The headline of the day is Billionaire bond guru Jeffery Gundlach Predicts he will make 400% on his bet against the stock market.
Gundlatch bought S&P PUTs betting the stock market will drop.
Does that make him bearish? Let’s find out.
“I’ll be disappointed if we don’t make 400 percent on the puts, and we don’t even need a big market decline for that to happen,” Gundlach said Tuesday on CNBC’s “Halftime Report.”
He said that in his firm’s analysis, volatility is so low that it can make a big return by buying put options — bets for a decline — on the S&P 500 for December. “It’s not really a bear call on the S&P 500. It’s more of a bull call on volatility,” he said.
“I think going long the VIX is really sort of free money at a 9.80 VIX level today,” Gundlach said. “I believe the market will drop 3 percent at a minimum sometime between now and December. And when it does I don’t think the VIX will be at 10.”
Gundlach reiterated his expectations for a snap higher in the VIX once volatility picks up, since hedge funds have piled heavily into bets that volatility will remain low.
The investor believes the VIX could double to 20, he said.
3% the New Bear Market
Here’s the kicker. If the stock market pullback is driven by seasonality or a change in investor sentiment, Gundlach said he thinks “it will be contained and you can buy it.”
Wow, talk about embracing the bubble.
Statistical Analysis
Salil Mehta at Statistical Ideas came up with a similar idea on 1% and 2% Market Drops.
In contrast to Gundlatch, Mehta offered no opinion as to whether the “carnage” would be contained to 3%.
Mike “Mish” Shedlock
Just like Bill Gross was saying Eurozone government bonds is a short of a lifetime, he is not selling his book, only offering an opinion. Opinion that can move markets, that is.
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Gundlach knows that Washington DC is out of options to kick the can down the road (without harming a major constituency). Read my lips, give my intern a WMD, and if you like your doctor we’ll drone your @ss. Here is the fundamental choice facing the federal government:
Pensions (state and local governments, old school private sector, most annuities / life insurance policies) cannot survive more years of artificially low interest rates, but the US government cannot afford to pay “normalized” interest rates. Retirees will lose, or the US government will lose.
Health care costs are crowding out everything else, in a budget that is already strained to unsustainable levels. Baby boomers are getting old — which means they will need more healthcare, not less. The government cannot afford current health spending, much less a huge increase.
Artificially low interest rates are making new factories / office spaces (aka JOBS) a poor investment. It makes far more sense to buy back stock, issuing cheap debt as necessary. Only a fool would expand a business while interest rates remain artificially low.
America’s creditors are increasingly “hostile” nations, or at least nations that feel they have received the short stick with the USA in the past. They have little incentive not to treat the USA with the same loan shark behavior that the USA treated them.
Expecting more volatility in the future makes a lot of sense. The mindless apes that have been running G7 countries are quickly running out of runway.
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What goes around comes around?!?
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There is no way for Congress to discuss tax reform without exposing the medium term insolvency that current spending entails. Not even Bernie the socialist is senile enough to suggest raising taxes by 50% across the board (on the middle class /poor too) — that would be required to maintain existing spending delusions. But no one has a plan to get spending under control either. Something has to give, and it will be painful for at least one major political constituency (if not many constituencies).
The tax debate is going to highlight the requirement to repeal Obamacare — full repeal is needed just to buy time (health care COSTS need to be reigned in, but that is going to take time the country doesn’t have under Obamacare).
The US can’t afford a war against North Korea (financially speaking — the death toll just makes it worse). North Korea can’t either, but they have nothing to lose. China can’t afford to allow North Korea to go to war (port of Taijin trade cut off), but they can’t afford a refugee crisis as N Korea implodes on itself.
China can’t afford to lose face and allow India to “occupy” the border between the two countries. I have no opinion about which country is “in the right”, just saying that both countries have put their reputations on the line. The last time, India suffered a rather humiliating defeat — but both countries were weak at the time (they couldn’t afford to escalate things beyond the border). This time, both countries need to save face and both countries have the military resources to make things messy.
After two decades of flailing aimlessly, the US military is over-extended, exhausted, and it hasn’t been able to exert influence in Iraq, Afghanistan, Libya, Ukraine, Syria, Somalia (still), Eritrea… just to name a few. The rest of NATO is useless for projecting power abroad, and questionable ability to exert power even domestically (France is unable to confront terrorists inside of France, and Germany looks rather doubtful too). The global policeman and NATO “assistants” are not in a position to babysit the world, even if they could agree on what/how to do it.
As Europe and North America return from summer holidays, a lot of the really big things that were swept under the rug for the past 20 years are coming home to roost.
Not sure if Gundlach is buying vega or gamma — both seem like smart bets
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been one heck of a bad bet so far this year.
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The world’s major markets have been nationalized. Central Banks are on their way to owning majority interests in every big public traded company. A market like this can never drop because Central Banks will never sell their shares. That’s why Gundlach now considers a 2% drop a bear market.
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He may not be “bearish”, but he is one wierd-looking dude.
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