(Marketrealist) Due to the raging trade war, weakening economic indicators, and political uncertainty, many market observers have been warning of the upcoming downturn or even recession. The yield curve inversion has particularly worried many market observers. According to DoubleLine Capital CEO Jeffrey Gundlach, the Fed has lost control of interest rates.
During yesterday’s interview with CNBC, Gundlach noted that he based his view on the fact that the current federal funds rates are higher than any part of the US Treasury yield curve. The federal funds rate range is 2.25%–2.50% compared to the yield of 2.03% on the 30-year Treasury bond.
Gundlach noted, “What else do you need to call it an inversion?” He added, “Everyone is parsing all of these little arbitrary things. But we’ve got an inversion.”
Gundlach warned of yield curve inversion and recession
The 10-year US Treasury bond yield broke below the US Treasury two-year yield for the first time since 2007 on August 14, spooking the markets. However, during an August 6 interview with Yahoo Finance, he cautioned that the odds of a US recession before 2020 have increased to 75%.
Gundlach’s view on a recession was based on his reading of the yield curve. He noted that one market indicator that’s “full-on recessionary” right now is the yield curve.
He warned of even more serious consequences. Many on Wall Street believe that if the Fed keeps cutting rates consistently, the country could avoid a recession. However, Gundlach doesn’t agree.
During an August 14 interview with Reuters, he noted, “To say that (rate cuts) are going to stop a recession is flawed.” He added, “Once the Fed is in easing mode, it is already too late. You already have a recession gaining momentum.”
Gundlach on the Fed’s inconsistent approach
Gundlach also doesn’t like the inconsistent approach of the Federal Reserve. Until the end of 2018, Fed chair Jerome Powell was giving hawkish signals, which contributed to the market carnage in Q4 2018. However, Powell changed his tone to strongly dovish in January 2019, which alarmed Gundlach.
He reiterated his stance on the Fed during his August 14 interview with Reuters. He said that is he concerned that Powell “can’t put a back-to-back consistent message together. It is different at every single meeting – the mid-cycle adjustment statement is not going to hold up.”
Gundlach has also been betting on the stock markets going down. During the June 13 DoubleLine investor webcast, Gundlach said that since mid-2018, the S&P 500 has outperformed the major tech stocks, which he thinks will mark the peak of the stock market. He also believes the market could sink below the December 2018 low in 2019.
Investors might wonder where Gundlach is putting his money in such a scenario. One place is definitely gold. We've highlighted that Gundlach believes that gold could rise to $1,600—$1,700 per ounce. During his August 14 Reuters interview, Gundlach said the six-month Treasury bill also looked attractive.
