Closing Bell - Closing Bell Overtime: The Fed & Your Money 12/14/22

Episode Date: December 14, 2022

DoubleLine’s Jeffrey Gundlach gives his exclusive first reaction to today’s Fed decision and Jay Powell’s news conference. Plus, Meera Pandit of JP Morgan Asset Management explains how to position your portfolio in this market environment. And, Mike Santoli’s last word on the Fed and what he’s watching as we head into a new trading day.

All right, Sarah, thank you very much, and welcome everybody to Overtime. I'm Scott Wapner. You just heard the bells. We're just getting started from Post 9 here at the New York Stock Exchange with a busy hour ahead. We get right to our talk of the tape, the Fed and your money and what happens to it now. CNBC contributor Josh Brown along in just a bit to answer that very question.

But first, let's ask DoubleLine founder, CEO and chief investment officer Jeffrey Gundlach. He's with us once again in a CNBC exclusive on this Fed Day. Jeffrey, welcome back. Nice to see you again, Scott. It's good to see you as always. I want your reaction first and foremost to this decision, which our own Steve Leisman says was, quote, pretty hawkish for the outlook. How did you see it? It started out very hawkish. Jay Powell's first sentences were strongly committed to bringing

inflation down to 2 percent pretty much on a consistent basis. We got more work to do. We anticipate continuing quantitative tightening. We're doing our balance sheet as appropriate. And then he, I don't know, 90% of the way through that statement, he repeated those exact same points almost verbatim again. But there was also balance on the other side, which is reflective of the fact that the Fed realizes that they were way behind the curve. Jay Powell himself said so today. When we got started, the problem was the pace was important. You'll remember I've somewhat facetiously said that the Fed should raise 200 basis points way back, and I guess it was May. And they basically did. I mean, they did three and a half, two and two thirds bites, I guess.

But I think that's what's really important here is the movement on the yield curve, because the Fed now thinks that they're going to have the Fed funds rate at 5.1% or so on the dots. And yet the Fed funds rate is already above the two-year treasury yield. And what tends to happen in these Fed sequential rapid hiking cycles is the two-year Treasury yield. And what tends to happen in these Fed sequential or rapid hiking cycles is the two-year Treasury, as I've talked about many times before, leads the way. The Fed ultimately comes in a little bit reluctantly following the two-year.

And after multiple rate hikes, the two-year Treasury is all the way long, is above the Fed funds rate, they're playing catch up, and then the two-year Treasury peaks out, and the Fed funds rate keeps going up. And that's exactly what's happening here. So we now have the Fed funds rate above the two-year Treasury. We have many recessionary indicators, including the leading economic indicators, the PMI for manufacturing, the housing market, of course, lots of these indicators, sentiment, and so forth. And Jay Powell said, I think at a moment of ad living, he brought back the Mr. Magoo kind of thing I talked about earlier this year. We said

we're going to feel our way. When people were trying to query as to whether they would contemplate a 25 basis point hype. He sort of said, we're going to feel our way. I mean, they're getting pretty close to that 5.1, even if they ultimately make it there. And I don't think they're going to. I actually, my intuition is that they're going to be highly encouraged by the inflation data on the headline CPI for the next six months. It's going to come down. It's already come down 200 basis points since the middle of the year. And it'll have gone by the time we get to the May print, we think that prints in June,

we think that the CPI will have gone from a peak of 9.1 a year earlier down to maybe 4.1. And I think the Fed and that's just because where commodity prices are and where where the base and the base effects from last year rolling off some very big monthly numbers and we now are getting decelerating monthly numbers on the CPI and I'm having a hard time figuring out why they're supposed to reaccelerate with the Fed funds rate where it is today. So I think that the bond market has completely priced in the fact that inflation is peaking out and going down. And yields are down very substantially.

I'm surprised people don't really talk about this. I mean, the long bond yield is down something like 90 basis points. The 10-year Treasury yield is down 75 basis points. And even the two-year treasury yield is down 50 basis points. And we're at these levels that suggest that recession is coming. And I think Jay Powell said in many different ways of phrasing it that we're going to be definitely softer. We're going to have unemployment go up to 4.6 and the unemployment rate now is it is at 3.7 and so the 12-month moving average of the

unemployment rate is at 3.9 when that crosses over and i can't emphasize this enough because employment is a lagging indicator when that that crosses over, when the unemployment rate crosses above its 12 month moving average, you're almost assuredly right at the starting point of noticeable economic weakness. And Jay Powell's plot says that the unemployment rate is gonna be at 4.6 at the end of 2023. That'll be well above the 12 month moving average.

