Yahoo Finance Presents: Jeffrey Gundlach

DoubleLine CEO Jeffrey Gundlach joins Yahoo Finance's Brian Sozzi to discuss the health of the U.S. economy and Gundlach's outlook for the stock market in 2022.

Video transcript


BRIAN SOZZI: Jeffrey, thanks for joining Yahoo Finance. We appreciate it. Thanks for bringing us into your home. It feels good to get out of my kitchen. [LAUGHS]

JEFFREY GUNDLACH: OK. Yeah, we have a nice day for you today. It was raining like cats and dogs--

BRIAN SOZZI: Yeah. No, well--

JEFFREY GUNDLACH: --and all kinds of flooding

BRIAN SOZZI: We appreciate it. Well, look, investors really had an amazing year. So many investors last year, double digit returns in the equities markets. What do you think is their-- should be their biggest concern coming into this year?

JEFFREY GUNDLACH: The Fed. I mean, been a relationship that's undeniable between the Fed's activity, not just the Fed funds rate but also the quantitative easing and the bond buying. And the bond buying has, every time, supported equity markets. Weirdly, when they do bond buying, yields go up. A lot of people don't think that that should happen, but it has happened without exception.

And so now that the Fed is really following the bond market per usual, they have forced to start to talk about raising interest rates more, talk about getting out of the quantitative easing business as early as March, which is pretty rapid. Now there's even talk of quantitative tightening has already started.

We've gone from a completely dovish profile at the Fed with zero interest rates for years with quantitative easing, as far as the eye could see, at $120 billion per month. And suddenly, when yield started to rise at the two-year and the five-year, the Fed always has to follow the bond market. So we now have today here, we have the highest two-year yield of the past year. We have the highest three-year yield. We have basically a tie on the five-year yield.

And so what's happening is the yield curve is sending a bona fide recessionary signal. You have interest rates going up at the short end and going down at the long end. That's the one investors really have to watch out for.

It's one thing when the yield curve flattens because one end of the curve is anchored and the other one either goes-- either goes down or this one goes up. When they go like this, which is kind of a pivot, that's a very strong signal. It's not there yet. But it's starting to get into the territory, where you have to follow it very, very closely.

So with the Fed not doing quantitative easing starting March, well, the relationship between the size of the Fed's balance sheet and the market cap of the S&P 500 is what I call Gundlach's law of financial physics because it's worked so well. It did deviate a little bit during 2020 and '21 a little bit because the action by the Fed was so aggressive. But that's what investors should worry about. The valuation of stocks is also worrisome. In the United States, if you look at the CAPE ratio, Dr. Shiller's CAPE ratio--

BRIAN SOZZI: One of my favorites.

JEFFREY GUNDLACH: --that is very elevated. It's nearly around 35 or so. If you look at the rest of the world, it's half of that. So the US has been very, very strong. And we're at the point of kind of extremes, where the valuation has been before. But it usually hasn't ended real well. And with the Fed in the reverse gear that they've been in for nearly two years now, that's going to cause headwinds for investors, I think.

BRIAN SOZZI: Do you think the Fed, at some point, raising interest rates this year, does that lead to an economic slowdown?

JEFFREY GUNDLACH: Absolutely. The bond market is already suggesting an economic slowdown is-- I wouldn't exactly say on the horizon. But it's-- you can't just not think about it anymore like you could a year ago. So, yeah, I think also that one of the things that investors maybe don't have a keen understanding of is, ever since rates peaked in the '80s, every single economic cycle, every single economic downturn has begun with the Fed funds level ever lower. It's always breaks the economy at a lower level.

So the one that broke the economy back in 2018 was about 2-2.5%. My guess-- and when you look at the yield curve-- my guess is that the recessionary signal will be that the yield curve may flatten significantly below 2% on the yield curve. You might actually get very little movement up in long rates, and the Fed will follow the market. And the message sent by the kind of large sell-off in bonds today, the Fed is likely to start raising rates and follow through on that.

