DoubleLine's Gundlach: Market Declines Suggest Margin Calls Underway

Jan 20 2016 | 9:34pm ET

By Jennifer Ablan (Reuters) - Jeffrey Gundlach, co-founder and chief executive of DoubleLine Capital, said on Wednesday that the major declines in equity and credit markets could suggest that "margin calls are going on."

In a telephone interview, Gundlach said he did not expect the high-yield junk bond market to bottom out unless the volatility index rises over 40. "This is not stopping any time soon," Gundlach said. The CBOE Volatility Index was up more than 17 percent mid-day Wednesday to 30.56.

"This is a liquidation cycle. All of these things that were so loved are being sold. We have a 'sell the winners mentality'," Gundlach said. "Today's action has all the trappings of a liquidation sale."

Wall Street moved deep into the red in volatile trading, extending this year's selloff as oil prices continued to plummet.

Gundlach explained that tumbling oil prices are a symptom of central bankers' zero interest-rate policies.

"Oil is in massive oversupply due to ZIRP (zero interest-rate policy) induced over-investment," he said. "And crashing oil is not the cause of all this chaos, it is a symptom of global economic weakness. As are all the tumbling risk markets. We have insufficient and dwindling global growth."

The rout was across the board: all 30 Dow components and all 10 major S&P sectors were in the red, with five down more than 3 percent. The small-cap Russell 2000 index fell 2.7 percent. The New York Stock Exchange recorded 1,314 stocks hitting new 52-week lows, while 809 sank to new lows on the Nasdaq, the most on a single day since Aug. 24 for both exchanges.

Gundlach, who had repeatedly warned that the Fed prematurely raised rates in December, said: "The market is going to humiliate the Fed."

Gundlach said Fed officials need to soften their rhetoric on hiking rates further. He said he does not think the Fed will be able to raise interest rates eight times over the next two years, as reflected in its 'dot plot.'

Federal Reserve officials publish their forecasts for the central bank's key interest rate on a chart known as the dot plot.

Last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China's slowing economy would pressure emerging markets. In 2014, Gundlach correctly forecast U.S. Treasury yields would fall, not rise as many others had expected.

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