It's that time again when Jeffrey Gundlach, the billionaire chief investment officer and founder of DoubleLine Capital, holds his last webcast of 2021 for his DoubleLine Total Return Bond Fund where he touches on numerous market-linked topics. Readers can register for the webcast at the following link. The tile of the webcast is "in our time" referring to British Prime Minister Neville Chamberlain's famous appeasement of Hitler before the start of WWII.
As Bloomberg reminds us, a lot of the issues Gundlach discussed in September’s webcast are likely to come up again today, especially inflation. Back then, he said he didn’t think history books would say inflation was transitory (he was right). He also said the Fed was distorting markets by keeping rates ultra-low with moves reminiscent of the 1970s. Gundlach also said TIPS looked “pretty expensive”, so it will be interesting what he says today. Inflation prints have been coming in hotter-than-expected since the last presentation.
Gundlach may wade deeper into DoubleLine’s concerns over the U.S. dollar’s role as a reserve currency. Last month, the firm warned the dollar was at risk of being “dethroned” by blockchain technology and stablecoins.
As most know, Gundlach has been a staunch critic of Fed policy, and it will be interesting to hear his interpretation of the recent flattening of the Treasuries yield curve, which as we have repeatedly said is a clear signal by the market that it is engaging in a “policy mistake” where it tightens too quickly or too strongly and ends up ruining the economic recovery.
Explaining why he titled the webcast "in our time", Gundlach says that it's because he’s been thinking about what’s been happening in society and we’re going to see some major changes "in our times"
Gundlach also likes the book by the same title by Hemingway, and also mentions Chamberlain's "ridiculous piece of paper" which he waved when he said we have "achieved piece in our time" just months before the start of the great war.
The bond king starts with his favorite chart, showing that yields rise during episodes of QE and then collapse when QE ends - Covid QE “lo and behold, rates rose.” And now that the Fed is talking about a quicker taper, it would be more common for yields to be falling during that tapering.
Gundlach reiterates his view that the Fed’s Quantitative Easing is what’s “driving U.S. markets, not fundamentals" and is “granddaddy” of all factors driving assets. Not surprisingly, he shows a chart of the Fed balance sheet.
Gundlach references Powell’s statement that taper could accelerate and since stock markets have been clearly supported by balance-sheet expansion, it’s turning into rougher water for markets as we move into taper. Most people now believe Powell has turned more hawkish. That's why Gundlach says we’re likely to see much more uncertainty and stress as the Fed has decided to follow the bond market “and turn more hawkish.” He says Powell has admitted the word “transitory” is a meaningless phrase.
Looking ahead, he says that there will be much more uncertainty and stress as the Fed shifts tack. Gundlach says Powell tried to claim “transitory” meant no long-term structural problem. But inflation is likely to stay elevated until middle of next year -- what he means by that is a 4-handle, he says.
Gundlach then turns his attention to the record low real rate (which we have discussed here)...
... and the even more record shadow fed funds rate, both of which are extremely stimulative for risk assets it goes without saying.
After QE is rolled back, the Fed will still be at -6% for the “shadow” federal funds rate, Gundlach said, meaning that there is simply no way we can ever again have a positive shadow funds rate without crashing the economy.
Meanwhile, now that even the Fed has conceded that inflation isn't transitory, Gundlach says CPI inflation could hit 7% or higher over the next couple of months, and while it will fade after, it is likely to stay elevated (defined as above 4%) until at least the middle of next year.
As before, Gundlach says lots of things now are resembling the 1970s, include: the inflationary situation, the magnitude of negative inflation-adjusted interest rates, and the magnitude of geopolitical tensions. Not surprisingly, Gundlach chart of real rates is titled “Real Fed Funds Rate Since 1971.”
After flagging the collapsing consumer sentiment, Gundlach notes that it is not all bad, and says that Corporate America is in better shape now than in a long time because companies refinanced a lot of debt in the last year to take advantage of low rates.
Going back to the title of the presentation, Gundlach says that “In our time” we’re seeing things that haven’t happened in decades; that applies to things including negative sentiment about buying autos and about negative interest rates. Meanwhile, poor sentiment about car purchases will likely produce a headwind to growth in early 2022, he says.
Gundlach also correctly notes that the surge in buying of autos and durable goods are long-term purchases and many of those were pulled forward due to fears of even higher inflation in the future.
And yes, Gundlach echoes our warnings that CPI will stay elevated because the effects of owner’s equivalent rent need to percolate through CPI data in 2022, and is why CPI inflation gauge won’t drop below 4%, year-on-year, throughout 2022.
And yet, the Fed is trapped because according to Gundlach, as few as four quarter-point Fed rate hikes could break the economy. Meanwhile, discussing an observation we made last Friday when we pointed out that the fwd curve has already inverted, Gundlah notes that the nominal U.S. yield curve is flattening so much that we could see trouble “sooner rather than later,” possibly in the second half of 2022.
Another reason why Gundlach says rising inflation is because wage growth of entry level jobs will push into wage growth at higher levels. He references a restaurant sign he saw that advertised entry-level, unskilled jobs that paid $16/hour and supervisory jobs that paid $16.50/hour. Gundlach then notes that while a lot of wage growth is for workers ages 16-24, the DoubleLine CIO says these increases could lead to wage increases for older workers, too.
In short, “Wage inflation is starting to increase,” Gundlach says and sees this and rent increases causing CPI inflation to remain elevated through 2022.
Moving to markets, Gundlach said that emerging-market equities are attractive, and he notes the “outrageous” outperformance of U.S. stocks, adding that he “rest of the world is significantly cheaper than U.S."
“Look at the outperformance of the S&P 500 this year,” versus emerging markets, he says, adding that it's clearly due to economic outcomes and the strong dollar, he says about emerging market’s lag (although he does concede that it’s still too early to buy emerging market equities).
However, “when the worm turns,” emerging markets could outperform the S&P 500 by more than 100%, but he wants to see the dollar turn weaker first. And speaking of the dollar, Gundlach reiterates that he’s a long-term dollar bear adding that his "long term view remains” very dollar bearish. The main reason for his bearish take: The twin-deficit problem will cause the dollar to go down over time.
Going back to inflation, Gundlach says it’s interesting how core services was negative for a while in U.S. CPI print. He says he feels food prices might be higher than is being reported. Gundlach also said that shelter inflation has gone up, and notes that home inflation is way above 3.5%. He shows a chart in which he replaces the CPI Shelter Component with Home Price Appreciation and demonstrates that real inflation would be at least 2x higher.
There is much more in his full presentation below