Now, let's bring in Jeffrey Gundlach. He is the CEO, CIO, and founder of DoubleLine. He joins us now from Los Angeles. Welcome back. Good to have you.
Good to be back again, Scott. I hope you had a nice week off last week.
I did. I didn't. It's good to be back in the seat and visiting with you. I would have hated to miss that. I'd love to begin with your reaction. As I mentioned, you know, there was no move in rates, but there was still plenty of drama in what Chair Worsh talked about. What was your reaction?
Well, he said the word family fight a lot of times, and he also said 2% very, very definitively. I gave him a little bit of push back last meeting when he talked about the left of the decimal point has to be a two. And now he's really sharpened that point up and says no that's not it at all. It's really two. So I really thought the most interesting thing about the press conference though was I'm going to say that the real takeaway that I'll remember is what are you waiting for? Which one reporter actually said directly and then another reporter later in the press conference basically asked the same question like what's going on? It sounds like you're planning on making a plan. I get that. You've got this task force. You're talking a lot about inflation and the employment is just taking care of itself, I guess. But one of the things that he did say is he's getting information from the market. And I'm going to talk about what happened during that press conference. But first, I want to say what happened since the last meeting. The number one performer of broad asset classes was the commodity index since the last press conference, up three and a half percent. Then MSCI Europe, then the dollar, then the Dow Jones Industrials, then amazingly bank loans because there's some stress in the bank loan market at the particularly at the AI level. And then everything else is down. High yield is down. The bond market is down a little bit on the aggregate market. The S&P is down. Bitcoin is down. And then you've got emerging markets are really down. But that's really driven by Korea, which has been all over the place. But during the press conference, you know, you started out with a pretty flat yield curve relative to recent history. And the yield curve did nothing but steepen during that press conference. The two-year rates dropped and the long-term interest rates actually went up by about 10 basis points or so. And now the yield curve, which was down at 77 basis points, twos to 30s, is up at 94 basis points, which is a very large move. So, I think the market is looking at this and saying he's talking a lot and he's talking about questions that he's asking and he's going to figure out what the real inflation outlook is when we adjust for shocks and are those shocks moving into other areas of the inflation market where they don't really seem to be adjacent to those shock areas. And I think the answer to that question is it seems to be because the commodity index just continues to be the top performer. In fact, since the December Fed meeting, the top performer is the Bloomberg Commodity Index of all these asset classes that we follow, which is up 23%. And of course, the war is not going away. When this war broke out, everyone was saying it was going to be short-lived. And I just said, every war that I've experienced begins with the troops will be home by Christmas. And here we are over five months into it, and it doesn't look like there's a lot of progress being made. And so we have oil, West Texas Intermediate, back up about five or six dollars today heading higher and it seems that we're running low on stock piles. The strategic reserve has been drawn down quite substantially over the course of this war and we're talking about hearing about problems in Russia and China. And so I think that the inflation rate is not going to go to two unless they start raising interest rates and not by 25 basis points. And he's committed to that so forcefully that I wonder if he'll be able to keep rates stable in September.
Wow. So, so are you suggesting that they should have raised rates today?
In the context of his vehement statements that they're going to get to 2%. And he didn't mention a specific index, but I think we mean the CPI, maybe the CPI core, probably the PCE would be the top one. And the PCE is not close to 2%. It's about double 2% on the headline, and it's still in the mid-3s. And with the construct in the commodity market where it is now, I think that we're not going to get a headline CPI below 3.5% for the remainder of this year. And there will be a drop in March of next year because you have the base effect of the initial war problem rolling off, but we're not getting towards 2%. And as I said in our last conversation, he has basically defined failure for this Fed of not getting to 2%. And so if you really want to get to 2%, I think you have to raise interest rates. I don't think getting 2% is going to take a long time. We might not get there over the course of the next couple of years, but if that's really what you're focused on, then I think you have to start raising rates. The two-year Treasury rallied today because it thinks the Fed is taking its time and the long bond yield went up significantly after the press conference because the bond market vigilantes are saying if you really want us to believe your rhetoric, you got to start acting. And I thought I lost control of the room a little bit when those reporters started saying, 'I hear you're talking and you're pretty glib the way you bring these things up, but what are you waiting for if you're so determined on 2% when in the context of that press conference, there's zero concern about the employment market? Zero. So why not raise interest rates?' The tutor says you should. That's what one of the questions alluded to when they say when the chair says and other members there's quote no tolerance for inflation as one of the reporters clearly put it, but there is inflation and it is above target so what gives? Where's the disconnect here? And that's exactly what you seem to be suggesting as well.