And at the long end of the curve, it seems like the Fed ever since the 30-year Treasury yield kissed 2.5%. It seems like the Fed has been defending the long end of the bond market. And for several months now, it's coming on a year, it seems like, whenever it gets to 2%, weird things happen. It just stops. The 30-year Treasury today is going to be really interesting to see because it hasn't closed above 2% in a long time.

And every day that goes in the last several months, that intraday, you get a yield of like 2.02%, 2.03%. Lo and behold, something magical happens, and it closes the day at like 1.98%. And so it almost looks like there's yield fixing going on, which is one way of explaining these negative real yields that we're dealing with. These are the most negative real yields in the history of the record book. Yields are much more negative than they were or about as negative as they were under Jimmy Carter.

One of the things that I find remarkable about our current situation-- and I always thought this would happen. I've been talking about this for about 15 years-- is that we're starting to get lots of things that look like the late '70s and early '80s but almost in the mirror.

BRIAN SOZZI: How so you mean, high levels of inflation?

JEFFREY GUNDLACH: Well, we-- higher levels of inflation, low real yields, geopolitical problems, kind of a malaise feeling in the White House. I mean, a lot of these things are the same. And yet, interest rates were super high then. And now they're super low.

So we have the same condition-- very, very negative real yields. I mean, real yields, basically, the Fed funds rate is negative 6.8% right now because Fed funds is at 0% and the CPI is 6.8%, so very negative real yields. But this time, it's because the inflation rate is much higher than the yields. Before, you know, it was a situation with very high inflation that was being fought by the Fed.

So we're starting to get back into that mode of thinking we need to fight inflation. But we're starting at such different levels in terms of economic valuation, you know, stocks versus GDP, sort of Warren Buffett's indicator. These things are really elevated.

But what's odd about the situation is, as overvalued as stocks are by historical comparisons using the S&P as a proxy, thanks to the meddling by the government, they're actually cheap to bonds. So it's a tough choice for investors. Because you look at stocks and the PE is in sort of a danger zone. And yet, bonds have these wildly negative yields. And inflation is going to continue to go up at least in the next couple of months.

BRIAN SOZZI: Where do you see inflation this year? CPI.

JEFFREY GUNDLACH: Well-- well, OK, we have to look at different measures of CPI. CPI is at 6.8% right now year-over-year. The one that's rolling off for last December is 0.2%. So the way things are going, it seems pretty likely that we're going to get a 7 handle on the CPI soon.

But the CPI, of course, is a strange construct. It's not calculated the same way as European CPI. If you use the European CPI methodology, our CPI right now would be at 7.8%. So it's calculated a little bit differently.

Also, there's this strange thing about shelter. That's almost a third of our CPI. And shelter includes largely something called owners' equivalent rent. And owners' equivalent rent is not a real thing. It's not like you're going out there and measuring rents. What you're doing is asking people that don't rent out their house. If you did rent out your house, what do you think you'd rent it out for versus last year?

As if a regular homeowner that doesn't rent out their house has any idea. I probably couldn't estimate what I could rent my property out for within 20%. I have no idea. I've never looked at it. But the owners' equivalent rent that they come up with is the most recent reading is 3.5% year-over-year.

But there are other indices. There's the Zillow index. There's another one that-- I lose my memory right now. But they're running at-- well, they were up at 23% year-over-year a few months ago. Now it depends which one you look at. But maybe they're only at like 13%. But even so it's like 10 full percentage points higher than what the government uses in its CPI calculation.

So if you use more like the actual rent databases, or certainly, if you use single family home price increases, you would get something quite a bit higher on the CPI. If you went so simplistically, it's just use the change in the median home price, something like the Shiller index or something like that.

The CPI right now would be over 12%. That's the Delta that is the gap between those two. Home price appreciation, it seems like it should slow down. But there's so little inventory. And another negative interest rate phenomenon is driving it.

