Jeffrey Gundlach sheds light on the Fed’s thinking in a recent interview.

 He (Fed Chair Powell) is getting mindful of the tightening that has already taken place and policy time lag, noted Jeffrey Gundlach.

Fed Chair Powell publicly acknowledged the ferocity of rate hikes and policy lag interpreted as Dovish, which got the bulls off the ground.  

“Bonds went down, and stocks went up a lot,” said Jeffrey.

Then comes the rug pull when the Fed head says rates have to go higher than we thought.  

“Fed Chair Powell publicly acknowledged the ferocity of rate hikes”

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Is the Fed a Dove, or is it a Hawk; Jeffrey Gundlach sheds light 

“He sounded kind of Dovish with a sort of high, we have tightened a lot already, but we think rates will go higher,” said Jeffrey Gundlach.

The Fed is trying to stage its next move away from resembling a pivot and keep the animal spirits of greed in the box to tame inflation. 

Jeffrey Gundlach sheds light on the Fed’s dovish leaning

“It is quite a shift from we need clear and convincing evidence, and then he put this one in to show that they are mindful that they have gone a long way,” he said.  

Jeffrey Gundlach was critical about the Fed in May, believing they were way behind the curve. “I said they should raise rates by 200 basis points and see what happens, but they have done that,” he said.

“It is quite a shift from we need clear and convincing evidence, and then he put this one in to show that they are mindful that they have gone a long way”

JEFFREY GUNDLACH

Jeffrey Gundlach sheds light on a tightening slow down

Fed head has publicly acknowledged the sharp rate hikes and that there are lags. I think he will slow down,” he said.

Lawrence Summers was one of the chief critics of the Fed 

“On balance, especially given its past errors, the Federal Reserve should stay the course and evaluate things,” said Summers in November 2022.

“Terrible CPI data fuelled all these rate hikes” – Jeffrey Gundlach

Jeffrey Gundlach said he was very much in line with Summers’s thinking from May to July. 

“But I think what he is missing in this analysis is quantitative tightening,” he said. Jeffrey Gundlach recalled 2018 when the Fed was doing QT and made a rate hike too many in December, which triggered a stock market meltdown, the worst December for stocks since the 2029 stock market crash. Staring down the barrel of a financial crisis and deep recession, the Fed decided to pivot immediately. 

“Terrible CPI data fuelled all these rate hikes. The numbers are going to be rolling off. CPI got in the headlines in the 8s and even 9.1%. It is coming down next year,” he said.

He thinks CPI will end the year at around 7% and likely be 4.5% as a base case in the May reading.

“If that is coming, you are getting CPI down around a few hundred basis points, and we have QT and the Fed said they are not raising rates,” he said. 

He thinks inflation will roll over as the money supply is coming down.

We are seeing a peculiar scenario where there is deflation and inflation

Discounts are everywhere, with up to 40 to 80% on clothing and footwear.

Early signs of a deflationary depression are in play for discretionary items.

However, the real problem causing a cost of living crisis, a currency crisis, is the spiraling cost of non-discretionary items.    

Food is fast becoming a political hot potato, remains elevated with coffee and meat, and poultry prices surging. Fuel costs are adding to the worst cost of living crisis in forty years. Keep food and fuel costs on the radar which is already sparking workers, strikes, and potential civil unrest. If the situation worsens, we could see price controls and rationings.

 

“People often hear what they want to hear and hear what they fear”
Jeffrey Gundlach

The cost of living crisis will be worse in economies where the currency is the weakest due to currency debasement caused by an excessive supply of the currency, and a lack of investor demand.  

But he believes negative economic indicators are a sign of a recession, the 2s and 10s yield curve has inverted.

Thinks fed played catchup admirably, they were slowly compounded by the fact that all spikes were driven by commodity spikes. 

“People often hear what they want to hear and hear what they fear,” he said. 

He thinks the recession is easily 60 to 80% from April 2023 onwards.

The job recession has already started, with corporations laying off workers every week. 

2022 was the year of collapsing asset prices, and 2023 could be the year of job losses.

He still thinks treasuries represent unprecedented opportunities for investors. 

He doesn’t think you will make a fortune in the long bonds. We entered the year with no yields anywhere and stocks wildly overvalued by all metrics, he noted. 

Everything has changed, stocks are less overvalued near the end of the year, but bonds have underperformed, he noted.

High yields enable invetsors to buy these bombed-out credit markets.

Junk bonds, high yield corporate bond index reached a yield of 21% in 2008, the last financial crisis when investors sold junk bonds at a firesale, deep discount, fearing a debt default. 

Then the Fed entered the market with the most aggressive bond buying in history. In just one year, 2009, Junk bond prices jumped and sent yields down to 9%, and junk bond investors made off like daylight bandits by front-loading the Fed.

New decade, same grifting. Banks are unloading $42 billion of high-yielding debt at a deep discount in a firesale while someone buys these junk bonds hand over fist.  

Is that you, Jeffrey Gundlach?