DoubleLine CEO Jeffrey Gundlach at the 29th annual Milken Institute Global Conference in California in May. At an event in Toronto, Mr. Gundlach said soaring interest expenses may push the U.S. to print money or restructure debt.PATRICK T. FALLON/AFP/Getty Images
U.S. stock markets face hidden risks despite major indexes remaining near all-time highs, Jeffrey Gundlach, CEO of the Tampa-based investment firm DoubleLine Capital, warned in a webcast this week, as he likened the S&P 500 index to an outwardly healthy, diseased maple tree.
“There’s all this rot that’s in the S&P 500, but it’s not in plain sight,” said Mr. Gundlach, who earned the nickname the “bond king” from a history of timely market calls. He was speaking at an event in Toronto hosted by economist David Rosenberg, founder of Rosenberg Research.
Noting that 440 of the 500 stocks in the U.S. benchmark have fallen more than 21 per cent from recent highs, Mr. Gundlach said that there is “an awareness that’s building that everything isn’t just fine” despite resilience in technology and artificial intelligence stocks.
The S&P 500 index is down about 1.9 per cent from a record high touched on Aug. 13.
Mr. Gundlach said the market had hit “peak lunacy” over artificial intelligence, with relentlessly positive expectations for the technology shifting in the space of a year to dour pessimism.
“Now we have a new pivot two or three weeks ago to ‘it’s not just going to take your job, it’s going to take your life,’” he said.
“It’s going to wipe out potentially all of humanity by the year 2030. Which at least will be wiped out before Social Security goes bust.”
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Mr. Gundlach argued it had “never been more dangerous” to invest in market capitalization-weighted index funds given the concentrations of major U.S. stock indexes in tech and AI.
“I want to do equal-weighted. Just get me as far away as I can from the blast radius of this AI thing,” he said.
Mr. Gundlach highlighted the impact of debt issuance by “price-insensitive” AI companies on rising bond yields across the developed world. Higher crude oil and diesel prices as a result of the U.S. war with Iran are also contributing to inflation and pushing yields higher, he said.
“The AI situation is out there, we have the inflation rate, we’ve got the diesel, we’ve got the war, and we’ve got this outrageous amount of bond issuance that is just going to keep compounding higher,” he said.
“So the path of least resistance at the long end (of the yield curve) has been up for a long time ... And it will rise until such time as something is done about it.”
The U.S. 10-year Treasury yield climbed past 5.3 per cent on Thursday, touching its highest level in 24 years. Bond yields rise as their prices fall.
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Mr. Gundlach said that soaring interest expenses might eventually push the United States to print money or restructure its debt. While the latter would constitute a default, he said that restructuring “has a higher probability than most people believe.”
Investors’ growing fiscal concerns mean that U.S. government bonds are unlikely to see a drop in yields if the country slips into recession, Mr. Gundlach said. “People realize that we’re in a different regime.”
With both money printing and debt restructuring likely to lead to higher inflation, Mr. Gundlach said he saw value in owning gold.
“Gold has become a legitimate asset class. You’re no longer laughed at when you recommend gold,” he said.
“If it goes anywhere below US$3,800, I’m gonna buy it with both hands.”