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Jeffrey Gundlach on where he sees opportunities in the market

Jeffrey Gundlach, DoubleLine CEO, joined Yahoo Finance's Julia La Roche for an exclusive interview to discuss his market outlook, inflation, commodities, and bitcoin.

Video Transcript

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ADAM SHAPIRO: Yahoo Finance's Julia LaRoche speaks for some of the biggest names on Wall Street and in finance, and she's speaking today with bond King Jeffrey Gundlach. So let's go to Julia now live. Julia? [WHOOSH]

JULIA LAROCHE: Well, thank you so much, Adam. And Jeffrey Gundlach, founder and CEO of DoubleLine Capital, thank you so much for having us here for your Investor Days. So I think it's best to start with your overall view of where we are in the markets. What do you make of what's transpired over the last year plus?

JEFFREY GUNDLACH: Well we've had a relationship between the Fed growing its balance sheet and the value of the S&P 500 that's been in place for years now, ever since they started quantitative easing. And it's almost like a law of physics. It's like if you take the capitalization of the S&P 500 and you divide it by the Fed's balance sheet, it looks a lot like a constant.

And so once the Fed started quantitative easing, that reversed the stock market's collapse from the pandemic. And they haven't-- they slowed it down a little bit because they were doing it at such a breakneck speed. But now, they're continuing to do it, and so the stock market continues to be supported by that.

Also, the valuation of the stock market, even though it's really high by historical comparisons, we also have very low bond yields relative to inflation, particularly this week. We have, you know, the CPI came out at 4.2 year-over-year, and then, the PPI is up to 6.2 or something like this, and bond yield on the 10-year Treasury is at 1.65-- so the yields are so negative.

So when you look at the classic relationships, like PE ratios look elevated. The Dr. Schiller's cyclically-adjusted CAPE ratio is kind of matching those of all-time highs. And yet, weirdly, if you look at E divided by P, which is the yield on stocks, it's below average in terms of its valuation versus bonds.

So the Fed has been manipulating markets for a long time. And on top of that, obviously, we've had incredible amounts of free money, fiscal stimulus. Last month, there was another round of checks, and I don't think a lot of people are aware that about 1/3 of last month's personal disposable income was given by the government.

Also, the government is running a deficit that's about 30% of GDP in terms of their spending. And they're only paying for a little less than 1/2 of it. So there's a lot of distortions that are going on, but with the money that's flowing, it's helped to distort many economic series, and also the value of most asset classes.

JULIA LAROCHE: I was going to ask you if we've move beyond markets. You're talking about distortions. Where are you seeing those distortions taking place in the economy?

JEFFREY GUNDLACH: Well, the housing market's a good place to start. Home prices are up very strongly over the past 12 months. I think the median home price in America is up 17% year-over-year. And there are some markets that have been particularly attractive for people that are, maybe, rethinking their life in view of the pandemic that are up 30% or 40%. So there's a massive distortion there.

Also, we have this strange thing of 8 million job openings. And everywhere you go, people are saying, businesspeople are saying, I can't fill them; no one will take them. And it was obvious when they started these money giveaways that there was going to be an issue, because right away, everyone noticed that a certain fraction-- that was not trivial-- of people are making more money sitting at home watching Netflix than they are at work, and they don't want to go back.

I think one of the dangers that we've opened the door to is these stimulus checks are starting to feel like they might not go away. They seem like there's always another round of them. In fact, this week, Gavin Newsom, the governor of California, announced $600 to people that are making less than something like $75,000 a year, because California-- thanks to the government money-- has gone into a large surplus of their budget, at least temporarily. So now, in New York, the City of New York and State of California, a lot of people are getting $57,000 per year tax-free by not working. So there's a lot of distortions there.

We've seen big distortions, partly due to government programs, but partly due to the pandemic. We've seen a lot of distortions with automobiles not being available. I actually bought a truck a couple of weeks ago, and the lot, the car dealer-- it was a big car dealership-- they had no new trucks. There weren't any.

