Inflation is starting to peak and by next May it could have “a 4% handle,” DoubleLine CEO Jeffrey Gundlach told attendees at Schwab Impact yesterday. Even though the U.S. economy looks strong enough to avoid a recession this year, conditions are likely to change noticeably over the next six months as the variable lags from higher interest rates spread through different sectors, he said.

Asked by CNBC’s Scott Wapner about the prospects for a soft landing, Gundlach said he couldn’t find a part of the economy that’s going to “plug the gap” or “pick up the slack.” He noted that “credit card usage is way up” because real, inflation-adjusted wages are failing to keep up with the cost of living, particularly housing.

“When housing goes negative, the economy could lose several million jobs,” Gundlach told Wapner. “Once the job market slows down, that’s a tough ship to turn around.”

In some markets, the combination of rising housing prices and mortgage rates has caused the average monthly payment to double over the last three years. Gundlach noted that the mortgage refinancing industry is “completely dead.”

He is not alone in this downbeat take on housing. A recent article in Fortune cited a Redfin survey claiming that housing prices in many markets now are falling at a faster rate than they did in 2006.

For most Americans, their home is their largest financial asset and the popularity of work-from-home during the pandemic drove up prices in many markets, temporarily fueling consumer confidence among homeowners. Now some fear this could turn into the second worst housing market since the Great Depression. "Housing prices are doomed," Gundlach told advisors.

Ultimately, he believes Fed Reserve Chairman Jerome Powell “wants to put the U.S. into a recession.” Once layoffs start, the momentum could be “hard to stop.”

The short end of the Treasury yield curve is “almost inverted” and the bond market “is screaming” that the Fed needs to start cutting interest rates within six months. Gundlach expects the Fed funds rate to top out around 4.5%, but it's an open question how long rates remain at that level. Powell has hinted it could stay there for a while.

The labor market still looks strong and leaves many investors feeling positve, but it’s a lagging indicator. Moreover, the bond manager expects the unemployment rate to move above its 12-month moving average sometime next year. “That’s almost always coincident with a recession,” he said.

Already reports of layoffs in Silicon Valley and Wall Street are announced on a weekly basis and Gundlach noted that the widely trumpeted, strong job openings data is easy to manipulate. If DoubleLine wanted to, he pointed out, it could announce it was looking to hire 100 distressed debt hedge fund managers and pay them the minimum wage, but  it wouldn’t receive any applications.

Gundlach also voiced concern about the possibility that a clumsy, heavy-handed Fed could overplay its hand and bring back deflation down the road. Its record on fine-tuning interest rate levels isn’t encouraging, he said.

He said he suspected the central bank’s goal at the start of the pandemic was to raise inflation to 4% and “they overshot by 500 basis points.” Why should anyone believe that when they miss a target by that much “they are going to nail the landing?”

Many have questioned whether the Fed’s 2% inflation target is realistic. “If [inflation] falls from 8% to 2%, there isn’t a snowball’s chance in hell it will stop [there],” Gundlach predicted.

That’s why he is buying long-term Treasurys. Indeed, the bond market, which witnessed tremendous outflows from high-yield and emerging market bonds this year, now offers numerous opportunities in his view. To get a 5% yield two years ago, an investor had to buy a junk bond and leverage it significantly. Today, she can get that by buying a two-year Treasury. “In January of this year, stocks were really expensive but, by any standard, they were cheap relative to bonds,” he said.

However, the recent reversal has been dramatic. “We’ve gone from the least attractive bond market of all time to the most attractive in a decade,” he said.

Asked about the stock market, Gundlach said he thought it could end the year about where it is, although tax-loss selling could change that picture.

But the big opportunity for equities in the next cycle is likely to be in emerging markets, with the exception of China. “They might just confiscate it [foreign holdings],” he said in reference to China.

In contrast, he thinks emerging market stocks could outperform the S&P 500 by 100% in the next cycle. That’s close to what happened in the years after the dot.com bubble burst.

The U.S. dollar is likely to be a long-term victim of the next recession, he said. Gundlach expects the Fed’s monetary response to the next recession to be a major reason why the dollar “get decimated.”

As for the U.S. political scene, Gundlach said he expects the Republicans to recapture the House in next week’s mid-term elections, a result that should have a positive impact in the intermediate term. A GOP victory will terminate the prospect for more “slush fund” spending programs that have fueled inflation since the pandemic began, he said.

Still, deficit hawks should not get their hopes up too high. Gundlach cited the analysis of Hoisington Investment Management’s Lacy Hunt, who estimates the Fed could send the Treasury a loss of $500 billion for 2022.