Video summary

Gundlach Unlocked: The Fed’s Next Move

Main summary

Key takeaways

Finance

Finance-focused summary (macro + markets + investing implications)

Macro & rates backdrop

  • Fed policy expectations / next meeting: “Fed Day” is next Wednesday.

    • A “warp function” based on the short-end yield curve implies about a 60% chance of a Fed hike.
    • The speaker says they don’t fully trust the model and are leaning against a hike, though not strongly.
    • If no hike: the speaker expects long-term yields to rise after the decision (i.e., bonds likely sell off).
    • If hike: long-term rates “perhaps” stay around current levels.

  • Bond yields & regime:

    • Barclays/Bloomberg U.S. Aggregate “yield to worst” has been rangebound roughly low 4% to ~5%, with a notable spike in 2024.
    • Mentioned averages: 4.03 (last 20 years) and 3.25 (last 30 years / average over listed window).
    • Recent yields are described as not “suppressed”, implying a meaningful real-rate environment.
    • High-risk fixed income yields:
      • U.S. local currency Emerging Market and bank loans around ~7%.

  • Long-term rates trend & continuation risk:

    • The U.S. 30-year Treasury is referenced around 5.24%.
    • The speaker argues that when yields rise sharply (roughly +500 bps) and don’t retrace, the next move is likely continuation upward rather than mean reversion.

  • International yields synchronizing with a rising-rate world:

    • Developed countries (except Switzerland) are rising “in sync.”
    • Japan: from near ~0% to ~3.97%, nearing U.S. 30-year ~5.24%.

Framework/model mentioned (10-year Treasury starting point)

A model for a base-case 10-year U.S. Treasury yield using:

  • German 10-year bond yield
  • 7-year average of U.S. nominal GDP

Reported fit: R² ≈ 0.93

  • Model output vs actual:
    • Expected ~4.71%
    • Observed ~4.78%

Caution: “path of least resistance could be higher.”

Yield curve vs Fed funds (rate gap)

  • Historical remark:
    • In 2022, 2-year Treasury was about ~200 bps above the Fed rate (“out of sync,” described as the biggest gap in the speaker’s career).
    • In “2025,” the Fed was “overly offsides” the other way.
  • Current stance: Fed funds rate “should probably be” ~50 bps higher relative to the level implied by the 2-year yield.

Credit spreads & AI-related debt risk

Spread divergence: AI vs non-AI credit

  • Investment grade (excluding AI sector):

    • IG spreads are described as not widening meaningfully.
    • AI-related spreads: from about ~50 to about ~125 (interpreted as ~+75 bps widening vs IG).

  • High yield:

    • AI-related spreads: from about ~180 bps to ~325 bps (~+145 bps widening).
    • Non-AI HY spreads: near tight-of-the-year levels.

  • Interpretation / caution:

    • Treasury issuance is high due to deficits (~6–7% of GDP cited).
    • The speaker worries about who is buying AI debt and notes continued “avalanche” supply in AI-related issuance.
    • Markets are demanding higher compensation specifically in AI credit.

Inflation-protected securities (TIPS) stance

  • Speaker preference: TIPS, especially short-term TIPS, because implied inflation vs nominals is “too low.”
  • Major caution:
    • 30-year TIPS do not hedge nominal-rate risk the way people assume.
    • Claim: the difference between 30-year TIPS and 30-year nominals has been stable for ~5 years, meaning long-duration real yields track nominal bond moves rather than offset them.
  • Recommendation/disclaimer-like conclusion: don’t buy long-term TIPS expecting a hedge versus long-term nominal Treasuries.

Inflation: why the Fed may not get to 2% soon

Reported inflation trend (PCE)

  • PCE deflator goal: 2% (speaker attributes this to Fed communications).
  • Numbers cited:
    • 12-month PCE deflator: ~3.7%
    • 6-month annualized change higher than 12-month (implying inflation is worsening/less improving recently)
    • Core PCE: ~3.3%
    • Headline PCE: ~3.7%
  • Timing: inflation has been rising since mid-2024, and has stopped rising recently; next readings may influence expected policy direction.

Alternative “pure inflation” proxy (export/import prices)

  • Export prices YoY: ~8.25%
  • Import prices YoY: ~5.95%
  • Speaker’s derived average/sum logic: average suggests inflation around ~7% (described as their “purest” measure).

Energy/power & oil constraints on disinflation

  • Electricity retail price (residential):

    • From about ~12.1–12.5 cents/hour (years ago) to about ~18 cents/hour (~+50%).
    • Speaker: trend appears not slowing, contributing to weaker consumer sentiment.

  • Oil (Brent) & inventories:

    • Brent referenced around ~$100/bbl (“true global benchmark”).
    • U.S. Strategic Petroleum Reserve lowered from about ~750 million barrels to ~287 million barrels (down >50%).
    • Refilling the SPR could create a floor under oil and keep inflation stickier.
    • Global oil inventories described as at the lowest ever / near lowest in recent years (notably as low as 2025).