Now, that's partly due to the chip shortage. But all he had his entire lot were two used trucks. And the price-- the one I bought was used with 8,000 miles on it-- the price was only $2,000 less than the sticker price of a new truck. And the fellow who sold it to me, he claimed-- and I think I believe him-- that he was doing me a favor, because he probably could have sold that truck, thanks to shortages, for more the manufacturer's sticker price. So a lot of distortions.

Also, average hourly earnings are very distorted, because a lot of the people that were displaced from their jobs were the lowest wages. So when we look at economic statistics, we have to understand that there's been a huge mix shift. The types of people that are in the mix of average hourly earnings are higher baseline job earners. So average hourly earnings looks like they really spiked, but you have to take the mix shift into consideration, and it's kind of hard to do that.

So I was talking to Felix Zulauf today, and we were talking about how murky the crystal balls have become, because we have such different data sets than what we had historically-- thanks to the sudden shock of the recession, but also the way it was very unevenly felt in the economy. My profession-- you know, investments and finance-- actually hasn't had any growth in unemployment at all. But when you go to, you know, obviously, casino operators and Carnival Cruise Lines types of people, they have a very large shock that's taken place.

So we're trying to figure it all out, and it seems to me that interest rates are starting to get loosened up a little bit on the upside. We had that incredible decline where the long bond in the United States went to exactly 1.00% intraday, you know, and now, it's up at 2.4. So I don't think a lot of investors are aware how much money has been lost if you panicked into Treasury bonds back last March or April. I mean, we're talking about losses that are pretty substantial-- about 30%. It's equity market type of losses, and your potential reward was a 1% interest rate per year for 30 years. So lots of imbalanced risk-reward was brought on by the Pandemic

JULIA LAROCHE: You have to kind of wonder, like, who wants to own government treasuries right now?

JEFFREY GUNDLACH: The Fed. The Fed is the one that wants to own them.

JULIA LAROCHE: Yeah, can we talk about inflation for a bit? This is such a hot topic right now. And we hear that the two sides of the debate-- that it's transitory, others who say it's going to be more rampant. When are you going to start to get worried about inflation and the consequences?

JEFFREY GUNDLACH: I think it feels to me like the market started worrying about it a little bit this week, because the CPI print of almost 0.9-- I think was 0.9 on the core and 0.8 on the headline-- was the biggest mistake on CPI in many years, maybe even in my whole career. The guess was for 0.3, and it comes out at 0.8, 0.9. And that really shocked everybody.

We have a model of inflation at DoubleLine that's quite helpful for a few months forward. It goes off of a couple of variables, and it's been quite accurate. We knew that inflation was going to go above 3 and 1/2, but we thought it was going to be in a month or two. And so the fact that's already leapt up to 4.2, I think, I believe, in our model that it's probably going to go higher in the next couple of months. The peak might be in July.

If we keep going higher from there, then I think people are going to be seriously worried, because the concept of transitory has everything to do with what they call base effects. You know, you came off of very low numbers, and it's almost like Mount Whitney is right next to Death Valley for a reason. You know, a big hole in the ground, the dirt has to go somewhere. Inflation got so low that it was a natural rebound.

But one thing is to think about, the CPI is kind of a false construct. They use things like owner's equivalent rent to calculate shelter inflation, and owner's equivalent rent for the last 12 months is up 2. But the median home price is up 17. So if you would replace owner-equivalent rent with home prices, the inflation rate actually would have been 8% year-over-year. So there's reasons, really, to worry about inflation.

The Fed, I think, likes to talk about transitory. I think the Fed is most content when the inflation rate is higher than the bond yields all the way across the yield curve, which they've managed to accomplish. So they're trying to make people not scared about inflation by calling it transitory, but how do they know? How does anybody know whether it's transitory or not, given the unusual circumstances that we're in?

Don't forget that Ben Bernanke, way back in the day, he had a completely wrong interpretation of the dire nature of the mortgage crisis. He said it was confined to subprime, and it was many, many times worse than that. So I'm not sure how they know it's transitory.

