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.