Jeffrey Gundlach Breaks Down the Fed’s Dilemma and His Market Outlook

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Fed의 9월 금리인하 기대: 고용 리비전 급하락으로 2년물 금리 25bp 하락, 연내 2회(최대 3회) 인하 전망. 데이터 신뢰도 저하 지적. 장기채 회피, 2s30s 150bp 확대 전망. 달러 약세 구조적 지속 예상, 금 강세 추세 유지, 비미국(유럽·멕시코·인도) 주식 선호 및 미국 모멘텀 종목 비선호.

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※ 자동 자막 원문(다듬기 전)

01. Joining us now in a CNBC exclusive interview with his first reaction to last week's Fed decision and jobs report is Jeffrey Gunlock. He is the founder, CEO, and CIO of Double Line. It is good to see you. Thanks for being here. Good to be with you again, Scott. So, you now have the benefit of course of not only the Fed decision having been made and hearing from the chair, but you have a jobs report to think about in answering my first question, which is did the Fed make the right move last week by not cutting interest rates?

02. Well, I think that's up for debate right now. You know, one thing that Jake Powell said, he said, uh, one of the words he used was, we want to be efficient in the way we manipulate the Fed funds rate. I'm not really sure what he meant by that, but he seemed to be relying a lot on the fact that he has two sets of inflation and jobs data that were going to come in between that meeting last Wednesday and the one upcoming.

03. And it was certainly quite a week for data. you know, you had GDP that came out pretty good and then you had uh the Fed meeting and uh lots of interesting crosscurrens at the Fed meeting and then you had that wild jobs report that kind of changed everything. So, I'm actually sort of glad that we took a rain check on doing it last week because you're right, so many things have come in.

04. I thought that Powell was quite hawkish at his press conference. He actually said uh in response to one question in a way we are looking through the current inflation data otherwise we might have raised rates. I don't think there was a single question at the press conference about uh raising rates. It was all about cutting rates and uh I thought Steve Leeman characterized the meeting very very well.

05. He said uh basically J. Paul said we are at our employment target and we are not at our inflation target which I think is a fair characterization uh by J. Paul and and Steve Lee's been characterizing it that way. Uh but then all of a sudden it looks totally uh inacronistic since we had that jobs report with its 250 plus thousand uh 250 100,000 jobs being being uh uh you know uh eliminated or revised away.

06. And so suddenly we have this gap between the Fed funds rate and the two-year Treasury which widened out dramatically last Friday. It was about a 25 basis point move down in the 2-year Treasury. So now we're getting at that strained level again where the Fed funds rate is 70 basis points uh higher than the 2-year Treasury rate.

07. So the 2-year Treasury is looking for a rate cut. This is this is very reminiscent of exactly 12 months ago when we had the September meeting and they had to cut rates uh 50 basis points because they should have cut them perhaps with benefit of hindsight uh in the July meeting and that kind of feels like where we are again.

08. It's not as bad as it was a year ago where there the two-year Treasury was over a 100 basis points below the funds rate, but 70 is is quite a lot by historical standards. And so there is talk in the air of if if indeed there is another weak uh jobs report or revisions lower. You know, people might be talking about a 50 basis point rate cut.

09. We'll see what happens there. So I I feel like um this data that is coming out is getting much less reliable and this has been building for a long time. People are saying that you know the surveys that get are sent out to be filled out for the jobs report only 60% are being responded to and that's that's been rising over time.

10. Also the CPI data is getting kind of suspect. Uh several years back about 8% of CPI input prices were estimated. They call them imputed prices. Now it's 35%. It's jumped way up. So 35% in the most recent CPI report of the uh inflation inputs are just kind of made up. And so people are starting to get really worried about the you know the reliability of a lot of this data.

11. So, I think it's almost a certainty at this point, unless we get a a mirror image of this jobs report for the next one coming out. I think it's virtual certainty that the the Fed is going to cut rates. And in fact, now, even though there's not that many meetings left in the year, we're starting to see market pricing of perhaps as many as three rate uh cuts this year.

