Jeffrey Gundlach hedging strategies were revealed at the Exchange ETF Conference in Miami Beach, US.
With tropical palm trees in the background and a light blue to the almost clear aqua ocean in the distance merging with sunny blue skies above, Jeffrey Gundlach gave his views about inflation, The Fed, and his own investment strategies.
Jeffrey Gundlach hedging strategies are based on his belief the US economy will experience inflation and deflation simultaneously.
Jeffrey Gundlach believes inflation may have peaked but will remain sticky with price pressures, continuing to be challenging for the Federal Reserve, which he thinks is behind the curve.
“Jeffrey Gundlach hedging strategies are based on his belief the US economy will experience inflation and deflation simultaneously”
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To date, the investment landscape has been testing for investors, particularly for those following a traditional investment portfolio strategy of the 60 40 stock to bond ratio portfolios, which are underwater so far this year.
Jeffrey Gundlach hedging strategies go against the grain.
“I have been advising against the 60 40 portfolios consistently for the past two years,” he said.
Jeffrey Gundlach explained that we are in unusual times where the risk of inflation and deflation are both real.
“Right now, we are experiencing the inflationary side. So what is happening is that the Fed is behind the curve, he said. “The bond market is grossly mispriced thanks to the government’s manipulation and so everything is being repriced,” added Jeffrey Gundlach.
Jeffrey Gundlach hedging strategies consist of a 25 25 25 25 asset class diversification strategy.
“What I have been advising over the past few years is instead of 60 40, it is something more radical, which is a broadly a very diversified portfolio,” he said.
“I have been advising against the 60 40 portfolios consistently for the past two years”
JEFFREY GUNDLACH
Jeffrey Gundlach recommends 25% commodities, 25% cash, 25% stocks, and 25% long-term treasury bonds.
“They are so ridiculously valued, but that is your deflationary hedge,” he said.
Jeffrey Gundlach explained that if investors had a 60 40 portfolio in 2022 was their worst year ever. “But if you had 25 25 25, you would be far better off,” he said.
“Commodities are up 25%, so it more than compensates your stock losses, and bond losses and cash is just dry powder,” said Jeffrey Gundlach.
Regarding investor’s bond portfolio Jeffrey Gundlach recommends owning some long-term treasury bonds as an inflationary hedge and other short maturity bonds.
Jeffrey Gundlach explained that with core inflation at 8.5%, there is no reason to go all-in on long bonds other than it being a deflationary hedge.
He recommends owning shorter maturity bonds which he refers to as staying in the belly of the curve.
“It is almost laughable when the Fed talks about 2% wage inflation being real, everyone knows it, and print inflation of CPI is grossly understated”
– Jeffrey Gundlach
Jeffrey Gundlach hedging strategies factor in peak inflation
We are near peak inflation unless you have another surge in energy prices. Inflation is peaking because the base effects are somewhat favorable. But as mentioned above, Jeffrey Gundlach believes that inflation could be sticky. In other words, inflation will remain stubbornly high.
“It is almost laughable when the Fed talks about 2% wage inflation being real, everyone knows it, and print inflation of CPI is grossly understated,” he added.
Jeffrey Gundlach advocates replacing the Fed fund rate-setting committee with the 2-year treasury rate, which he believes would be more accurate at setting the Fed fund rates.
“The 2-year treasury is what guides the Fed’s rhetoric. The 2-year treasury was completely subdued in the first nine months of 2021. It was gently rising, but it was below a half of one,” he said. Suddenly it went on the upside, and in September, it really broke out when Jay Powell started talking less dovish, and in December, it was suddenly above 2%, and it was guns blazing, tools, tools we are going to use to fight inflation,” he added.
“The dollar going down is very consistent with the deficit being out of control”
– Jeffrey Gundlach
The trajectory of the 2 Year treasury gives a heads up to the direction of Fed funds, which forms a part of Jeffrey Gundlach hedging strategies
“That is what set the bond market on fire. It’s always because the 2-year treasury went up,” he said.
The 2-year treasury is at 2.5%, so the bond market is predicting the Fed will raise 50 basis points in May, probably 50 basis points in the next meeting, and a whole bunch of 25s to get us to 200 basis points. I have charts to show that the Fed is not a leader but a follower, so why not just admit it. We are following wage growth. We are following the 2-year and just go with it because they do it begrudgingly,” said Jeffrey Gundlach.
“Jay Powell has said so many times that we are going to fight inflation because the 2 year is dragging them into it,” he added.
Jeffrey Gundlach is known as the bond king. But bond investors and fixed income investors have risk aversion wired into their DNA.
Moreover, his calls have had their share of ebbs and flows. He was bullish on European assets earlier in the year, which turned out to be out of the money call, and he made no mention of the war in Europe.
In January, he said the USD as a reserve currency was nearing its end game and hinted that the dollar would head lower. But the USD is up almost 5% against the Euro in the last three months and up 10% year to date.
“The dollar going down is very consistent with the deficit being out of control. In the short term, the flattened yield curve supports the dollar. My highest conviction is short the dollar, not this week. I look forward to an investment horizon of four to five years,” he said.
But with the EURO being the nearest contender to the USD and fears of a Europe Hiroshima no longer sounding like the script to a science fiction movie, demand for king dollars is likely to grow.
Europe is half a world away from the USA.
He continues to be short cyclical and remains long defensive names like staple stocks. He thinks that will be a good play for 2022 and doesn’t see the dollar going down until the next recession in 2023.
But all bets could be off until the conclusion of the Russian Ukrainian war is known.