And most economists corroborate that idea. So I don't think there was a lot new here, because we've already kind of peaked out on rates. And the market has been anticipating this rapid increase up to the two-year Treasury yield, but it's basically already occurred. So I think we're getting late in the game here. And Jay Powell said, I'm going to feel my way along. That's that Mr. Magoo driving the jalopy until he hits something. And with the inflation rate likely to go down into the low fours in just six months on your over your headline CPI basis, I'm sure that he'll call that convincing evidence that we're going to settle in at 2%, but it's a pretty vast improvement from 9.1 to 4.1.

And I think that's going to influence the Fed's thinking. If a week or so ago at the CNBC-FA summit, you told me, quote, I think the Fed is getting it right, it sounds to me like you're questioning that today. No, it depends what your definition of right is. I actually think the definition of right is that we raise the unemployment rate and we make more progress and we aren't afraid of the stock market treading water at best. And we're not afraid of 0.5 percent real GDP, which sounds to me like an arbitrary number. It sounds a lot like a negative number for 2023, when the Fed itself says two years in a row of 0.5. They're not shy. They're admitting the fact that they want the economy to slow down and they want wages to not be rising. One thing weird on wages, as Jay to follow said he was really strong wage increases

but he wants wage increases are consistent with two percent inflation wage growth is consistent with two percent inflation don't submit looks like two percent so much for that's really strong wage growth but it'll take some it'll take some work in terms of unemployment rate going up to get wage growth consistent two percent it also sounds to me as you reference this unemployment rate going up to get wage growth to be consistent with 2% inflation. It also sounds to me, as you reference this so-called disconnect between what the Fed is saying and what the market believes will actually happen, it sounds to me today,

listening to you, that you think the market is right and the Fed will ultimately have to come to where the market is. Is that correct? Absolutely. I mean, the price of money, the interest rates are the market. Dots, predictions of maybe what will happen in the future, dots are cheap. You can say anything with dots because you're not committing to anything. So when you say 5.1, I think it's a tip of the hat to their commitment to getting the inflation rate down, that they're willing to raise that terminal rate. In fact, Jay Powell said it's possible they're going to raise the terminal rate further, perhaps,

at the next meeting. Of course, he's not committed to that. I think that's very unlikely when you start to see these inflation trends starting to become much happier. I mean, in the last two months, what's really happened is we've had CPI miss on the downside on the monthly number. And that's what's stoked some of these relaxations in the markets with rates going down. And, you know, everyone thought back in September when the S&P was at 3550, everybody and their brother, including me, thought maybe a plausible target was 3400. Now it feels like everybody thinks the S&P is going to 4200. That seems to be baked in or 4250.

That seems to be just about everybody's consensus case. I doubt we make it that high with this economic situation and with earnings now being meaningfully causing worries about significant declines in the first part of 2023. In terms of whether the Fed has to come, you know, meet the market, so to speak, and that the market is right, Steve Leisman earlier suggested that in order for that to actually be the case, the Fed would have to cut rates next year, which you actually think they will. At your recent webcast, you said you think the odds are probably greater than 75 percent that there's a rate cut

in 2023. Do you still believe that after listening to the Fed chair today, who you could easily make the case suggested otherwise? Let's not get too excited about forecasts. I mean, a year ago, the forecast was the Fed might go to 1% this year, and obviously we're way higher than that. So I just think the economic conditions are going to be such that the fed is is committed if they said in plain english repeatedly now for months that they're going to make this we're going to get the job done is one of the emphatic answers that jay powell gave so that means uh that means they're going to be uh hammering the economy even just keeping rates where they are. And I think they're unlikely to stay on pause in February. So we're looking at another ratchet higher. I just think that's enough.

It's the same old thing. You know, we started out with paint or get off the ladder back in February, March of last year. Now I just feel like maybe they're supposed to take a pause. I laugh about that Crown Royal ad where they're taking shots in a bar and referee walks in, blows a whistle and says, everybody, your next drink is a water. And I feel like we've been doing metaphorically a lot of shots here with these Fed funds rates going up. And I think the Fed's starting to realize that want to feel their way, sit back. But it's going to the economy is going to weaken. I think the Fed's starting to realize that want to feel their way, sit back. But it's going to the economy is going to weaken. I think that's already happening on many fronts.