I mean, look at the increase in home prices. Look at the increase in wages versus the interest rate on a mortgage. I mean, what's wrong with buying what you think might be a bad timing in the market if your interest rate is below the inflation rate? If your interest rate is below your wage increase, it's kind of pretty affordable.

So as bad-- as strange it is that home prices are up so much, they're actually way more affordable than they were prior to the global financial crisis. It's about the same level as you were at around 2004 in terms of affordability. And that was a level from which home prices were able to go vertical. Thanks to a lot of funding lending. But also, the affordability wasn't that bad when the funding lending began.

So CPI next year, I think it stays elevated. I think the rent and wage components, the owners' equivalent rent has to go up. The wage components is likely to go up. That will largely offset, I think, some of these so-called supply chain problems and, you know, base effects, and all those things that are starting to lose credibility already. I mean, the base effects, that's kind of coming out two years ago now.

So for the year 2021, we had PPI above 0.5% every single month. And the PPI leads the CPI. And there's many ways that you can slice and dice the PPI. Some use final demands, finished goods. One of them is running at about 9.6%. Other ones running-- one of them was up at 26%. So a lot of volatility there.

So I think the idea that inflation is going to come down, which is very much in the consensus economist camp. And I don't mean-- the consensus economists don't think CPI is coming down in the next three months, but they do think it's coming down to 2% in 2023 roughly. And I don't know about that. I think it's highly dependent like everything on government policy.


JEFFREY GUNDLACH: Everything is government policy.

BRIAN SOZZI: So if the Fed is going to embark on this inflation-fighting venture at some point this year, shouldn't equities have to correct? And do you think they're sowing the seeds of a recession in 2023?

JEFFREY GUNDLACH: Yeah, again, as I said, I think the bond market is already showing enough of a recession indicator that, by 2023, it seems pretty likely. And like I said earlier, I don't think a lot of the Fed officials and economists and investors appreciate the fact that the economy keeps buckling at lower and lower interest rates.

So I think the Fed only has to raise rates four times, and you're going to start seeing really a plethora of recessionary signals. I think it's certainly a non-zero probability that you get a recession in the later part of 2022. That's going to be dependent, again, on how aggressive the Fed is and the like.

So one thing that we did notice in 2018 is the Fed started-- they stopped QE. They started quantitative tightening, letting the bonds roll off. And then they started raising interest rates. And we got an instantaneous bear market that was one-- which felt like a very historically compressed bear market. But when you compare it to 2020, it was actually a little bit more extended.

But it really-- it fell-- certain indices fell 35% in weeks back in 2018 because it's the double-barreled tightening that led to the economic stresses. And the Fed was really quick to reverse. And I think the Fed is going to reverse again. And this might be the last time. We might be getting really finally to the endgame of this, where, when you have to start reversing at such low rates and your responses are so powerful in terms of deficit spending.

During the peak of our deficit spending, we were between the trade deficit, the twin deficits, the trade deficit, the budget deficit. We were at 20% of GDP. That's totally out of the context except maybe World War II. And now it's only 15% of GDP because some of those giveaway programs, especially the special unemployment benefits have stopped.

What we've noticed-- and this is one of these inflationary signs that I think will get more powerful as we go through 2022-- is the Michigan consumer confidence survey has really deteriorated. I think people were feeling very flushed with the government money. And once it stopped, the consumer confidence index basically fell off a cliff.

The consumer confidence for the future was already-- it's almost always bad. It's sort of strange. There's almost an embedded pessimism. People say, what do you think is going to be a year from now? And it's almost always lower than where it is now, except in recessions because that's obvious, because they start to realize that it's bad now.

So when you already have the future expectations week and it's joined by perceptions of the present, that's a building recessionary signal. Like the curve, the yield curve of the bond market, it's not there yet. But some of the things are starting to build up. And that's, again, something to watch.

