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Yes, hello. This is Lee. Is n't there an FMC meeting this week? One of the key points to watch for in this FMC is the bond market and interest rate hike. I brought this topic today because I advised preparing for a larger interest rate hike than the market expects . Yes, today's protagonist is the bond king, Jeffrey Gundlach.
He is a figure who needs no introduction. You can consider him the only remaining bond king now. Since my major is bonds, I have a very good grasp of macroeconomics . And because of this data obsession, I bring in a lot of good data. So, I would like to say that Jeffrey Gundlach's macro reviews are always worth checking out .
Yes, today's content is as follows. As mentioned earlier, Gundlach strongly predicts an interest rate hike. So, what is the basis for this, and if interest rates rise significantly in the future, how should one invest? Let's take a look at investment strategies . Of course, there are also opposing views regarding this Gundlach view.
So, while introducing some opposing viewpoints, I would also like to discuss the key points to watch regarding this week's FMC . yes. First of all, the market expects a price increase of about 25 billion by the end of the year, based on the Pad Watch . But Gundlach seems to be looking beyond that. There are broadly three main reasons .
The first is prices, and the second is the movement of the bond market. The third is Cavinacy's changed attitude. We can look at it in these three points. yes. First of all, the first is prices. The market breathed a sigh of relief when the recent CPI price indicator was released . This is because not only did the results match expectations, but the core CPI, excluding energy and food prices, actually came out 0.1% to 1% point lower than expected when measured on a wide-area basis.
So, the graph compares the nominal CPI with the price level excluding energy and hourly wages. Hasn't the gap widened quite significantly now? The reason is precisely oil prices. However, as the war enters its final phase with peace negotiations, people assumed that oil prices would soon subside. Looking at the current figures, they reasoned that once oil prices stabilized, things would be fine, which is why the GPI did not deliver a significant shock to the market .
However, Gundlach is saying that the market is being too complacent . This graph is what it is. The dark color represents energy prices, and the ochre color represents service prices. If you look, you can see that energy prices and service prices are similar . So, in the case of Gundlach, it is said that energy prices lead service prices by about eight months.
Gundlach believes that since energy prices have risen like this, service prices will also soon increase significantly. So, contrary to what the market thinks, I believe that high oil prices will now have a ripple effect on service prices and other areas as well . And regarding the representative price indicators we commonly know, such as the CPI or PC, Gundlach believes that those indicators are distorted .
PI and PC have been subject to weight adjustments and changes in calculation methods, so they are distorted. In that case, what is the indicator that accurately reflects actual real-world prices without distortion? Gundlach says it is precisely import and export prices . So, price indicators are widely used when assessing inflation.
As you can see, both import and export prices are rising . So, even looking at undistorted price indicators, Gundlak is observing that prices are currently declining significantly across the board, not just in oil prices . So, in Gundlach's case, he believes that prices could hit another big wave in the future .
This graph is the CPI, and the red line represents the CPI from the 1970s, when the oil shock occurred. The navy blue represents the period from 2014 to the present . The waves hit twice in the 70s . yes. Gundlak predicts that this time, just like in the 70s, the waves will come crashing twice like this .
So, looking at prices alone, it seems they will rise significantly in the future contrary to market expectations, and Gundlach believes that interest rates will inevitably jump even higher accordingly. And looking at the overall macroeconomic environment, raising interest rates is absolutely natural.
This chart shows that. The x-axis is manufacturing employment and the y-axis is manufacturing costs. However, if you look at the top right of this chart— that is, the periods when employment was quite good and manufacturing costs were quite high—you can see that interest rates were raised in most of those instances .
Among these points, the brown ones represent when the Fed raised interest rates, and the blue ones represent when the Fed lowered them; in fact, they raised rates in most of those cases. There were instances where interest rates were lowered, such as in 1973, 1974, 1976, and 2008. In the 1970s, it was during the tenure of Federal Reserve Chairman Aspenz, who is credited with reigniting inflation.
At that time, Nixon exerted immense pressure to lower interest rates, so they had no choice but to do so, and in the case of 2008, there was a financial crisis. At that time, they probably had no choice but to lower interest rates. In that case, where is it now? I am currently around here. So, looking at the past, raising interest rates was the norm unless it was a very exceptional case.
Therefore, in times like these, it is highly likely that interest rates will be raised . yes. And true to the nature of the bond market, the bond market is once again discussing grounds for an interest rate hike based on predictions . We will bring in the 2-year rate right away . It’s something I always say, but people say that the 2-year bond yield always leads the benchmark interest rate.