And that's at some point they're going to realize that growth and jobs and other things are more of a concern than they're feeling now balanced against the inflation rate. So the inflation rate is relaxing. So so you're suggesting that you don't think the Fed should do any more hikes at all after today? I think they should not do any more hikes after today. I've been, as you know, I say this like a mantra, the Fed follows the two-year treasury. And the two-year treasury is below the Fed funds rate right now as we're speaking, Judge. So I think they'll probably do another 25. I thought it was very interesting to kind of feel our way, wait and see attitude. But once that inflation rate dips, and I want to say one more thing about inflation. The inflation rate forecast is that you're going to get the inflation rate down to about 3% or 2.5% even

by the end of next year. And then everybody's forecast predicts that it's going to just stop right there and go dead sideways for the next three years, which is completely implausible. The inflation rate never goes dead sideways, even when it's in something of a range of 100 basis points or so, it's bouncing all around. I just think that with the resolve and the desire to keep rates high, perhaps on an extended basis, I just think that the inflation rate, if you get it making the progress that's so-called clear and convincing down towards two or two and a half percent, I don't see any reason why it would stop there. I just think that

when you have that kind of momentum going from nine down to two and a half, which seems like a stretch it's going to get there, some people are forecasting that, why would it just stop there? I think it might actually go down to zero or something like that. And this is one of the reasons I think bonds are rallying. The bond market knows inflation's coming down. Bond market knows that the Fed has gone a long way and the variables are, you know, are long, the effects are long and variable. And we've done a lot of work here. And we don't have a clear accelerant in any sector of the economy but what

sector of the economy is supposed to really uh keep uh momentum going that's why the fed is basically a zero gdp forecast and once that starts to happen you know i i think you start thinking about uh easing easing rates and when the yield yield curve's inverted, it's a signal all every time that the economy is weakening and the Fed is at the end of the tightening cycle. It seems as though so many are talking about the degree to which inflation is coming down, except for Jay Powell himself, where he says today, quote, we've made less progress on inflation than anticipated. Ongoing hikes are appropriate. Continue to see risks to inflation as to the upside. He even used the words himself tighter for longer.

Early in the statement, there was talk about, you know, food prices, energy, things that are obviously coming down. Is he missing something? He just wants to maintain the inflation fighting credibility that he fought so hard for back in the summer and at the Jackson Hole thing and at some of his past couple of meetings, a couple of meetings ago. I don't really understand why he says we're not making progress on inflation. He should have said that a year ago. He should have started tightening a year ago, said we're not making progress on inflation. But there is progress on inflation. It is, I mean, sure, some of the core numbers are understandably, because of the construct, are a little bit stickier. But the CPI is falling year over year 200 basis points. And it's going to fall another 300 basis points in the next six months.

So I don't really understand why he says that other than to just redouble his commitment. Just like I said earlier, he starts his statement with we're going to take inflation at 2 percent. We're not going to stop. We're going to work until we get the job done. And I think it's a little bit, I don't know, self-deprecating that he says we're not making progress on inflation at this point. Because I saw Gary Cohen on a show earlier. I thought he made a really good point. He said, you know, eight months ago we were talking about lumber, right? We were talking about container ship prices.

We were talking about all these things. And no one's – we were talking about oil, you know. And now we have oil near a 52-week low last week. We're talking about all these things and no one's we're talking about oil, you know, it up. And now we have oil near a 52 week low last week. So I mean, I think I think there has been some progress on inflation. Nobody's really talking about all of these runaway price increases anymore. And with the economy weakening, I think the inflation rate is going to fall faster than

most economists do. But you and Gary Kohner are obviously on the same page because you guys are talking about the same thing of the market being more right and that the Fed is eventually going to get to where the market is. The other thing we need to discuss are the cumulative effects of all of this, as you have been discussing. In fact, you did in your own webcast this week where you said the effects of these rate hikes and the accumulation of quantitative tightening and draining of liquidity from the bond market are going to make 2023, in my view, probably a recessionary year. You've told me about this copper gold ratio, which you use to be a good indicator, maybe the best that you like to look at. But, you know, where Powell says a recession is not set in stone, have you already chiseled it in in your stone?

I think it's a better than 75 percent probability. There's two things that people aren't really talking about that really make a difference. No one talks about M2 anymore, money supply, and it's growing at a super slow rate in fact the six month rate is negative and i think the year over year rate the 12 month rate which i think has less significance but it's interesting that's down near zero as well so there's not a lot of liquidity out there and making liquidity more difficult obviously is the fed raising rates but no one also talks about uh enough quantitative tightening. Jay Powell said $95 billion a month. I mean, this is a lot.

This hurts liquidity conditions. It hurts the economy. It makes a headwind for the stock market. I've used for years the chart that shows the size of the Fed's balance sheet overlaid against the level of the S&P 500. And, of course, they deviate from time to time. But the broad patterns are very clear to the eye. You don't have to run an R-squared correlation matrix. You just look at it and say, look, when this Fed is shrinking its balance sheet, it gets hard for liquidity

conditions. And it's reflected by headwinds for the stock market as well. So that's kind of where we are. So I do think there's a recession coming we obviously have a housing recession and some and we have durable goods that need to retrench services will people spent of their money on the revenge travel in their services and hospitality and put on the credit card we had we've had months and months of increasing credit card balances

you'd be in a revolving credit being used increasingly every month sequentially. For months, we had excess savings. Now we don't have excess savings. We have borrowing. So I just think the conditions are very late cycle, and just about everything looks that way except employment, but it's a lagging indicator. And when that unemployment goes above its 12-and-moving average, that's sort of recessionary. So what's strong in the economy? It's the labor numbers and more recently, the spending on services. But the spending on services is borrowed money. I just can't find the accelerant to the economy. I guess the one thing you might, you know, you might get,