12. I just I I I'm skeptical of that. I've been one thing I've been consistent with all year starting with the January conversation we had Scott is I said I think two rate cuts maximum here in 2025. Now I I I think that the data has weakened so substantially uh with these revisions that um you know it's possible that we get a third but I'm I still think my base case is two rate cuts this year.

13. So the these revisions uh are strangely statistically on these because these job revisions seem to almost always be negative. Biden had 48 jobs reports over four four years and 45 of them were revised lower subsequent to the first release. So, some people kind of cynically say maybe they like putting a rosy number on the headline because everyone pays attention to the jobs number on that first Friday of the month and the revisions usually get a little bit swept under the carpet.

14. These were so big though that it was kind of like it was kind of like a bomb went off and the two-year Treasury yield went way down 25 basis points. Interestingly, with stocks recouping more than half, well more than half, I think, of their losses from Friday, the 2-year Treasury yield is basically unchanged.

15. So, that pricing remains intact. Well, well, because you've always made the argument that the Fed follows the 2-year. And I'm wondering if what we're seeing in the equity market today is stock market investors starting to think that, well, we're going to get rate cuts now. If you can believe in any way, shape, or form that the labor market is going to be weakening as this data would suggest, then rate cuts are in the offing, so why not buy stocks?

16. I feel I feel like that's that's where we are today. What do you think? Well, lower rates are are supportive of stocks obviously, and it kind of takes off some of the pressure for the valuation being so high because you're going to get rate cuts. Well, then the valuation will not look quite as overextended.

17. So, it's not surprising at all that uh that uh the market recouped because the 2-year yield has not recone back up today. So, it the the mentality of the fixed income market is that the reaction that happened on Friday remains uh sensible and so yes, the probability for rate cuts has has clearly gone higher.

18. Um, you know, I still I still think that the the one of the big impacts we're going to have here though that we have to watch out for is the US dollar index has been falling. It's back below 99 again. And it really is amazing that commodity prices can't get any traction. With the dollar falling pretty substantially over the course of this year, it kind of suggests that there isn't all that much of an inflation problem.

19. People are focused on these tariffs and they're they're worried that they're going to be inflationary. Jay Powell says that it might be a one-time inflation increase. I mean, there's some logic for that and certainly some parts of the consumer markets. Um, but you know, what really affects inflation is money supply.

20. It's Milton Friedman famously said, you know, inflation is is always and everywhere a monetary phenomenon. And so tariffs do not increase the money supply. So it's going to have an uneven effect. Some prices will probably go up, but it'll take demand away from some some other places. The money supply M2 is up 4.5% year-over-year.

21. It's actually been expanding at an increasing pace, not in an alarming way, and there is some seasonality to it. So typically, as we get around the end of the year, for whatever reason, the money supply tends to level off. But if the money supply keeps growing at four and a half percent uh uh on a year-over-year basis, I would be worried about the inflation rate um not coming down to the extent that you know the the Fed wants to see it down to 2% or so.

22. But the inflation numbers that I give the most credibility to always are the actual prices, not all of these adjusted things for for you know quality and you know the price of a TV goes down a whole a whole bunch. uh yet the quality of the TV is so much better and so there's this multiplying effects.

23. I think import and export prices which is a monthly number that comes out that are not seasonally adjusted are really the best measures of inflation and they're really not that alarming right now. Import prices are actually slightly negative year-over-year uh for the US and uh export prices are up about 2.7.

24. So if you kind of average those two, we are fairly close to the Fed's target. But Jay Powell spoke a number of times about maybe we should raise rates. I had I had the impression that he was being you just a little push back. He doesn't want to be, you know, muscled around by politicians and President Trump.

25. And so I think he was a little bit laying it on uh kind of off the cuff, a little bit thick on what thought was the uh potential for for higher inflation. I wonder I wonder if we are um at somewhat of an inflection point to things that we've spoken about in the past and I think you are referencing a bit here.

