When last we checked in on bond king for the post-Gross world, exposer of WSJ conspiracies, and man who showed up at Sohn dressed in a Jack Nicholson Joker costume, Jeff Gundlach, the DoubleLine boss was busy explaining how the U.S. was mixing up a toxic cocktail of Fed hikes and deficit spending.
Specifically, Jeff said the following during his latest webcast:
Increasing the size of the deficit while we’re raising interest rates almost seems like a suicide mission.
Right. And you can trust him on that, because any man brave enough to wear a purple corduroy halloween costume in late April is a man who knows something about “suicide missions”.
Here’s the chart, although there’s nothing at all unique about it:
Of course just because Jeff didn’t tell us anything we didn’t already know (and that every economist and analyst on planet Earth hadn’t already said) doesn’t mean he’s not right. In fact, he’s exactly right. A late-cycle, deficit-funded fiscal expansion piled atop rate hikes is a disaster waiting to happen, and to the extent Jeff pointing it out helps draw attention to the lunacy of it, well then good for Jeff.
Fast forward to last Friday (that’s a little “back-to-the-future-ish“) and Barron’s was out with a new interview that finds Gundlach doing what Gundlach does best: stating the obvious and implicitly suggesting that because he’s the one saying it, it’s more true than it was before.
Everyone knows the curve has been flattening relentlessly and there’s no more mainstream recession indicator than an inverted yield curve, but Gundlach is going to regale you with Econ 101 because, again, you need to hear it from him. To wit, from Barron’s:
There’s a narrative out there that says the flattening yield curve isn’t sending any message about a recession, and that couldn’t be more wrong. In fact, with rates so low, the yield curve signal is even stronger than usual.
We are getting closer to a recession. When the curve goes flat from the two-year Treasury to the 10-year, the recession risk is at least a year away. Recently, that spread was 28 basis points, which is pretty close to being flat. It is flashing yellow. It needs to be respected.
Got that? There’s “this narrative out there” being foisted upon the clueless masses (maybe by the same gang of “crass hucksters” that swindled Jeff out of a cool million by selling him 67 bottles of fake Bordeaux) who, were it not for him, might be inclined to think the yield curve shouldn’t be “respected.” But now you know better.
Next, Gundlach talks about the “suicide mission” again (the deficit spending and the rate hikes, not the Joker costume):
At the same time, the Fed has said it intends to keep raising interest rates, probably twice more this year. That, together with the signal from the yield curve and perhaps $600 billion of quantitative tightening, and a budget deficit that is growing, is an issue. The strangest thing is that Congress passed a $280 billion tax cut and spending increases so late in the cycle, and with interest rates rising. It’s like a death wish. The U.S. is taking on hundreds of billions of dollars of debt while raising rates, which means our debt-service payments are going to be under serious pressure to the upside.
There’s more to the interview (which you can find at the link above) including Jeff’s prediction for the midterm elections and an attempt on his part to explain why his Brazil ETF reco went wrong, but all well-meaning Gundlach humor aside, he’s right to characterize the current juxtaposition of U.S. fiscal policy and U.S. monetary policy as a “death wish.”
And that’s all that matters right now.
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