I guess, maybe a weaker dollar would potentially contribute to that. But we're going to talk about that. We'll talk about that as well. And some investing opportunities specifically based on the view that you have. Let's sneak in a quick break, Jeffrey, if we could. When we come back, we'll have much more from the DoubleLine CEO, Jeffrey Gundlach. Josh Brown is going to join us, too. First, our Twitter question of the day. Will stocks be higher or lower by the next Fed decision? You can head to at CNBC Overtime to vote. We'll bring you the results later on in the hour. We're back in just two minutes. All right, we're back in overtime. Our exclusive interview with DoubleLine CEO Jeffrey Gundlach

continues. The Fed chair was asked about their two percent target, Jeffrey, and I want to get your reaction to a tweet from Bill Ackman a short time ago in which he says, quote, I don't think the Fed can get inflation back to two percent without a deep job destroying recession. Even if it gets back to two percent, it won't remain stable there for the long term, excepting three plus minus inflation is a better strategy for a strong economy and job growth over the long term. What's your reaction to that? I think he's kind of channeling on that question that was asked of Jay Powell. Maybe I'm thinking about raising your long term inflation target. And Jay Powell,

with no surprise at all, said no chance we're even thinking about thinking about that. He'll pass that on to the next chairperson, I think. But I kind of secretly believe that the Fed's inflation target is probably more like 3 percent right now. I think to get to 2 percent, this is one of the reasons I say the conditional statement, that if we get down to 2, I don't see any way it's going to stop there. It would just be so much momentum to the downside and so much unemployment, as Ackman says, that I just don't know if they really want to go that far. I kind of secretly thought that when they said they want to get into inflation back to 2% back in 2020, I think they really wanted to get to 4%. They just don't always articulate the moving of the target

because that makes them look weak. It makes them look indecisive. But I think the Fed would be very happy if the inflation rate went down to 3% and stayed around there. But they're just not going to acknowledge that. So I think Ackman's probably right on that. And the Fed, I think in this case, isn't being completely transparent. Interesting. So let's talk about specific investment ideas. Dave Zervos, who was on the prior program, said there are more interesting opportunities in credit than equities. You can get equity like returns in parts of credit right now without taking on equity risk. Certainly looking into the new year that obviously plays right into your wheelhouse and knowing you and what you do for a living.

I'm sure you would agree with that. But what is the most interesting part of credit right now? If you believe like he does, that opportunities exist there better than they do in the stock market. First of all, I do agree with Zervos on that. And I've been talking about that exact point for the past couple of months, that you had an incredibly different opportunity set in the fixed income market today than where you had a year ago. A year ago in fixed income, to get a 5% yield, you had to leverage junk bonds and hope you didn't get any defaults because their yields were around 3.5. You had to leverage them almost 50% to get there. And roll forward to a couple of months ago, and there were double-digit yields all over the place in the bond market, and you had already had a 50% drawdown on the long-term treasury. And those things happened

simultaneously. So interest rates went up, making bonds more attractive. Of course, inflation went up too. So you have to factor that in. But yields went up and the spreads on credit products widened in some cases pretty dramatically, for example, in emerging markets. And so I started to advocate at that time a mix of long-term treasuries together with some of these exposed credit sectors. So double B corporates, single B corporates, some structured products, some commercial mortgage-backed securities. When you say things like commercial mortgage-backed securities or consumer receivable asset-backed securities, people immediately break out in hives. They say, oh, but that's the economy that could be stressed

during the recession. Of course it is. That's why they're cheap. Things get cheap when there are obvious risks. Where you have problems in fixed income is when there are risks, but you don't see them or they aren't being contemplated. Now, some of these, that strategy that I advocated has worked pretty well. I mean, already, treasuries, long treasuries are up, you know, 12% or so since then, because the rates are down significantly. And the credit market spreads have come in as well, leading to some like 8, 10, even 12% returns in just two months out of fixed income. So the super low-hanging fruit isn't there anymore, but I still think it's a top quartile type of attractiveness, particularly versus stocks. You facetiously, Scott, said that you knowing what I do for a living, I'm going to, of course,

