Jeff Gundlach sees challenging times for investors, and he cites recessionary pressures mounting in his recent interview.
“It is a tough environment where nobody is making money,” said Jeff Gundlach, billionaire investor and founder of DoubleLine.
Jeff Gundlach sees challenging times, and he believes that the probability for the Fed to hike 50 basis points next month in March is below fifty percent
“At the present moment, I am betting on 25, but I think there is a one in three chance it will go to 50 by the next meeting in March,” said Jeff Gundlach.
Jeff Gundlach believes recessionary signs are already showing, and he doesn’t think the probability is high enough for the Fed to go 50 basis points, or 0.5%, in March.
“It is a tough environment where nobody is making money”
Jeff Gundlach gives his heads for forecasting the Fed fund rates, which is to follow the treasury two years yield.
“The Fed just follows the bond market,” he said, and he added that he joked about this in my podcast. “All we need is the two-year treasury. We don’t need the Fed,” said Jeff Gundlach.
“If you plot out the Fed 2 year Treasury, it is almost a perfect relationship,” said Jeff Gundlach.
However, Jeff Gundlach sees challenging times ahead with recession indicators flashing
But he still believes we will see 50 basis points in this tightening cycle.
“It looks like the Fed is going to raise rates five times this year,” he said.
“It looks like the Fed is going to raise rates five times this year”
But it looks similar to 2018 when the Fed walked away from hiking after its last hike in December caused a stock market meltdown. We do not think the Fed will hike two or three times at max without triggering a stock meltdown.
“Interestingly, the tremendous flattening of the yield curve that we have seen since March of last year has slowed down a lot which feeds into the idea that the yield curve is flatter at the lowest Fud fund rates in forty years. This has been a long-term trend in every economic cycle,” said Jeff Gundlach.
“I think the Fed should have stopped quantitative easing, not next week, not tomorrow, not yesterday but a year ago, and what we are seeing is the consequence of all this stimulus” – Jeff Gundlach
Jeff Gundlach sees challenging times as the economy goes on recession watch
“So we are starting to get some recessionary indicators. It is the stimulus that has been keeping the economy going and, oddly, we are talking about a 50 basis point hike at the time that the Fed is still doing quantitative easing,” he said.
“I think the Fed should have stopped quantitative easing, not next week, not tomorrow, not yesterday but a year ago, and what we are seeing is the consequence of all this stimulus,” he added.
All this stimulus in the lockdown would have an inflationary impact. We were hawkish on inflation at Doubleline but not enough. We were audacious to say that we would get a 5 % handle on CPI. It is now 7.5%, which sounds a lot higher than 7% one month ago,” he said.
Will the Fed be able to tackle inflation without crashing the economy, bearing in mind Jeff Gundlach sees challenging times?
Jeff Gundlach doesn’t believe the Fed can pilot a soft landing. “I have never seen it happen before. I suspect that they will keep raising rates until something breaks which is always the case,” he said.
“We are starting to see more recessionary indicators. Consumer sentiment, which is always one of the best leading indicators of a recession, and it looks horrible Michigan’s sentiment is down to 61 the view of the future is tanking,” added Jeff Gundlach.
Jeff Gundlach sees challenging times as yields flatten
“The yield curve has us on watch already. Once you get the 2s and 10s inside a fifty basis point you’re on recession watch, and that is where we are,” he said. He also sees 5s and 30s inside 50 basis points.
So raising the short-term rates and Fed tightening could break a fragile economy, according to Jeff Gundlach.
He sees a similar movie playing out in the fourth quarter of 2018 when the Fed was forced to abandon tightening.
“We are seeing signs of economic stress. The deficit is 15% of GDP, that’s a big fiscal drag,” he said.
“Lumber prices have probably peaked. Housing is going to start having problems with prices being so high. Medium home prices are up over 30% year over year. Rents are up double digits” – Jeff Gundlach
Jeff Gundlach thinks Fed will need to keep talking and acting more hawkishly which is a risk to risk assets. This is why Jeff Gundlach thinks it will be a tough environment for investors to make money
Expect inflation will decline, but he expects it will be disappointing. “Lumber prices have probably peaked. Housing is going to start having problems with prices being so high. Medium home prices are up over 30% year over year. Rents are up double digits,” he said.
He sees some wage growth increase.” At this point, I think the trend is your friend how many months in a row has CPI printed well above expectations. We think inflation is very likely to print at least 5% for 2022,” he said.
Jeff Gundlach compares the ratio of copper to the price of gold which is where he believes the 10 treasury should be.
He thinks a 10-year treasury should be a 100 basis point higher than where it is now.
If Jeff Gundlach sees challenging times, where is the bond king investing?
Every asset price has to be reprice to these higher interest rates. He sees a process where capital preservation becomes paramount.
He is bullish on European equities, particularly in the UK.
He is getting near to buying emerging market equities, but he is not a fan of commodities because they are already pricey.
He is not expecting weakness in risk assets going into the march meeting.
Regarding cryptos, he said it is not in his DNA “It’s too volatile for me,” he said, which is typical for risk-averse bond investors.
Finally, he thinks 10-year yields will hit 2.5%, but he would be surprised if it hits 3%.