Six months ago, DoubleLine CEO Jeffrey Gundlach told CNBC that he thought stocks were very expensive. Today, they are about 15% higher.
When asked by CNBC’s Scott Wapner what he thought of equity prices yesterday, he acknowledged they were very expensive. But the “biggest case for stocks” today is that they are “cheap compared to bonds,” he said. Moreover, many stocks are not selling near their highs.
Gundlach also noted that the decade-long bull market that began in 2009 bears a striking similarity to the expansion of the Federal Reserve’s balance sheet. Fiscal stimulus and central bank “bond buying” are almost “the same thing,” he said.
The professional bond manager sees striking similarities between today’s environment and the 1970s. The latest monthly Producer Price Index report came in at 11%, Gundlach noted. And the U.S. military withdrawal from Afghanistan reminded him of the 1975 American exit from Vietnam.
When it comes to the bond market, Gundlach said it appeared the Fed was determined to keep the rate of the 30-year Treasury bond “capped at 2.0%.”
Gundlach’s longtime skepticism about stock prices seems muted—for the time being. “I think you are OK holding stocks for now,” he said.
Last fall, Gundlach recommended a portfolio that was evenly split with 25% allocations to stocks, cash, 30-year Treasury bonds and gold. He said the gold and long-term Treasury bond allocations represented hedges against inflation and deflation. Yesterday, he said he had reallocated some funds out of cash into stocks.
Where financial markets go depends in large part on what happens to the next stimulus program, he added. It’s a trade-off in his view.
If the stimulus is “curtailed,” the economy will get worse,” he said. But if some of the current proposals are enacted, inflation could continue to rise. He thinks it is highly unlikely that either fiscal stimulus or Fed bond-buying would end “cold turkey.”
On the pension front, the bull market in equities has left many pensions in the best condition years. At some point, Gundlach said they could sell a big chunk of their stocks and lock in 30-year bonds at today's low rates simply because it enables them to match their liabilities against their assets.
Why have interest rates remained so low in the face of persistently higher inflation numbers? The bond market thinks “the Fed is going to get more serious [about inflation], maybe even, God forbid, start raising short-term interest rates,” he said. Another obvious factor is the sheer amount of liquidity in the system.
Gundlach observed that several Fed officials—though not Fed Chair Jay Powell—are starting to recognize the spike in inflation. Already, the Fed’s definition of “transitory” inflation appears to be shifting from three months to six to nine months.
Future inflation is likely to be driven by wages in the labor market, not commodity prices. Gundlach thinks most of the latter may have peaked, which helps explain why the U.S. dollar has stabilized in recent months. The action in some commodities “was so extreme” that he doesn’t see “much upside” left, he said. Gold is actually negative for the year.
Wage inflation will be the key factor to watch in coming months. If stimulus programs continue, businesses will “have to compete with government” for workers, he said.
When DoubleLine holds meetings about macro conditions and his colleagues try to estimate future inflation rates, “I take the over,” Gundlach quipped.
As for bitcoin, Gundlach said it has become an excellent “proxy” for “speculative fever.” He recommended buying at $5,000 and selling at $23,000, which he conceded was way too early. But he now says the cryptocurrency is likely to fall below the $23,000 level.