(ValueWalk) On Fox Business Cavuto’s Coast to Coast, Neil Cavuto interviewed Jeffrey Gundlach as they talk about the current state of the economy, the Fed and politics.
A transcript follows.
Jeffrey Gundlach said not too long ago that the Fed predicted totally different policy than where they are now and wondered how they can predict 2020 policy with a straight face. So you're not a fan certainly of the Fed's predictive abilities. But what if it moves to hint of a move? I guess that's the consensus of a cut in rates next month. What do you think?
Well I think they're not going to cut rates today. I do think they're going to change their rhetoric again and talk about a lack of progress on inflation, which is kind of funny because when I was a kid progress on inflation meant you were getting it down now. Progress on inflation is now getting it higher. So it's kind of weird but the Fed needs to change its rhetoric to get in line with what the markets are saying.
Some people say that the Fed is being harangued by the president but it's really being harangued by the bond market. I mean the bond market has been saying that the Fed's policy is too tight -- by a very large amount -- for the past several weeks if not few months. The Fed simply cannot ignore that. They need to give some respect to what the bond market is talking about.
So they will talk about failure to make progress on inflation and they'll probably talk about the reason that the past forecasts weren't so great was because the tariffs have gotten to be more of a problem than they anticipated. So that's the way they're going to find cover for talking about a future rate cut probably in the not too distant future. They might even set the table for July but certainly September.
A lot of people say it would be a mistake to cut in its environment because there's no reason to cut. Leaving that aside, we're talking about a 40 to 50 percent chance of a recession in six months. Why do you see that?
Well we at DoubleLine have developed an awful lot of indicators that give us a little bit of a forward look on whether the economy might be weakening. And for about 18 months ago they were all super strong. There was no sign of any economic weakness whatsoever.
But one by one it's not a clean sweep by any means right now. Certain indicators have started to weaken. In particular consumer confidence in the present is very high. But consumer confidence in the future is very poor. And usually that relationship, when it gets to how it's looking right now, starts the sense of recession coming within six to 12 months.
Similarly the most important indicator that the New York Fed also uses as its recession model is the shape of the U.S. Treasury yield curve and people have been talking about this appropriately for a long time. But the three-month bill yield compared to the 10-year Treasury yield has every bit the look of a recession coming within 12 months and maybe within six months because that rate is inverted. What would really kind of put the icing on the cake for that would actually be the Fed easing. Ironically a lot of people think if the Fed eases it'll be an insurance policy against recession.
But if past patterns are prologue, if we actually start steepening out the yield curve from an inversion three months to 10 years, that's actually a highly coincidental with a coming recession. So there's there's a number of things that are deteriorating.
Citibank has an index that compares current data releases to their 12 month moving average. And all over the world those are steeply in negative territory and have been all year and in the Eurozone even for the last full year, not just year to date. So there's plenty of indicators the recession might be coming.
Also consumer spending I believe is at risk because of the tariff fears. I mean we've already put significant tariffs on some Chinese goods. If we end up putting tariffs on more Chinese goods coincident with the President rhetorically talking about "well we're gonna make a deal to remove the tariffs" that will absolutely put a halt to imports from China.
Because if you were going to buy something from China with a 25 percent tariff on it and you suddenly started to get rhetoric that the tariffs might go away and say three or four months you're going to stop that buying decision. So maybe the president is really as diabolically clever as some of his conspiracy theorists like to say and maybe he's actually trying to get the economy weak now so that consumer spending can rebound very sharply in 2020 just in time for the presidential election.
But let me let me ask you about that and you mentioned the president, Jeffrey. He had tweeted out the other day that if he's not re-elected the market is going to crash. What do you think of it.
Well I don't know about "crash." I mean he's always fond of hyperbole. But one thing that really is interesting is a lot of the current polls have come out. I know it's very very early for 2020 presidential polls.