26. the tension between the two mandates, the fact that we now have serious concerns, I suppose, about where the labor market's going from here, but yet inflation by the Fed's metric is above target. So, how can they act in that environment? In one way or another, something's going to have to win out. When we were last together, you said of that, quote, "At some point, one of these dual mandates is going to have to win out over the other one." And I think, and you've got to pick one, and I think they'll pick the fighting the rise in unemployment more than fighting the rise in inflation.

27. Are we at this point where the Fed needs to pick sides after that jobs report? I I felt yet, yes. I I think that's built all year. is it's curious that when we started our conversations this year in the January meeting uh Chair Powell was more relaxed and more confident uh than he'd been in quite a long time.

28. He was talking about how we're our policyy's in a really good place. We can wait and see. And as as the year has has gone along, the tension has continued to build and it really hit a crescendo uh last week with uh you know obviously the the Fed saying we don't want to uh cut too soon. We'll risk an inflation problem if we wait too long.

29. We'll risk a labor problem. Then all of a sudden you had that that bombshell of an employment report. And so now the tension is at a local high for sure. And I I think I think that potentially could very well grow. So if the unemployment rate uh continues to rise or rises uh further above its 36-month moving average, three-year moving average, and it's well above it right now, and also the TW's 10's yield curve versus its two its 12-month moving average looks fullon recessionary by historical standards.

30. You ju just take a look at the the the yield difference between the 2-year and the 10-year and map it against its 12-month moving average and it looks exactly like it did right at the front edge of the last three four recessions. So, I'm going to be watching that very very closely. So the Fed really is going to have to pick a mandate which side of the mandate and I believe that really when push comes to shove rising unemployment should it take hold in a more aggressive way will almost always win out uh over the the inflation side of the mandate because that's really that's right where people live.

31. you know, if you if jobs are disappearing, then uh there's a demand by the populace for some sort of, you know, of action that will relieve the situation and the inflation numbers. You know, I I think I think a small increase in the inflation rate could be blamed on tariffs. Whether it's tariff driven or money supply growing, doesn't really matter.

32. If it goes up, you can blame it on tariffs and then hope as Jay Powell has articulated that will be sort of a one-time deal that would just be Go ahead. Well, well, that that speaks to the dissents that that we got right from from Bowman and Waller where Waller says you're being, you know, overly cautious if you if you don't cut now.

33. and Bowman said, "Well, we should be looking through exactly what you're talking about, these one-time price increases, rather than thinking they're going to be something more protracted." I'm I'm wondering what you thought of not only the dissents themselves, but who they came from. It's not insignificant in any way that they came from two Fed governors, and we haven't seen anything like that in some three decades.

34. So, they hold more weight, if you will. What do you Well, yeah, maybe one of them wants to replace Powell as Fed chair come uh the end of his term coming coming up in May. So, uh we also had uh there's going to there's going to be another uh Trump's going to have another nominee to go on there. So, you're going to go to three descents almost certainly.

35. And after this after this uh employment report, I'd say that if they don't cut rates, if you get anything resembling this this employment report again, I think there's going to be uh many dissents. So, uh we're really you're right. This is this there's a little bit of turmoil going on between Trump's rhetoric and his sort of veiled threats and these dissents happening.

36. Um things are uh sort of changing direction from what we might have thought was normaly. I mean all these I I earlier on I talked about how the data quality is deteriorating and both the CPI and clearly these revisions on employment. It's it's a strange that the the revision the 253,000 or whatever is 258,000 revision almost half of it was from government workers.

37. I mean does the government not even know how many government workers there are? That just seems it seems embarrassing quite frankly. Now, you could say that maybe there actually were some cuts from Doge. I don't I don't know if really if that's true or not, but but if that could have some sort of an effect on it, but it is strange that the government can't really accurately calculate how many government jobs there are on a on a timely basis.

