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Jeffrey Gundlach, DoubleLine Capital Founder & CEO, joins Yahoo Finance to discuss the bond market, commodities, currencies, and the crypto market.
JULIA LA ROCHE: And to start off the 1:00 PM hour, I'm pleased to bring in our special guest in a Yahoo Finance exclusive. We have Jeffrey Gundlach, the Founder and CEO of DoubleLine Capital. Jeffrey, always great to have you on the program.
And as you and I have long talked about, this relationship between the markets, and the Fed here, and, of course, the fresh record highs-- so kind of just stepping back big picture, what do you make of what's transpired in the markets? What's your overall view?
JEFFREY GUNDLACH: Well, the Federal Reserve earlier this year pretty much promised that short-term interest rates would stay at 0 for at least a couple more years. And they seemed to also be interested in controlling a little bit the shape of the yield curve and controlling even long-term interest rates. So the 30-year Treasury bond got up to around 2.5% earlier this year, and now it seems like can't get above 2% even though inflation's been increasing.
And that's one of the reasons why I say I think the Fed is behind the scenes trying to manipulate interest rates lower at the long end. So they've been extending the maturity of their quantitative easing, which is $80 billion of treasuries per month and $40 billion in mortgage-backed securities. And there's some whispering behind the scenes that maybe they're going to start thinking about tapering that quantitative easing.
But as long as it's going on, they keep the bond yields at a very, very low level. I mean, we have negative real interest rates that are rivaling the Jimmy Carter era of the late-'70s with the CPI on the headline at about 5.4%, on the core at about 4.3%. Either way you look at it, you're at negative-3% or negative-4% real interest rates.
And so what I've been talking about for most of this year is that as overvalued as stocks are relative to historical measures like the price earnings ratio, or Dr. Schiller's CAPE ratio, or price to book and all that sort of stuff-- it's overvalued as they look by historical measures-- they still are cheaper than bonds, Treasury bonds. And that's one of the things that's bolstering the US stock market in addition to the stimulus in the economy.
So if you look at the inverse of the PE ratio, which kind of gives you a yield on, say, the S&P 500, it's below average on its valuation versus bonds. So simply, bonds are so overvalued versus the inflation rate versus economic growth and other measures like the copper-gold ratio-- all of our typical benchmarks for treasuries that we use and have been very helpful over the years-- they all suggest on a fundamental basis the 10-year Treasury should be at least 100 basis points, if not up to 200 basis points higher than it is versus economic and inflation fundamentals.
But it's not there because of the Fed's policy. And as long as the stimulus goes on, the stock market can stay in very overvalued territory. One of the things that I've been noticing for a decade now, even more than a decade, is that the stock market's market capitalization-- let's just use the S&P 500-- if you take that capitalization of the S&P and compare it to the size of the Fed's balance sheet, which is the consequence of the quantitative easing, which is now over $8 trillion-- if you compare the capitalization of the S&P to the size of the Fed's balance sheet, it's almost a constant. And it's been that way with very little variation. It's almost like a law of physics it feels like-- market physics, anyway.
And so as long as the Fed is expanding its balance sheet, there's a tailwind behind the stock market. And so I think that's one of the reasons you're going to those new highs is that the bonds are so overvalued.
JULIA LA ROCHE: Yeah, it's interesting analogy you make to almost like a law of physics, if you will. And, Jeffrey, you mentioned stocks are still cheap relative to bonds when you look there. I mean, from an investor perspective, though, where are you thinking about wanting to be allocated? Have you kind of shifted your views of how you want to structure a portfolio given the high valuations?
JEFFREY GUNDLACH: Well, a little bit. I've been for the past year-plus-- I started advocating a little over a year ago the construct of something that was a popular mutual fund a back a decade ago called The Permanent Portfolio. And it's 25% cash, 25% long-term government bonds, 25% stocks, and 25% gold. And not everybody loves gold, but that's just a placeholder for real assets.
I think that with the promise of the Fed at 0 interest rates and their stimulus of the economy, the cash percentage should probably be a little bit less than 25%. And gold has been a very poor performer this year, but commodities broadly have done very, very well until May of this year. And now they're going sideways.
When it comes to the stock allocation, for the first time in I think more than a decade, we at DoubleLine earlier this year started to allocate to European equities part of our equity holdings. And the equity market in the United States and the equity market in Europe have been very similar for quite a while now-- really since the middle of 2020. The US stock market had been outperforming Europe consistently and almost constantly for a decade. But starting in the middle of 2020, they're now moving in lock step.
And I think that the attractiveness of European stocks is based upon their valuation and kind of the structural aspects of the economy in Europe seems to be in sync with the growth that's going on in the globe. So we actually are now favoring European equities. It hasn't worked, really, for the past year and a half but it hasn't not worked either-- they have the same type of return.