What's driving that are two components. One is, is this a good time to buy a car? It's the lowest reading in history understandably, particularly used cars. The average used car price-- I don't know if it's median or mean. I just heard on the radio this morning-- it's $29,000 is the median used car price.

BRIAN SOZZI: Expensive.

JEFFREY GUNDLACH: And very expensive. And there's all kinds of anecdotes. I don't think they've relaxed very much that a used car with reasonably low mileage on it costs about the same as the MSRP on a new car. There's almost no differential. I actually have a personal experience with that. I bought a truck for a ranch property that I own. And the price was shocking. It only had 8,000 miles on it, but it was maybe $5,000 less than the MSRP on a new one. So that's a reason why people are feeling more pessimistic, I think.

BRIAN SOZZI: We have a lot of folks on our platform, the Yahoo Finance platform, that hang on every word that you say, Jeffrey. If they are concerned that the stocks they own are overvalued here, what course of action should they be taking?

JEFFREY GUNDLACH: The question, I think, that's the key issue for stock allocation broadly in 2022 is, do you want to be a value investor? Or do you want to be a momentum investor? Because the value thing has had some volatility versus growth. But broadly speaking, it's been weak. Growth is done way better.

But the breadth of the market-- and this varies. I mean, there are moments where there's good breadth. But one of the most fascinating statistics, if you started year end of 2019-- so you take a two-year view-- the S&P is up about 30%. It feels like more because people remember from the bottom in 2020. But there was a huge draw down in the first part of that two-year period. But the S&P is up 30%. If you take out the five FAANG stocks-- Facebook, Apple, Amazon-- what's the N in there?


JEFFREY GUNDLACH: --Netflix and Google, you know what the return is of the S&P 500-- the S&P 495 without those five stocks? You know what it is?


JEFFREY GUNDLACH: It rhymes with hero.


JEFFREY GUNDLACH: Zero. It's shocking, right? That's actually what you got in there. So do you really want-- and the NASDAQ had very substantially outperformed the S&P 500 with all of this going on, but not lately. I mean, it is sort of at a high. But it's not-- it's very much in the context of where it's been for about the last year and a third.

So a lot of things were on a one-way ride. The US stock market versus Europe, say, was on a one-way ride for 10 years. That ride has kind of ended. It's near a local high again. That's relative performance. But it's not very different than it was in August of 2020.

So a lot of these things that had this huge momentum, it's still sort of there, but it's dissipated a lot. And meanwhile, you know, growth versus value, it's pretty outsized how stretched some of these conditions are. Also, if you really want, for the not faint of heart, at some point in 2022, I think you're supposed to buy emerging market stocks. They are so cheap compared to the United States stocks by historical standards.

BRIAN SOZZI: Is China still an emerging market?

JEFFREY GUNDLACH: Of course, not. It's-- China is uninvestable, in my opinion, at this point. I've never invested in China long or short.

BRIAN SOZZI: Why is that?

JEFFREY GUNDLACH: I don't trust the data. I don't trust the-- I don't trust the relationship between the United States and China anymore. I think that investments in China could be confiscated. I think there's a risk of that. I mean, China is the-- China's ascendancy has been in lockstep weirdly with the deteriorating fiscal condition of the entitlement programs of United States. I wonder if that's not some causality in there.

You know, back in the early days of my career, it was always, well, Social Security is going to go bust. But it's going to be 2060. And then it was 2050, and then it was 2040, and then it was 2030. And now I think it's before 2030. And in lockstep with that, it was China is going to be a larger economy United States by 2060. Same thing. Pulled forward, pulled forward.

And now I think-- I kind of think, from a true productive economy sense, I think China's economy is bigger than the United States already. It isn't from a GDP calculation because of the way it's calculated. But when it comes to actual productive capacity, I think it's higher.