save bonds opportunities on a risk-adjusted basis, but it's not true that I always say that. In January of this year, I talked about how overvalued the S&P was on a valuation basis versus its own history of like P.E. ratios and stuff. But I said at that time they were very cheap to bonds because the yield on bonds was so ridiculously low entering this year that as overvalued stocks were versus their own history, bonds were even richer. Well, that's completely changed. So you've gone now to a situation where you can get an income stream from a mix of long treasuries, which protects you from the recession. So it allows you to own some of these credits. You can easily put together an 8% yielding portfolio, which is fairly balanced in terms of its risk. It's gone up in price in two months, so it's not as attractive as it was. But that's about four times the income stream off of stocks. And you're buying

bonds now because the prices are down so much. I mentioned that the 30-year Treasury had a 50% drawdown. It's now more like 40%. Still, it's a big drawdown. So you can put things together. And when you buy bonds at prices of 50 or 60 or 70, you have tremendous upside because bonds have this natural ability to go back to par. If they're going to pay back, they're going to go back to par. And so you have tremendous upside opportunities while having four times the income flow. And I have to believe that if the credit part of the portfolio does badly because of recessionary risk, it'll be offset by treasuries. And I have to believe that if the credit part of the portfolio does badly because of recessionary risk, I think it'll be offset by treasuries. But I also think that stocks will go down more than this bond kind of concept, mixing treasuries with sort of single B, double B

opportunities in the credit market. And I would also add emerging markets at this point in time. I think fundamentally, we still think they're challenged. But I like the fact that the dollar has peaked out. And that peak is getting quite convincing. And we're starting to see foreign stocks doing better than U.S. stocks in recent weeks. And we're starting to see emerging markets put up some pretty big numbers. But they fell so far. I mean, they were down like 30 percent. And they put a month in november of something like seven percent but still that dollar trend is very critical to investment allocation i've been talking to you for two years probably about the time will come when emerging markets are effective i think that emerging market debt should be part of that mix that should be part of the credit piece of the barbell portfolio of long-term treasuries and these credit opportunities.

I think it outperforms stocks on a risk-adjusted basis. I think your worst case, really, is a mix like this does about the same as equities. I think that's probably your worst case. Interesting. No, I just figured I was, you know, giving you the ball right at the rim, sort of asking the so-called bond king about whether he thought there were better opportunities in credit than equities. That's all. Josh Brown is here with me on the set, Jeffrey, and he'd like to ask you a question as well. Hey, Jeff.

Thanks for being with us tonight. Really appreciate it. Nice to see you. I wanted to ask you about international stocks as an allocation. Over the last three months, we've seen MSCI IFA up about 11 percent, the S&P flat. Very surprising. We don't see that often. A lot of that is probably the unwind of the dollar rally. Do you think that sort of thing might have legs? And do you think that's kind of an extension of the value versus growth rotation?

Should we not get too excited about that or could it be a sign of something bigger? Because for the last 10 years, IFA has lost again and again and again versus SPY. It would be really interesting if we get a prolonged stretch where that trend goes in the other direction. What do you think? I think the growth value thing has reversed from the 2020 extreme a pretty large amount. And so that reversal seems to be more complete than the one on non-U.S. stocks, in particular emerging market stocks. European stocks, if you take if you hedge out the currency which would have been pretty important over the last two years have actually uh outperformed the s p 500 moderately but emerging markets are very cheap and the dollar unwinding is clearly essential to emerging markets reversal as as you correctly reference and i think the dollar reversal has tremendous legs. I think it has legs because the Fed is incrementally going to be more dovish than other central banks.

They're going to be more dovish than they think, quite frankly. So I think that's there. And, you know, the budget deficit in the United States is going to be going up again, not only because of the losses at the Fed now and the interest rates the Fed is paying on Fed funds rates and stuff like this are higher than the balance sheet portfolio. So that's going to be contributing to the deficit. The Fed used to be sending money to the Treasury Department. Now they can't send money to the Treasury Department. And, of course, the recession will be a deficit problem.

And the deficit situation is going to be a real issue in the next recession. And I think that that's going to be way pretty heavily on the dollar. The dollar, you're absolutely right, Josh. The international stocks lost over and over and over again. And we got to this place where the U.S. stock market was supported tremendously on free money and speculation, I think I would actually just look at Bitcoin to underscore how much speculation is behind the price movements and how much speculation was behind the stock market, Bitcoin, everything else in response to all the government money. I wish the government would stop stimulus just

outright. And as Gary Cohen pointed out, they're not really there yet. I wish they would be. It would make Jay Powell's job a lot easier. But I think I would advocate non-U.S. stocks. I bought some European stocks a couple of years ago. They haven't hurt me at all. They haven't really helped very much. But I think if you're looking for asset allocation for a real investor, I'm not talking about for the year 2023 i'm talking about for a five-year horizon maybe even a 10-year horizon i think you want to own these emerging market equities their schiller cape ratio is less than half that of the s p 500 and it looks to me like the dollars peaked and the emerging market trend is reversing versus uh versus u.s equities