So, when I did the calculations based on this inflection point, I found that the interest rate on maturities leads the base rate by roughly 10 to 11 months. However, as you can see now, the interest rate on related products has started to overtake the base rate. So, when comparing the difference between the bond rate and the base rate over the past, there is a tendency for this gap to widen rapidly when the base rate, which was previously higher, enters a phase where the bond rate starts to invert.
It was the same back then, and it was the same this time, and since the current situation is similar to the past, the interest rates on ideological products will surge rapidly as seen in the chart above. In that case, since deferred interest rates lead the base rate, it is being said that the base rate will also rise in a similar manner .
And Gundlach believes that Kevin Warsh also has a strong tendency to raise interest rates . We originally talked a lot about Mr. Caviner being a "Trump pick" and that he would lower interest rates according to Trump's intentions . But Gundlach, on the contrary, says that looking at Cheminancy, he sees a resemblance to Volcker, who brought inflation under control in the 1980s, rather than a Fed leader who listens to Trump .
As I mentioned earlier, deferred rates now lead the base rate . However, conversely, there was a time when the base rate led the interest rate on related products . That was during the time of Paul Volcker, and he was a very aggressive and independent Federal Reserve chairman. They didn't pay much attention to the administration, nor did they care much about the market's reaction.
So, I didn't know about the experimental rate, but I just kept going with the stance that I would tackle inflation first . So, regardless of market interest rates, Volcan raised the base rate by almost 20% . However, looking at Kevin Urs’ recent remarks about abolishing the economic outlook table and the dot plot, it appears he intends to operate the Fed in a more aggressive, flexible, and proactive manner.
So, Gundlach assesses that Volcker is someone who will boldly raise interest rates because he is becoming soft in that regard . yes. So far, I have discussed the reasons why Gundlach has no choice but to look forward to interest rate hikes. I will introduce the argument regarding this point after the counter-argument, which is a bit more complex for me.
In that case, assuming interest rates are raised like this, what is Gundlach's investment plan ? First of all, they are advising against U.S. stocks and U.S. bonds . In the case of bonds, especially avoid long-term ones. They say that long-term bodies are not good, either in the short or long term. In the case of the stock market, it is currently being viewed as significantly overheated, and if interest rates rise from here, it would be a fatal blow .
The reason I said that long-term bonds are unfavorable in both the short and long term is precisely because the 30-year bond yield has deviated from its long-term trend, so it looks bad in both situations. So, given this deviation, Gundlak is predicting that interest rates will remain high or rise further.
Why is he viewing it that way? First of all, since interest rates will rise in the short term, it will naturally not be good for the long term, right? There is a possibility that long-term interest rates could rise further . And looking at the long term, although this is a point I have been consistently arguing for the past three years, even if an economic recession occurs and interest rates are lowered, this is no longer a bond issue .
Gundlach is saying that it is actually bad news for bonds . Because usually, when the base interest rate goes down, bond yields also fall. Long-term loans, in particular, are more sensitive to interest rates, so they fall more significantly. However, if we look back at the past, the U.S. made its first interest rate cut in September 2024 .
However, if we compare long-term interest rates before and after the rate cut based on that point in time, long-term interest rates actually rose after the rate cut . If interest rates are lowered, bond yields should fall as well, so why have long-term yields risen? That is precisely because of the U.S.
debt problem. Now, if the market lowers interest rates because the economy is bad, the government's fiscal deficit will expand because the economy is weak. Because the economy is weak, government tax revenue is decreasing, while conversely, as the government increases spending on things like unemployment benefits, it will issue more bonds, leading to an expansion of the government's fiscal deficit.
With debt already so high, the government is issuing more bonds to spend more money . In that case, it means that bonds are actually worse. So, in short, since bonds have now started taking issue with the debt in the U.S. market, lowering interest rates is no longer a positive development. So, Gundlach is saying that he does not recommend long-term investments, whether looking at it from a short-term or long-term perspective.
And the second was US stocks. In the case of US stocks, it presents a negative analogy, particularly regarding tech stocks . So, in my case, I say that I drastically reduced my exposure to US stocks starting one or two years ago . So, I expect emerging markets to perform quite well going forward, but you have likely heard a lot about the current overheating of the stock market .
This graph is one of the data points showing signs of that overheating . It illustrates the proportion of the market occupied by so-called leading stocks during the past era and compares that to the present. For example, there was the Nifty 50 in the 60s . At that time, Nifty 50 stocks accounted for about 40% of the SP 500.
During the Japanese bubble, the Nikkei index accounted for about 44% of global stock market indices . At the time of the Da Combebel Bell, these internet-related stocks accounted for about 41% of the total . So, how does it look now? The top 10 AI-related stocks account for about 41% of the SP 500 .
