By Jennifer Ablan
NEW YORK (Reuters) - Investors in equities and risk assets should brace themselves for the end of quantitative easing, given the high correlation it has to high stock and junk bond prices, Jeffrey Gundlach, chief executive at DoubleLine Capital, warned Tuesday.
Equity and risk-asset investors are "unfortunately about to see the first change in dynamic in years" with the end of QE, Gundlach said on a webcast.
In September, the Federal Reserve is expected to begin to reverse quantitative easing, QE. Interest payments and principal from maturing securities will no longer be reinvested in the bond market. This is known colloquially as "balance sheet reduction," because as the bonds and mortgage-backed securities mature, the asset side of the Fed's balance sheet will shrink.
"You go into a cumulative ... quantitative tightening. So I'm wondering if this suggests a little more trouble in 2018," Gundlach said about the reversal of QE.
"I am thinking that maybe we have to start going on 'Trouble Watch' for the middle part, perhaps, of 2018 with quantitative easing scheduled to go away."
Gundlach, known on Wall Street as the Bond King, noted that the percentage of the S&P 500 components that are above their 200-day moving average "are really weak."
"Generally, when you start to see weakness on the percentage of the 200-day, it's foreshadowing potential trouble on the index broadly. Not really that scary yet but these are one of the things that we have to watch," said Gundlach, who oversees more than $109 billion, as of June 30, at DoubleLine.
On the dollar, Gundlach said he thinks a short-term bottom has been made in the greenback and a rally is overdue, but the currency "does not trade well.
"I am really not that fond of emerging markets in the short term because I don't think the dollar is going to keep falling, but I do like EM a lot on a long-term basis," Gundlach said.
Gundlach remarked on Bitcoin in the wake of JPMorgan Chase & Co (NYSE:JPM) CEO Jamie Dimon's comments Tuesday at an investor conference, calling it a "fraud" that will "blow up."
Gundlach said on August 25 he received an email from his 86-year-old mother with a link to a story that recommended buying Bitcoin. "I philosophically don't believe that it's unhackable...I've had a lot of really smart 20-somethings argue with me on this that it really is completely safe.
"Obviously I am an investor and not a speculator. I have no interest speculating on a Bitcoin type of deal," Gundlach said. "I am going to let this mania go on without me."