Gundlach says ‘sinister side’ of cheap oil will dampen economic growth, markets

What the U.S. energy boom has given, the U.S. energy boom is about to take away if oil prices stay at or below current levels, according to DoubleLine Capital’s Jeffrey Gundlach.
“All the job growth from 2007 until today can really be attributed to the shale boom,” said the manager of the $41.8 billion DoubleLine Total Return Bond Fund (DBLTX) during his 2015 investment outlook webcast on Tuesday.
“The joyous part of the decline in oil prices is that the consumer feels the savings in their pockets,” he said. “The sinister side is the effect it might have on employment in the energy renaissance.”
Mr. Gundlach, who correctly forecast falling bond yields at the start of 2014, said this year he sees continued strength and opportunities in gold, the dollar, Treasury bonds and Puerto Rican municipal bonds.
“Gold is stealthy strong considering the strength of the dollar and the decline of oil,” he said. “For those who wanted to own gold, this is a good time.”
The case for more strength for the U.S. dollar is tied directly to the health of the U.S. economy, he said.
“If employment data stays the same, I think the Fed will raise rates and that can only make the dollar stronger,” Mr. Gundlach said, citing consensus estimates that also called for a strong dollar in 2014.
“Sometimes the consensus is right,” he said, adding that he still likes the dollar, even though “it is a crowded trade.”
In terms of a search for yield, he cited Puerto Rican municipal bonds as being “good for the speculative part of your portfolio.”
“I think that’s money-good if you hold it to the goal line,” Mr. Gundlach added.
The state of oil prices, however, appears to represent a potential tipping point investors need to monitor.
“The consensus still says oil will be at $80 a barrel in 2016. I’ll bet dollars to doughnuts that consensus goes down,” he said. “Don’t be bottom fishing oil. Contrarianism is dangerous in commodities. You can get carried out in a body bag.”
The falling price of oil, which dropped to $45 a barrel Tuesday, also introduces a “dilemma for the Fed” because of the commodity’s historical correlation to the consumer price index, he said.
“This means that CPI is going negative, and if they raise rates in declining inflation it will import deflation,” he said. “The message from the bond market is that inflation will be negative for two years.”
The ripple effects from cheap oil are just beginning, he added.
“Not a single OPEC country can balance its budget at current oil prices, and Saudi Arabia doesn’t care because they want fracking to go bye-bye,” Mr. Gundlach said. “And every single U.S. shale play is losing money at these price levels.”
The ultimate fallout from declining oil prices, he said, will hit the economy hard in the form of reduced capital expenditures from the energy sector.
“Thirty-five percent of U.S. cap-ex is energy, and that will fall to zero if oil prices stay where they are,” he said. “Global equity performance in 2014 was the U.S. if only because nobody was close to the gains of the U.S. markets.”
In the year ahead, Mr. Gundlach expects “substantially” higher volatility.
“If the S&P corrects or goes into a bear market this year, I think people will say there were lots of warning signs,” he said.