And if we consider the proportion of the entire US market including all other AI-related stocks, I understand it amounts to about 50% . And the same applies when looking at valuation . This graph shows the PBR of US stocks, the PBR of global stocks, and the PBR of non-US stocks excluding the US . The point is that when U.S.
stocks become excessively expensive compared to stocks in other countries, causing the gap to widen, this difference is corrected as U.S. stocks fall significantly . If you look at it now, the gap has widened significantly, just like in the past. So, the point is that if interest rates rise in an overheated situation like this, U.S.
stocks naturally cannot perform well. Of course, the market has already priced in some interest rate hikes, but please keep in mind that the rate increase Gundlach is talking about is a steeper hike than what the market is currently expecting. So, what is Gundlach's alternative? They are saying that emerging market stocks and bonds, followed by commodities, will be good .
First, raw materials. I view gold as the most promising among raw materials, but its price isn't very good these days. So, in the case of gold, although it has currently fallen, it is quite promising when looking at its long-term structure . So, people are saying that now is the time to accumulate gold, and regarding emerging stocks, they are saying that the trends between the U.S.
and non-U.S. markets have reversed, so non-U.S. stocks will perform better than U.S. stocks for the next few years . And as for bonds, it is being said that emerging market bonds will be advantageous because we have entered an era of a weak dollar . First of all, in the case of stocks, this graph compares US stocks with non-US stocks.
So, the idea is that the lower the index, the better non-U.S. stocks perform, and the higher the index, the better U.S. stocks perform. However, looking at the current situation, U.S. stocks have risen overwhelmingly compared to the past . However, Gundlach predicted that the gap would be corrected as U.S.
stocks perform poorly and non-U.S. stocks improve, and indeed, looking at recent trends, the gap has started to be corrected based on the year 24. Nowadays, you can tell a lot about non-US stocks compared to US stocks just by looking at the KOSPI. Non-U.S. stocks are performing quite well, and this trend is expected to continue for the next few years .
The reason for the next few years—which I will explain later—is that I believe the weak dollar trend will continue for quite some time. Also, since U.S. stocks are already excessively expensive compared to historical averages, it means there is still a long way to go before this is corrected . And as for bonds, you might ask, "But the U.S.
is raising interest rates, so how can international bonds be good?" Gundlach focuses more on this dollar index. This graph compares emerging market bonds with U.S. corporate bonds. So, the higher this is, the better emerging market bonds perform. The lower it is, the better American companies perform.
And this indigo is the dollar index. But this is an inverted axis. So, the stronger the dollar, the better American companies perform. De Gundlach argues that emerging market bonds are bound to perform well because, starting with the aforementioned U.S. debt problem, he believes an era of a weak dollar is coming, and he expects this to be boosted by the weak dollar.
yes. So, that was Gundlak's story. Of course, there are counterarguments to Gundlach's story . Of course, I am only at the level of Gundlak's claw belly, but still, we should hear the opposing viewpoint. First of all, regarding the interest rate issue, I think we are in a bit of a desperate situation.
So, while there are reasons to raise interest rates, there are also reasons why they cannot be raised, so I think the Fed is currently in a situation where they cannot even raise them to 5 degrees . So, I think that unless the situation changes significantly in the future, it will be difficult to choose any option other than a freeze .
This is a new home sale. But if you look at the number of new home sales right now, it is almost at the level of the 1980s and 1990s. The trading volume is similar to that of 30 or 40 years ago, but considering the population has increased that much over those 30 or 40 years, it means the real estate market is currently quite bad.
This is because we are only looking at new housing; if existing housing is included, it is said to be returning to the high levels seen in the 1970s . The reason the U.S. real estate market is currently in such a slump is precisely because of high mortgage interest rates. But they are raising interest rates further here.
They intend to further destroy the real estate market . And the second is AI investment. Thanks to this AI technology boom, companies led by tech firms are investing heavily. But now, when making that investment, they are even issuing bonds to raise funds. So, this graph shows the number of company issues by year.
The amount of corporate bond issuance has been increasing rapidly since late 2022 and early 2023, when there was a Chapity moment. Companies are taking on significant debt to invest in AI, so what are the current interest rates ? As shown in the graph above, if we look at current corporate bond interest rates based on investment grade standards, they are at a significantly high level compared to the past.
It is at almost the highest level since the financial crisis, and with all these companies scrambling to invest in AI, raising interest rates further might not be an easy choice. As Gundlach mentioned, there are grounds to raise interest rates, but as shown in the data I just presented, there are also grounds to not raise them .
