Jeffrey Gundlach webcast: “It’s Not Unusual”

In his June 7, 2022, Total Return webcast, DoubleLine CEO and Chief Investment Officer Jeffrey Gundlach first (5:07) dives into the real federal funds rate, running at an “incredibly negative” level of -749 basis points. Mr. Gundlach again points out the consistent track record of the two-year U.S. Treasury yield (8:57) as a predictor of the eventual terminal level of the fed funds rate – so consistent in fact that he has said “somewhat facetiously but somewhat seriously” that the two-year Treasury yield should replace the Federal Reserve as a governor of the fed funds rate. While the heavily adjusted Consumer Price Index is the most widely followed gauge of inflation in the U.S., Mr. Gundlach (11:24) prefers export and import prices precisely because there are no intervening adjustments. Averaged together, export and import prices would indicate inflation running at 14% year-over-year (YoY). Skyrocketing prices, including energy, Mr. Gundlach says, might put a damper on the consumer spending boom even on services.
Turning to the Bloomberg Commodity Index (13:06), which “has been on a tear” since March-April 2020, Mr. Gundlach points out this strength has come in the face even of a strong U.S. dollar. He takes note of the explosion in consumer spending, particularly for durable goods (14:46) but nondurable goods as well, under the effect of government stimulus checks. This presages weakness in the future, as it will take years for durable goods purchasing to drop to its long-term trendline. Another consumer-related explosion to the upside, consumer revolving credit (19:00), he says, doesn’t bode well for future consumer spending.

Among other issues, Mr. Gundlach discusses: surging monthly mortgage payments (20:31), undercutting the housing market as a support of the economy; people dropping out of the labor force, some in favor of entering the “criminal force” (25:14); the case for commodities over U.S. stocks (28:18); the apparent turn in a lot of cycles, including growth versus value stocks, U.S. stocks versus European stocks (30:50). As a harbinger of further tightening in financial conditions and trouble for equity performance (38:40), he points to a gap in spread widening within high yield corporate corporates. He sees a parallel spread gap between the BB and B rated segments of the S&P LSTA Leveraged Loan Index (40:41). In a tour of the universe of Agency mortgage-backed securities (Agency MBS) (41:25), Mr. Gundlach finds this sector attractive on spreads relative to corporates, saying “at these valuations, we are extremely bullish” on Agency MBS. He also (42:48) points out the risk of callability of mortgages has declined significantly in the wake of the rise in interest rates.

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