38. You have to revise them to a very large extent months later. This is a lot of things have have to be uh tightened up here. I I remember when the Doge thing was going on, when Musk was still working on it, they were saying they couldn't believe how what terrible technology is embedded in a lot of these government offices where they like using ancient technology.

39. I mean, they might be using floppy discs for all I know. Uh this needs to be this needs to be upgraded. Unfortunately, um we've been spending money on things that don't increase the efficiency of the data or the reliability of the data. Instead, you know, we're spending money on well, we're just borrowing money like crazy.

40. We're still running a deficit. We're on track for this calendar year to have a deficit that's almost 7% of GDP. And if if this economy is weakening and if jobs are weakening, uh that's going to be a further problem in terms of in terms of the long end of the Treasury market. I've been negative on the long end versus the shorter end of the Treasury market.

41. We had a huge move yesterday, you know, and now we're out between two two-year and the 30-year. We're out to about 110 basis points. Uh and this keeps this this just keeps on going. And I I think that's very likely to continue given the fact that the president clearly wants a Fed chairman that's going to cut rates and they want to finance the debt.

42. There's very little that's financed on the 30-year. It's less than 2% of all issuance, but there's there's a fair amount that's on T bills and the two years roll over uh with regularity. It doesn't take long for two years to go by. And we have a we have a situation where there might be collapsing interest rates with a much more dovish Fed chair come 2026 at the same time is we have a very high deficit uh which is uh really a strange situation for who's going to finance the 30-year Treasury bonds and the 20-year Treasury bonds.

43. We have been avoiding even incrementally further avoiding um a few weeks ago uh the long end of the Treasury curve. I still think that's the way to go. Um it's it is interesting that the I just want to make that clear because you you have made the argument with me um to avoid the long end of the curve.

44. You like the shorter end, the belly of the curve and you still want to avoid the long end. Oh yes. I mean the trend just it it just keeps it it almost never flattens. I mean it did I think in the month of July a little bit but but really it's a trend. You know, I've seen 2's 30s be 150 basis points many many times.

45. I would I would be quite uh I'm quite uh strong on the idea that the twos 30s will go to 150 basis points and we're at 110. So you've we've had very bad performance from the long end of the bond market even since the Fed started last September cutting rates. you know, the rates are down 100 basis points and typically when the Fed cut cuts rates, all maturities go to lower yields, but uh the long end is still significantly higher in yield than when the Fed started cutting interest rates.

46. This is really the first time that has ever happened and a lot of things are acting differently than they used to. I pointed out um there have been 13 corrections in the S&P 500 since around 2010 or so and the first 12 of those corrections drops of more than 10% on the S&P 500 all time the first 12 of those times the dollar went up when the S&P corrected this time when we had the trouble back in March April uh the S&P went into a correction and yet the dollar went down by about 8% usually it goes up by about 8% uh when you have corrections in the S&P.

47. This is this this hasn't happened uh ever uh before this cycle at least in modern times. And so a lot of things aren't behaving uh the way they used to and I I would echo back what you said Scott just a few minutes ago that these dissents by governors is fairly unprecedented as well. So, uh things continue things continue to um you know uh the the old systems the old data systems the the old uh protocols seem to be uh weakening if not reversing in many ways.

48. And I think that one of the reasons for all this is I think secularly the dollar is headed lower um and maybe a lot lower. We're right on a trend line that goes back to about 2010, maybe the late OO's where we we are right we're sitting if you look at the Dixie index you just draw a trend line there there are two lows that connect the that the line connects and where we are right now is right on that line.

49. So, if the Dixie index weakens further, and that's likely if the Fed is cutting rates while Europe and Japan are not cutting rates, well, we'll break through that trend line and we could go much lower and that's not good for the long end of the bond market either. It's very helpful to finance your debt when you have a strong c, you know, when people are interested in buying your debt and you you have a strong currency, but that's not the case right now.

50. Who wants what foreign investor wants to buy into the dollar bond market if the dollar is depreciating? The currency translation is just is a capital loss for them. So I I pointed out that since past 18 years or so, we've had about $25 trillion flow into US markets. The net US position was was $3 trillion and it got up to 28 trillion.

