U.S. stocks are very overvalued on almost all metrics: 'Bond King' Jeffrey Gundlach
Billionaire bond king Jeffrey Gundlach is warning the current financial conditions could have the United States on track for another long-term bond bear market.
In a television interview Tuesday, Gundlach, the founder and chief executive officer of investment manager DoubleLine Capital LP, said the torrent of stimulus and massive quantitative easing programs will almost certainly ignite inflation, pressuring bond prices to a degree not seen in decades.
“Once they stopped the yield-curve control of the 1950s, we went into a 27-year massive bear market in bonds because of the policies of … Lyndon Baines Johnson as president. Well, that kind of looks like our policies today,” he said.
“It seems to me that we have an echo of what was happening that led into the bond bear market of the 1970s and into the early 1980s. We have massive budget deficits, we have a Federal Reserve that now wants inflation, by their own words, they welcome inflation. This is exactly the opposite of the Paul Volcker Fed of the 1980s.”
While yields on benchmark 10-year bonds have more than tripled from the August low of 0.5069 per cent, they remain low by almost any historical standard. Yields during the bear market of four decades ago peaked north of 15 per cent in 1981, before Volcker instituted his inflation-busting policies.
Bond yields have a negative correlation with bond prices – when prices fall, yields rise, and vice versa.
While inflation remains near the U.S. Federal Reserve’s two per cent target rate, there are concerns widespread stimulus could continue to push inflation higher. U.S. Federal Reserve Chair Jerome Powell has said repeatedly he expects inflation will run hot in the near term and that the central bank is comfortable with some transitory inflation above its target range.
In spite of Powell’s reassurances, Gundlach, whose DoubleLine Capital manages more than US$136 billion, said he remains unconvinced that inflation will in fact prove transitory.
“I’m not sure why they think they know that it’s transitory: how do they know that? I mean, there’s plenty of money printing that’s been going on, and we’ve seen commodity prices going up really massively,” he said.
“It’s not clear to me that inflation is going to go back down to around two-and-a-half or two per cent. We don’t know, nobody knows, I’m most concerned about the fact the Fed thinks they know.”
Gundlach said the degree and depth of the potential selloff in bonds depends almost entirely on the scope of further asset purchases by the U.S. Federal Reserve.
“Who’s going to buy all these many trillions of dollars of bonds? Well, it’s not foreigners, they’ve been selling for years, and they’ve accelerated their selling in the last several quarters. Domestic buyers haven’t done any net buying in years either – they’re not exactly selling, but they’re not adding to their holdings,” he said. “So what’s left to absorb all of this bond supply is the Federal Reserve.”
“It really depends a lot on how much manipulation the authorities are willing to do.”