In that case, the Fed is currently in a difficult situation, but I think there is still some room for them to observe the situation and deliberate a little longer . This graph shows the real interest rate, calculated by subtracting inflation from the base interest rate . This was the time in 2022 when the Fed began raising interest rates, and at that time, the real interest rate was nearly -8%.
But while it is currently negative, real interest rates are not that low compared to the past. Therefore, I think the Fed has the leeway to observe the situation a little longer and make a decision later . So, Kevinussi recently stated that he prefers the truncated mean PC . So, the plan is to exclude the top 30% of high-risk stocks and the bottom 20%, and then look at the middle.
In other words, it means excluding the outliers and focusing on the long-term downturn. I think that such remarks also make sense in the context . So, I think it might be difficult to easily interpret the direction of interest rate policy . So, given this situation, what are the key points to watch for in this week's FMC?
I personally believe the key point to watch is whether we can still view the economy through the lens of the past. I think the point of view will be how Kevinner and the Fed think about this issue. So, what I'm saying is... We say that GDP is largely composed of four components. It is consumption, investment, government spending, and net exports.
However, there is a view that this structure of the U.S. economy will change significantly in the future . The point is that while consumption has traditionally accounted for the largest share of the U.S. economy, going forward, investment and government spending will become the main drivers of the economy .
The current state of consumption is unusual. This graph shows the Consumer Sentiment Index and the forecast value used to predict it . This forecast is the result of a prediction model created based on representative price indicators such as the CPI, PC, and stock price returns; when compared to the past, the Consumer Sentiment Index and this forecast value are very similar .
However, recently, as we moved into 2020, this gap has become extremely serious. In short, looking at the current price and economic conditions, consumer sentiment should be quite good, but the actual consumer sentiment index is actually at rock bottom. How did such a discrepancy arise? I think it is precisely because of prices.
This graph is the CPI index. But when we usually look at the CPI, we look at the year- over-year or previous year growth rate, right? This is based on the index, not the growth rate . This dotted line represents the Fed's target of 2%. That is the trend line when prices steadily rose to the 2% range .
This blue line is the actual CPI index. However, the actual CPI index has completely deviated from the trend line of the Fed's 2% target inflation . Due to inflation that has occurred since 2021. In that case, to return to the original trend line, how should prices turn out going forward, just like in the past ?
The CPI must remain at 0% for 5 consecutive years, or remain at 1% for 10 consecutive years. So, in reality, the point is that it is really not easy for us to return to past prices. So, the absolute level of our current prices has become too high. In this kind of structure, consumer sentiment is bound to weaken, and it will inevitably affect actual consumption .
So, while structural headwinds have emerged in consumption, investment and government spending are currently gaining new momentum due to AI. What this graph represents is... The red line represents data center construction expenditures. The navy blue represents the construction expenditure for the building used for drinking.
Since the release of the latest data point in November 2022, data center construction has increased rapidly, and now the United States has become a country that spends more money on building data centers than commercial buildings. So, as these indicators show, investment and government spending have gained a new engine, while consumption is likely to weaken; given this structure, wouldn't the U.S.
economic structure change significantly going forward? In that case, interest rate policy is bound to be affected by the changing economic structure . Therefore, I believe that if the Fed reveals its stance on these changed economic structures at the first FMC meeting, it will help establish some guidelines on how the market will react favorably or unfavorably to future economic indicators, such as employment and inflation figures .
The recent employment indicators were not as extreme as yours; instead, when they came out somewhat ambiguous, the market has continued to show signs of wavering . So, the key point this time is probably whether or not the guidelines will be reduced, and Wash and the Fed staff have discussed their positions on this matter so far.
Wash largely agrees, to borrow Drakemula's words, that the economic boom is changing due to AI, whereas looking at past remarks by Fed members, that is not the case yet. It appears to be dismissing it as unrealistic. So, the key point to watch is whether a unified position will emerge from this FMC, and if so, how it will be interpreted.
Secondly, regarding the concern that the U.S. economic structure might shift to one driven by government spending and investment rather than consumption, there is one economic powerhouse among the countries we know that has such a structure. It is China. If the U.S. economic structure changes to become more like China's, would n't the stock market also be significantly affected?
After all, in the case of China, manufacturing is the best. Robotics-related stocks have been soaring so far; wouldn't the nature of the US market change in a similar way to the Chinese market? In that case, naturally, stocks related to this AI infrastructure are bound to benefit in this way . yes. So, I think this is a point worth considering for future investments, especially for those holding semiconductor stocks . yes. That was all for today's video. I will see you again in the next video .
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