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let's welcome in doubl line Capital CEO CIO and founder Jeffrey gunlock it is a CNBC exclusive welcome back it's nice to see you in this new year yeah good to see you Scott nice to be here again you said on social media leading in that this was the most predictable quote no change in years meeting um what do you make though of what you heard the market seems to have taken this at least a bit hawkish is that your takeaway as well yeah it's a little on the hawkish side I think I mean the words of this press conference are you actually nailed it in your intro Scott it's no hurry we're not in any hurry to uh to cut rates and uh that's appropriate I I think uh we've had a range-bound interest rate market for some time now and the 2-year treasury is about 4.25% or 4.2% and the FED funds rate is at 4 and 38 so they're very much in sync so I heard a very um wide openen view of what the next move might be uh no hurry to cut rates doesn't seem to be there's any inclination to raise rates at this point in time and he's obviously focused on the stability and the unemployment rate right now in terms of not feeling a need to cut rates the uh inflation rate has been drifting Higher by a little bit I mean the CPI is up in the high twos and it was was down in the mid tws and with the commodity complex uh being above its 200 day moving average on the Bloomberg commodity index and looks like it may have bottomed out and the price of oil is uh in the low 70s and uh Trump wants to get the price of oil down so he says drill baby drill but the price of oil hasn't uh hasn't changed very much it's still somewhat elevated so what's really fascinating is since the last fed since the First Fed rate cut back in September the 2-year treasury yeld is up by 60 basis points the 10-e treasury yeld is up by 85 basis points the long Bond ETF uh is down by on price only forgetting about the the the coupon it's down by about 11% so we have had this very unusual move that with the FED beginning a cutting cycle we have not seen a bond rally in fact um the general high quality bond market hasn't made much progress so I I think no hurry and uh we're very very data dependent it seems like uh a new high has been reached in data dependency and I worry a little bit as I have periodically since the hiking cycle started and now the cutting cycle I worry that they were running into a high degree of short-termism that we're going to wait and see what the data does in just a few months ahead is what I think we're looking at but I think marget participants takeaway from this is the Fed is on hold and uh they're just going to wait for data and so what came out of this meeting was completely expected and not a lot of insight on where we're headed uh other than data dependency I feel like we we might have gotten some insight if nothing else into the psyche of the Fed chair when he said policy is quote well positioned I mean I think he made the case that they think they're in a really good place and they can afford to not be in a hurry as as he said do you agree with that or do you call that into a little bit of question I think when he says we're in a really good place in terms of policy and the economy he's basically saying we're on hold and yet contradicting that he says we're above the neutral rate so the implication is that we're on hold until the inflation rate goes down and unfortunately it's probably not going to go down very much uh in the several months ahead so I wouldn't be looking for rate Cuts uh in at the next meeting certainly we didn't expect one in this meeting and so we have a relatively stable place where we're where we're standing and it kind of supports the fact that uh the market is is in a calm position right now and so is J Powell apparently there are some things that are troubling though regarding markets I notice how high the cape ratio is on the S&P 500 it's up in the mid-30s it's interesting that when Ronald Reagan took office the cape ratio was down at at about 10 and so now it's about four times higher or or eight times higher anyway than it was when Reagan took office so is it doesn't seem there's any room for valuations to expand and so it's it's an entirely earnings driven Market we're going to have to see how that develops at the same time the credit markets are very very low incremental yield versus treasuries this has been a theme that's been developing now for a year and a half and there's not a lot of room for error and in fact some things have happened if you get a little bit down in the weeds that are qu somewhat uh disconcerting because they're reminiscent of what was going on in the mid oos heading into the global financial crisis about 20 years ago and that is that we're starting to see retching of credit risk you remember was the credit ratings that screwed everything up in the subprime market back in 2007 or so well now we're starting to see in the res securitization markets of of bank loans which is called the the C o Market we're what we're starting to see is retching of traditional letter ratings so for example there's triple triple B rated bonds and all of a sudden they're they're retching them into uh senior triple BS and Junior triple BS why are they doing that they're doing that because the average interest rate that's paid by truning it into two pieces is lower than