We're going to have Jeffrey Gundlach with us. He's the CEO, CIO, and founder of DoubleLine. He does join us now. Welcome back. It's good to have you as always.
All right. Good to see you, Judge. I'm in New York and you're in California. We got it backwards this time.
I know. We certainly did. But at least we're talking. That's the most important thing for our viewers. What's your reaction?
Well, I thought the press conference was kind of devoid of content. There were a lot of questions that were asked and not a lot of answers given. But he once again the chairman emphasized that everything's fine with employment and he reiterated that the speed of the inflation, the inflation statistics are not coming down with sufficient speed. If I were on the committee I actually would have dissented today. I noticed that in your halftime show that there were a lot of people playing word games with like, you know, the old one and done and then Steve Leeman said one and mom. I actually would have dissented and voted to raise rates 50 basis points today. And I would have called that stun and done and give the market a little bit more of a trueing up with the Fed funds rate. The two-year Treasury going into the meeting was more than 100 basis points above the Fed funds rate. And the two-year Treasury rate has risen today in reaction to the one hike. I think that one of the real problems is that the true inflation and I use import export prices is what I call true inflation because there's no seasonal adjustments. There's no adjustments for quality and other things that are kind of artificially estimated. Import export prices, they're just really prices. And if you average import export prices, which just came out recently, the average is 7.8%. Which is pretty high. And also getting to something that's more standard, the PCE is at 3.3 on the core rate and for the 14 years before COVID, 2.6 or 2.7 was the high on the core PCE. The 2.6 was the low on the core PCE. Ever since it bottomed out at 2.6, it's now trending higher at 3.3.
And so I just also think that one of the things that's, he did mention correctly that the economy looks stronger if you look at GDP now over the past few weeks, but the real reason for that is inventories. And I heard a story yesterday that kind of set a light bulb off and that is that Costco doubled their price for their Kirkland motor oil. And when they doubled the price, I think that they feared or perhaps anticipated that when the price doubled, you might get hoarding. You know, when prices go up, people think maybe they're going to go up again. When you double the price of the Kirkland oil, people might think, gee, I notice the oil's above $100 a barrel. Maybe it'll double again. And they might want to go and grab, you know, a year's worth of motor oil. And so they're rationing it out. That's a phenomenon that I remember from the 80s and the late '70s where people start to say I think prices are going to go up and so they want to buy now and when you look at the GDP now the inventory increase is really what has pushed GDP now up in recent weeks and I wonder if stores broadly, retailers broadly aren't thinking hey, you know I think prices are going higher I notice commodities and we all that oil is up tremendously and so maybe people are thinking I think prices are, when you get this what I'm saying judge is when you get a psychology that inflation is now trending higher which is clearly the case on the PCE and on import export prices I worry that the inflation problem is not being fully respected and Kevin Warsh really focused in the press conference on the fact that inflation is not falling fast enough and it's still too high. It's been too high for too long. And I would have just done the 50 and then see what the data does. And so I was, I'm not surprised that the markets weakened over the course of the press conference because I thought the content was pretty thin.
I mean, you, I think it's fair to say, if my memory serves me well, you've always been, at least recently, a go big or go home guy, at least when it comes to hiking rates. I remember the conversations we had when the Fed was about to embark on its prior hiking cycle under the prior Fed chair and I think you wanted the Fed at that time to raise by at least 100 basis points if not more and just get it over with. Do I remember that correctly? So, this is consistent with how you've been thinking.
That was in February of 2022. And at that time, the 2-year Treasury yield was more than 200 basis points above the Fed funds rate. And so, your memory is quite good on this. I actually recommended my point was that they should have raised rates 200 basis points in February of 2022. And I think history will record that that was a wise recommendation on my part because they did have to raise rates 200 basis points in just a few months. I think they raised rates 75 basis points and then a couple 50s and so that they really needed to do that. So, you're right. I do follow the two-year. I've said for years that the two-year leads the Fed and I've been right once again. And I noticed that Steve Leeman, to his credit, has now been referencing the two-year Treasury quite frequently in the discussions as he gets close to Fed day. And now that the two-year Treasury rate has risen again. So now it's only 90 basis points higher because the Fed raised interest rates. So now we're only, I guess so what are we up now here? About 10 basis points. So they're only 15 basis points worse off. So I think that, you know, I do think that the Fed is moving kind of slowly and Jerome Powell is very opaque today. I don't, and as I said in the past, I don't like this task force thing. It's like a company that's having trouble that wants to hire consultants and the consultants always want to figure out what the people at the company really want to hear and then they tell them what they want to hear. So, I'm not, I think, as I said before, I think one of the problems with the Fed is it operates as a committee. Back in the Volcker days, I think it was pretty much just up to Volcker. He famously when they didn't ratify his rate increase at one meeting he walked out of the room saying he was resigning and they didn't want to go without Volcker so they had to go with him.
