Jeffrey Gundlach gives his bearings in the fixed-income market, which he has been navigating for forty years. He is an old hand at fixed income investments.
“A little over a year ago, you couldn’t get a yield of over 5% without leveraging junk bonds by 50% and hoping you would get no default. S&P 500, was overvalued by nearly every metric,” he said.
“What was fascinating about the S&P setup is that it was cheap compared to the treasury,” he said.
“What was fascinating about the S&P setup is that it was cheap compared to the treasury”
Jeffrey Gundlach gives his bearings on 2022 and 2023
“2022 was the year everything made sense. Everything was overvalued, and the Fed went into tightening mode. The Fed started quantitative tightening, and bonds had the worst year for investment-grade bonds in history. The 30-year treasury bond had a 50% drawdown from its highest price in late 2021, the S&P 500 remains down substantially, and the NASDAQ remains in a bear market,” said Jeffrey Gundlach.
“What is interesting is that as cheap as stocks have become, they are now a complete reversal concerning bonds,” he said.
Jeffrey Gundlach noted that last year the Fed went from being almost scared to hike rates to going 75 basis point hikes four times in a row.
“The effects of these rate hikes and the accumulation of quantitative tightening and draining of liquidity in the bond market will make 2023, in my view, a recessionary year,” he said.
“What is interesting is that as cheap as stocks have become, they are now a complete reversal concerning bonds”
Jeffrey Gundlach gives his bearings on inflation
“I agree that the inflation rate is certainly going to come down in the next six months in a way that is almost unavoidable with the numbers rolling off the CPI,” he said.
In the first part of the year, we are going to get the inflation rate down from the seven handle to the four handle by the middle of the year.
The base case is 4 % for May number in June.
The Consensus in the market is that the head CPI is going to fall just as fast as it went up, and it might, thinks Jeffrey Gundlach.
“Right now, the copper-gold ratio is completely out of whack with where the 10-year treasury yields are” – Jeffrey Gundlach
Fed tightening policy to destroy demand is triggering noticeable weakness in the economy, and corporate layoff could be a story in the first quarter
Weaknesses in the commodity sector, which is to be expected, are also playing out.
Jeffrey Gundlach thinks if the Fed follows through with its rhetoric, if it keeps doing QT and goes forward with a higher terminal rate, then he would not be surprised if it went lower than forecasts, at least temporarily.
“That would be positive for bonds, and it’s corroborated by our favorite starting point for the 10-year yield of the US, which is to the price of copper to the price of gold, the copper-gold price ratio,” he said.
Copper is an important economic input and will go up with inflation, and gold is a flight to safety asset, and so the numerator correlates to the 10-year yields going up, and the denominator going up, correlates to 10-year yields going down,” he said.
“Right now, the copper-gold ratio is completely out of whack with where the 10-year treasury yields are. 18 months ago, the copper-gold ratio said 10-year yields were way too low. But it finally got resolved with a dramatic increase in the 10-year treasury yield, which has substantially overshot with copper coming down due to recession fears,” added Jeffrey Gundlach.
“Copper gold ratio suggests somewhere around 2 and 2.5%, depending on what time window you use for the analysis, which is very consistent with inflation coming down and many inflationary signals leading indicators, yield curve inversion, perhaps we get close to unemployment crossing its 12-month moving average I can go on and on, all this suggests lower inflation and peaking yields,” he said.
“We are talking about fighting 2 billion people with our 350 million people, maybe we can do that through technology but financing that is still a difficult proposition” – Jeffrey Gundlach
Jeffrey Gundlach gives his bearings on geopolitics
He said that he doesn’t understand how a nation with 350 million people and a 31 trillion dollar deficit is going to fight a war with Russia, which doesn’t have many people. But they have a lot of weapons, and China has a lot of weapons and a lot of people.
“We are talking about fighting 2 billion people with our 350 million people, maybe we can do that through technology but financing that is still a difficult proposition,” he said.
He noted that for the first time ever, global yield curves are inverting. He thinks inflation will come down but could rise again due to policy shifts. He worries about the large deficit in a period of relatively low unemployment. He also thinks fiscal and monetary response will lead to a decline in the US dollar.
Jeffrey Gundlach gives his bearings on global bond liquidity
“People don’t understand how bad the situation is. In Japan, days go by without trade. In the US there were sustained periods of poor liquidity in 2022 even in the most liquid treasury market,” he said.
The widening bid-ask spread in treasury yields, index followed by Bloomberg, when the index goes up, it means liquidity is going down, and the index was high for the entire year, which indicates illiquidity problems in the bond market.