And, of course, the Chinese GDP, even by the classical measure, has grown quite a lot relative to the United States. And it's now getting in the ballpark. And, of course, they have much better fiscal situation, shadow banking problems pushed aside. I'm just talking about the savings rate and things like that.

So what happens when China continues to build its military, which they clearly have intentions of doing, their economy gets bigger than the United States' economy, their military gets bigger than the US military? They've got these hypersonic weapons that are far ahead of ours, at least as far as I know. I mean, maybe we have them, but they're not telling us. But China apparently is doing well there and Russia, as well.

So what happens when you have the largest military and the largest economy? I kind of think you deserve a seat at the table of reserve currency. And that I think has been a goal of China for a long time.

So I almost feel like there's no turning back on some of these things. I feel like the Taiwan-Chinese situation is getting near an end game. I think the US dollar reserve currency situation is getting more near an end game. And that's really going to be the game changer when I say the next bailout is going to be the one that is-- maybe breaks the camel's back. I think it'll take the dollar down.

So it's in the next recession, I think, that we're going to see dollar weakness. And the dollar is very, very overvalued versus our twin deficits. One of my most trusted indicators is the direction of the dollar, broadly, versus the twin deficits as a percentage of GDP. There's a long lead time. It's a long-term thing. It doesn't work for a year. It's something that has like an eight-year cycle.

But the dollar peaked out in 2017, January of 2017, on the DXY index about 103. And it managed to double top about that same level due to the pandemic. But it's down at 96 now, which isn't very low. But it's six or seven percentage points off its highs. But it hung in there during 2021 largely because it started the year weirdly at a very locally low level. It's been at 96 for quite a while. And when it gets low, it goes down to 90. And that's where it started 2021. Here, we're starting at 96.

So I think for those that have a long-term perspective and can withstand a wild ride-- let's say people that are comfortable investing in commodities-- I think it's time to start seriously watching the emerging market versus US market relativity.

Because last year, emerging market equities were down. There was a lot of dispersion. But some are down pretty hard. And, of course, the US was up in the 20s. House prices were up a lot of places in the 20s. Commodities were up in the 20s. So it was a great year for risk taking last year.

Next, I think, when the dollar does buckle down, that's going to be the buy signal for stock investors to basically get out of the United States. I bought non-US stocks in my asset allocation funds. Early in 2021, I bought European stocks for the first time in the history of DoubleLine, which we're now in our 13th year.

It always feels weird in the investment business when you've been standing aside on something, European equities. And it's just been working, working, working. Like every year for 10 years, and not by small amounts, by multiples, US outperformed Europe. And then you go, well, you know, I've been-- it's been rewarding to not own this.

But I just think the relative valuation and the way the policies are evolving, I think European equities have stopped underperforming. And they did. So it was a weird feeling. It didn't work exactly. But it didn't not work. It kind of win lockstep.

I kind of think the next move, the big move, is to enter emerging markets. We've been zero emerging market equities this whole time. And we've been underweight, until very recently, emerging market debt, as well.

BRIAN SOZZI: If you're concerned about the dollar, clearly, you're concerned about the outlook for the dollar and recession risk at some point over the next 18 to 24 months, whenever that might happen. Can you make a case for going along Bitcoin as a hedge against all this stuff?

JEFFREY GUNDLACH: I've been-- I was very positive on Bitcoin a year ago. It was around, I think, it was as low as like $4,000 or something. Is that possible-- in my one year off here?

But at any rate, I thought it was a bull because I thought it would go up 4x, and obviously went up a lot more than that. It went up more like 16x, or something like that, at the peak. But it peaked out and has double topped at $65,000 or so. It actually put in a minor new high in November, taking out the high that was in place around April or so. But it didn't hold. And that's never a good sign.

So I think Bitcoin is for speculators. At the present moment, I would advise against Bitcoin. I think you may get an opportunity to buy it. I think now it's at about $45,000, so about $20,000 off the highs. Volatile is all get out. Maybe you should buy it at $25,000.

