Jeffrey Gundlach, DoubleLine Capital CEO, shared a negative forecast regarding the economic situation. The expert said the recession would hit in a few months, while economic problems were starting to pile up.
As a result, we may expect the FED to cut rates for the second time this year. Traders are seeing economic winds building up with the unemployment rate expected to go higher. At some point, the FED will have to choose between inflation and the economy. While economic pivot and unemployment problems grow, they will have nothing to do but give up inflation.
The problem is that cutting rates in an inflationary environment can be a tough challenge. Such monetary policy put already high prices under more pressure. In simpler words, the FED will be forced to take drastic measures in the face of recession to oppose the financial system. As a rule, such measures involve quantitative easing and deficit spending.
So, the recession will inevitably come. The only question is how severe it is going to be. Liquidity issues are the red flag to watch. The gap between what one can get in the banking system and on T-bill will expand. Liquidity will shrink.
The most obvious path to handle the situation is to sell equities into rallies. Selling on weakness seems to be impossible taking into account volatile markets. It all makes gold a favorable asset for traders’ portfolios although it made a pullback to $1,800. Even a small downtrend looks like a good scenario considering the FED raising rates.
