Gundlach Says Fed Will Hike "Until Something Breaks", Dumps Bank Shares

Tyler Durden's picture

Last week, in an abrupt shift to his bullish posture, Bank of America strategist Michael Hartnett laid out how he envisioned the transition from the current "Icarus" rally to what he dubbed the market's "Great Fall" - or "Humpty Dumpty" trade - which he expected to take place in the second half of the year, and which he said would be precipitated by another downward inflection in EPS, but more importantly, a more hawkish Fed. Specifically, he showed a chart which revealed that historically, once the Fed starts tightening, it keeps tightening until there is a “financial event.”


Overnight, in his latest webcast to DoubleLine investors, Jeffrey Gundlach echoed Hartnett, when he said that he expects the Federal Reserve to begin a campaign of "old school" sequential interest rate hikes until "something breaks," such as a U.S. recession. As we noted yesterday, Gundlach - who does not believe a recession is imminent - said that U.S. economic data support a rate increase as soon as the next Fed policy meeting next Wednesday, and further rises this year after a series of false starts in 2015 and 2016, .

"Confidence in the Fed has really changed a lot," Gundlach said on an investor webcast quoted by Reuters. "The Fed has gotten a lot of respect with the bond market listening to the Fed" now that economic data support the tough rhetoric from Fed officials.

As Reuters notes, it was not so much Yellen but Dudley who gave markets an initial jolt last week when in a television interview he said that "animal spirits had been unleashed." Dudley also said the case for tightening monetary policy "has become a lot more compelling" since the election of President Donald Trump and a Republican-controlled Congress.

To validate the Fed's upcoming decision, which faces just one hurdle this week in the face of the February payrolls report on Friday, Gundlach said on the webcast that inflationary pressures are increasing as well as business confidence, which will translate into a stock market that will "grind higher." But Gundlach, who previously was far more skeptical on stocks, repeated his warning Tuesday that U.S. stocks are not cheap, and added that he holds Treasury inflation-protected securities and gold against this economic backdrop.

The bond king also said that a short position on German 10-year bunds was "a hell of a lot smarter than going long" the securities , joining several fellow hedge fund managers who are likewise bearish on German paper. As for financial stocks, Gundlach told Reuters in an interview that he sold his stake in bank and financial shares because "the easy money has been made."

Finally, for those who missed the highlights from his latest webcast, here are some of the key charts:

While Gundlach notes this is one of the most synchronized upturns in
the global economy in years, he is still expecting the 10Y will first
dip to 2.25% before moving to 3.0%.

German vs French unemployment: "watch out for Le Pen"

Gundlach on soaring Business Confidence: "unlike the Byrds, it is not aloof and detached."

Optimism is surging, but it is mostly "the republicans who are really feeling it."

Curious how unemployment does under republican presidents: this should answer it.

The Leading indicator has moved up again - Gundlach does not see a recession in the near term.

The market vs the Fed's balance sheet; Gundlach quotes Jim Bianco who
correctly observes that while the Fed may not be buying assets, all the
other central banks are.

On Trump making reflation great again, Trump shows a fun chart on reflation vs deflation chart from BofA:

Real time prices, via PriceStats, are about to overtake their previous 2011 highs:

An curious divergence in the trend of actual average hourly earnings vs stated expectations to raise worker compensation via the NFIB. Maybe it is time to lower those expectations again.

On S&P growth expectations: maybe this time will be different

Market is very richly valued as the Shiller CAPE chart shows:

... and as the Price/Sales ratio confirms:

Margin Debt predictably at record highs:

... As Libor continues to rise:

Meanwhile, the copper/gold ratio vs the 10Y suggests that more downside in 10Y yields:

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bigkahuna's picture

I'll believe it when I see it - lol!

VinceFostersGhost's picture



If it ain't broke......don't fix it.


But if you clean up the mess.

BandGap's picture

Love how unemployment is cited under the Soetoro regime and is expected to rise under a republican president. Sort of like Cat's accounting, nothing wrong until you get caught. There is no <5% unemployment.

Radioactive Ideas's picture

It's interesting to note that the Fed is NOW set to tighten. NOW because the (fabricated) numbers say so. NOW because, well, Trump. They'll hike until the economy turns south and leave Trump holding the bag. Its a set-up.

BullyBearish's picture

Still waiting for juicey Wikileaks on the fed...come on whistleblowers, lay it out!

xtndmedia's picture

the Fed works in the open dude... see the money.. then we invest it... gone!

xythras's picture
xythras (not verified) xtndmedia Mar 8, 2017 8:51 AM

Wait, what?

Why the hell should we care about ze German bonds? Not even ze Germans care because their economy has a booming influx of quality medics and engineers every year. That's the shit. Ze German shit..not stinky poor like 

Hungary which Moves to Detain All Asylum-Seekers in Container Camps

Handful of Dust's picture

A hike wont happen.

They been saying that for 10 years.

Wont happen.

BigFatUglyBubble's picture

They will do it as a feint just to lower them again.

billwilson2's picture

Just give him a bit more time and President Snowflake will make america broke again.

VinceFostersGhost's picture



Yeah......damn shame we didn't get the female pedophile.


Damn shame we didn't get the lifelong professional female crook/grifter.


I think I'm gonna take the Soros money......and start protesting. $15/hr....not bad.

BigFatUglyBubble's picture

Rand Paul ran.  Now one gave a shit though.  Swamp rules!

VinceFostersGhost's picture



Rand Paul ran.


Yes for senate....and won.


Then he became a professional politician.......we're done with those.

