The price of oil, as measured by the benchmark WTI index, could hit $150 this summer, according to Jeffrey Gundlach. That price may not be sustained, he said, “but the path of least resistance for oil prices is up.”
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Gundlach spoke to investors via a webcast, which he titled “It’s Not Unusual,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.
The title is from a hit song sung by Tom Jones in the mid-1960s, which led to two appearances on the Ed Sullivan show. Gundlach chose it because, he said, “it is not unusual for markets to get unusual.”
But it would not be that unusual for WTI to hit $150/barrel. It peaked at $140 in 2008, during the great financial crisis. Adjusting for inflation, that would be greater than $150 today. WTI closed at $119.81/barrel on the day he spoke.
The real Fed funds rate is highly unusual, he said, at -749 basis points. The CPI has stopped rising year-over-year and will start to fall in the second half of this year. As it decreases and the Fed funds rate is hiked, the real Fed funds rate will increase.
The only asset class that is up this year is the Bloomberg commodity index, and it is up 38%. Bitcoin has been the worst performer, down more than 30%. Since the last Fed meeting in early May, volatility is down and yields are up modestly, he said.
Inflation was a prominent topic in his talk. He said it was largely fueled by excessive government spending, including an “outrageous increase” the deficit and stimulus programs.
Export and import prices are the best measure of inflation, because they are not subject to substitutions and changes in methodology, as is the case with the CPI and PCE. Based on today’s methodology, inflation during the Carter administration would be approximately 9.1%, in line with what we are experiencing now.
Year-over-year, export prices are up 18% and import prices are up 12%. Averaging those two, Gundlach said that inflation is around 14%.
“We expect inflation will fall later this year,” he said, “but there is a question whether it will fall after that.” He predicted that CPI inflation will average 6% over the course of 2022.
Commodities have been “on a tear” this year, he said, following a small pullback in the fourth quarter of last year. Commodities are in a secular uptrend, according to Gundlach. Food consumption at home is up 11% and up 7.2% away from home. The war in Ukraine is responsible, he said, at least for price increases in wheat and barley.
Read the full article here by Robert Huebscher, Advisor Perspectives.
