Jeffrey Gundlach of DoubleLine Funds just wrapped up his latest webcast: “Penny For Your Thoughts.”
The bond guru updated us on his take on the economy and markets.
He focused on currency debasement, the bond market, and housing.
Here are highlights from the presentation:
Rise of the yuan
“Currency debasement is not new,” Gundlach said.
There are a lot of pennies out there and they cost a lot to make, more than the value on it, Gundlach explained. He added that the dollar has lost 96% of its value since 1913, and lost a lot of purchasing power.
The U.S. is close to historical norm of how long global reserve currencies have lasted. The U.S. has been a reserve current for 94 years, Spain had the longest reign at 110 years. And there’s increased talk about China’s yuan emerging as a potential reserve currency. He even gave Bitcoin a shoutout.
Interest rates not responding to growth
Gundlach pointed out a few key reasons that interest rates have fallen in 2014. First, it is because there aren’t too many bonds floating around. Second, interest rates are down in part because of negative GDP growth in Q1. Consensus is for Q2 GDP forecast of 3.4%, he thinks it might be closer to 3% — Gundlach thinks the average for the first two quarters will be about 1%. Third, interest rates have also fallen because of a huge short position in the U.S. Treasury market going in to 2014.
Gundlach said conditions in the labour force are terrible for 16-19 year olds, having fallen nearly 30 points in the past generation and a half. Labour force participation is falling for everyone but the old folks he said.
The U.S. has a huge change in population of 65 and older as a share of total population. And the slope is very steep for the next 15 years before flattening out.
Market has priced in most China risk
Gundlach points out the absolute parity between U.S. and Spanish 10-year bonds. In the near-term Spain will be near or reside below the U.S. in yield considering the hand off in quantitative easing. In terms of range for the U.S. 10-year this year, Gundlach sees it going up to 2.8% and thinks it could possibly be pushed down to 2.2%.
“I don’t know if China is going to have a hard landing — I don’t think it matters,” he said. “It’s crystal clear that China is underperforming expectations and that will be the operating thesis until it changes. It could easily come under 7% this year.” Meanwhile, emerging market debt has been a good performer this year.
Margin debt in the United States has rolled over, dropped 2 months in a row, and the stock market has gone to new highs despite this. Usually there’s a high correlation — it’s rare to see new highs in the stock market against background of margin debt liquidation.
Gundlach said he is not negative on housing, but he doesn’t think home prices will do much. He doesn’t however think there is a crisis. “New home sales will be less of a support for the economy than the consensus believes,” he said.
Long-term Treasuries have been the big winner. Investment grade corporate bonds are higher because they have longer duration, and it doesn’t matter what grade. Corporate bonds are up about 5%.
Millennial housing risk
New home sales are where they were at the depths of the recession. Those that are super bullish are hoping that first-time buyer reappear — they see a large pent up demand. But Gundlach said he doesn’t think Millennials (those in the 18-34 cohort) will come back to market the same way. He thinks people in 20s and 30s have been scarred by the recession. “They don’t see housing as security, they see it as risk.”
Highlights from the Q&A:
- In response to a question on which Chinese economic indicators to watch since most are rigged, Gundlach said he follows three things: 1. Shanghai Composite; 2. The currency; 3. The prices of industrial materials like copper and iron ore. “Market prices don’t lie.”
- Gundlach said gold could move to about $US1,500 this year, though some might call it a “nutty prediction.”
- Inflation in high-end, about 8% (like Picassos), in the low-end, in things like technology, there’s deflation. “If you think inflation isn’t 2%, its at 4%, then you have to believe …we’re still in negative growth.”
- When asked if he thinks municipal bonds are overvalued, Gundlach said that “Munis are rich right now versus Treasuries.” On the one hand taxes are going higher for wealthy people. He still owns the same amount of Muni’s as he did in 2010, though he is less comfortable today than he was in 2010. But Gundlach said he is not a seller of Munis because taxes are going higher. He said the real question is when will they tax muni income? “It is coming,” he said.
At 4:15 p.m. ET, Jeffrey Gundlach of DoubleLine Funds will hold a webcast.
The bond guru will be updating us on his take on the economy and markets.
Wall Street had been looking for bond yields to rise in 2014, but Gundlach had pointed out that they could tumble to as low as 2.5% during a Jan 14 webcast.
Last month, Gundlach said that we could be on the verge of a big bond market rally. “”If we go down [more] on Treasury yields, we will see one of the biggest short-covering scrambles of all time,” he said at the time.
Today’s webcast is titled “Penny For Your Thoughts.” We’ll have Gundlach’s comments live.
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