Inflation numbers as measured by the CPI and other various metrics are likely to fall into the 1% to 2% area in the next few months, DoubleLine Capital CEO Jeffrey Gundlach told clients in a webcast yesterday.
This helps explain why the best-performing asset class since the last Fed meeting has been long-term Treasury bonds, which climbed more than 6% since July 31. Gundlach also said the bond market is pricing eight Fed rate cuts over the next 12 months.
He also repeated his July 31 remarks on CNBC that the history books will say that “we were in a recession” this month. As evidence, he cited the consistent downward revisions to non-farm payrolls in recent months.
Furthermore, the unemployment rate is almost above its 36-month moving average. Were it to cross that level, Gundlach would consider it a serious recession indicator.
Many signals, like the Leading Economic Indicators (LEI), have been pointing to a recession for several years and yet the economy has continually surprised markets. Gundlach attributed this to the heavy weighting of manufacturing in the LEI. Another reason the U.S. has managed to dodge a recession is the huge "amounts of M2 sloshing around" the economy that were injected into the money supply during the pandemic.
The webcast took place before the Bureau of Labor Statistics' report yesterday that the core Consumer Price Index rose 0.3% in August, the most in four months. However, Gundlach was addressing longer-term, directional changes.
If the price of oil “remains in the $60s,” the Consumer Price Index will have “a one handle” over the next few months. Gundlach added that his call for a CPI rate of under 2% didn’t factor in some expected “normalization” of the housing market.
This would be a “very significant change from where we were,” he said. At present, core services and shelter are about the only categories within the CPI that is showing any life, he continued.
During the webcast, Gundlach took a deep dive into the methodology through which the CPI and other inflation indexes are calculated. For example, inflation in Europe technically is lower than it is in the U.S., but if “we calculated the CPI the way Europe does, [the U.S. CPI] would be 1.72%," he said. That's 1.08% below where it stands here as of yesterday.
Auto insurance and housing are the only categories that are rising today. Gundlach mentioned the possibility that, if mortgage rates were to fall below 6.0%, it might unlock a sufficient supply of homes for sale to jump-start more activity in the housing market. And he reitereated the idea that an increase in the supply of homes for sale actually could lower prices, since they have soared 40% on average since the pandemic.
Nonetheless, when it comes to the actual level of prices, the damage has already been done in terms of the impact on American consumers, Gundlach said, pointing to articles about people skipping meals in reaction to the price of food. The economy needs prices to go “sideways for quite a while,” probably four or five years, to get back to normal.
Gundlach chose not to dwell on the federal budget deficit, but he said that if the economy entered a recession, budget deficits, currently running at $1.7 trillion annually, could get “much worse.”
Asked by a webcast attendee what would happen if the Treasury held one of its regular auctions and failed to sell the scheduled tranche of bonds, Gundlach said in an understated tone, “That would be bad.” Such an event could give rise to the “unthinkable,” rising interest rates during a recession, he said.
Gundlach, who garnered a degree of fame in 2016 when he predicted the election of Donald Trump when the vast majority of political pundits were predicting Hillary Clinton would win the presidency, did not address the current election. However, he did say the public had little confidence in the U.S. government and added it was likely “the institutions of the past seven decades are likely to be replaced.”