the interest rate if it was just a triple B and this is a slippery slope it's only getting started now I don't think that that it's an imminent problem one thing I've learned in over 40 years of the investment business is you might be seeing signs that are worth taking note of but by the time that they really develop into a consequence it takes much longer than you think so in the subcribe crisis the retching stuff and the Nutty activity got started in ' 05 and into ' 06 but it wasn't until ' 07 that it really blew up so I'm not really looking for this to be a problem uh you know in the first half of 2025 but something that bears WI ing because once you start making AAA rated Securities out of Triple B rated Securities which is what actually happened in the subprime nuttiness that's not happening right now but it is a slippery slope something to watch out for so we're getting more and more concerned about the levels of valuation on the lower tiers of credit I've talked about this in the past fed meeting day appearances but it's getting worse uh it's getting more overvalued and there's these activities of retching are very they're dangerous over a multi- quarter time frame so I think investors need to be upgrading across the board in terms of reducing risk and upgrading across the board based on valuation and you know the fed's on hold and they're not really in any hurry as Jay poell said to cut so you're not going to get any relief from interest rates and you're not going to get any relief from valuation because valuations on stocks are very very high versus their own history and the valuations on non- Treasury bonds versus treasury bonds are very very high based on uh their own internal history so this is a time to be to be careful did think it was interesting that when the chair was asked about financial conditions related to the stock market he said that asset prices are elevated by many metrics right now now he was and I think he made the point pretty clearly that he was zeroed in on parts of tech and the AI uh related stuff but maybe not overall so I understand what you're saying last time you were on with me you said quote two cuts are on the maximum side for 2025 given the fact that you believe today was uh you know maybe putting in Sharpie if you will that they're on hold for the foreseeable future um two cuts does that still make sense to you for the balance of 2025 I would say exactly what I said uh in December and that is maximum two cuts this year and what I mean maximum I'm not I'm not predicting two cuts I just think that's the most you can possibly think about and uh at the present moment I if you had made me pick a number I would say now one cut would be the base case and maximum two though still isn't that pretty good I mean wouldn't that be a Good Thing If the Fed doesn't have to cut as much as it might have thought uh initially and that investors have come to grips with that fact is chair pal said as I told you what he what he said about you know where the economy is and the labor market he thinks they're in pretty good balance right now yeah well the unemployment rate went up for uh consecutive months several several months it went up and now it ticked down and I think in the most recent reading and I think he's taking a lot of Solace from that that movement he was worried about the labor market weakening and so the fed's uh goals were in something of attention I mean the CPI or the year-over-year inflation rate which he he referen today that you was year-over-year I thought that was important he mentioned that it takes out some of the noise of of seasonality but it's a departure from where we were uh 18 months ago we're talking about annualizing short-term inflation numbers so he's looking more at year-over-year inflation uh I do think that the unemployment rate being at 4.1 and having relaxed a little bit I I think that unless the unemployment rate starts going up uh there's not there's going to be a very uh it's going to be a slow process to get to a hurdle to cut rates again and as I said uh just sever a few minutes ago I don't think you're going to see a cut at the next fed meeting so uh when the FED says we're in a good place he means the policy he believes or he chooses to believe that it's going to lead to the the unemployment rate staying at a comfortable level a relatively low level and the inflation rate he he's hoping that it comes down I don't really understand he they mention owner's equivalent rent or the shelter component and yes that should come down I don't know how much uh Southern California is going to factor into that that uh because there's obviously not going to be uh home price declines for new construction or for rentals and so forth in Southern California but I think it is good that the fed's on hold and it's it's because you need the FED to be on hold or being easing to support the valuation levels that we have Jeffrey I bring you back in in terms of inflation it was the chair who said quote we seem to be set up for further progress and in fact recent reads on inflation were more calming I think we could agree do you think we've seen the peak in the in the backup in rates that we witnessed from the cut that we sat together on the very first one that jumbo cut then rates backed up we both sort of looked at the screen and we're like whoa you know that's interesting and