BRIAN SOZZI: Have you ever owned Bitcoin?

JEFFREY GUNDLACH: No, no, no, that's-- that's just not in my DNA. I-- you know, I didn't really gravitate to bonds in my career. I got-- I got shoved in there. You know, bonds were a necessary evil, and somebody had to do it. But it turned out that it fit my culture of cowardice, if you will. I'm not-- I'm not a momentum investor at all. And, in fact, I'm sort of an anti-momentum investor.

And I think Bitcoin is for momentum investors only. Just like-- just like at this point, I would say the FAANGs are for momentum investors only. The valuation is not good. And so I'd be looking-- I like buying stuff that's cheap. And I usually sell it too early. But that's kind of where the easy money is. You do better as a momentum investor except--

If you're a momentum investor, I think it's kind of like being a roulette wheel player that somehow has a strategy that works as long as it doesn't come up on the zero or double zero. And it's, you know, you're making money, making money. And then eventually, you know, you get a double zero. And you're busted. And I think that's what happens with momentum investing. They tend to-- they tend to, you know, go out in a blaze of glory.

BRIAN SOZZI: You're also known as being an astute art investor. Many just looking around. Oh, it's just beautiful. Do you find it almost funny to see how far NFTs have come? I mean, you're owning things in this alternate universe.

JEFFREY GUNDLACH: Yeah, I think it's-- I think it's sort of shocking how-- you know, Bitcoin started at-- I don't know what the first price was-- but a lot of people got in and $1,000. OK? And it took a while to get to $60,000

The NFT thing went from worthless to what? $69 million? $96 million? It went from-- I don't know what an NFT is till it's worth $70 million. And so that's certainly not for me. That's for momentum investors on large doses of steroids. So I'm not-- I'm not interested in that. I-- I think--

That's another bond thing. I like buying quality. I've never really loved junky stuff. So I believe, when it comes to art, just like when it comes to real estate, you should really buy the highest quality. And, you know, so they can appreciate very steadily like real estate appreciates very steadily. There's drawdowns, you know. And when the recession comes, you have problems in all asset markets. But I would-- I don't-- I've seen one NFT thing that I thought was interesting.

BRIAN SOZZI: What was that?

JEFFREY GUNDLACH: I can't even remember. It was-- it's this guy who's kind of famous for it. And there was something about there was all these things moving. And I didn't spend a lot of time looking at it. But I thought I was interesting. It's sort of like in the world of art. I almost never liked video art. And I've seen like two that I thought were good.

And when it comes to that, the value-- the definition of good when it comes to video art is that, five years later, you can remember it. There's so much video art-- that five minutes, five minutes later, you can't remember it. But there's been actually about three of them now that I've very strongly remember. And so if it makes it-- it's like, if someone's a poet, you know, if someone says that they write poetry, you should ask them to give you a couplet. And if they say they can't remember one, they don't write good poetry.

BRIAN SOZZI: [LAUGHS] It's a good point. Jeffrey, we're nearing the midterm election season. What do you-- what do you think the market impact could be of a contentious midterm election season?

JEFFREY GUNDLACH: It never-- it always seems to me that the elections never seem to have that big of a market impact. The markets probably would-- are probably looking forward to the midterm elections because it's going to glue up the gears of government a little bit more. I'm quite sure that you're not going to have the ability. You know, we have basically Democrat one-party rule. They're having a hard time keeping it together because there's dissention within the party.

But "Wall Street" and Finance seems to always like it when there's a split in the government. And I think it's-- I haven't looked at the betting markets. But it's got to be very high probability that at least the House or the Senate flips to Republican. So on the margin, I think the markets are probably like that.

BRIAN SOZZI: As always, we always learn so much from you. Jeffrey Gundlach, thank you for joining Yahoo Finance. We greatly appreciate you hosting us.

JEFFREY GUNDLACH: OK, Brian. Thanks for coming.

BRIAN SOZZI: Thank you.