually when the Fed starts cutting interest rates, rates across the yield curve go down. The 10-year Treasury almost always goes up [in price] immediately following the first Fed rate cut, and then it keeps rallying for a while. This time, the 10-year yield went up, and the yield curve is steepening.
So I think what we have is recognition that the interest expense for the United States is untenable – if we continue running a $2.1 trillion budget deficit and we continue to have sticky interest rates.”
The Bond King zeroes in on foreign investors, noting that they hold tens of trillions of dollars in US assets. Gundlach says it is now within the realm of possibility for the investor cohort to start exiting US markets.
“There’s a net investment position; foreigners were investing more in the US than the US was investing outside the country to the tune of $3 trillion. That was about 15 or 17 years ago. It’s now over $25 trillion is the net investment position, and the dollar is falling. It’s not inconceivable that some of that $25 trillion that came in not even two decades could go out.”
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