i would not invest in china however as a dollar based investor i think there's too much too much geopolitical problems there and uh... you could you could you could win but not be able to cash the ticket if you know what i mean images kept in my stop you know if if the investment loses you're holding the bag of the investment wins are going to take it away from

will make that the last word uh... jeffrey thank very much. I wish you a great end of the year. Happy holidays. January 10th is your big webcast. We'll be listening in there and we will look forward to spending the next Fed Day with you among all those that lie ahead. Thank you. All right. Thanks, Judge. Big bills game coming up this weekend. I'm hoping for a big W there. Good to see Thanks, Judge. Big Bills game coming up this weekend. I'm hoping for a big W there. Good to see you, Judge. All right. You as well. Be well. Yep. That's Jeffrey Gundlach of Double Line joining us in yet another CNBC exclusive interview. It's time now for a CNBC News update. Josh is going to be back with us, of course, in a little bit, too. But Frank Collins here now with the news. Frank. Hey there, Scott. Here's what's happening at this hour. More tornadoes from a massive storm ripping across the U.S. in southern Louisiana.

Two funnel clouds were seen merging as a nearby hospital was damaged. Earlier in the day, police blamed another tornado for the death of a mother and her son. The eight-year-old was found a half a mile from where their home was destroyed. Across northern parts of the Great Plains, crews are busy clearing inches of snow from busy roads. Parts of South Dakota were hit with more than two feet of snow. The storm is expected to bring harsh conditions to the eastern U.S. in the coming days. And an investigation has found widespread misconduct directed at the players of the National Women's Soccer League. The probe was commissioned by the

league and its players union. The report details emotional abuse and sexual misconduct involving multiple teams. It also found instances of sexual abuse and manipulation. The league's commissioner has apologized for systemic failures in protecting players. That's the very latest. Scott, back over to you. I appreciate that, Frank. That's Frank Holland. Thank you very much. Up next, much more on today's market action as the Fed signals more rate hikes are ahead. We'll break down what it all means for your money next in Overtime. We're back in Overtime. Stocks pulling back as the Fed raises rates by a half point,

signals even more rate hikes are ahead. CNBC contributor Josh Brown, Ritholtz Wealth Management, as you know, was here for our conversation with Jeffrey Gundlach. So you heard what he had to say. It's good to have you here to react to this headlines from him. Fed should do nothing more. Stop now. And that we're going to have a recession, that there's a 75 percent chance. What do you make of what he said and what you heard from the Fed? So that camp has been growing and we hear that again and again. And it's not people

predicting the worst recession ever, because the one thing that you continue to hear is either rolling recession meaning different industries experiencing at different times which i would argue were in the midst of go tell somebody the mortgage business we're not a recession the left your face outside totally agree with that idea the other idea is mild recession and mild recovery because the tug of war

of full of of of the largest forces that would influence that outcome is going to be one for the ages. Now you're in a situation where no matter what you do, the hurdle rate is going to be 5%. Do I buy this stock? Do I buy this fund? Do I want international stocks? Do I want large cap? Okay, will it do better than 5%? Sleep at night, absolutely no volatility, no risk. How many investments can you really say that about? So very oddly, the meme that's taken the market is, I want slow growth, reliable, high quality, dividend, high cash flow. I don't care about growth.

I don't care. I'm not so sure that's going to be the case throughout 2023. Because one of the things about markets where economic growth is tough to come by, the companies that do have a secular growth story actually tend to capture our imagination. And you're going to see some growth stories that don't require the Fed to be, quote, on our side. So I think it's going to be a little bit trickier than just buy the most conservative stock, she'll be fine. That's what's worked in Q3 and now in Q4. I don't know that that's definitely the case next year. What sectors are you thinking about will do better than others in the environment in which you describe a mild recession, mild recovery, muted stock returns? if you are involved in names where they have a secular growth story that is not reliant on the

Fed turning dovish or GDP growth beating expectations or any of the things that are probably going to be tough to come by in the first half, those are the types of stocks that other people are going to discover after you and pay higher prices for. Because again, growth will be scarce. And in the end, everyone's got to allocate somewhere. So, look, tell me, if you have an investment story you want to tell me, tell me why that is materially better than buying the BIL ETF at a 4% yield and not worrying at all about volatility. It's a tougher game to play than the game that we've been playing since 2012.

