Gundlach sees oil hitting $200 a barrel, raising recession and stagflation risks

The price of oil has risen 35% in the past six days, and yet, when it comes to inflation, the worst is yet to come for Americans and others around the world, according to DoubleLine CEO Jeffrey Gundlach . Speaking on a webcast sponsored by Magnifi yesterday, the prominent bond investor made a compelling case that the price shocks consumers have seen at grocery stores, at gas pumps and in their heating bills are likely to get worse before it gets better.

“The Fed is in a really difficult position,” Gundlach said. If he really wants to fight inflation, “we’re going to need the Fed to be aggressive.”

A major problem is the huge chasm between inflation, which is hovering at 7.5%, and 10-year Treasuries which are yielding 1.7% or 1.8%. “Interest rates are now more negative than they were under Jimmy Carter” while oil prices are soaring even faster, he noted.

In Southern California, premium gasoline that was selling for $5.25 a gallon at the start of the year recently hit $7.60 a gallon. People complaining about gas prices “have seen nothing yet,” Gundlach said. Towards the end of the webcast, he said oil could hit $200 a barrel.

The story is the same for a range of products. Over the past 18 months, the Bloomberg Commodity Index has risen more than 100%, Gundlach said.

“The trend is your friend,” he said. “We’ve been talking about temporary inflation on many commodities” for 18 months and there has been no real setback.

Supply chain bottlenecks remain as problematic as ever and demand has yet to pick up. Ultimately, consumer demand will deteriorate, as sentiment polls like the University of Michigan are already signaling.

“All of these stimuli take time to pass through the system,” Gundlach said. “I think the risk of recession is increasing very significantly.”

Recession indicators, like the narrowing of the spread between two-year and 10-year Treasuries, are starting to flash. “Once you’re at 25 basis points” that represents recession eve, and yesterday that spread reached 15 basis points.

Historically, oil shocks have caused the kind of demand destruction that triggers recessions. The “usually quoted” figure is a 50% rise in oil prices – and the economy has already surpassed that figure, Gundlach said.

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