"I Feel Young Again" - Jeff Gundlach Annual Just Markets Webcast Live

Tyler Durden's Photo
by Tyler Durden
Tuesday, Jan 11, 2022 - 09:20 PM

It's that time of the year when Jeffrey Gundlach, the billionaire money manager and chief investment officer at DoubleLine Capital, gives his outlook for 2021 in his annual “Just Markets” webcast today at 4:15 p.m., this time titled "I feel young again. Readers can register for the free webcast which will only discuss markets here (or by clicking on the image below).

As Bloomberg reminds us, we last heard from Gundlach at the start of December when he focused heavily on inflation, saying that it was likely we could see a 7% print for the CPI reading (it will tomorrow). He also told us that he thought markets could be facing rougher, choppier waters after the Federal Reserve signaled that it was willing to quicken its tapering program.

Since then, we’ve learned -- through the release of meeting minutes -- that central bank officials might favor earlier and faster rate hikes as well as a balance-sheet runoff. Indeed, that’s caused a lot of choppiness in the stock market, with richly valued equities taking a big beating so far this year.

Gundlach’s talking points may overlap with the prominent themes we’ve been seeing discussed in 2022 outlooks. Listeners will want to know his take on the Federal Reserve’s path toward tightening and how it’ll play out in markets, as well as his outlook on inflation and what lingering impact the variants of the coronavirus may have.

We will highlight the key presentation notes in this post, which starts off with a bang, and a comparison between Biden and Carter...

... as part of his contrast of today’s negative real rates with the 1970s. Back then interest rates were high, and inflation even higher. Now, rates are low and inflation high. Gundlach says Powell today further acknowledged the inflationary problem. He’s referring to the Fed chairman’s appearance in front of Congress for his re-confirmation hearing.

Gundlach then goes straight to the big guns, showing the surge in the market via the famous JPM chart which goes back to 1996, and where Gundlach says “we had this huge run” that was largely uninterrupted from 1998-2018"....

... comparing it to pre- and post-covid goods spending, saying that we’ve had similar goods spending in the past two years as we did in the previous decade...

... and ultimately the Fed's balance sheet change.

Gundlach says Powell is dusting off the 2018 “playbook” in terms of shrinking the balance sheet, noting that autopilot-QT led to a selloff in the stock market in 2018 which ultimately caused the Fed to pivot. He says that it looks like Powell is talking about repeating the quantitative tightening formula, which of course will lead to the same policy error.

Remarkably, Gundlach says something we have been warning about for the past month, namely that the Fed is hiking into a slowdown, only he goes one step further saying that “I do think recessionary pressure is building.”

The Doubleline strategist then shows various cross-asset returns in 2021, pointing out that bank loans were his top bet from last year’s webcast and that those securities outperformed...

... as well as the return of the S&P vs commodities, with Gundlach suggesting that commodities are set for a massive melt up.

Oil was the big winner last year and oil and commodities have rebounded again. Commodities are coming “roaring back,” he says and indeed, Exxon just had its best day since Feb 2021.

Going back to his recessionary point, Gundlach says consumer sentiment has “given up the ghost,” and looks like a recessionary level when scouring the chart. “This bears watching,” he says, noting to the “freefalling” sentiment which Gundlach says looks “somewhat recessionary”

He attributes this to the collapsing affordability (i.e. surging prices) of autos, which has led to the lowest ever reading in the series whether this is a good time to buy a car (he notes that people can make money by buying cars and turning around and flipping them, which is “interesting” and “unbelievable")...

... or house.

One reason for this: mortgage rates are now well below wage growth rates. Gundlach says there are some signs that “mortgage financing looks pretty cheap” given high inflation and low rates. So far there hasn’t been much of an increase in mortgage rates.

“Home prices are still going up a lot,” Gundlach says, pointing out the obvious.

Gundlach then spends some time discussing soaring inflation, including still clogged-up west coast ports, and focuses on export and import prices. "They’re really high", he says, adding that a lot of people don’t think export prices matter but the things we export, we also consume domestically. He also says that with export prices at all time highs, nearly 20%, all those conspiracy theorists who claim that inflation is artificially suppressed are likely correct.

Gundlach also notes that the ISM manufacturing PMI series shows some positive signs on inflation, noting that prices paid are “rolling over." But not yet, noting that CPI will be around 7% in tomorrow's report.

The DoubleLine founder also looks at surging wage growth, pointing to the record quits rate and the high appetites among Americans to switch jobs before citing JPMorgan CEO Jamie Dimon who sees the biggest wage inflation in his lifetime. Gundlach predicts that gains in entry-level wages will push up costs.

Gundlach then shows the Citi Inflation Surprise index, noting that every region tracked by Citi has surprised to the upside on inflation. That according to Gundlach, is one of the impetuses for Powell to change his tone from “transitory” to where he is now.

Gundlach shifts topics, and is now discussing the US dollar, where he remains bearish over the long-term and neutral currently. He claims that the dollar is broadly correlated with the “twin deficits” - the current account and federal budget gaps.

He also shows a chart comparing the (inverted) dollar to the yield curve (via the 2s10s), which he says suggests more weakness is coming, and more USD weakness..

... and also shows the historical correlation of the USD vs commodities.

Addressing the yield curve chart, Gundlach says the yield curve is now starting to flash “weaker economy ahead,” adding that when it gets to 50 basis points, that will be a signal to watch. The 2/10s spread is currently 85 basis points, so not too far away from the 50 mark that Gundlach mentions. It’s up from 73 basis points late last month.

Moving away from the yield curve and the dollar, Gundlach says that he is "quite bullish" on gold over the long-term for the same reason he is bearish on the dollar. However, currently he is neutral.

Gundlach next shows a chart of the “shadow” Fed policy rate target which is far lower than it hit back in the Carter era, he says, at -8.7% (thanks to soaring inflation). This takes the near-zero nominal federal funds rate target and adds in an estimate of the impact of quantitative easing. “The most aggressive stimulus in the history of this data series,” he says, while noting this is “academic.”

In an interesting detour, Gundlach notes that the economy has “broken” at a lower and lower level of two-year yields over time, echoing the famous chart from BofA which shows that every tightening cycle ends in a crisis at a lower and lower rate.

Here Gundlach says the Fed will follow the two-year yield until the short end reads the “riot act” to policy makers. Two-year yields tend to lead both tightening and easing moves by the Fed, he says and make the key observation that the Fed may be able to get to 1.5% for the federal funds rate before it needs to stop, about a percent below where it ended its rate hike cycle in 2018.

His conclusion: “We’re going to be more on recession watch than we have been,” which leads straight to our observations that the Fed will never be able to do 4 or even 3 rate hikes this year as the economy will contract long before that.

There is much more in the full DoubleLine presentation below.