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Gundlach: Watch Out for 4% Inflation, Bond Fallout

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What You Need to Know

  • “In my opinion, not only is the Fed unconcerned by increased inflation, they'll welcome it,” he said.
  • The DoubleLine executive reiterated his view that the stock market is overvalued.
  • He also said the volatility index could likely go to 100 during the next downturn.

Doubleline Capital CEO Jeffrey Gundlach sees headline inflation, which includes food and energy prices, surpassing 3% this summer. 

During a webcast Tuesday, the fixed income exec said this figure might even go higher  a move that could “really spook the bond market.”

“Based on ISM Prices Paid [data], one could plausibly predict headline inflation rising above 4%,” he explained.

On Wednesday, the Labor Department reported that the core Consumer Price Index, which excludes food and energy, rose 0.1% in February from January and 1.3% from the prior year, according to Bloomberg. The overall CPI figure grew 0.4% from the prior month and 1.7% from a year earlier.

Meanwhile, Gundlach said, the Federal Reserve is signaling to the bond market that it’s unconcerned about price changes and in fact favors a combination of rising inflation and negative interest rates — since that means it can pay for the deficit with cheaper dollars.

“In my opinion, not only is the Fed unconcerned by increased inflation, they’ll welcome it,” he said. 

Market Madness

Asked about whether the stock market is now in a speculative bubble, which “Big Short” investor Michael Burry has warned could produce an 80% drop, Gundlach said: “To say that it’s anything other than very overvalued versus history is just to be ignorant of all metrics of valuation.”

Though “80% is kind of an arbitrary number … ,” he said, “I certainly think there’s a catalyst for the market to gear on the downside — and that it’s not gonna be 10 or 15%.”

Gundlach sees the drop as likely to “be much bigger than that — probably something along the magnitude of, I don’t know about 80[%], but a large number.”

As the market begins such a decline, “We’ll have tremendous unwind of a lot of the money that thinks that the stock market is a one-way thing,” he added.  

Also in his talk, the DoubleLine executive said “the VIX will go over 100 during the next downturn,” referring to the CBOE Volatility Index, which hit a year-to-date high of 37 on Jan. 27 and was just below 29 on Wednesday.

He specifically sees the six biggest technology stocks and Tesla “as pretty overvalued, and they massively underperformed over the past few months vs. the small-cap sector.”  

“I think Tesla is a cult stock,” Gundlach said.

He ended Tuesday’s webcast by defining what he sees as the cheapest asset in the world today: farmland. 

(Photo: Alex Flynn/Bloomberg)


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