March 8, 2022

Jeffrey Gundlach on the Many “Convoys” of Macro and Societal Change

In his March 8, 2022, webcast, “Convoy,” DoubleLine Chief Executive Officer Jeffrey Gundlach surveys the “horrific” beginning of the year across nearly all asset classes except for commodities. While on recession watch but not yet calling for a recession, he notes a worsening growth outlook given a trio (16:51) of demand destruction by inflation, reduced fiscal stimulus and falling durable goods demand. Mr. Gundlach notes (5:28) the yield on the two-year U.S. Treasury note, which consistently leads the target federal funds rate, indicates the Federal Reserve might raise that rate six times. Further out the Treasury curve, he observes significant flattening. Futures on Treasuries (40:37), he says, indicate the bond market thinks the yield curve will flatten at the 2% level. “If the bond market is wrong,”

Mr. Gundlach says, “it’s wrong at being too high. I think it might be that the yield curve goes flat at 150 (basis points). That would continue the over-40-year trend of (how) nearly every Fed hiking cycle of any significance broke the market at ever lower yield rate.” Mr. Gundlach disagrees (8:47) with those who expect the war in Ukraine to temper the Fed’s tightening campaign, given exploding prices and supply shortages from fertilizer to corn, from wheat to natural gas. Mr. Gundlach expects the Consumer Price Index to climb to 9% or, depending on the commodities market, 10% in the months ahead. “If we’re going to get a 9% CPI, I can’t possibly see how the Fed can pull back on interest rate increases. Their job is to fight inflation. They’ve done a terrible job of it so far. All they did is try to jawbone it down, say it was temporary or transitory, but it’s still going higher.” In addition to commodities, Mr. Gundlach marshals information on bottlenecks hindering the inflow of imports into the U.S. economy (14:56), housing prices and rents (33:06), export and import prices (34:29) and wage inflation (35:51).

Despite plenty of unfilled jobs, the Labor Force Participation Rate (21:11) remains 1% to 1.5% below pre-pandemic levels. Mr. Gundlach suggests two causes: People still have enough left over from stimulus checks not to work and a “Crime Force Participation Rate,” in which more people are turning to crime with prosecutors announcing no legal pursuit for thefts up to a certain economic value. “You tell people they can steal $900 and they won’t be prosecuted, they might go out and steal $900.”

The U.S. Dollar Index, a trade-weighted index of the dollar, Mr. Gundlach notes (23:27), “is very highly correlated in the short term to changes in the yield curve.” However, while yield curve flattening supports the dollar over the short term, Mr. Gundlach is bearish on the dollar over the long term due to the twin deficits: the trade and federal budget deficits. On the equity markets (25:32), he favors dollar-cost averaging out of U.S. stocks into emerging markets stocks. Among the long-term “auto-pilot” trends being challenged today (27:46), he notes the breakdown of the Nasdaq 100 Index’s 20-year outperformance of the S&P 500 Index. Turning to commodities (31:21), he notes that the surge in prices has been of such magnitude to be outstanding even in the context of 27 years of price history. “A big up move in commodities – in particular, energy commodities – is often a catalyst and in a postmortem is determined to be part of the causes behind recessionary periods.”

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About the Presenter

About the Presenter

  • Jeffrey Gundlach

    Jeffrey Gundlach

    Mr. Gundlach is CEO of DoubleLine.  In 2011, he appeared on the cover of Barron's as "The New Bond King."  In 2013, Institutional Investor named him "Money Manager of the Year."  In 2012, 2015 and 2016, he was named one of "The Fifty Most Influential" in Bloomberg Markets.  In 2017, he was inducted into the FIASI Fixed Income Hall of Fame.  Mr. Gundlach is a summa cum laude graduate of Dartmouth College, with degrees in Mathematics and Philosophy.