Gundlach: Market Unwind Will Be “Turbulent, Not Just A Few Days”

Thursday, February 8, 2018
By Paul Martin

by Tyler Durden
Wed, 02/07/2018

Doubleline CEO Jeffrey Gundlach echoed earlier calls by analysts from SocGen and Morgan Stanley, saying that the “low rate-low volatility” market environment went on for so long that now “the unwind will be turbulent and not over in a couple of days.” In other words, don’t buy the dip.

Speaking to Reuters’ Jennifer Ablan, Gundlach also said that bitcoin was the “lead horse” of risk assets and its recent plunge has had a cascading effect on other risk assets. Incidentally, last Friday we highlighted the oddly close correlation between bitcoin (inverted) and the VIX, when we asked if the VIX “tail” is wagging the Bitcoin “dog.”

Two weeks ago, Deutsche Bank’s Masao Muraki also discussed this peculiar relationship:

First, implied volatility. Implied volatility is an index calculated from the price of a derivative product (options) of an underlying marketable security. However, we now have a “tail wagging the dog” situation where the price of the derivative product is feeding back into the price of the underling marketable security.

Next, cryptocurrencies. Cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets. Although institutional investors recognize that stocks and other asset valuations may have entered bubble territory (US equities’ average P/E is around 20x), they cannot help but continue their risk-taking. Now, a growing number of institutional investors are watching cryptocurrencies as the frontier of risk-taking to evaluate the sustainability of asset prices. The result is that institutional investors, who are supposed to value assets using their sophisticated financial literacy, analysis, and information-gathering strengths, are actually seeking feedback about the market from cryptocurrency prices (which are mainly formed by retail investors).

The Rest…HERE

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