And since European equities are so much cheaper from a PE perspective or a Shiller CAPE ratio perspective, and the fact that we believe, ultimately, that these deficits from the stimulus and from the trade deficit expanding also due to stimulus of the dollar, although we've been bullish on the dollar for the past several months, it's just a tactical move-- we think in the longer run the dollar really is going to fall fairly sharply because, historically, when you run massive budget deficits and simultaneously expanding trade deficits, it's very highly correlated to dollar weakness. What we're in right now with the dollar strength appears to be a counter trend move that may be nearing its end as we move into the end of 2021.
JULIA LA ROCHE: Right. I want to go back and bring something up. You mentioned gold being a poor performer, and it just makes me a little bit curious because we've had a lot of talk about inflation lately. I know you and I have discussed this. You know, I'm wondering why gold has been such a poor performer, or is it because Bitcoin's suddenly becoming kind of this inflation hedge-- there's a lot of talk around it being, I guess, kind of a form of insurance. What do you make of all of that when gold's not performing when we talk about inflation?
JEFFREY GUNDLACH: It's a very good point. You know, gold has been stuck at 1,800. I think it's almost exactly 1,800 as we're speaking today. And it got up to around 2,000 and then just gave up the ghost-- this is sort of about a year ago. And now, basically, it's cheap when it's at 1,750, and seems like it's expensive relative to its trading range at 1,850.
Meanwhile, as you correctly point out, Bitcoin has been on a wild roller-coaster. But broadly speaking, it's up a lot. And I think it has to do with the way the government stimulus has been sprinkled around very, very broadly into the economy with stimulus checks going to people. And I do think that the people that received stimulus are probably more likely to trade Bitcoin than to deal in gold.
And so I do think that the stimulus has been a booster for the relative performance of cryptocurrencies. Also, it just seems that governments just seem to be becoming less and less in control of the situation, and there seems to be a sort of societal, cultural theme that people believe that Bitcoin and other cryptos are a little bit outside of the government.
I don't agree with that assessment. But as long as that's the mentality of investors or speculators, it can rule the day. And I think that's what's happening with Bitcoin.
JULIA LA ROCHE: Do you see a place for Bitcoin in a portfolio? Just curious, like, if you see merits there. Have you ever thought about owning the cryptocurrency?
JEFFREY GUNDLACH: No, it's too risky for me. I gravitated to bonds partially because I was assigned to do bonds 35, 40 years ago and I had an affinity for it. But bond people are very low-risk people. People that want risk, you know, it's difficult to trade in bonds if you are interested in a wild ride, because a big day in the bond market is the move of a percent. And Bitcoin can change 20% in an hour-- I've seen that happen.
So I give advice on Bitcoin. And I'm actually not bullish on Bitcoin. I've been wrong on Bitcoin recently. But I've been broadly bullish on Bitcoin for about two years. I'm just not in the short-term. But Bitcoin is clearly a tool of speculation. And you know, it's a great trading vehicle if you want a lot of action, and I think that's one of the appeals.
A lot of people, when you give them $2,000, or $1,200, or whatever size a certain stimulus check can be, they feel like they're playing, with a certain extent, with the house's money. And Bitcoin is a great vehicle for speculation-- far greater vehicle for speculation than gold. So no, I've never been personally long or short Bitcoin.
JULIA LA ROCHE: You mentioned this kind of vehicle for speculation-- maybe it's like the broader theme of what's happening in the markets. How do you kind of see this movie playing out, Jeffrey? How are you thinking about it, like, maybe even the longer term consequences?
JEFFREY GUNDLACH: Well, the longer term consequences of US policies are going to be-- it's one of the reasons why I favor non-US stocks-- not emerging markets, even though they're super cheap. Emerging market stocks are so cheap compared to developed markets stocks, but there's a reason for that cheapness. And that's the COVID problem is so much more significant in emerging markets with health care systems and vaccinations not available in many cases.
So emerging market equities aren't even-- they're not even up this year. So really, I think that the places to be in the long term are going to be emerging markets and non-US entities, because the dollar-- my number one conviction-- I know I've told you this before, Julia-- my number one conviction looking forward a number of years-- I'm not talking about the next few months at all, I'm talking about several years-- is that the dollar is going to go down.
Because of that, I think investors-- I've already rotated into European equities, I will rotate very aggressively into emerging market equities. I just think it's too early for that right now. So the dollar going down, it's another reason why, ultimately, we talked about-- we touched on gold, I think ultimately gold is going to go a lot higher. But it's really in hibernation right now.