‘Bond King’ Gundlach says inflation environment today reminds him of the 1970s: ‘Jimmy Carteresque’
The current inflation scenario is reminiscent of the 1970s and the Federal Reserve must take measures to dampen rising prices, said “Bond King” Jeffrey Gundlach.
DoubleLine Capital’s CEO told CNBC’s “Mid-Term Report” Thursday that US bonds were essentially negative-yielding assets amid rising inflation and persistently low government bond yields.
“If you look at real long-term Treasury rates, it looks like the Jimmy Carter area,” said Gundlach. “We’re talking a CPI of 5.4%, and if we want to use the 10-year government bond, it’s not even 1.4%, that’s a negative rate of 4%. That’s Jimmy Carteresque.”
Inflation data has continued to rise in recent months, as warned by the Federal Reserve, although recently the numbers have been higher than even the central bank would have expected. The June consumer price index hit 5.4% – the largest year-on-year increase since 2008 – and the producer price index for the last month rose 7.3% year-over-year.
Gundlach compared the current period of rising prices to the 1970s, when inflation rose from 1% under President Lyndon Johnson in 1965 to a breakneck 15% in March 1980.
“A lot of things remind me of the 70s. We are just pulling out of a failed war in Afghanistan where we were basically fighting a stalemate. It kind of reminds me of the 70s in Vietnam and we had guns and butter that to inflation in the late 60s and 70s and even early 80s and we certainly have guns, butter, student loan termination, free unemployment benefits and everything else, “said Gundlach.
In order to counter the price increases in the Jimmy Carter era, the then Fed chairman Paul Volcker raised the key interest rate and tightened the money supply. The rate used by banks and credit unions on overnight loans to other depository institutions reached a record 22.36% in July 1981.
Meanwhile, the central bank is sticking to its unprecedented stimulus packages and near-zero interest rates, which Gundlach says are keeping the stock market near record highs.
Fed chairman Jerome Powell has repeatedly signaled that the central bank believes rising inflation will be temporary, but Gundlach said several months of hot inflation data will require Fed action.