Jeffrey Gundlach gives his insights into the most aggressive tightening in over forty years, which is being implemented by the Federal Reserve to stamp out the inflation fire.

Jeffrey Gundlach Doubleline manages one of the largest fixed income investment funds in the world with over 107 billion US dollars under management. 

“We have been having a lot of volatility in the bond market. June was a terrible month for the high yield bond market and the emerging markets,” said Jeffrey Gundlach in his interview last month.   

“We had a strong rebound, particularly in corporate bonds and the high yield bond market,” he added.

So in the wake of the June bond sell-off bonds are fairly priced, according to Jeffrey Gundlach gives his insights thesis.

“We have been having a lot of volatility in the bond market. June was a terrible month for the high yield bond market and the emerging markets”

JEFFREY GUNDLACH

“We have an interesting situation now that markets are priced cheaply thanks to what happened all these months,” he said. 

“Good returns over a six-month horizon have significantly improved,” added Jeffrey Gundlach. 

Jeffrey Gundlach gives his insights into what could have eroded Fed credibility.  

“Forward guidance is what cost the Fed credibility in the past.

Promising certain things wouldn’t happen, then events change and they had to make them happen,” he said. 

I don’t want the Fed to promise silly things based on backward looming data. When you commit to something then all expectations have to be set,” he added. 

Jeffrey Gundlach noted that the market reaction, to July’s hike, was less of a sugar high than in June and May.

Markets have been reacting positively to Fed rate hikes on the thesis that with each rate hike the Fed pivot nears. 

“Forward guidance is what cost the Fed credibility in the past. Promising certain things wouldn’t happen, then events change and they had to make them happen”

JEFFREY GUNDLACH

Jeffrey Gundlach gives his insights believing that the Fed should cease pretending

“Paint or get off the ladder take Fed funds rates now to 300 basis points,” he said. 

The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.50%.

“They are painting but they are still on the ladder but they are making progress on the job,” he said. 

Here is the dovish tone in which Jeffrey Gundlach gives his insights view

“The Fed has to understand that rate hikes have a lagged effect.

We need to wait and see what effect this will have on the economy,” he said. 

Jeffrey Gundlach said in July that he was glad there are eight more weeks till the next meeting, believing with more data sets we get clearer optics. 

Jeffrey Gundlach believes lower inflation and a benign recession can be achieved with sound monetary policy 

He acknowledged that 2.5% inflation is a neutral rate.

“We need the inflation rate to come down if we can hopefully avoid a severe recession” – Jeffrey Gundlach

Jeffrey Gundlach gives his insights into what the Fed’s main criteria should be for setting rates

“They need to follow the 2-year treasury yields since they have gone 150 in six weeks. The 2-year treasury is down 50 basis points and the Fed funds are up 150 basis points so there is a 200 basis point swing there,” he said.

The Fed is no longer behind the curve, is the crux to Jeffrey Gundlach giving his insights interview

He thinks markets are sustainably calmed down by this.

Jeffrey Gundlach also believes this has given Powell more credibility, as he noted Powell’s trough in his credibility with transient inflation error. 

“Looking longer term I think valuations are good,” he said.

“When you start at 1000 basis points of excess yield like parts of the bond market the CCC when you round them up to 1000 basis points. There are parts in the securitized market in bonds where there are realistic returns of 11 and 12% even if you go into a moderate recession,” he said.

He is calling a victory now a mild recession. He believes the best possible outcome for all financial markets would be a mild recession and continuous sequential declines in the CPI. He does not think inflation will drop to 2% or four this year. “Hopefully, it has peaked out. It feels like a lot of the price increases have stabilized. We need the inflation rate to come down if we can hopefully avoid a severe recession,” he said. 

“We are going to have congress people and governors putting out stimulus checks, and the inflation merry-go-round is going to go into overdrive”
Jeffrey Gundlach

That would be a good outcome for investors’ portfolios who have been reeling from what happened in the May meeting. 

“The long end of the bond market doesn’t look attractive to me because we have had a rally, and the Fed could slow it down.

For astute investors who have raised cash and are looking for conservative investments, there are a lot of investments in the bond market that have potential you’re not going to find in the index market,” he added.

He thinks they will go to 3% If we get three or four sequential CPI declines. “I think the Fed will stop hiking. I hope they will. I hope they pause in one of the following meetings,” he said.

“We want to see the aftermath of these rate hikes, given that they are also doing quantitative tightening.

I think we are getting close to the end. We see the 2-year treasury yield curve flat as a pancake.

The Fed says they look at inflation and unemployment. But they follow the 2-year treasury yield curve,” he added.

Jeffrey Gundlach gives his insights into modern monetary theory

He is clearly no advocate of a universal basic income. 

He believes we need to stop money printing. But Jeffrey Gundlach relocated to the tax haven state Florida, so the billionaire doesn’t want to pay much higher taxes to fund a workforce increasingly displaced by fourth revolution technology and automation. 

“We are going to have congress people and governors putting out stimulus checks, and the inflation merry-go-round is going to go into overdrive,” he said.

But what is the alternative, third world type poverty in advanced economies, political extremism, civil war, global war?