Taps Coogan – February 17th, 2022

Enjoy The Sounding Line? Click here to subscribe for free.

Jeffery Gundlach, the founder of DoubleLine Capital and the manager of one of the largest funds in the world recently spoke with CNBC in a wide ranging interview about the prospect for monetary policy and inflation in light of the Fed’s whiplash on transitory inflation. Noting the absurdity that the discussion on monetary policy is now one of intermeeting and double rate hikes while the Fed is still doing QE, Gundlach sees inflation closing the year out at 5% and the first early recessionary signs building on the horizon.

Some excerpts from Mr. Gundlach:

“It’s interesting that the tremendous flattening of the yield curve we’ve seen since March of last year has slowed down a lot, which feeds into the idea that I’ve been toying with that the yield curve is going to once again flatten at the lowest level than at any other time since about 40 years ago. This has been the pattern. So we are starting to get some recessionary indicators… which last time we talked… there was just nothing about recession. It was all about stimulus, but what’s been feeding everything is the stimulus… It’s very odd that we are talking about perhaps five interest rate increases and you’re querying me about a 50 basis point hike at the next meeting at the same time as the Fed is still doing quantitative easing. It’s really kind of remarkable. I think the Fed should have stopped quantitative easing not next week, not tomorrow, not yesterday, but a year ago…”

“Maybe it’s just me but 7.5% (CPI) sounds a lot higher than 7% from one month ago. 7.5% sounds like we are headed for double digits… I feel young again because I grew up with Jimi Carter and so many of the things I remember… are sort of looking the same… We are looking at sort of a similar situation but almost in the mirror… Interest rates are so incredibly low. They’re super negative on a real basis. They were super negative on a real basis under Carter but they were at a much higher level. So, it’s not surprising that markets are having trouble because they are all predicated on the stimulus which is obviously being taken away…”

On the prospect for a soft landing:

“I’ve never seen it before. Every time you get into this sort of environment you start to hear people talk about ‘this time is different…’ I think the Fed is going to have to raise rates more than the market still thinks. I think we are priced for… a terminal Fed Funds are of about 1.5%, maybe 1.75%. My suspicion is that they are going to keep raising rates until something breaks, which is always the case…”

On the inflation outlook:

“I do expect it’s going to come down but I think it’s going to be disappointing the pace and the degree to which it comes down versus those who think it’s going to come down to 3% or even 2%… We’ve been very hawkish on inflation, more than almost any other firm in the investment business, but not nearly hawkish enough… We think inflation is very likely to print at least 5% for 2022…”

Sounds about right. The 1970s in the mirror is a great analogy: in some ways the same, in some ways the opposite.

Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.