51. Now it's reversing. So it looks like money is not really coming into the United States the way it used to. And you know when you're when you're threatening tariffs and and other uh you know punitive actions on uh trading partners, they're probably disinccllined to increase their purchases of of your of your debt particularly at the long and I I think this is this is a sort of fundamental problem.

52. So yes, avoiding the long end of the treasury market and investing in uh you know 5 years, 5 years, 3 years in the treasury market is good. uh the two-year is is getting less and less interesting because the yield is down to you know 3 370 or so and you know it used to be quite a lot higher than that but it it started out anticipating uh Fed uh cutting cutting rates and the Fed did that twice 50 basis points each but now the two years is strongly signaling that bond investors think that the the Fed should be cutting rates

53. and I so that's that's what we're looking for and we we one last thing. Credit spreads have been volatile this year. It's my dog. Let him out. Credit spreads have been volatile this year, but pointtooint, they've hardly changed at all. Uh incremental yield for credit is quite low. Uh we're right back to where we were starting the year.

54. We had a lot of volatility. Spreads widened by 200 basis points on emerging market debt and on junk debt. And yeah, junk bonds widened out on Friday, but um by 25 basis points, that's a lot in a day, but they're still pretty tight. So, we're about 300 basis point OAS on high yield bonds, and it never goes inside of about 250.

55. It did get there at the tights of the year, but now we're back to where we started the year pretty much on all sectors of the bond market. So, the strategy has been um kind of unchanged for much of this year with not a lot of point-to-point volatility, but I still the types of things I talked about in the past is is still central to our playbook and it's been working quite well.

56. Jeffrey, let's take a quick break. I don't want you to go anywhere yet. Uh we'll do that and I'll come back. I've got more for you on the other side with Jeffrey Gunlock of Double Line. You're watching Closing Bell on CNBC. We're back with our closing belt exclusive, our interview with Double Lines, Jeffrey Gunlock.

57. You know, Jeffrey, lastly on Chair Pal before I I talk to you about some more investment ideas. There are those who make the argument that Pal should resign now to actually preserve the independence of the Fed, that he's in a no-win situation in a sense at this point. If things work out great, the president takes all the credit.

58. And if things work out poorly, he gets P. Powell gets all the blame. Should he serve out his term or should he resign? I think he should serve out his term. I I don't think him resigning says much about Fed independence. It's almost suggests to me that he's being browbeaten. And you know, just Yes, you're right.

59. That the Trump will take credit for everything good that happens and will blame uh other people and in this case J. power for everything bad that happens. But I just don't think it's a good idea for Ched for fair Fed chair people to resign. I think they should serve out their term and he should do that.

60. Um you know I think I think if Paul resigned, it's pretty obvious that we'd uh get a rate cut very very quickly because you know that somebody that is rate cut oriented is going to be installed. And I I I feel that that's kind of it's just a question of when that happens. When when uh when Paul gets replaced, whether he resigns or whether he just serves out his term, he's going to be replaced with somebody very dovish.

61. Um and that I think is very negative for the US dollar. And I think it's very negative for the long-term bonds. Again, all these these trends just seem to be very firmly in place to me that the long end of the bond market cannot rally very much. It's it's it's interesting. You know, we've seen the two-year Treasury come down a lot, leading leading the Fed on, but we're not terribly far away from the high on of the year on the 30-year Treasury bond.

62. And I say the same thing, I make the same similar comment in a different way about gold, something that I've been bullish on. Gold just doesn't go down. I mean, yeah, it it it got up there briefly to uh a high number, but it it just doesn't sell off. It just keeps sitting there at 3,300 $3,400 an ounce.

63. And one thing I've learned after all these years in this business is when something moves a long way and it just consolidates. It doesn't fall and yet goes has has sometimes some some good reasons for showing bigger correction. Gold hasn't corrected hardly at all. I mean, if if you're long gold, you haven't had anything to worry about.