they continued their March certainly the you know the 10e towards uh 5% it felt like it was going to get there but then they backed off of late had rates peaked I think that rates have not peaked on the long end I I think rates will have another move up on the long end um it is interesting the the chair says you know that we've cut rates by 100 basis points and that's true on the FED funds rate but the 10-year treasury rate is up by 80 basis points since that first cut so mortgage rates which price off the 10year treasury had relaxed a little bit and so housing got a little bit of uh of improvement but rates are back up to about 7% on 30-year mortgages and I think the longer they stay at that level the shock of you know people remember the 3% mortgage rates and then all of a sudden they were seven and that's kind of a shock but now they've been up at seven for around seven uh for really a year and a half and so but I think that that the the budget deficit problem is primarily responsible I think for this backup in Long rates even though the fed's cutting interest rates this is by far the worst performance of the tenure during a Fed cutting cycle usually bonds rally when the FED starts cutting rates but that didn't happen at all in fact rates went up so I I think that uh inflation is not going to easily go back down to 2% we're well above 2% I mean we're at 2.9 on the core CPI and you know or 2.6 or 2.7 on the headline I mean we got to get below two and a half I think to talk about uh putting rate Cuts back on the table and chair pawell was quite clear in stating that we don't need to see a 2.0 uh inflation number and I think he uses the pce primarily but we don't need to C 2% to talk about cutting rates it's it's almost like it's the direction of of the CPI and right now the direction of CPI is sideways and he needs it to start coming down I see that the owner's equivalent rent can filter through that there is mer Merit to that idea but I don't really see it from the commodity complex and uh we'll see what happens with tariffs so there's a lot of uncertainty and for that reason I think we're only six days or eight days whatever it is into the administration for that reason I think the FED being on hold corroborating the you know with the FED funds rate totally corroborated by the 2-year treasury um it's it's appropriate the fed's on hold and so this was a inconsequential meeting versus expectations a little bit of hawkishness with that no hurry language but he he he he was he was a good three-handed Economist on the one hand on the other hand on the other hand and it's a wait and see situation given your view of the deficit and certainly the the long longer end of of the yield curve is that why you is it fact I guess is it a fact that you still like intermediate dated bonds nothing longer than the 10-year like you told me before yeah we we still believe that the yield curve continues to steepen irregularly of course but you know we were negative 108 the 2-year treasury was 108 basis points above the 10 year back in last summer and now it's at 34 basis points positive we've had a huge swing on that and I think it has a lot to do with Supply problems and I don't believe that the deficit is going to improve under the Trump Administration uh you can find you know $50 million here and $6 million there through something called you know the the the Doge uh thing or the dog e as I call it but uh I don't think you're with a with looking at some tax cuts and uh forever spending on Wars and and natural disasters and all this stuff I I don't think the deficit is going to go down under Trump and that's going to be a problem with the FED on hold and now the bonds that were rolling off from five years ago with coupons of one half of 1% or 1% it looks like they're going to be solidly in the four and a quarter to maybe five and a quarter range when those bonds roll over and there's a lot of them coming up so the long end I would I would continue to avoid it I I like uh the intermediate part of the market uh it's not nearly as attractive as it was 18 months ago sprads are much tighter on credit products the treasury rates are lower than 18 months ago but when you take a look at the inflation rate even it's a even it's at 2 and a half% to 3% you have a real rate of return from fixed income I think that's you should always have a real rate of return from fixed income we've we've lived through so many years of repression of interest rates that we had zero or negative interest rates versus the inflation rate for a long time we should always have a term premium in in in bonds and we have one now so bonds aren't all that risky but I do think that under the fiscal situation that we'll likely see uh another move up in the 10-year treasury yield everybody uh obviously uh you me every investor uh the Fed chair himself as he made it clear today trying to figure out what the impact on the economy and inflation tariffs are going to have their proposed Commerce Secretary Jeffrey Howard lutnick said today on Capitol Hill that it's quote nonsense that tariffs are inflationary what do you think well he's got an example to point to it's a sample set of one but the last time the tariffs came through we did not have an inflation problem back under the the first Trump Administration there were tariffs and inflation did not stir whatsoever so I'm open-minded