Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Jeffrey Gundlach Says the Fed Pivot Is Already Priced In
Transcript
- Lucas: Jeffrey Gundlach went on CNBC Wednesday and said something that should make every investor pause. He said markets are set for a much more hawkish Warsh Fed than people expect, and that the 'easy money' chairman everyone hoped for is not coming. Luna: That's a direct quote from the headline. And the market reaction since then — the 10-year yield jumped to 4.49 percent, the VIX ticked up to 16.78 — suggests some people are paying attention. But are enough? Lucas: That's the question. Gundlach's point isn't just that Warsh will be hawkish. It's that the bond market has already priced it in. He's essentially saying the repricing is mostly done on the long end, but the risk is that the Fed itself might be even more aggressive than the market anticipates. Luna: So the market thinks it's ahead of the curve, but Gundlach says the curve might be steeper than anyone thinks. Lucas: Exactly. And look at the numbers. The 10-year yield at 4.49 is up from 4.43 a week ago. The two-year at 4.20. The spread is still 27 basis points inverted. This is not a normal yield curve. And Gundlach is known for reading the bond market tea leaves better than almost anyone. Luna: He called the 2022 rate shock early. He warned about the regional bank stress in early 2023. So when he says the market is complacent, I listen. Lucas: Right. And the VIX at 16.78 — that's low. It's up 3.6 percent in five days, but that's from a very low base. The VIX was below 15 a few weeks ago. So you have this disconnect: the bond market is still inverted, growth is slowing — real GDP growth annualized at 1.6 percent — but equity volatility is near historic lows. Luna: That's the classic definition of complacency. Low volatility before a shock. Lucas: Gundlach specifically said the Fed under Warsh is 'not going to be the easy-money chairman many hoped for.' And I think the market has been operating under the assumption that rates would come down quickly once inflation was under control. But if Warsh is more hawkish, maybe rates stay higher for longer. Luna: And that changes the calculus for stocks, especially high-growth names that are priced on future cash flows. But also for bonds, because if you believe the Fed will keep rates high, you want to lock in those yields now. Lucas: There's another layer. The 30-year Treasury yield is at 4.93 percent, basically flat. So the long end isn't moving as much as the intermediate maturities. That suggests the market thinks long-term inflation will be contained, but the near-term policy path is uncertain. Luna: So the curve is uninverting, but slowly. And the 3-month yield at 3.83 is below the 2-year, which is still below the 10-year. That's a textbook signal that recession risk is real, even if the timing is uncertain. Lucas: And Gundlach has been saying for months that the yield curve uninversion often precedes a recession by 12 to 18 months. So if the curve normalizes later this year, that would put a potential downturn in late 2027 or 2028. Luna: But the market is looking at the Fed pivot as a positive — lower rates are good for stocks. Gundlach is saying: be careful what you wish for. The pivot might come because the economy is weakening, not because inflation is beaten. Lucas: That's the distinction. A rate cut in a strong economy is a tailwind. A rate cut in a weak economy is a life preserver. And if Warsh is forced to cut because growth is faltering, that's not a bullish signal. Luna: So what does Gundlach recommend? He's been overweight long-duration Treasuries for a while, right? Lucas: He has. And in the interview, he reiterated that he likes bonds at these levels. But he also said the market is 'overpricing the ease of the pivot.' So he's not calling for a massive bond rally. He's saying the risk is asymmetric — more downside to stocks than upside to bonds. Luna: That's a pretty sobering view. Especially since the S&P 500 is at 7,501, the Dow at 51,565, and the Nasdaq at 26,518. Those are near all-time highs. Lucas: They are. And the Russell 2000, which we've talked about a lot on this show, is at 2,980, down 0.9 percent in five days. Small caps are lagging. That's usually a warning sign. Luna: So the picture Gundlach paints is one where the bond market is already pricing in a more hawkish Fed, but the stock market is still pricing in a soft landing. One of those is going to be wrong. Lucas: And history says it's usually the stock market that adjusts. Not always, but often. Gundlach's edge is that he's reading the bond market first and then asking what equities are missing. Luna: Let's talk about what listeners can actually do with this. If Gundlach is right, what's the play? Lucas: I think the conservative take is to make sure your portfolio isn't relying on a rapid rate-cutting cycle. If you're in long-duration bonds, you're probably fine — yields are attractive. If you're in high-growth stocks with no earnings, you might want to ask yourself what happens if rates stay at 4.5 percent for another year. Luna: And if you're holding cash, you're getting 4 or 5 percent in money market funds. That's not a bad place to be if you think volatility is coming. Lucas: Exactly. There's no urgency to reach for yield. And that's actually a theme that ties into something else — you know, we talk a lot on this show about the decisions we make with our money. And if these conversations have helped you think about one of those decisions differently, that's really what we're here for. Luna: Yeah, and we want to keep doing it — ad-free and independent. If you find value in the show and want to support it, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that makes a big difference for us. Lucas: We appreciate every single person who listens. Now, back to Gundlach — there's one more thing he said that I think is worth unpacking. It's about the Warsh nomination itself. Luna: What did he say? Lucas: He said Warsh is 'not going to be the easy-money chairman many hoped for.' But he also said that Warsh is a pragmatist. So it's not that he's a hawk for the sake of being hawkish. It's that he's not going to cut rates just to please the market. He'll cut when the data says cut. Luna: That sounds like a return to the Greenspan model — data-dependent, not market-dependent. Lucas: Exactly. And if that's the case, then the market's job becomes harder. You can't front-run the Fed as easily. You have to wait for the data to confirm the narrative. And that creates more volatility, because every CPI or jobs report becomes a binary event. Luna: Which might explain why the VIX is low but the VVIX — the volatility of volatility — is at 88.43, up 0.8 percent. That suggests traders are hedging against a spike in volatility. Lucas: Right. The VIX itself is calm, but the options on the VIX are pricing in a potential breakout. That's the smart money positioning for a shock. Gundlach would probably say that's the right trade. Luna: So to wrap up: Gundlach sees a market that's too complacent about the Fed, a bond market that's already adjusted, and an equity market that hasn't. Investors should be prepared for a repricing. Lucas: And the key number to watch is the 10-year yield. If it breaks above 4.5 percent decisively, that's a signal that the bond market is forcing the Fed's hand. If it stays below, maybe Gundlach is too pessimistic. But I wouldn't bet against him. Luna: He's been right before. And being early is not the same as being wrong. Lucas: Exactly. Thanks for listening, and we'll talk next time.