Asset performance & portfolio implications

Commodities/energy strong; bonds weak (relative performance oddity)

Since the war started (end of February 2026 referenced):

  • Bloomberg Commodity Index: +34%
  • Energy/commodities: strong; described as double digit across most areas.
  • Bonds: generally pretty much weak.
    • Leverage loans cited as best-performing bond-like asset: +3.1%.
  • Investment grade categories: Treasuries / MBS / corporates described as negative (MBS “least negative”).

The setup is described as strange: strong risk/real assets while fixed income lags.

U.S. debt/deficits trajectory (macro risk)

  • Total debt: about $40T now, could reach $50T by 2032.
  • Social Security: funding runs out by ~2032 (possibly earlier than assumed).
    • If not reformed: benefits may need cuts around ~22% (speaker estimate).
  • Federal deficits:
    • New records referenced in fiscal 2026 pace and projected worsening into fiscal 2027.
    • CBO projection to 2035: rising interest expense line under “better-than-today” assumptions.
    • Under stress assumptions: deficits could be ~7–8% of GDP, and potentially near/beyond 10% within ~10 years.

Equity valuation, concentration, and risk warnings

  • Shiller CAPE ratio: ~42 (highest level “of all time,” comparable to late-1990s; slightly below 1999/1929 context).
  • Forward returns vs CAPE (scatter/regression):
    • At CAPE ~42, historically 10-year real forward returns have been negative ~-5% to -9% per year for broad cap-weighted S&P exposure.
  • Equity concentration:
    • Information Technology share in S&P 500 around 38%, described as higher than prior concentration peaks (e.g., around 1999), and higher than pre-GFC.
    • Conclusion: “not a lot of bargains” in cap-weighted S&P 500.
    • Speaker: does not recommend capitalization-weighted equities.
  • AI vs “rest of market” relationships:
    • 120-day rolling correlation between AI complex and S&P 500 ex-AI shifted from positive to negative.
    • Correlation mentioned falling from about ~+0.5 to about ~-0.14 recently.
    • Implication: if AI is rising, the rest may move opposite; could persist (“momentum,” not expecting quick reversal).

Equal-weight vs cap-weight

  • Equal-weight S&P 500 outperforming for about ~1 to 1.5 years (as of the speaking time).
  • Speaker: this resembles past regime shifts, but calls it not fully convincing as a long-term trend yet.

Dollar/relative value and recommendations implied

  • Dollar weakness:
    • DXY fell from about 110 (end of 2024) to below 100 currently; described as “eerily stable.”
  • Valuation spread (price-to-book):
    • MSCI US price-to-book: ~5.72
    • Rest of world ex-US price-to-book: ~2.49
    • Speaker argues the U.S. may underperform when valuation/relative dynamics revert historically (especially during corrections).
  • Relative equity call:
    • S&P 500 expected to underperform when the dollar trade-weighted broad index falls (link to EM outperformance mentioned).
  • Seasonality:
    • September/October flagged as generally difficult months for risk assets (early September noted).

Explicit recommendations / positioning ideas (as stated)

  • Avoid / don’t recommend:

    • Capitalization-weighted equities (due to valuation + concentration).

  • Prefer / consider:

    • Gold as part of every portfolio.
    • TIPS strategy: short-term TIPS; don’t rely on long-term TIPS to hedge if you dislike long-duration nominals.

  • Relative risk positioning implied:

    • Expect non-US equities / EM local currency equities to outperform if the dollar continues to fall.
    • Expect EM local currency outperform US corporate bonds if USD weakens (framed into “holiday season”).

Key tickers / indices / instruments mentioned

  • Equities / indices: S&P 500, NASDAQ (100 implied), MSCI Europe, UK, MSCI US, MSCI EM, S&P 500 equal-weight, S&P 500 ex-AI complex, S&P 500 vs MSCI (EM)
  • Fixed income / credit: U.S. 10-year Treasury, U.S. 30-year Treasury, 2-year Treasury, Fed funds rate, U.S. Aggregate bond index (Bloomberg/Barclays Aggregate), investment-grade corporates, high yield, mortgage-backed securities (MBS), leverage loans, emerging market sovereigns (local currency), bank loan index, TIPS (30-year and short-term)
  • Macro indicators: ISM manufacturing prices paid, ISM manufacturing employment index
  • Commodities / FX: Gold, Bloomberg Commodity Index, Brent oil, DXY (U.S. dollar index)
  • Inflation measures: PCE deflator, core PCE, headline PCE, CPI, export/import price index
  • Other: JP Morgan Asset Management chart reference; Yaxis/warp function (modeling tool referenced)

Disclosures / disclaimers

  • The provided subtitles do not include an explicit “not financial advice” statement.

Presenters / sources mentioned

  • Jeff Gundlach (implied by the “Gundlach Unlocked” format; speaker is repeatedly “I” and references his webcasts)
  • Kevin Warsh (named regarding Fed goals / inflation views)
  • Paul Volcker (named; “Saturday night massacre” referenced)
  • Arthur Burns (named; referenced regarding pressure to keep rates low)
  • JP Morgan Asset Management (source of an exhibit referenced via ISM prices paid vs employment scatter plot)
  • Bloomberg / Barclays (referenced for bond/index yield/spreads)

Original video