I think that's well said. Yeah, that's sort of the problem. He's setting out a long-term strategy, it seems like, and it seems that the market's interpreting it is until you get a little bit of meat on the bones of the strategy, you're not going to do anything. And he tried to counteract that sense by talking about this family fight and we were, you know, we were constructive and collegial, all these things.
Yeah. And we're really working on it and we're going, it's all going great. This is really going great. Well, then why is the yield curve steepening if things are going so great? And why are commodity prices rising if things are going so great relative to this inflation thing? So, I thought he's very well spoken. He's very glib, but I thought that his contradictions really and sort of the way he was approaching some of the questions and answers that he gave. I just thought it seemed sort of inherently contradictory. And so I suspect that we're going to see a little bit of a change in approach with a little bit more meat on the bones in the future. At least I hope so. And I don't like this task force thing at all. I think that one of the problems with the Fed is it's a committee and committees have a hard time making a final decision. Somebody's got to be a decision maker. Someone's got to be the CIO at an investment firm. You can't just have a committee deciding what the duration of your bond portfolio is going to be. Somebody has to own it. And I think that committees is one of the reasons why the Fed has been slow to move, why they allowed the inflation to come up in 2022 because as I said to you back in 2021, Scott, I said, you know, they raised rates 25 basis points, but they should have raised them 200. I was so bold as to say that and I think I've been completely justified in saying that because the inflation rate went to 9%. So now not only do we have a committee, but we also have subcommittees. And these subcommittees are just going to be another roadblock to crisp decision-making. So I'm not really in favor. I think he's got almost an econometric kind of way of thinking about the economy where it's all just a big algebra equation. You just have to get the coefficients right and make sure that you're following the markets and see if the coefficients are changing. But I just don't think that there's a lot there to grab on to right now. And so I think that the market likes it. The stock market probably likes it because they like the Fed to be slow in hiking interest rates, but the long bond doesn't like it at all. And so I think that's the big takeaway.
Can't they afford in some respects to be in your words slow because the market has reacted in kind as you suggest? Rates are up in the 40 whatever days it's been since the prior meeting. And I thought this was one of the biggest takeaways, at least for me today. The idea that the Fed chair said, quote, 'Markets have made decisions because we've stepped back from trying to influence them. Markets are playing the ball, not the referee.' In other words, forget the idea that the Fed is going to hold your hand and guide you to wherever you need to be, Mr. Market. Now you're going to have to use your brain and not ask the teacher for help anymore. What did you make of that?
Yeah, I actually liked that phrase. I thought it was kind of clever. But if you're letting the market make the judgment, the market's judgment is that the yield curve is steepening and long-term interest rates are rising and mortgage rates are back to the level they were a year ago at 6.7 on the bank rate. And after today's moves and if they continue in the weeks ahead, you're going to get the mortgage rate up at around 7%. And that's interesting in terms of the affordability question that is on everybody's mind. And obviously mortgage rates going up and electricity prices going up and insurance going up and everything else in significant ways. The affordability issue is not getting better. And so I just, Scott, I'm just going to say it one more time. I just don't like this slow pace sort of way of playing it when you're adamant that you're going to get to 2%. And not 2.5, not 2.2, 2.0. I think he even said not a whisper above, I think, is a phrase that he said. And there's a fundamental inconsistency here. And I thought it was very telling that the reporters, a couple of them actually said, 'I kind of you're kind of losing me here. You know, I need help with some of this. What's going on with this contradiction?' So, he needs to somehow fine-tune that tension between his commitment and his slow pace.
