A confident, reconfirmed Fed Chairman Jerome Powell has abandoned his narrative that inflation is transitory. But DoubleLine Capital CEO Jeffrey Gundlach thinks Powell remains wrong about the U.S. economy, which the central banker has called quite strong in light of the current 4.2% unemployment rate.
In a webcast on Tuesday, Gundlach took serious issue with Powell’s characterization of the U.S. economy. If it really were so strong, the Fed might be in a position to address inflation, government debt and federal budget deficit with more hawkish monetary policy rather than the modest tapering it is currently initiating.
The economy is “pumped up on stimulus” exactly because it “isn’t strong,” Gundlach declared. Despite the Fed’s efforts to control bond prices, market conditions support Gundlach’s view.
Gundlach told webcast attendees that inflation is running even higher than the 5% rate DoubleLine had expected and clearly is no longer transitory. But the bond market doesn’t believe it will persist over the next five years and is focused elsewhere.
Classic recession indicators like a yield curve inversion have not yet occurred but it is flattening, Gundlach observed. Consequently, the bond market is signaling its conviction that business activity is weaker than the Fed proclaims.
“The yield curve is trending in a way” that doesn’t suggest stronger growth in 2022, Gundlach noted. Every time the yield curve has started to flatten over the last decade, some pundits have argued “this time is different.”
Every time they are “wrong,” he responded. For the yield curve to start flattening out at such a low level of interest rates sends “double” the signal that something is wrong.
What would happen if there were a 20% downdraft in the stock market, one webcast attendee asked. Would the Fed step in again with another round of monetary juice?
“That’s been the case,” Gundlach said, adding he wouldn’t bet against it. Equity ownership among American households has soared from $5 trillion in 2009 to more than $30 trillion today, so the economic ramifications of a bear market could be far more widespread next time one occurs.
Most of America’s growth since the 2008 financial crisis, if not before, has been supported by massive debt creation and firendly interest rates, Gundlach noted. This encompasses the Fed’s balance sheet, other issuance of government debt as well as expansion of corporate and household balance sheets.