Kind of when they all say the same talking point, it starts to sound like some of the mainstream media, you know? Where every single guest from either the tribe on the right or the tribe on the left has the same talking point. So you wonder if it's just a brainwashing mechanism that the Fed is trying to get investors into on this transitory stuff.

But I'll get worried if the inflation remains elevated through the summer. And I think the bond yields would start to test the Fed's resolve. They say there's no limit to their quantitative easing and stuff like this. We'll see, because if the rates go up, the few buyers that there are for Treasuries-- foreigners have been selling for years, domestics have been gently declining in their ownership. All you got is the Fed.

And so with all of the debt that we have-- which is, you know, it's really-- the deficit's really-- the true deficit is about 20% of GDP. Absorbing those bonds if inflation stays high is going to be a really big problem. And if you can't absorb those bonds and the yields are allowed to rise, well, that's going to be really trouble, problematic for the valuation of the stock market, which is depending on zero short-term interest rates and suppressed long-term interest rates via quantitative easing.

JULIA LAROCHE: I want to go back and talk about-- we were just discussing stimulus and, you know, the enhanced unemployment. And you were talking about maybe the stimulus, it might seem that's going to continue. Do you think we're opening the doors up for UBI?

JEFFREY GUNDLACH: I do. I mean, I think we're already there. We had basic income way back in the 1960s that's still with us, with welfare programs and the like. And now, we've been expanding it and expanding it.

And yeah, I mean, there's a lot of conspiracy theories that typically should not look attractive. But with the deficit going up so much and the debt now pushing 29 trillion, you know, how-- it's almost like they're moving into UBI and even sort of a wealth tax sort of situation by having the deficit so big that where are you gonna get it from?

But yes, UBI has been expanded. It hasn't shrunk at all. We started out, you know, with checks from the government. I thought was gonna be-- people thought it was gonna be one. It was gonna be a few months of unemployment, further assistance, and it's been extended and extended. And not only is it being extended, it's being increased, as I just said, in California. And the federal government, my guess is that they're ready to roll out another one, because that's just been the pattern.

I was most struck when President Biden signed the bill. I think you kind of lose track, there's so many of them. But it's the $1.9 trillion one, and it had some benefits for certain parts of the economic structure in America. And it took all of three days for Nancy Pelosi and Chuck Schumer to clamor for those stimulus checks to be permanent.

So they've already talked about the permanence of this type of stimulus. And people's behavior is already, I think, partly modified to kind of factor in ongoing government assistance. And the government doesn't seem to be discouraging them from thinking that is gonna be here for a long time.

JULIA LAROCHE: I want to shift topics and bring up cryptocurrencies-- Bitcoin, specifically. I know you have commented on past webcasts about Bitcoin. We saw Bitcoin drop, I think it was something like 10%, because of an Elon Musk tweet that came out yesterday about no longer accepting Bitcoin for payments at Tesla as he saw the news, but they'll keep it on their balance sheets. What do you make of what's been going on in the Bitcoin space?

JEFFREY GUNDLACH: Bitcoin and the other cryptos have clearly been objects of speculation. And it had a lot to do, again, with the government money. I mean, remember the GameStop thing that happened, too, all these things? A lot of people are just playing with this funny money. And when you give people money that don't need it-- which, unfortunately, we've been doing a lot-- they feel like they're playing with the house's money, so it actually does resemble a casino to them psychologically.

Bitcoin, I thought, was really low at the beginning of 2020. I was really bullish on it. I went so far as to say I think it's gonna go to 15,000 when it was at 4,000. And I looked like an idiot by the summer, because it was still-- it was still languishing at around 5,000 or so.

But then, all of a sudden, it blew right through 15,000. And also of a sudden, it was 23,000. And that's when I turned neutral on it-- too early, obviously, because it's now double that, and it was nearly triple that. But it's moving around like crazy.

