Jeffrey Gundlach recommends bonds over stocks believing that the risk-reward for the latter is better in light of the recent surge in bond yields. 

Bonds or fixed income investments are lower risks and less volatile assets compared to stocks. 

But the current inflation rate makes holding 10-year treasuries a loss-making investment.

August CPI of 8.3% and with the 10-year yield at 3.45% means the yield on the 10-year is negative 4.85%.

“Bonds or fixed income investments are lower risks and less volatile assets compared to stocks”

Long maturity treasury investors are seeing 4.85% of their wealth pot evaporate due to inflation

The Ukraine war now looks likely to widen, and if so, global supply side shocks in energy food could continue. 

Moreover, the billions of dollars created to fund a war in Europe are inflationary.  

So with these dynamics in play, we do not see inflation going much lower for the foreseeable future. 

Central banks can raise rates to 10%, but that will not stamp out hyperinflation in food and energy. The demand curve for food and energy is inelastic irrespective of its price. People will still need to consume a certain amount of calories a day and burn a given amount of energy to survive.

So further central bank tightening will only add to the hardship and collapse the supply chains, creating more shortages which could lead to civil unrest and political instability.   

“the billions of dollars created to fund a war in Europe are inflationary”

Despite negative real yields and the likelihood of inflation remaining stubbornly high, Jeffrey Gundlach recommends bonds

 “The capital gains potential is the best in the last 15 years, he said. Bonds are “the place to be.”

The 60-40 is having its worse year ever, which is a strategy where an investor holds 60 percent in bonds and the remaining 40% in stocks. 

“Adjusting for inflation, a 60/40 portfolio is on pace to lose 49% this year, which would be the worst annual return on record,” according to Barrons. 

The 60-40 portfolio performance continues to worsen. 

“We are accelerating our addiction to debt” – Jeff Gundlach

Jeffrey Gundlach recommends bonds, but is the king of bonds, the largest fixed-income investor in the world, just talking up his book?

Jeffrey Gundlach spoke to investors via a webcast, entitled “Rehab,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.

The title referred to a song, performed by Amy Winehouse, released in 2006.

“The U.S. needs to get into rehab,” he said and recounted some of the societal problems we face.

“Most Americans think the U.S. is on the wrong track. The 31% who do are about the same percentage who think Elvis is alive and living on the Moon,” he added. 

Jeffrey Gundlach noted that the budget deficits came down during COVID, but are back to the level (3.2%) most people think is disturbing

“Maybe we should save money and run a balanced budget,” he asked rhetorically.

“We are accelerating our addiction to debt,” he said. “We need to go into rehab. Debt is decelerating our growth.”

The student loan debt-to-income ratio went from 31% in 2007 to 44% four years ago to 54% now.

Since 2022 household savings have collapsed into negative territory due to four-decade high inflation. 

Consumer credit is up 10.9% year-over-year. “Consumers are borrowing for the future to eat today,” said Jeff Gundlach.

“We need the economy to get off of this credit-debt binge that has been going on for 40 years,” he said.

We need to get back to making things. Manufacturing is the backbone of an economy. Make onshoring sexy again. It is no coincidence that the two largest economies in the world, Germany and China, are manufacturing economies. 

“Consumer delinquencies are up from 2.5% a year ago to 5%, where it was three to five years ago. A year ago, the two-year yield was 15 basis points. Now, he said, the Fed funds rate may go to 4%, along with the two-year,” he said.

“The addiction to debt and stimulus is having consequences with inflation that is hurting consumers” – Jeff Gundlach

Despite the litany of problems Jeffrey Gundlach recommends bonds over stocks

Jeffrey Gundlach highlights the challenges 

“The addiction to debt and stimulus is having consequences with inflation that is hurting consumers,” he said, causing poverty and hurting the middle class.

The housing market is likely to be the next shoe to drop. 

Jeffrey Gundlach notes mortgage rates are about 6.25% (up from 2.75% in early 2021), which is a tremendous headwind for the housing market. The monthly mortgage payment on the median home was $1,000 two years ago but is now $1,816, which he said may not include the most recent mortgage rate data.

Jeffrey Gundlach notes that unsecured personal loan delinquencies are up sharply since early 2021.

Quantitative tightening (QT) is just getting started, he said. In the fourth quarter of 2018, there was QT that weakened the equity markets, causing the Fed to reverse, lower rates, and go back to quantitative easing (QE).

“QT is a negative sign for equities.” QT is also negative for bonds.

The Fed will raise rates to 4% and maybe a little above that, he said. But that is already discounted by the market, he said. The two-year yield is already near 4%. 

“They overshot, so they have to tighten aggressively,” added Jeffrey Gundlach.

But economists and the bond market believe the CPI will go down faster than it went up, he said. They believe inflation will go from 9% to 2%, and then go sideways.

“That is ridiculous,” said Jeffrey Gundlach,

So with inflation likely to be sticking for some time, Jeffrey Gundlach recommends bonds as a good play. But bearing in mind the eroding effects of inflation on fixed income investments maybe not.