64. I mean, sure, there's volatility daytoday, but the level has held up. it's doubled in price over the past couple of years and it doesn't show any signs signs of relaxing. So, um I I I feel like these things are long-term trends that have that have started to develop and I'm I'm sticking with them until such time as there's some fundamental reason on the horizon why these things are going to change.

65. But if the economy is weakening, we're going to have more bond issuments from the from the US government as tax receipts would go down and expenditures would go up. And we're starting at nearly 7% of GDP. So we could easily see a budget deficit that's that's, you know, $3 trillion, $4 trillion in the next recession.

66. And that's not going to be good for long-term bonds. So, I am sticking to my uh ideas that I've been developing over the past few years now that in the next recession, you are not going to see a bond a long-term bond government bond rally in the United States. I thought you'd see one initially on a knee-jerk basis, and that indeed happened, but now we're closer to the high of the year on yields than we are on the low of the year.

67. And uh this with uh in the context of uh a weakening a weakening picture in many many parts of the economy most notably now perhaps one robin doesn't make a spring but uh perhaps this uh employment report last Friday is more meaningful than we thought it was going to be uh on Thursday evening. So we'll see we'll see what happens.

68. I I think I think employment is clearly weakening. the the establishment survey is the one that comes out on the first Friday of the month. There's also a a broader survey, a household survey. The jobs created in the household survey are negative for the last three year three months cumulatively and the last six months cumively.

69. There's negative job growth from the household survey. And so it's pretty clear that the the the labor market is finally it's always we always say it's it's a lagging indicator. It's not it's not a leading indicator. It's a lagging indicator. and it appears that it's starting to fall in line with some of these other indicators which have been suggesting weakness uh for quite some time.

70. So, uh that's where I think we are and I think we're going to see the Fed cut rates at least at least a couple of times, probably two, maybe three this year. So, it it somewhat of a conundrum for investors. If you if you think the economy is weakening, you're like, well, maybe I don't want to own US stocks at current valuations.

71. However, as we already discussed, if the Fed's cutting, well, I don't want to fight the Fed because that would be silly, so I might as well buy stocks. But you've been favoring non US equities, Europe, Mexico, India. Do you still And how does that factor into what even you admit is going to be a rate cutting environment?

72. The only question being how many? Yeah, those these ideas are long-term plays. I I I particularly when it goes to risk assets, equities for sure, I I take a very long view. Most people, you know, that watch CNBC, they're watching they're watching the markets minute by minute, certainly day by day, and uh, you know, they may be making adjustments week by week.

73. I don't I don't invest that way for for long-term money for risk assets, which is long-term money for me. I and I think that these non- US trends are absolutely wrapped up and uh and in place because the dollar is weakening and it's going to continue to weaken as the Fed cuts rates and other countries don't.

74. So I I I think as a dollar-based investor, you're making money on the currency translation and depending what day you look at it, you're having similar types of gains on just an absolute percentage basis. But when you translate it into the dollar, you're doing much better in some of these other places than you are in the US.

75. Unless you're in the the the momentum stuff in the United States, which is just continues to uh to do to, you know, set new highs. I I just I am just not a momentum investor. I'm I'm I'm much more a value investor. It probably comes from my heritage of being, you know, grown up in the fixed income markets where us us bond guys, we our job is to find 10 risks when there's only three risks.

76. We're always we're always we're trained to be it's a negative science. You're trying to avoid uh risky things because in bonds you make money slowly and you lose money quickly if you get into a default cycle. equities. I I mean, I've been investing in India for years and years and and uh I I just believe that the 20-year outlook there is very very strong and I I'm a dollar bearer.

77. So, I I I I think foreign markets for dollar-based investors make a lot of sense. Okay, we'll leave it there and we will see you next Fed Day and we will see you in person too at your headquarters in LA, which I look very much forward to. Jeffrey, be well. We'll see you soon. All right, good luck everybody.