"New debt king" company manager: Fed is the enemy of the market, banking crisis still worries

Jeffrey Sherman, DoubleLine's deputy chief investor, said the Fed was "the enemy of investors," according to Insider.

In an interview with Insider, Jeffrey Gundlach, deputy chief investor at DoubleLine, the "bond king" whose firm manages about $96 billion, shared his outlook for the markets and the economy.

He argued that the S & P 500 Index's price-to-earnings ratio of about 19 times "seems a little expensive to me," Mr. Sherman said, warning that it would be "very difficult" for the index to meet Wall Street's earnings growth forecast of 12 per cent next year, given the Fed's efforts to cool the economy.

Mr. Sherman, a former university lecturer in mathematics and statistics and former asset manager TCW, said investors might have better luck with bonds. "It's hard to ignore credit markets" on a relative value basis, he said, noting that fixed income assets are also generally much less volatile than equities.

The veteran fund manager advises investors to "delve into the riskier parts of credit", where yields exceed 10 per cent in some places, while also holding risk-free Treasuries that offer solid returns.

He said that in addition to investment-grade bonds rated BBB- or higher, they may also consider owning mortgage-backed bonds (CLOs) and commercial mortgage-backed securities rated BBB.

No "edge" of recession

Sherman rooted his argument in the current economic backdrop. Consumer spending and employment have proved resilient since last spring, when the Federal Reserve raised interest rates from near zero to more than 5 percent to reduce inflation. While higher borrowing costs cool demand and cause the economy to contract, that has yet to happen in the United States.

"I don't think we're on the brink of a recession today," Mr. Sherman said, adding that he thought growth and inflation had peaked this cycle.

DoubleLine's deputy chief information officer did, however, highlight some areas of concern. Regional banks, for example, face a greater risk of default among key clients as interest rates climb and the value of their fixed-income portfolios plummets. Commercial property developers are still worried about another wave of withdrawals from deposits, as was the case with Silicon Valley banks.

"Troubled" commercial real estate

Mr. Sherman said regional banks were the "lifeblood" of small businesses and many American citizens. "If they have to do that... kill credit, that puts us in a recession."

Mr. Sherman also described the debt-dependent commercial real estate sector as "problematic," especially as the trend toward remote work slashed demand for office space, but he noted that while some parts were doing well, they were not to be taken lightly.

More broadly, Sherman said, for credit cards, the auto loan and subprime mortgage delinquency crises suggest that parts of the economy are in trouble - even if the pain doesn't lead to a full-blown recession.

He stressed that the Fed's rate hikes will take time, especially as many homeowners and businesses lock in low prices a few years ago, and they haven't felt the squeeze of borrowing costs. However, he said more people will start to be affected, so the economy will suffer.

Sherman also said he expected inflation to prove stubborn and that the Fed would cut interest rates later than should have been expected, as the central bank remained committed to 2 percent inflation for now. He warned investors not to trust the Fed to balance inflation and growth while also supporting asset prices.

"I think they may be behind the curve when it comes to rate cuts," he said. "The Fed is not your friend - it is now the enemy of everything."