This is all based upon speculative fever. It's almost like every era of really highly-valued markets, after they've run a lot, has some sort of a poster child, if you will. You know, it was like some of the crazy dot-coms had no revenue that were coming to market very successfully in the year 1999. Here, I think it's really these cryptos.

And what I think is most interesting presently about Bitcoin is what you just alluded to, and that it's peaked. Now, maybe it's only temporary, that peak. But when you're looking at a speculative fervor, I look for the poster child to roll over last.

And so these things are-- you know, the NASDAQ is underperforming the S&P 500, and it has been for a while now. This year, year-to-date-- excluding today, because I didn't get the final prints-- the NASDAQ was only up 2%, and the Dow Jones was up double digits. And so that's another sign that some of the speculative fervor might be in the process of dissipating, because for the longest time, the Super Six, which powers the NASDAQ, were tremendously outperforming everything else, and they just aren't anymore.

So I was looking for-- I always look for things that are sustained trends that get out of hand, and then, quietly, without a lot of people talking about it, they roll over. And it's a sign that risk, risk would be increasing. And I'm feeling that the market's more at risk now than it was, thanks to the higher interest rates.

Interest rates, I think if we take out the highs on the 30-year-- which was around 2 and 1/2, or 2.55, I can't remember which-- but we're at 2.4 today. So we're one really bad day away from going to a new high yield on the 30-year. I think that that's something to watch out for as a risk factor.

JULIA LAROCHE: So I think our viewers who are watching would be interested to know, what do you see in terms of-- where are you finding opportunities, and what are you buying right? Now what's interesting to you?

JEFFREY GUNDLACH: Well, I've been very bullish on commodities, and they've gone up almost every single day for the last year. And it looks overextended. So I think that we're going to be taking a pause in the short term, probably, on commodities. I think maybe the dollar might have a little bit of strength for the rest of this year, having been in a range-bound situation, but recently most a little weaker.

One of my recommendations in January that I still hold to is for fixed income investing, I think that floating-rate corporate debt is good, like bank loans. There's the BKLN ETF, and it was having nothing but outflows during 2020 because people thought interest rates were going to be at 0 for the rest of their lifetime. But now, they're starting to factor in the idea that maybe interest rates-- even on the short end-- will ultimately go up.

And the bank loans actually yield about the same as longer-duration, or longer-maturity, other below-investment-grade credit. So I kind of like that. I think this will ebb and flow with the wiggles and jiggles of the market. But ever since we started DoubleLine, until about six weeks ago or so, we never owned any European stocks. We hated them. We didn't like their negative interest rates. We thought there were all kinds of structural problems in the eurozone. And we actually, thanks to the valuation and thanks to our longer-term dollar view, which is definitely a lower dollar-- and I don't mean this year. I mean longer-term view. And I think you're going to be better off in European equities.

So we actually bought some. And they've performed, this year, exactly the same or slightly better than US stocks. That's another one of these trends that seems to be changing. Just like the NASDAQ is no longer outperforming the S&P 500, suddenly, non-US stocks are not lagging anymore. They are in Japan and in China, but not in Europe. Europe is actually slightly outperforming, and that's another sign.

The thing that I think it's too early for that. I like longer-term is emerging market equity. Just the emerging markets are having significant problems with slower vaccination, with inferior health care systems, and really struggling. I mean, emerging markets aren't up at all. So we have, basically, the developed markets are doing well, and for now, the emerging-- and emerging will do well, but I don't think it's this year.

JULIA LAROCHE: Well, it's certainly something we will be watching. Jeffrey Gundlach, CEO of DoubleLine Capital, I thank you so much for your time. And for our viewers, we're going to continue this conversation, and you can watch that on yahoofinance.com. I want to send things back to Adam in New York. Adam?

ADAM SHAPIRO: Julia LaRoche, well done. Especially, I mean, there's so much you're going to be able to pull for that that our consumers will be able to watch on the platform-- the warnings about universal basic income, Bitcoin. A lot of great material there. Julia, thank you. Mr Gundlach, thank you.