BigFatUglyBubble's picture

Professional crony capitalist is much better.  NOW WITH 25% MORE SWAMP!

whatisthat's picture

The federal reserve needs to end the corrupt corporate welfare and demonstrated support of the US government deficit by raising interest rates back to 6%.  When the chips fall there is perceived benefit  to establish accountability then prosecute and imprison the corrupt politicians and bankers who increased the US government deficit.

brushhog's picture

We can all dream I guess.

Muad&#039;Grumps's picture

Could be the Fed might hike to 3% really fast to make runway for drastic cuts into negative territory. 

brushhog's picture

How far can they hike with a 20 trillion $ debt? If they go to like 3% the interest would outstrip entitlements. Nah, they'll bump up another .25 or so and pretend theres no inflation for the next 5 years.

VinceFostersGhost's picture



How far can they hike with a 20 trillion $ debt?


Hold on.......I'm thinking about it.

Muad&#039;Grumps's picture

No, they could raise rates to 3% within the next few meetings. That's not enough time to hamper govt finances. But the yield curve will be inverted and the real economic downturn will no longer be hidden. By June we can see rates rise to 3% then the Fed do about face and cut to zero or even negative rates with helicopter money in the works.


Something has the Fed spooked. Have you seen the global layoffs announced recently? The global economy is decelerating bigtime.

brushhog's picture

Yeah they might do that for a very short time. I wonder how much if any effect a very short term turn-about like that would have? It might also make the fed look like they dont know what they are doing. IDK, we'll see I guess.

whosyerdaddy's picture

We had one miniscule rate hike in 8 years of the Magic Negro. Now the Fed is going to "hike until something breaks"? What a transparent political exercise that would be.

Zero-Hegemon's picture

What's that? The Fed will hike until Donald Trump's administration is defined by a recession?

buzzsaw99's picture

The Fed has gotten a lot of respect...

laughable. that's why i try not to read this crap anymore.

mily's picture

Never trust a pikey

Last of the Middle Class's picture

The Fed has been undressed and revealed as the money whore it truly is. They will hike in order to give some cover to the 8 trillion they gave away to TBTF, a huge dose of money for friends, that will take decades to work itself through the economy as it shows up as shadow inflation and reduced buying power for millions. It's a scam, my friends and we're not in the circle of friends.

JTimchenko's picture

Yes. The Fed hikes will crash the US economy. Even what little they've done so far is crashing retail as exemplified by the terrible results at Macy's, JC Penney, Target, etc. That said, I don't think the implosion of the fake economy that they created with zero interest rate policy bothers them. The people who give the Fed its marching orders are oligarchs who may like a few of Trump's new policies, mainly in terms of lower taxation of rich people, but still see him as interfering with their primary power grab goal, which is a one-world government & currency run by and for them.

In other words, at this point, the Fed wants to crash the US economy, and it will. Even now, about 1/3rd of America's malls are likely to close because their anchor stores (Macy's, JC Penney etc. al.) are about to be closed. The Fed wants to crash the US economy completely, however, so they will definitely hike rates, and things will implode. I find the argument for buying gold very persuasive. People read this article, which makes a good case for the likelihood of a major gold price reset in the very near future:

Nexus789's picture

I think its already crashing. The Fed will just make it hit the wall harder. 

Muad&#039;Grumps's picture

ZH should post Avery's stuff.

LawsofPhysics's picture

The Fed must defend the only thing it truly controls... The Federal Reserve Promisory Note.

Full FAITH and credit motherfuckers!

JailBanksters's picture

If they don't hike, people will continue to stop playing Planet Ponzi and it will crash.

If they hike then it will crash because those currently playing Planet Ponzi will not be able to keep playing.

brushhog's picture

The smart ones are already out.

Nexus789's picture

The left ages ago.  It's now waves of greater fools rushing in. 

lester1's picture

Janet Yellen is trying to stop Trump on behalf of her globalist buddies. She will raise rates until the bond market collapses. Then the dishonest liberal media will blame it all on Trump. Thats the plan. 


Get out NOW !!

Ban KKiller's picture

Just hire PWC, such clever accountants, to correct the books? 

Raising rates to project the lie of a great eCONomy!

SheepDog-One's picture

Wow they're really going full retard over a .25 rate hike, these inflation seeking assholes already getting all nose bleedy and vertigo over the .50 interest rate where it is today, very very weak.

Uranium Mountain's picture

The 10 Year UST going to break this bitch.  Is currently at 2.576%.  Pricking territory.   Let's raise it to 2.82% and see what happens.  #playingwithlivesandtheeconomy

Iconoclast's picture

Raise rates to 3%? Kills the economy, then lower them...

They'll not raise beyond 1.25% over the next 12 months. We'll then have the mother of a global depression/recession by end 2109 offering of the excuse to lower back to zero. This is where we're stuck, rates will never and can never normalise to 3-5% in our lifetimes.

I Write Code's picture

Depends on your lifetime, bucko.  Let's say ten years.  And even over that dog's life, I'm not so sure.  Of course it will require a bit of magic.  Let's say ten trillion dollars in federal debt just sort of disappeared, or hey why not twenty.  Then rates could go back to norbal.

Ink Pusher's picture

A pathetic ploy to make their junk bonds more attractive.

Anyone that buys this bullshit deserves every basis point of following grief.

PurpleNIRPle's picture
PurpleNIRPle (not verified) Mar 8, 2017 10:56 AM


barysenter's picture

Until something breaks or enough Fed employees and associates "jump".