There's reasons to be worried about inflation: Jeffrey Gundlach

yahoo finances 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 will you well thank thank you so much adam and jeffrey gunlock founder and ceo of dublin capital thank you so much for having us here for your investor days um 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 well we've had a relationship between the fed growing its balance sheet and the value of the s p s 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 from the pandemic and they haven't they slowed it down a little bit because they were doing 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 this the 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 classic relationships like p e ratios look elevated the dr schiller's cyclically adjusted cape ratio was kind of matching those of all time highs and yet weirdly if you look at e divided by p there's a 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 a third of last month's personal disposable income was given by the government also the government is running a deficit that's about 30 percent of gdp in terms of their spending and they're only paying for a little less than half 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 i was going to ask you if we move beyond markets you're talking about distortions where are you seeing those distortions taking place in the economy 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 percent so it's a massive distortion there also we have this strange thing of 8 million job openings and everywhere you go people are saying business people 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 has announced six hundred dollars to people that are making less than something like seventy five thousand dollars a year because the california thanks to the government money has gone into a large surplus of their budget at least temporarily so now in new york say 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 um partly due to government programs but partly 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 the car dealers 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 on his entire lot were two used trucks and the uh price that i bought the one i bought was used at 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 they was doing me a favor because he probably could have sold that truck thanks to shortages for more right than 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 looked 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 a felix zuloff 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 of the recession but also the way it was very unevenly felt in the economy my profession you know investments in finance actually hasn't had any growth in unemployment at all but when you go to you know obviously casino operators and and carnival cruise lines types of people if they have a very large shock that's taken place so we're trying to we're trying to figure it all out and uh 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 one point zero zero percent 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 into treasury bonds back last march or april i mean we're talking about losses that are pretty substantial about 30 percent it's the type it's equity market type of losses and your potential reward was a one percent interest rate per year for 30 years so lots of uh imbalance risk reward was brought on by the by the pandemic you have to kind of wonder like who wants to own uh government treasuries right now um the fed is the one that wants to own them yeah can we talk about inflation for a bit this is such a hot topic right now and you know we hear the the two sides of the debate that it's transitory others who say it's going to be more rampant when do you get when are you going to start to get worried about inflation and the consequences i think the 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 miss on cpi in many years and maybe even in my whole career the the guess was for 0.3 and it comes out at 0.8.9 and that really shocked everybody we have a model of inflation at double line that's quite helpful for a few months forward goes off of a couple of variables it's been quite accurate we knew that inflation was going to go above three and a half but we thought it was going to be in a month or two and so the fact that's already left 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 very low numbers and it's almost like mount whitney is right next next to death valley for a reason you know with 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 orders equivalent rent for the last 12 months is up two but the whole median home price is up 17. so if you would replace owner equivalent rent with home prices the inflation rate actually would have been eight percent year over year so there's reasons for 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 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 this the tribe on the right or the tribe on the left has the same talking point so you wonder if if it's just a brainwashing mechanism the fed's trying to get investors into on this transitory stuff but i'll get worried if 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's the fed and so with all of the debt that we have which is you know it's really the deficits really the true deficit is about 20 percent 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 yields are allowed to rise well that's going to be really trouble a problematic for the valuation of the stock market which is depending on zero short-term interest rates and uh suppressed long-term interest rates via quantitative easing i want to go back and talk about um our we were just discussing um stimulus and you know the enhanced unemployment and you were talking about maybe the stimulus might it might seem that it's going to continue uh do you think we're opening the doors up for ubi i i i do i mean i think we're already there we we we had um basic income way back in the 1960s it's still with us with welfare programs and the like uh and now we've been expanding it and expanding it and yeah i mean there's there's a lot of conspiracy theories that typically should not look attractive but with the deficit going up so much and the in the debt now pushing 29 trillion you know how it's almost like they're they're moving into ubi and even even sort of a wealth tax sort of situation by having the deficit so big that where you're going to 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 it was going to be people thought was going to be one it was going to be a few months of unemployment further assistance and it's been extended and extended and now it's being extended it's being increased as i just said in california and the federal government my guess is that they're they're ready to roll out another one because that's just been the pattern i was most struck when when uh president biden signed the bill i think you know you kind of lose track there's so many of them but it's the 1.9 trillion dollar one and it has some benefits uh for certain parts of the economic uh structure in america and it took all of three days for nancy pelosi and chuck schumer to 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 going to is already i think partly modified to to kind of factor in ongoing government assistance and the government doesn't seem to be discouraging them from thinking that it's going to be here for a long time i want to shift topics and bring up cryptocurrencies bitcoin specifically i know you have commented on past uh webcasts about bitcoin we saw a bitcoin drop i think it was something like 10 because of an elon musk tweet that came out yesterday about no longer accepting uh bitcoin for payments of tesla's you saw the news uh but they'll keep it on their balance sheets what do you make of what's been going on in the bitcoin space the bitcoin and the other uh cryptos have clearly been a uh objects of speculation and it had a lot to do again with the government money i mean the game remember the game stop thing that happened to 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 been doing a lot they feel like they're playing with the house's money so it actually does resemble a casino in their to their to them psychologically bitcoin i thought was really low at the beginning of 2020 i was really bullish on it i i went so far as to say i think it's going to 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 5000 or so but then all of a sudden it blew right through 15 000 and also it was 23 000 and that's when i turned a 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 um this is this is all uh based upon speculative fever it's almost like the the 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 some of the crazy.coms that had no revenue that were coming to market very successfully in the year 1999. here it's i think it's really it's really these cryptos and what i think's most interesting presently about bitcoin is what you just alluded to and that it's it's peaked now maybe 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 um it's this year year-to-date excluding today because i didn't get the final prints the nasdaq was only up two percent and and the dow jones was up double digit 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 third year which was around two and a half or two point five five i can't remember which but we're at 2.4 today so we're we're one really bad day away from going to a new high yield on the third year i i think that that's something to watch out for is a risk factor so i think our viewers who are watching would be interested to know what do you see uh in terms of what are where are you finding opportunities and what are you buying right now what's interesting to you well i've been very polish on commodities and they've gone up almost every single day for the last year and it looks overextended so i think i think 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 i haven't 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 you should i think that floating rate uh corporate debt is good like bank loans there's the bkln etf and uh it was having nothing but outflows during 2020 because uh people thought interest rates were going to be at zero 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 uh i'm not this will ebb and flow with the you know the wiggles and jiggles of the market but ever since we started double line 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 they 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 isn't is uh 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 in european equities so we actually bought some and they've performed this year exactly the same or slightly better than u.s stocks that's not 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 but and and china but not in europe europe is actually slightly outperforming that's another sign the thing that i think it's too early for that i like longer term is emerging market equity it's just the emerging markets are having significant problems with slower vaccination with uh inferior health care systems and really struggling i mean emerging markets aren't up at all so we we have we have basically the developed markets are doing well and for now the emerging and emerging will will do well but i don't think it's this year well certainly something we will be watching uh jeffrey gunlock ceo of double line 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'm going to send things back to adam in new york adam 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 but the warnings about universal basic income bitcoin a lot of great material there julia thank you mr gunlock thank you

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Length: 19min 14sec (1154 seconds)

Published: Thu May 13 2021