Core personal consumption expenditures (PCE), which the Fed uses as a measure of inflation, are rising, but commodity prices aren’t following suit.
The dollar has softened thus far in 2016, Gundlach says, but should remain strong over the long term.
The combination of slow growth, a strong dollar, and rising wages should constrain corporate earnings, says Gundlach, which will contribute to the downward pressure on markets.
“I see a lot of forecasts for 7 percent or 10 percent earnings growth, but that is inconsistent with 2 percent GDP growth and with the Fed’s dots saying they will be tightening,” Gundlach said.
Weak markets should cause the Fed to reconsider it’s plans to tighten monetary policy, said Gundlach, pointing to the volatility that occurred after the Fed raised rates in December 2015, the first rate hike in nine years.
“The market collapsed after they raised rates,” said Gundlach. “It’s clear the markets fear deflation and want inflation.”
Negative interest rate policies are bad for the global economy, said Gundlach, because they’re blunting the impact of monetary policy. “Negative rates are bad for the banking system,” he said, pointing to troubles surrounding European banks like Deutsche Bank.
Gold is the one bright spot identified by Gundlach. The current market environment could cause gold to rally, but not the gold miners, “Stay long gold, trim gold miners.”
Gundlach held out gold as a potential bulwark against low or negative interest rate policy.
Though Gundlach acknowledges that politics are driving the economy, he’s not worried about the U.S. presidential election, predicting that Marco Rubio may drop out of the race in the next few days and noting that a Trump win would mean expanded military spending to stimulate the economy.