What do you make also of what Jeffrey said in response to your question about international stocks versus U.S.? I think it's interesting. You have high yields. You have companies that some of – if you look at the European indices, for example, what are they overweight in? They're overweight in all the right sectors that the U.S. – that are working in the U.S. They're overweight in banks. They're overweight in all the right sectors that the U.S. that are working in the U.S. They're overweight banks. They're overweight mining, believe it or not. They're overweight energy relative to what we are in our indices. So it's not necessarily all a dollar differential or interest rate differential story. Some of this is about literally industry group concentration

in those indices. You would if I told you how well the FTSE was doing, you wouldn't believe me. It's shocking. Well, because the narrative is the recession in Europe is going to be longer and much deeper than it is if we even have one here. Look, the years where Europe does great and the U.S. is struggling are few and far between. I actually can't even think of one. However, if you've got this continued value trade in favor and the industries I just explained, if those continue to remain in favor, there's a very good argument why IFA could outpace the United States. And by the way, you're paying a much lower valuation to find out. We're looking at the chart right there. Let's expand our conversation.

Bring in Mira Pandit, global market strategist at J.P. Morgan Asset Management. Welcome. It's nice to see you here today. So what's your reaction to what you got out of the Fed and what's your investment idea, given what you saw and heard? Well, it was a surprise to see that that terminal rate moved up to 5.1 percent as a potential for next year. But yet the bigger surprise to me was the distribution of the dots when we take a look at the dot plot. Because if you look back in September, zero members of the FOMC thought the federal funds rate terminal rate would go above 5 percent. Now you've got 17 of 19. Now you have 17 of 19. Not only that, but if you look at that dot plot more carefully, seven people also said above five and a quarter. So it's clear that this debate over the terminal rate is going to continue

into next year, which means that we're going to continue to see volatility in both stocks and in yields. Right now, I do think in the short term, yields need to reprice a little bit more, three and a half percent or less on the 10-year, 4.2 percent on the two-year. It doesn't really reflect an environment in which the Fed funds rate is near 5 percent. But at the same time, if we do end up in a recession at some point next year, which I do believe we will very likely, then that is an environment in which yields can then come down more substantially. So I do think that legging into a bit of duration, higher quality bonds is one that will help protect portfolios in the new year. You're referencing this disconnect. We want to use that word, between the Fed and the market, you heard Gundlach and many others suggesting, including Gary Cohn, who was on prior to us, saying that the market is right.

The market's going to be right, and the Fed's going to come back to the market. If that is in fact the case, what does that mean for equities? I think the Fed's biggest fear at this point is not moving from 7% inflation to 4% inflation, but it's what happens when we get to 4% and how quickly can we get below that closer to their target. So I think the Fed has to talk tough in the interim to make sure that inflation expectations continue to stay well anchored and potentially move lower. And they need to convince the market that they are going to be tough on inflation and prevent any sort of drift back higher, that they're going to continue to be very persistent and resolute. So I'm not surprised to necessarily see them want to

gear towards hawkish. You know, fool me once, we saw them be quite hawkish in Jackson Hole in their November meeting. We didn't really see that at the Brookings meeting. And I think that, therefore, we were primed to see a pushback on financial conditions this time around. But I do think that when we think about the markets next year, look, if the Fed doesn't come in as strong as they say they are today, maybe that could provide a little bit of a relief rally. But we're still going to be very restrictive on rates. And that's still going to be a headwind for the equity market next year. One of the things that we really benefited from is that everyone was able to refinance and

refinance over the last couple of years. And we really just don't have this economic slowdown being accompanied by blown up balance sheets, massive bankruptcy. In fact, the most of the high yield issuers are energy companies, and arguably they look better than they have in any previous recession. But you do have a wall of maturities, probably the end of 23 going into 24, where all of a sudden that could become a fear if we're actually in recession. How do you guys express that idea to clients about, yeah, everything looks calm now in corporate credit, but it's not going to go on like this forever? How does that work?

If you're allocating to credit right now, you certainly want to be in the higher quality areas in that investment grade space, not in the high yield space. We've actually seen that high yield spreads have tightened for the last eight to 10 weeks, and we would expect them to widen quite considerably in a recessionary environment. Even if we look at spreads during non-recessionary times, we're about 58 percent of that peak in the high yield market. So we really need to see spreads widen quite a bit from here in order to get comfortable with pricing, to feel comfortable with that risk reward tradeoff. So right now, we would certainly gear more towards the investment grade over the high yield, again, really leaning into that quality. I do take your point, though, that some of the fundamentals in the high yield market look better. It will become attractive. But right now, we don't want to get too greedy with yields. You know the saying goes, don't fight the Fed. And I'm wondering if that's about to turn. If you do believe, like Gundlach and Cohn and others are

suggesting that the market is going to be right, at some point, is it going to be right to actually fight the Fed and figure that they're not going to be able to do what they say, that they're not only going to pause, they're going to be forced to pivot. And at some point, and I don't know when that date is, that it's going to be more prudent to fight the Fed rather than not. Well, what we know about how markets move is they tend to bottom in advance of a recession, in advance of earnings bottoming. So if we're starting to see some of that looming as a result of some of the Fed's actions, we don't want to reposition portfolios too late. In fact, if you want to be a little bit more defensive, a little bit more cautious,

the time to do it would have been this year and kind of stick with that plan into next year. But we could also be in a position where you tend to not see multiples and earnings both decline in a given year. So next year could be the year where earnings decline, but multiples actually start to pick up because markets are forward looking, looking beyond what some of this action could could entail. And I do think while the Fed has pushed back a lot on we're not going to cut rates in 2023, if we are in a position where inflation is closer to 3% and where growth has slowed down and we're actually in recession at the end of 2023, it's going to be a little bit hard for the Fed to keep rates above 5%. Right. Even if they go to 4.5%, 4%, you're still pretty restrictive in that environment.

