Gundlach: Likes Bonds, Not Homebuilders

DoubleLine founder prognosticates on gold, the U.S. dollar, bitcoin, demographic trends and why he gets hate mail

DoubleLine CEO Jeffrey Gundlach DoubleLine CEO Jeffrey Gundlach

DoubleLine CEO Jeffrey Gundlach says there’s some potential for gold and good support for a strong U.S. dollar. He shared these views and much more, of course, during his “Penny for Your Thoughts” webinar late Tuesday, in which he also clarified his controversial view on the housing sector.

“Calls for much higher Treasuries yields are premature once again,” he remarked.

The trading range is likely to stay between 2.2% and 2.8%, the fixed income expert says. “We are now at the midpoint of the range, so it’s not a bad time to think about bonds.”

In the first half of 2014, U.S. Treasuries made it to 2.44% and then moved up to 2.64%.

“Pension plans are taking advantage of big equity gains to move from stocks to bonds,” Gundlach explained. “And that cyclical movement is having an impact.”

The bond-shop CEO believes interest rates of 4% are not expected until 2020. “That’s what the market is saying,” he explained on the call.

Why are rates so low? “There’s a big short position in Treasuries” held by speculators, Gundlach said.

Of the $16.8 trillion of Treasuries, the Federal Reserve holds about $2.1 trillion, while the Social Security system has $2.6 trillion. The Chinese own $1.3 trillion of Treasuries, but other countries have double that amount.

Home Sales

As for the U.S. housing industry, “I am negative on homebuilders,” he said. “And I do get hate mail about this.

“I am not negative on housing — though I don’t see prices doing much. I do not see a crisis. The idea is limited to the theme that new home-buying will be much less than previously thought. It’s not so much of an economic story, but new home sales will be less of a support for the economy than some believe.”

Rules have tightened up the home-buying process, Gundlach points out: “Housing finance has changed markedly.“

“New home sales of the past 10 years are nowhere near those of the bubble, and they are now at the level of ’09,” he explained. “There’s been no uptick recently.”

He sees this as a generational shift.

“I do not see millennials buying homes like the previous generation did … Young adults today are scarred, and I do not think they see housing as security. I think they see it as risk.”

Dollar Dynamics

With interest rates going lower in Europe and better economic fundamentals on this side of the Atlantic, “The U.S. dollar is incredibly stable and doesn’t want to move,” Gundlach said. “We think it should see some upside.”

Politicians in Europe want to keep the euro low vs. the dollar, he notes, “and don’t want it to move.”

Still, he said earlier in his presentation, U.S. dollar debasement — as measured by purchasing power parity – has been substantial in the long term. “The dollar has lost 96% of its value since 1913,” Gundlach said.

He reminded those joining the webinar that a gallon of milk cost about $0.04 in 1910 vs. more than $3 today. “That’s a compound annual growth rate [in the price via inflation] of 4.3%. I recall my grandfather telling me how proud he was to make $14 a week during the Depression.”

As for the Chinese currency, the renminbi or yuan, its ascendency started in 2001. Today, about 40 central banks have embraced it.

“Interest in bitcoin has been revived in the past few months,” Gundlach pointed out. “But the U.S. government is claiming you will have to pay capital gains” on any profits made by using it. “So resistant to it could have some teeth.”

As for GDP growth, he says the second-quarter forecast of 3.5% may be a bit high. “I think it should be about 3% and thus about 1% on average for the first half of 2014.”

There are some big storm clouds ahead, Gundlach predicted, such as further deflation in Europe and the lowering of China’s economic growth forecasts.

Metal Movement

“When it comes to gold, we are at a decision point in the market,” he said.

“I think in the second half of 2014, we should see higher highs … and thus over $1,400 an ounce,” Gundlach said.

“We could have another modest performance and go higher, but we’re not going to go over $1,500. That’s the best case,” he added. “Is that nutty? We could get close.”

Other Shifts

The bond chief had good news on U.S. demographics.

While the U.S. has an expanding population 65 and older, it is not going to experience some of the stress and strain such a shift has brought to Japan and Europe.

In Japan, the share of population 65 and up is about 26% today and will hit 40% in 2050. In Germany, this demographic group will expand from 21% to 30% of the total population.

In contrast, those 65 and older represent about 14.5% of the U.S. population. This figure should rise to about 21% in 2050.

On the other hand, as fewer older workers retire, younger workers in the U.S. are paying a price, Gundlach points out.

“The labor participation rate of 16- to 19-year-olds was 60% in the 70s and now it’s down nearly 30 points!” he said.

“The old folks won’t or can’t retire, so there’s less jobs for the younger generation,” Gundlach noted. “It will be a fast-moving situation in the next 10 years … and we’re now on the threshold.”

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