So I don't like the way committees work. I really think you need a primary decision maker and now I mean I'm glad they had a unanimous decision. I think for anyone to dissent on the don't hike side was just non-defensible. So as I said I would have gone 50 basis points. So now we're having subcommittees. We have five subcommittees. I think that's going to make the process slower and less crisp.
It definitely felt like the chair had an agenda today to be briefer than we've become accustomed to with the prior chair and even this one from the very beginning. I should note for our viewers that this news conference was 15-20 minutes shorter than we've become accustomed to. I want to push back on one thing.
I almost didn't make it into the chair on time because I usually come to the camera at about 12:10 Pacific time. So all of a sudden I was watching the TV. I was watching CNBC and I hear last question and I go, 'Whoa, I better get moving.'
Yeah, that makes two of us. My dancing shoes were going to be tested for a moment. So I'm glad you were in the chair. Let me push back on one thing that you said if I could. We talked about how inflation is, you know, trending higher. You use that word. And then you also said, I think it, you're not sure it's being respected by the committee. Is that truly the case if you've got 16 of 18 members saying at least another hike this year. How do you reconcile those thoughts?
Well, the reason I say that is because I think they should have raised 50 today if they really respected what was going on. So yeah, I mean it's true that they're acknowledging that inflation, I mean that was the whole focus of the press conference really was that inflation is not a problem or is a problem. Sorry, that they haven't fixed the problem yet, but they're going to fix the problem. And I guess on the SEP they said that the 2% goal wouldn't be reached until 2029, which is just a continuance of where we've been for a couple of decades, which is the inflation rate is going to get to our target in 2 years or 3 years. It's certainly been the case since COVID for sure. Kevin Warsh did not mention this time that they've been above their 2% goal for five and a half years or more. So they again, he's talking a lot about the inflation rate and promising but I'm going to say it one more time. The two-year was at 100 basis points above the Fed funds rate and now it's rising again. So the market I don't think is really as pleased with this move as a 50 basis pointer would have been. It would have been a stun and done. I get it. But I think it would have been a lot more impactful.
What about, you know, this notion of, as you mentioned, you know, one and done, as people had thought going in, would that be the case? It clearly doesn't seem as though it could be the case. If for no other reason than if they put out as part of their statement, including the language, quote, a timelier return to a 2% target, obviously going 25 basis points, and for that matter, even if they would have gone 50 basis points today, doesn't do much to ensure a quote timelier return to a 2% target, does it? The implication I would take from this is that this is not one and done. That they're far from done.
I think that I certainly agree that they're not done and I don't think they should be done and I think they didn't do enough today. So yeah, there's, I see virtually no chance that this is the peak of the Fed funds rate for this hiking cycle is one hike. I think that probability is extraordinarily low. It'll be interesting to see how the swap for December starts moving up. Everyone keeps saying that October is off the table and they say it because of the proximity to the midterms, but I've always kind of dismissed that type of logic. Because what percentage of Americans know that there is a Fed funds rate, let alone what the Fed funds level is? It's probably a smaller percentage even than those that are supportive of Congress which polls down at about 14% or something. I think nobody knows what the Fed funds rate is and I would advocate for them to hike in October if the data stays the way it is. Particularly the commodity complex, the oil complex and all the knock-on effects that are just really starting to get critical. And I'm talking about the strategic petroleum reserve in the United States, which has been driven down pretty heavily in this war. And you can't take the strategic petroleum reserve down to zero. You can't even get close to zero because it pollutes the oil, the conditions in the caves. And so we're getting pretty close. My energy team tells me it's, you know, the estimates vary, but it's not a long period of time before you can't draw the strategic reserve down. And that's also true around the world. The world petroleum reserves are at the lowest level of all time going back, you know, at least a couple of decades. And of course, the world population and the world economy and energy usage is higher. So we're at kind of a critical level with that. So this may spread out. This inflation rate due to the high oil prices may spread out fairly rapidly.
Fertilizer, sulfur, high quality lubrication products, obviously fertilizer, diesel is in California, there's gas stations, they have a conundrum. They have diesel, a gallon of diesel priced at $9.99.9. And the reason they're doing that, they want to actually raise it higher, is their pumps only have the three digits on them, the 999, the old Herman Cain tax policy plan, 999. I'm sure they could retrofit their diesel pumps to make them sell diesel by the quart instead of by the gallon and that way they get the price up to $40. I sure as heck hope it doesn't go up there, but diesel prices are extremely important and they're very high. We've gone to new highs on diesel prices. And I also notice at least earlier in the day, we saw the mortgage rate that's commonly quoted at 7.2%.