So I do think that the Fed is forecasting a little bit differently than they may eventually act given how quickly inflation probably is going to come down. You know, we see inflation kind of shaped like the Eiffel Tower, rises very sharply, falls very sharply. So I think the path from 7 percent to 4 percent on inflation is one that we could see and reach quite swiftly by, I agree with Jeff Gundlach, probably the summer. The question is, and I think what keeps the Fed up at night, is how do we get from 4 percent closer to the Fed's 2 percent target? And is that 2 percent target achievable without a recession? And to his point, whether you just blow right through that, why would you stop even if you get to 2 percent? But we're going to see how it all shakes out. It's great having you here.

Thank you so much, Amir. Josh, thank you as well for being here, sticking around, too. We'll see both of you soon. Up next, we're breaking down the biggest stock moves in overtime. And later, Santoli is here with his last word reaction, of course, to the Fed. Our interview with Jeffrey Gundlach. We're right back. All right, let's track the biggest movers in overtime now. Christina Partsenevelos, of course, is here with that. Christina. Let's start with shares of Warner Brothers Discovery. C-sign right now in the OT after the company said it expects to take a bigger write-off than initially expected as part of the company's restructuring following the merger with Discovery. In a filing, Warner Brothers Discovery says it will need to write off an additional $800 million in content and development costs. The company says overall restructuring costs will now be between $4.1 and $5.3 billion.

Shares are off about half percent right now. Shares of Novavax right now, though, that's another story, down over 11 percent, double digits after announcing it will sell $125 million of its common stock, along with an offering of convertible senior notes. So this is unsecured debt securities that are purchased by institutional investors. The company says the proceeds from these sales will go towards paying down debt, clinical trials, and other corporate stuff. Last but not least, another common stock offering, sending shares of New Fortress Energy lower in the OT. The company saying it is selling

nearly 7 million shares, about 3.3% of its outstanding float. The liquefied natural gas firm said the company itself is not selling any shares. So a little bit of a different story there compared to Novavax. Shares are down over 4% for Fortress Energy. Scott. All right. Thanks so much. Christina Partsanova is still ahead. Santoli's last word when we come back. Last call to weigh in on our Twitter question. We want to know, will stocks be higher or lower by the next Fed decision? Head to at CNBC Overtime to vote. The results plus Santoli's last word is next. The results of our Twitter question are in. We asked, will stocks be higher or lower by the next Fed decision? Slim margin, the majority of you saying lower. But it was a pretty close race until the end.

Let's get to Mike Santoli for his last word. What do you make of everything today? Everything? Well, everyone talking about the apparent divergence between how the market is looking into next year and how the Fed is saying next year is going to play. This supposed disconnect. And there is one, obviously. But what the market knows is it's seven weeks until the next Fed meeting. It's a pretty long stretch. It's early February. The average time between the final hike in a Fed tightening cycle and the first cut is five months.

OK, it's not because the Fed a year in advance said, well, we're going to finish tightening here and then we're going to start to cut. It's because the cycle happens. So the market is pretty much pinning its hopes and expectations on downside momentum and inflation enough so that the Fed doesn't have to make good on its promise to be hawkish continuously to get rates above 5 percent. So that to me explains it. And, you know, from from months and months, I've been saying everyone's been saying Powell's going to talk hawkish until the moment that kind of he has no choice but to not be. Or the data get better.

It's all about the inflation numbers. It's not about what they think the neutral rate is, whether we're restrictive yet. It's about what the numbers tell us. The question is, does something break in the interim? That's right. Yeah. And does the economy? And are they going to be correct?

That's what I mean about breaking. They're trying to take a million and a half job losses and get unemployment up to four and a half percent before we can get traction to the downside on inflation. Yeah, that's why it's a tricky environment, but not necessarily one that the Fed is going to force the economy into anything or not. If we get lucky on inflation the way we got unlucky on inflation all 2022, then it's a it's a more benign story. We'll have to be talking about, you know, the chances of a recession now, a chance of the Fed making a major error. We'll see. I'll talk to you tomorrow. That's Mike Santoli. His last word, fast money, is now.