Jeffrey Gundlach, DoubleLine Capital Founder & CEO, joins Yahoo Finance to discuss the outlook of the U.S. dollar, the U.S. economic recovery, currencies, and Fed expectations.
JULIA LA ROCHE: Welcome back to Yahoo Finance Live. I’m Julia La Roche. And we’re having a fascinating discussion with DoubleLine Capital Founder and CEO Jeffrey Gundlach. Jeffrey, you’re just making a point about your strongest conviction on the future of the US dollar. I want to explore this a bit further and help our viewers understand what some of the longer term implications of this might mean, especially for the standing of the US globally.
JEFFREY GUNDLACH: Well, the US has enjoyed the status of sole reserve currency globally for decades. And it’s an incredible benefit. We also have the biggest military in the world, which just kind of goes hand in glove with being a reserve currency, I think.
But in the aftermath of the lockdowns and pandemic that continues to wear on, the strongest economy in the world, by far, has been the Chinese economy. And the US economy has bounced back with a lot of consumption. A lot of that consumption is going to China. It’s one of the reasons China has such a strong economy.
So what we’re seeing is the United States is starting to fall behind in economic growth. That’s not a new thing. That’s been going on for a generation– the US falling behind. But the Chinese economy is growing so rapidly that the estimates as to when the Chinese economy will be the largest in the world keep getting pulled forward. 20 years ago, it was thought to be 2050 the Chinese would be bigger than the US, and then it was 2040.
And now, the estimates are maybe it’s in the 2020s– maybe even 2028, the Chinese economy gets bigger. And China’s made no secret of the fact that they want to be a global player and have at least a seat at the table of global reserve currency status. And they’re spending like crazy on military and have also made no secret of the fact that they want their military to be dominant, maybe the biggest in the world.
Also, they have huge savings in China. They have a culture of savings– the gold medalists of saving historically. And so when you put all those things together with the US growing debt like crazy– we have debt to GDP that is fueling the majority of our so-called economic growth. So is it really economic growth when you borrow money or print money, send checks to people who turn around and buy goods on Amazon, in addition to maybe paying down debt speculating, and these goods come in from China?
So we’re running our economy in a way that is almost like we’re not interested in maintaining global reserve currency status or the largest military or global, call it, a superiority or control. And so as long as we continue to run these policies, and we’re running them more and more aggressively– we’re not pulling back on them in any way– we are looking at a roadmap that is clearly headed towards the US dollar losing its sole reserve currency status.
And I feel that as long as we run these policies, it’s almost certain that that’s going to happen. And because of that, the dollar should be going down. The value of the dollar is so high because we enjoy global reserve currency status. And we don’t really respect it enough. We take it for granted, I guess.
We seem to take a lot of things for granted these days in the United States relative to how we thought about things in prior decades and generations. And I believe that we’re setting the stage for us to, unfortunately– I use the word, enjoy, I guess experience, I suppose I should say, the consequences of our actions the way we’ve been running a non-serious economic program now really since 1980– but it’s really accelerated so much in the past decade.
And there’s no signs of it abetting. So that’s the reason why the dollar is going to go down. And it’s already peaked. It peaked in the DXY index at 103. There was a double top in January of 2017 and then right after the pandemic hit. And now we’re living down about 10% lower, and I believe the dollar is going to take out the lows of the past down cycle.
See, the dollar has been in a series of declining highs for decades. It goes back to the ’80s. And for that reason, I think when we get to the next break to the lower level, the dollar is going to go past the most recent low of around 80 and even take out the low of 70. So I think there’s easily 25% downside in the US dollar. And with stocks so overvalued versus historical metrics, it means that other stocks– for US-based investors, buying stocks in foreign currencies, right now I prefer the euro, ultimately will be emerging markets maybe starting next year, that’s going to be the place to be.
JULIA LA ROCHE: Hmm– certainly an interesting thesis you lay out there. I do want to bring up the Federal Reserve again. And of course, a lot of talk lately, Jeffrey, as you know, about taper talk, if you will. And we have the symposium coming up– the Jackson Hole symposium later this week, not that we’ll get any insight on tapering there. But what are you kind of looking for from the Fed? How are you thinking about what their next move might be?
JEFFREY GUNDLACH: Well, I’m certainly of the mind that the Fed is not thinking seriously about raising short-term interest rates as long as they’re doing quantitative easing. So the taper was thought to be impossible for anywhere here in calendar 2021, but there’s whispering behind the scenes– some of the Fed officials are thinking that maybe they should start tapering even as soon as next month.
I don’t think that’s going to happen. I think they’re going to wait and see. They’re clinging to this transitory or temporary inflation thesis. They’ve already been wrong on that. When they’ve talked about this bump in CPI and other inflation being temporary, they’ve kind of defined that as being two or three months.
But it’s already been more than two or three months. Now, they’re talking about six or nine months. I think if we go into December– if we end the year 2021 with inflation on the CPI headline above 5, which is about a 50-50 proposition I think– we’re at 5.4 right now– if it stays for the year at 5, then I think the Fed may start tapering, because the transitory inflation thesis will be very hard to defend at that point.
Keep in mind that the PPI, which is wholesale prices, which [? will need ?] CPI, on the headline are 9.6 or something like this– I know it’s 9 and change, and on the headline it’s 4.3. So the Fed policy is going to depend completely on whether or not these elevated inflation levels can endure.
And with commodity prices having stabilized but not dropping, I think it’s a fair bet that inflation is going to continue to be stubborn on the upside. And with that happening, taper becomes more of an issue and more talked about. But I don’t expect tapering is going to happen– I would think maybe December at the earliest.
JULIA LA ROCHE: Jeffrey, my colleague Brian Sozzi has a question for you. Brian.
BRIAN SOZZI: Jeffrey, yes, just following up on what you were saying about the Fed– given that you do see stocks as overvalued, when the Fed does taper, how disruptive do you think that will be to stock and bond markets?
JEFFREY GUNDLACH: Well, it certainly would be negative for the stock market. I pointed out the expansion of the Fed’s balance sheet goes in lockstep with the capitalization of the S&P 500. And what we saw when they tried to taper in 2018, the stock market had a sort of mini-crash– actually went into a very compressed bear market in the fourth quarter of 2018. And it forced the Fed to completely change their activity.
So it has a negative effect on the stock market. For bonds, what’s weird is when the Fed is tapering historically, yields have actually fallen. It’s weird– counterintuitive. But historically, that’s been the case that yields have fallen when the Fed has tapered. And now since the Fed has been expanding the balance sheet, actually, Treasury rates have risen. They were a crazy low level once we went into lockdown– you know, the 30-year Treasury bond actually got down to 1% on a closing basis.
And then the Fed reacted with massive stimulus. And now the 30-year Treasury bond is not tremendously higher, but it’s up at about 1.85% or so. So as they’ve been doing this quantitative easing, stocks have gone up and bond yields have modestly gone up. And so counterintuitively, a lot of people don’t understand– they think this tapering bond yields will go up, but historically, the opposite has been the case. So it would probably mean bond yields stay subdued and stocks would fall.
JULIA LA ROCHE: Jeffrey, I have one question for you on the economy. And I’m so glad to have you here today. So we had consumer sentiment crater just the other week, yet we also have job openings at 10.1 million, which is incredibly high. And then when you look at GDP, we’re essentially flat from Q4 of 2019, yet we’re flat but with 5.8 million fewer workers– so productivity has gone up. How do you kind of think about the overall economic picture here, especially given all of that as a backdrop?
JEFFREY GUNDLACH: Well, the economic picture is very, very hard to divine ever since the government got so involved in the economy. And they’ve made so many– so much– it’s like pushing on, like, a waterbed or something– you know, as you push on the side of the water bed, the other side goes up, and weird things happen, and you can’t really compare it to a time period where you’re not pushing on the water bed.
So it’s very hard to discern what’s going to happen. But certainly, the employment situation that you point out is really fascinating, and it’s kind of seminal to the screwed up nature of the economy. Everywhere you go, almost any profession you ask, they say they have a hard time getting workers. Well, no surprise– people are making more money or the same amount of money by not working. And the government continues to support that.
So what will happen when these stimulus programs ultimately end or people actually have to start paying their rent? There’s going to be tremendous economic disruption. Officials have a tiger by the tail, and for now, they are not getting clawed or mauled by the tiger. But if you let go of the tail of the tiger, you’re going to very likely get mauled.
And that’s what’s going to happen. If you end it, you don’t have to pay your rent, the eviction moratorium, there’s going to be all kinds of consequences to that. Rents are going to go way up if that happens, I think. Also, people are relying on stimulus. And the stimulus is responsible completely for this economic growth.
You know, GDP is 70% consumption. And as the economy has rebounded back on a GDP basis, it’s done so with tremendous increase in the trade deficit. Multiple percentage points of GDP have come from an increase in the trade deficit. And that’s not real GDP.
Consumption is not really the economy. The economy is about production. And when you buy goods produced in Asia with stimulus money, it shows up as GDP, but it’s really Asian GDP. It’s consumption in the United States.
So the economy isn’t really that strong, as you point out, with five million fewer jobs. It shows up as, correctly mathematically, in the productivity equation, but it’s really Chinese productivity, because, again, if you just consume goods, you’re not really having economic growth. You’re just having consumption, but we define it as economic growth.
So it’ll be fascinating to see what happens when these programs end. I saw that the $300 unemployment supplement is being curtailed on schedule. But states still have a lot of money that hasn’t been dispersed. So the stimulus state’s discretion could continue longer even though it’s no longer being funded weekly by the federal government. But when it all ultimately ends, we’re going to see– well, people talk about the stimulus and the Fed’s low interest rates as a punch bowl– and certainly, this has been a very deep punch bowl spiked pretty heavily with 100-proof liquor.
And once this party ends, the hangover is going to be in the form of a sharp drop in economic growth. I think one of the reasons consumer sentiment dropped so much, just cratered in the most recent reading, has to do with the fact that people are aware that maybe the stimulus is getting a little shakier in terms of our ability to predictably rely on its coming again. But also the misery index, which I think Ronald Reagan created, which is the sum of unemployment and inflation, once it goes over 10, they call it misery.
And it’s at 11.3 right now– the sum of CPI, headline, and unemployment. And maybe the consumers are feeling the inflation. I think people are starting to realize that inflation is out there. If you ask people what is the big thing that’s worrying you about the economy, overwhelmingly right now, what comes across is inflation, because people see it at the gas pump, they see it at the supermarket. And as long as there’s stimulus happening, I see food inflation as continuing.
JULIA LA ROCHE: Well, Jeffrey Gundlach, Founder and CEO of DoubleLine Capital, I thank you so very much for stopping by Yahoo Finance Live today.