Which obviously isn't helping affordability in any way. And one of the problems here, of course, is all of this issuance of bonds. The issuance of bonds has just exploded. The issuance of corporate bonds in just the past three years or so has gone up $2 trillion of corporate bonds. So we've had debt go up by a lot of course we all know the Treasury bonds are going up with now bumping against the $41 trillion debt ceiling. There's just a lot of bonds to absorb. And what we're noticing interestingly in the credit market is in the investment grade market we can divide it into investment grade bond market we divide it into the AI sector of corporate bonds investment grade and then everything but the AI sector and on a duration and rating adjusted basis the spreads on the non-AI sector of investment grade are still pretty stable. They've widened from about 70 basis points to 78 in the past few months which is almost nothing.
Whereas the AI investment grade bonds have widened out by 50 basis points over the last few months. When you go to the high yield markets, it's even more stark. The high yields, if you do the AI and XAI high yield bonds, the XAI high yield spreads have really not widened at all. Whereas the AI high yield bonds have widened by about 150 basis points over the past few months. In my view, the whole AI thing is showing red flags because AI, you know, is issuing so much and but just weeks or even days after a bond gets issued, the spread starts to blow out, which means that the corporate bond investors do not believe the ratings that are on these AI bonds. They're pricing them as if, you know, if you widen 150 basis points on AI bonds whereas non-AI corporate bonds are not widening at all. It means that the market is rerating the AI bonds and it's not to one notch lower with that kind of widening. It's a lot lower. And I think that the thing about AI that's really interesting is in June or July of this year I feel like AI was at peak embracement in terms of enthusiasm. It was kind of an enthusiasm mania almost and it was like AI is going to let us all retire and live on Tahiti and live a life of luxury. And then people started to worry about job losses. But that didn't scare people enough. Now we have to go into it. We're all going to be dead by the end of the decade if we don't do something about this rogue AI thing, which to me sounds a lot like the COVID vaccine scare back in 2020.
Like we're all going to die if we don't take seven or eight booster shots. I think that this is extremely concerning that we're now getting an attempt, this on the face of it to me is an attempt to get the government involved in picking winners and losers and actually maybe helping out with aiding and abetting financing in the AI situation. So I think that this is a really, it's not surprising that AI bonds are underperforming non-AI bonds and that frankly AI stocks are underperforming non-AI stocks. I've recommended the equal weighted S&P and it's outperformed in recent periods and I think that it's a great, I like the equal weighted S&P even better than I did before because it completely eliminates the overconcentration in this one sector which is at about 40% which as we talked about last time is the type of level over the past sort of seven mania cycles where it kind of pooped out and started to, you know, reached its apogee in terms of market concentration and then it was kind of lights out. So, we have these AI companies. It's clear that some of them don't like the other ones and want maybe even government help to slow them down, slow their competitors down anyway. And that to me is sort of a sea change in what's going on. So, I like the equal weighted even better.
Okay. I like, I still like the shorter part of the yield curve with the credit products I've talked about in the past. Not so much corporate bonds but more securitized products. That type of portfolio strategy stock this year is up 2% where the Bloomberg bond index, the aggregate bond index is down one and a half percent. So concentrating on these type of higher tiers of credit but still investing in credit but more like seven years down to two years has delivered positive returns anyway. This has been a bad year for the Bloomberg aggregate out of the last 50 years. We're down at like, I think we're down at number 32 or something like this or even worse in terms of down at the bottom of the heap. So it's tough year to make bonds but the recommendations I've given have worked. Also the best performing sector which I've also recommended and continue to recommend with confidence is local currency emerging market bonds which are the best performing sector of the global bond market sadly because they're only up something like 2 and a half to 3%.
He keeps telling us in the statement it's a new feature that we have an ample reserve regime. That tells me someday that might change and that someday and maybe not too long from now, the Fed chairman may be pivoting to trying to reduce this balance sheet and maybe using the balance sheet to exert more downward pressure on inflation as an instrument. He's made clear that for now the interest rate is his main tool, but that line has shown up only under Warsh and it remains there that he keeps telling us it's an ample reserve regime. What does that mean? Lots of money around for banks to lend overnight to each other.
I appreciate it very much, Steve. I'm not going to ask Jeffrey that question because you just did. I'm going to have him answer it and we'll, you, why don't you stick around for a moment to hear the answer as well? Jeffrey, I presume you did hear the question from Steve. Just can you just paraphrase it for me?
