I always found it interesting that we value freedom of speech, but if you yell “fire” in a crowded theater, you can get arrested.  I wonder what the punishment would be if you yell “fire” in a crowded theater, and was able to make money off of that (say you owned a car service).  And yet in some arenas, people do the latter all the time.  The arena I am referring to is obviously the markets.

In the freedom of speech vs “fire” analogy, what is that line that it is distasteful/unethical to cross?  Can you say, “hey, does anyone smell smoke?” or “what are you hearing regarding a fire in the theater lobby?”  I’m only just asking about the fire, after all.  There are many shades of grey.  Most of last year, I just found a lot of Bill Ackman’s (Pershing Square CEO) attention-grabbing tactics distasteful – whether it was his non-“smoking-gun” on Herbalife, or him talking up a weaselly company like Valeant.  In the fixed income world, we used to have Bill Gross, but nobody really took him seriously.  Now we have Gundlach.  His calls last year were quite good, so he is riding a wave of respect as the new Bond King.  But some of the things he’s said recently seem somewhat distasteful:

  • “The market is going to humiliate the Fed.” Humiliate?  Does “market” = Gundlach?
  • It’s “frightening” to see major financial stocks trading at prices below their financial crisis levels.   Interesting word choice for someone trying to spook the markets.
  • The VIX needs to be above 40 before a bottom can be made in the high-yield junk bond market. So you don’t want any buyers to emerge until then?
  • Stock markets are likely to struggle early in 2016 before a “buying opportunity” later in the year. So you don’t want any buyers to emerge for the next 4-6 months?  …but you don’t want to claim you yelled “fire” in a crowded theater?

In defining this line, should the impact be a factor?  With Ackman and Valeant, the number of people he was hurting was relatively small.  If the markets end up pushing us into a global recession, that’s going to leave a much more permanent mark on many more people.

There’s a fine line between exercising your rights to express your views, and trying to manipulate the markets.  So for me the jury is still out on Gundlach.  I don’t really know him to say whether he is just passionately taking about his views, or he is attempting to scare the bejesus out of a thin and fragile market.  The junk bond market depth is probably non-existent with all the banks reducing trading.  Is the morning routine to have a cup of coffee and call all the dealers every morning asking for a bid on a yard of oil bonds?  Or just start a few rumors about Operation Twist II or Deutsche going under.  I’m not saying this is Gundlach.  But there are a “non-zero” number of people out there who have questionable ethics.  Henceforth, since Gundlach is the new Bond King, I will refer to these citizens as “Gunds.”  But back to fragile markets…

When I look at the potential headline bombs in the next 3-6 months, you KNOW the following will happen:

  • A few more oil & commodities companies are going to default.
  • Greece is going to be in financial and economic chaos (as predicted last year).
  • There will be a renewed PIIG scare.
  • Any negative banking headline will be a sign of impending doom.
  • Anything China that is not positive will be spun to be negative.
  • Any natural yuan devaluation will be the cause for alarm.
  • Any other news from Asia that could be remotely linked to China will immediately be spun into a contagion story.
  • All people will be talking about during the Olympics is the Zika virus – heaven forbid if a US athlete gets bitten or gets some disease from swimming in sewage. This must be a sure sign Brazil and EM are not what we thought they were.
  • The Middle East is going to look worse – before it gets better. Hey!  I just did a Gundlach.  I basically said nothing, but it sounds smart.  If things get worse, I’m right.  If things get better, I was right but my timing was a little off.

With all these things on the horizon, I could see how Gundlach could be right about things not bottoming for a while – especially if the Gund banter keeps up.  Am I bitter because he was “right” and I got stopped out of a few trades?  Yes.  I am petty.  I admit it.