Taps Coogan – April 15th, 2022

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Jeffery Gundlach, the founder of DoubleLine Capital and the manager of one of the largest funds in the world, recently spoke with CNBC to share his outlook on monetary policy, markets, and the US Dollar. He slams the 60-40 portfolio construct, sees the Fed as essentially doing nothing but following the 2-Year treasury, and expects inflation to peak on a year-over-year basis but remain “sticky.”

 

Some excerpts from Jeffery Gundlach on inflation:

“I think we are near peak inflation unless you have another surge in the price of energy… Inflation is peaking because the base-effects are going to be favorable. There were some big month-over-month prints in the middle of 2021. I don’t think that is going to occur (again), but it’s going to be sticky. It’s going to be frustratingly elevated… It’s almost laughable that the Fed still talks about 2%… The wage inflation is real. Everybody knows it. The rent component of the CPI is grossly understated.”

On the Fed following the 2-Year Treasury:

“I’m not joking… The 2-Year treasury is what guides the Fed’s rhetoric. The 2-Year treasury was completely subdued in the first nine months of 2021… then all of a sudden it started to get (inaudible) on the upside and then in September it really kind of broke out and that’s when Jay Powell started to talk a little bit less dovishly… And then in December, the 2-Year treasury was above 1% and then all of a sudden it’s guns blazing. The Fed’s (like) ‘Tools, Tools, Tools’ …I can show charts all day long that show the Fed is not a leader. The Fed is a follower so why not just admit it?”

On the US Dollar:

“My highest conviction is short the dollar, but not this week. I am talking about looking forward over an investment horizon of four or five years…”

There is no doubt that monetary policy has followed moves in the Treasury for decades. Indeed, one of the charts that first really peaked my interest in monetary policy was a chart showing just such a relationship. Of course, it’s more of a ‘chicken and egg’ problem than it seems at first blush. 

The market anticipates monetary policy. The 2-year treasury yield moves up because it believes the Fed is going to raise the overnight rate. 

The more interesting question then becomes: what would happen if you got rid of the Fed. If not for Fed manipulation, the treasury market would price off of inflation and growth. In other words, nobody would be buying 2-year treasuries yielding 2.5% with inflation at 8.5%, and earnings growth around 5%. Thus monetary conditions would have been tighter and inflation lower this whole time. The Fed isn’t needed to raise short term rates when inflation rises or to lower them when it falls. To the contrary, the Fed is the primary reason rates have been so distorted for so long as to create our current predicament. 

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