Having been proven correct – so far – on his December 2017 prediction that the best performing asset class of 2018 will be commodities, DoubleLine CEO Jeff Gundlach is holding another monthly webcast that that is open to all who care to listen.
Readers who wish to listen, can do so after registering by clicking on the slide below (or clicking here).
The presentation starts with the question everyone would like the answer to: is a recession coming? As the charts below suggest, Gundlach is not too worried, at least not now, but things will change as we approach the end of 2018.
Still, as Gundlach notes, “Everybody knows that there has been some slowdown in growth” and adds that “peak momentum in the economy may be behind us.”
Gundlach: “there has been a sharp decline recently in soft data in addition to a slowdown in the hard data. We’ve got to start paying close attention to the data”
On the flattening yield curve – a traditional recession leading indicator – Gundlach notes that it hasn’t moved much in recent months, and wouldn’t be too worried until the flattening resumed again in earnest.
On inflation, “it’s trending higher”, and notes that if Core CPI goes above 2.25%, the entire inflation narrative is going to change as it will be “something of a breakout.” If we don’t go above 2.25%, it will be more of the same.
Looking at service inflation vs goods inflation (i.e. “Amazon inflation”), both have started to move higher.
Gundlach points out that the NY Fed’s Underlying Inflation Gauge leads Copre CPI by 16 months with a surprisingly high correlation. If the NY Fed UIG is accurate, core CPI will rise to the highest in over a decade, and will break out above Gundlach’s key 2.25% Core CPI level.
Gundlach on the dollar: very bearish on the long-term, but is very bullish in the shorter-term: “Wouldn’t be surprised to see a 95 handle on the dollar.”
One reason why he is bullish in the near term: extreme positioning.
Another reason: financial tightening, as observed by the surge in the Libor-OIS.
Here is Gundlach on the Fed’s balance sheet shrinkage (i.e. tightening) which as we showed previously, is directly correlating with the rise in 10Y yields.
Another interesting observation: “departing Fed chairs always tighten to give successors flexibility.”
Summarizing Gundlach’s latest economic assessment: “rising rates and deficits are a pretty dangerous cocktail“…
… and so “we could very well see a recession in 2019″
* * *
On the market, and key levels, while everyone is talking about the 3% on the 10Y…
… Gundlach believes that the key level that matters now is 3.22% on the 30Y.
Meanwhile, junk bonds continue to sink.
Full Gundlach slideshow below: