WHEN: Today, Friday, February 23, 2018
Following is a link to the unofficial transcript of a CNBC EXCLUSIVE interview with DoubleLine Capital CEO Jeffrey Gundlach and CNBC’s Scott Wapner on CNBC’s “Fast Money Halftime Report” (M-F 12PM – 1PM) today, Friday, February 23, 2018. Following are links to video from the interview on CNBC:
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Jeffrey Gundlach on bitcoin, stock market moves
Jeffrey Gundlach's market picture
Jeffrey Gundlach: We don't see a recession on the horizon
Scott Wapner: that stock is up better than 2%. Well, Jeffrey Gundlach is the CEO of Doubleline capital. He joins us now on our newsline. Jeffrey, welcome back to the “halftime report.” it’s good to hear from you today.
Jeffrey Gundlach: hey scott. It’s nice to be here with you.
Wapner: yeah, good to have you. So it’s two weeks to the day since we hit the low. And I want to get to the inflation debate and question in a moment, but first, just give your view on what you see in the markets today?
Gundlach: well, let’s start out with something people think I know something about, which is the bond market. And it seems that bond yields, let’s just talk about the ten-year treasury, are at a level that makes a pretty good of sense right now. I mean they’ve gone up a decent amount so far this year – ended last year at about 2.41 or so, they’re up 46 basis points or so. But one thing that people talk about is nominal gdp, and I’ve been talking about this for a long time. It’s a fairly good starting place, where you think about maybe the ten-year treasury should be. Obviously there’s a lot of noise. I mean, they don’t track eachother anywhere close to perfectly. But it’s sort of like a dog that’s tied to a stagecoach that’s going across the country. It’s on a 100 foot rope, I mean, sometimes it will be behind the stachcoach and sometimes ahead, but if the stage coach is nominal gdp, and the not ten-year yield is sort of a dog, and yeah, there will be variation, one versues another, but they’re both going to end up going across the country together. There’s no way the dog can really stay that far away from the stagecoach. So what’s going on now, nominal gdp in the united states is at 4.4, which sounds really high compared to the 2.87 10-year treasury yield. But to be honest, it’s also manipulated non-u.S. Yields. We should talk about germany as a good starting place. The german yield is way down at a ridiculously low level because it’s manipulated. So the economic facts of germany and the united states are not that different. The nominal gdp is about the same, the inflation rates aren’t that different, manufacturing is good in both areas, retail sales are good in both areas, but the german yield is being manipulated. So when you think about a ten-year treasury yield, what we’ve been doing at doubleline for the past few years really, is noting that it tends to reside in the average of nominal GDP and the competitor yield, which is the German yield. So let’s look at where we are today. The German yield is roughly 70 basis point, and nominal gdp is probably going to go up a bit, because GDP now from the Atlanta Fed is 3.2 at present, and we’ll tack on a little bit of inflation, so let’s call it five. And so if you have five for nominal GDP in the u.S., and you have 70 basis points on Germany, add those together, you get 5.7. You divide by two, and lo and behold, you get 2.85, which is within two basis points, even slightly less than that, as where you are today. So as long as bond yields do not break out to the upside, which is a clear and present danger right now, then you probably can keep some stability going in risk markets--
Wapner: it’s interesting that you say that. So you say where we are today in a ten-year, in your words, makes sense, but it could be problematic if they accelerate. Do you expect them to move higher, on you do you think we’ll stay in what we could call a range?
Gundlach: well, I have a low conviction feeling that we’re going to break out to the upside on yields. When I talked at the barron’s roundtable earlier in January, I talked about how rates would likely rise this year, and a lot of people agree with that. But right now the market is pressing right up against incredibly powerful yield resistance, particularly on the 30-year treasury bond. The trendlines are all gone on all the maturities of the treasury market. If you go to the trendlines back to the last 5 years, in many cases even the great bull market that’s over 30 years, the move up in rates since September has taken out all of those trendlines. In fact, interest rates across the yield curve, other than the 30 year treasury have been rising since September 7th at an annual rate of about 200 basis points. It’s not – that’s not just been a few weeks. We’re coming up on almost five months into this yield rise, almost – really, coming up on almost six months now for this yield rise, they’ve been rising pretty quickly, but all the trendlines are gone. On the 30 treasury, you still have this one last line in the sand of – declaring that the bull market might still be intact and that’s the pivot point, which was the high yield back 18 months or so ago, and that’s at 3.22. So fascinatingly, the 30-year treasury bond closed at 3.22 a couple of days ago, right there, and it didn’t close above it. So for now, we’re only 6 basis points away from this incredibly important level. So my viewpoint is this is a terrible trade location to be selling longer-term treasury bonds. Long-term treasury bonds – I’ll put it another way - if long-term treasury bonds are a great sale at 3.16, they’re also a great sail at 3.25. And we’re going to let the market decide on itsself, give a signal as to if this breakout is going to happen. If you force me to make a bet, I would say I do think they’re going to break to the upside.
Wapner: yeah, it’s interesting—
Gundlach: and when they do, they will accelerate. And if they accelerate, clearly what’s happened ever since 2.50 was breached on the 10-year treasury is the prices of treasury bonds and the prices have equities have started to become more correlated, meaning that when yields go up, stocks start to suffer. And I think, if we started to tack on significant yield with the breakout from these levels, it seems to me we would go back into another – down for risk asset.
Wapner: but it is interesting though, you do say in the near term at the very least that it is still a good environment, if you want to use that word, for risk assets. So what do you make of the correction that two weeks ago today? Was that overdone? Unjustified? Did we go crazy over a wage number that got everybody spooked on inflation?
Gundlach: well, I think definitionally things went kind of crazy. We started a change by 1,000 points per day, which is pretty unusual. But you started out at an incredibly high level, I mean we had a vertical rise from September 7th, which was led and epitomized by bitcoin. Bitcoin started at about 4500 and went up to about 20,000 or so, and – I was on your – you were in our offices back on the 13th, as you recall judge back on December 13th, and it was all bitcoin all the time, and so it was all people want to talk about. And of course, you had to ask me, because I was on your show for about an hour, and I said you know, I think the shorts are the ones that are going to make the money. And boy, was that right. I mean bitcoin’s still down 40% from there. But bitcoin peaked out in December, and it crashed, and that sort of presaged the volatility of the stock market. And then bitcoin – when the stock market was having trouble finding its footing, bitcoin managed to start rallying in advance. And then the stock market bottomed out. And so strangely, bitcoin seems to be the poster child for social mood and market mood, and it’s -- it’s been relatively stable recently, it’s found its footing at 10,000. So weirdly, I’m actually using the sentiment regarding speculative assets like bitcoin as a guide to maybe what the future will bring. So I think if stocks are going to take another tumble, I think it would be preceded by a bitcoin decline, and then probably also consistent with a break up higher in yield.
Wapner: ok, so we’ll keep our eye on that for certain. Let’s have this discussion now about inflation, as to whether fears of it are overblown. You have the treasury secretary out in the last 24 hours, quote – “there are a lot of ways to have the economy grow,” he said. “you can have wage inflation and not necessarily have inflation concerns in general.” you tweeted out that have that, quote – “Mnuchin -- policies will raise wages without inflation. Yeah, sure, and we are going to expand the buffalo ar museum without making it bigger.”
Gundlach: right, I mean, inflation is inflationary. It’s not really up for debate. If inflation is going up in a certain sector, like wages, then all things being equal, inflation is going up. Sure, there could be other sector where inflation goes down, but that’s not happening right now. So if the variable changes that wage inflation increases, it’s a strange assumption in my viewpoint to somehow just automatically believe that something is going to offset that. You remember back in the 70s – maybe you don’t, judge, you’re probably too young for that --
Wapner: thank you.
Gundlach: but there’s something called a wage price spiral. You know wages led to inflation elsewhere. So there’s a historical precedent of great significance that wage inflation can be an inflationary issue. I’m just -- in that tweet I’m saying it’s definitional. If inflation goes up, then inflation is going up. You can’t make the art museum bigger -- you can’t expand it without making it bigger. I put that in there, because someone actually said that to me. I had to laugh. Because some people don’t like change. And you may or may not know, I’m involved in the buffalo art museum expansion project and so I’ve been having discussions with people. And one guy comes to me and says, “it sure would be nice if we could expand the museum without making it bigger.” and so, you know, that’s quite a trick. And I feel that if inflation is going up, duh, inflation is going up in fact.
Wapner: sure. But you also mentioned a lack of offsets and I’m just wondering, and others have raised this point as well, in fact, Ed Yardeni, who was sitting with us in the last 20 minutes or so, took the other side, or took Mnuchin’s side of this discussion and said there are other deflationary sources at work that could offset any of the concerns like the type that you’re talking about, whether it’s technology and the advancements being made there, and other areas of the economy as well.
Gundlach: sure, and I mean, those are plausible and decent academic arguments. But if that’s the case why is inflation higher today then it was a couple of years ago? Inflation was siding on -- talk about the headline cpi – there’s a lot of indicators out there that people can look at for inflation. Well, let’s start with the headline cpi, it was a huge challenge for the fed to – they were frusterated that they weren’t making progress towards 2%. The headline C+PI was down at 1.5% persistently and sometimes even lower than that. Well, now it’s above 2%, and our models at the Doubleline show – and they’ve been pretty accurate over time – that it’s quite likely to expect inflation over 2% here as we go through 2018. Maybe even into in the mid 2s, all things absent any kind of shocks. So if the inflationary forces are supposed to be offsetting, why aren’t they offsetting now? I mean, inflation is higher today than it was a couple of years ago. So, I don’t know, maybe they forces can come out of the blue starting next week, but I’m from missouri on all this stuff. Show me the declining inflation trend. If you take the stable inflation trend in the 2s we have now, and laddle on top of that wage inflation – I gotta think that the baseline assumption has got to be that there’s going to be a higher inflation level.
Wapner: what’s your best trade in the market today?
Gundlach: I still like commodities, judge. We’re late cycle, we talked about this december 13th, commodities have outperformed stocks since December 13th, even though stocks are up a little bit, our commodity fund is up more. And I think late cycle commodities always rally. And you can make the argument that we’re not very late cycle, if you like -- I’m not going to argue with someone who says that. We’re not early cycle and we’re not mid cycle. This expansion is getting to be one of the longest in history. If we go four quarters in 2018 with positive growth -- it will be the longest post-war expansion. So we are late cycle, and late cycle, you can bank on it, commodity prices go up, and not by 20 or 30%. And this has happened since the ‘70s. Going to the front – commodity prices go up 100, 200, sometimes 400%, so I think that’s the trade that investors should be looking at. And most investors are underweighted or completely not invested in commodities because they’ve been so quiet, sleepy ever since – and actually negative since the peak in 2011 and certainly the big peak in 2008. So commodities is my choice investment for investors to get diversified at low prices now.
Wapner: so you think the dollar is going to remain weak?
Gundlach: I do think the dollar’s gonna remain weak. It started to rally and it’s been rallying a bit, and generally it’s correlated with higher bond yields, but the dollar trends are persistent and they tend to go on for six or eight years. The cycles are quite predictable that way. And the dollar peaked out – it bottomed out in 09, and then it peaked out basically in 2016, so it’s about an eight-year cycle. And now it had a bad year last year. Usually a bad dollar year starting a trend is followed by another bad dollar year, and so far that’s happening. The dollars down on the DXY 2.5% year to date. I do think the dollar goes lower, and you’re right, that’s completely consistent with the commodities thesis.
Wapner: now— and when – some are talking –
Gundlach: and by the way, one last thing, judge, that’s also consistent with higher inflation in the united states. That’s another variable that would argue for higher inflation down the road, is if the dollar is already down 15%, trade weighted basis and another leg down, certainly is not going to be deflationary.
Wapner: when -- if somebody was to ask you, because people are talking about it, and certain well-known money managers are talking about it, whether it’s Ray Dalio looking at a recession, you know, not next year, but perhaps 19 or 20. When do you see a time that we need to seriously be thinking about a recession on the horizon?
Gundlach: not yet because we monitor about a dozen, maybe even 18, indicators that have proven to be good telltales of a coming recession, and virtually none of them are showing anything except a green light for growth. I mean, money velocity, which has been anemic for a long time, is the one that argues that may be more of a precautionary, but everything else— leading indicators came out at a new high. Like 6.1 year over year. Those – you never get a recession without leading indicators going negative year over year. We’re not even close. So you can go through a lot of things, the unemployment rate is obviously still on its lows and many others, so no recession can be found in the months ahead. These indicators can change quickly. But they usually give you a runway of the coming recession of at least a few months, and so many things too, like consumer sentiment, like ceo sentiment, small business sentiment, all these still very high, the ism, so no recession now, but here’s the deal: when the next recession comes, it’s really going be interesting because we’re already putting on a 1.2, 1.3 trillion dollar deficit in fiscal ‘19, and we have quantitative tightening going on, which could be as much as 600 billion in fiscal ’19, we’re talking about nearly 2 trillion of government bonds and corporate bonds and jump bonds, and bank loans starting to show some real maturities, so you put a recession on top of that, you can be looking at bond supply like we have never seen before. And so the real question, and this is something we’re noodling with a Doubleline, and we’re gonna let some of the developments form our point of view, now we don’t have a preset point of view, always better to keep an open mind, but will the next recession be bond friendly with all of that supply coming? It’s really an interest question for investors to ponder. We don’t have to answer that today, because the recession isn’t here yet.
Wapner: the unknown variable in all of this, of course, is the fed. And to what extent the fed is going to go hung ho on rate hikes this year. How many times do you think they’ll raise and is there any fear in your mind about a policy mistake from the fed that could result in a recession sooner than you forecast today?
Gundlach: not sooner than what I forecast today, no, because when it’s coming, I think these indicators will give us a heads up. Another one is these jump bond spread to treasuries, which widened during the sell-off a couple weeks ago, but nowhere near enough to be consistent with recession. So you ask me how many times will the feds raise rates? I think it will be three. I think it will be three this year. Obviously they’re raising in march, I mean that’s just virtually a guarantee. And the data will obviously drive things, but the fed wants to raise rates sequentially. They’re getting as I said to you in the past quasi-old school, it used to be every meeting when the data looked like this, now it’s basically once a quarter, maybe a little less. But they want to raise rates, and so their base case is raising rates. And so I think, based upon history, market participants who are experienced -- they should realize that the fed with this mind-set probably will make a policy mistake. Particularly because it’s together with the unchartered waters of quantitative typing, which is going to be start being a real effect. I mean there hasn’t been much yet but as we get further along, there could be as much as 50 billion a month that is rolling off the treasury’s balance sheet. That together with the quarterly type rate hikes, I think certainly has a cocktail with a potential to lead to recession, sooner than what a lot of people are talking about two years from now are thinking. I don’t think it’s in the months ahead but I certainly believe we can have a recession in a year’s time.
Wapner: I know some of the folks in front of me have questions so let me ask you lastly, three rate hikes is almost an outlier view now. Right? You’ve got consensus seems to be almost moving towards four, and then an economistic at Goldman Sachs yesterday in an internal podcast says you’ve got to be perhaps wondering about the chances of even five.
Gundlach: yeah, well we’ll see what happens with that the data. Five seems like quite a stretch for me from what the rhetoric of what’s been coming out of the fed so far. But one thing that’s interesting is the move up in treasury rates of recently has not been flattening the yield curve. The yield curve has flattened out at 50 basis points, 2.10 as its narrowest levels, now it’s up to about 67 basis points or so and it was a little bit wider than that. And one thing that’s interesting is I think if we get this break to higher yields that maybe would happen on 3.22 on the 30-year I don’t think -- I don’t think it’s steepen the curve. So it would be interesting to see because the fed is a little more measured. The rates on the two years, five years and ten years for the past nearly six months have been rising at a rate that would be consistent with eight fed rate hikes, if the curve were going parallel in a year because it’s up by 200 basis points annualized. So there’s a lot of interesting things going on. We’re at an important juncture. We got to watch that 3.22 level. Judge, I’m sorry – I’m pressed for time today. I’m going to have to sign off here, but it’s – I really enjoy being with you, and good luck to everybody out there.
Wapner: no, we appreciate it Jeffrey. Thanks so much for calling in, it’s great to hear from you. So many issues to kick around. We’ll talk to you soon. Jeffrey Gundlach, he’s of course, CEO of Doubleline.