on the idea that tariffs do not have to have an inflationary impact but first we have to see what the tariffs are going to look like and there's an awful lot of saber rattling going on with the tariffs if you do something that the president doesn't like it's instantly tar tariff talk and I don't know I I don't think that's really healthy as a one tool reaction to all policy programs you know if if if if you have a if you have a hammer every problem looks like a nail and if you're a tariff guy and you're going to respond to policies of foreign countries that you don't like and you're just constantly going to tariffs I I don't know I think the effect of that will incrementally wear off but we'll wait and see what the tariffs look like and they need not be inflationary you have argued against the renewal of the tax cuts I've asked you about that on several occasions you've been pretty unwavering on that is that still your view today yes I I want I want the budget deficit to shrink and you're not going to do that by more tax cuts so I I I don't really like the uh the salt thing in the tax cuts I think it's it's really kind of absurd that that was put on way back in the first Trump Administration that one I'd like to see go away but um otherwise the tax cuts I I I don't want to see tax cuts I want to see spending cuts and I don't know if we're going to get that uh certainly history has not given you confidence that talk of reducing spending was going to result in the reality of cutting spending but uh we we shall see I I I don't D Trump was a deficit spender in his first term and I don't see any indications that that's going to change and that's why I caution against highrisk positions right now because I think long-term interest rates can go up and valuations that I said at the outset are very high on credit in the bond market and on obviously parts of the equity market so I I'm favoring again equal weighted Equity exposure rather than Market weighted that seems to have started to work and I think fading the trends of growth versus value and small cap versus large cap equal weighted versus Market weighted I I I think those got very extended during 2024 and I would not want to be be betting on just a momentum trade that that continues so I I like equal weighted in the S&P I I continue to uh like cash because fed's not going to cut rates Bonds on the shorter end intermediate range the price off of a a Fed on hold will continue to deliver you can you can get 6% fairly easily it's not going to make you rich but it's a real rate of return of more than 3 % and I think you can uh live to fight another day when you get cheaper valuations in both stocks and credit Bonds on that note has has what I like to refer to as the gunlock model portfolio changed in any way you like cash you said last time 30% cash 50% short-term bonds 20% in US Stocks that's still sound right given what we know today that's that's about right I might change something you know an ' 05 here or there but broadly speaking that's the right parameter about half money in a relatively uh you know middle middle credit to Upper credit Bonds in the shorter you know the fiveyear area threeyear area of the yield curve I don't like stocks at these valuations and I would still maintain maybe some of that cash you might want to hold in uh a real asset perhaps a commodity fund which seems to be showing signs of life and uh gold I think has another move higher as high as well although it is near the the all-time highs uh so but I still think dollar cost averaging into into gold makes sense in this uncertain geopolitical environment sure um Before I Let You Go Jeffrey I know and uh you know we've talked before and I I could see from some of your social media posts that you're out in the Palisades um and it's really hard to comprehend those pictures especially 3,000 Mi away uh here in New York for many um I just wanted to say we wish you well uh everybody out there our hearts with everybody uh just a terrible situation that's going to take a long time to recover from it's it's much worse than anybody realizes uh in terms of the disorganization there's nobody in charge there was no preparation and nobody knows what rebuilding is supposed to look like or how it's going to be organized but I was spared I was evacuated for 3 weeks but I was able to get back this week and I had some damage to my property but fortunately my house is inside is completely intact if you go through the neighborhood it's it it truly does look like the pictures you saw of Dresden from World War II and all that's left in most houses is a bunch of powder on the ground and a chimney and the chimneys are evocative of a tombstone and there's an awful lot of them thousands and thousands of them it's absolutely brutal to go through the neighborhood and I don't under it's not going to be a short period of time it's going to be years years and years before this gets to some level of of uh stability and livability so thank you for the for uh the thoughts and uh lots of lots of people uh dislocated I've had quite a few employees have their houses burned to the ground yeah is it hard to process uh all of it we wish you and everybody well we'll see you next time Jeffrey thank you okay thanks judge see you next time good luck everybody yeah that's Jeffrey gunlock
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