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.

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