Gundlach Sounds Alarm on Inflation and Interest Rates

Bond king Jeffrey Gundlach issued three warnings ahead of the Federal Reserve's interest rate meeting. If the Fed doesn't raise rates, long-term rates will surge; inflation is far from subsiding and is eerily similar to the 1970s; and AI bond spreads have nearly doubled.

Gundlach believes that inflation in the US is not cooling down as the market thinks, but rather following a trajectory similar to the period of high inflation in the 1970s. He cited data showing real inflation possibly reaching 7%, which would be a significant concern for the economy. Gundlach also pointed out that there's a severe divergence in the credit market, with AI corporate bonds experiencing a dramatic widening of spreads due to 'avalanche-like' supply.

In terms of interest rates, Gundlach stated that he wouldn't be surprised if the Federal Reserve doesn't raise rates next week. If that happens, he expects long-term rates to rise fairly significantly thereafter. He also emphasized that the current inflation situation and ongoing vigilance regarding US fiscal trajectory are major concerns.

Gundlach highlighted multiple signals of inflationary pressure, including rising Brent crude oil prices nearing $100 per barrel, residential electricity prices increasing by over 50%, and global oil inventories at their lowest since 2018. He also noted that the current Shiller price-to-earnings ratio of the S&P 500 has reached 42 times, which is a level that often results in negative actual return rates.