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Gundlach: Stimulus Fueling ‘Distortions’ in Economy

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The slow post-pandemic reopening, combined with federal stimulus benefits, are creating “substantial distortions” in the economy, DoubleLine Capital founder Jeffrey Gundlach said Tuesday.

Nationwide, businesses of all sizes can’t hire enough employees to get up and running. There are “lots and lots of jobs that are open but can’t get filled because of the government competing with private enterprise,” said the investor whom Barron’s has called “the new bond king.”

The chief of DoubleLine, which has more than more than $140 billion in assets under management, hosted a 90-minute webinar Tuesday in which he laid out his views on the post-pandemic economy.

Inflation Forecast

Inflation is on the rise, Gundlach noted, but that may be temporary. Food prices are high, and manufacturing inventories are at the lowest they’ve been in some 20 years. “That’s not exactly likely to put downward pressure on prices,” he quipped.

The Producer Price Index (PPI), which measures the average change over time in the selling prices of goods and services produced domestically, has been rising, too, but nobody knows how long that will last. Gundlach predicts the rate of increase will likely slow, however, even if prices continue rising.

Distorted Sectors

“What’s really been exploding to the upside in certain parts of the economy: used cars,” he said, “where prices have nearly doubled over the past year.” He recently found that the price of a used truck, if he could find one, was almost the same as that for a new truck. “This is obviously not sustainable,” he said, adding that these elevated prices are far from “indicative of a disinflationary trend.”

Home inventories are another part of the economy that’s “highly distorted,” he said. They are at the lowest level in years; in some parts of the country it’s practically impossible to find a home for sale. There are towns, he said, where there are 10 times as many real estate agents as homes for sale, “which doesn’t sound good for those agents.”

High demand for remodeling and home building has caused lumber prices to explode — like many other commodity prices — but Gundlach thinks those amounts may have peaked.

Office real estate continues to stumble; occupancy rates remain low. “Despite all this economic recovery in parts of the economy, and some of this inflationary stuff that’s happening, we haven’t seen any movement to speak of” in back-to-work office occupancy, he said. He predicts that will change toward the end of summer, “unless there is a setback.”

But even so, he noted, it probably won’t be business as usual. “Many people have indicated a desire to have some work-from-home days, since virtual technology has proven to be very effective and, in some cases, [it's] a productivity increaser because it saves significant time commuting,” he said.

International Stocks, Falling Dollar

Meanwhile, U.S. equity markets have been outpacing international equities for years. That differential is narrowing, however. “Non-U.S. stocks have started to perform in line with or superior to U.S. stocks,” said Gundlach. If the dollar starts falling, the differential favoring international equities will likely increase. He is investing in non-U.S. stocks for the first time.

“There are plenty of indications that the dollar should be falling in the medium to long term,” he added. Yet for the short run, he is neutral on the dollar.

Further suggesting that the dollar will ultimately fall is the fact that the U.S. trade deficit and budget deficit are now “double what used to be considered a bad level,” he observed. When Americans received their stimulus checks from the federal government, many used them to buy products — many of which were made in Asia. This only contributed to the trade deficit.

“The strength of the retail investor has also been a distortion due to all of this disposable income from the government,” he said.

Unemployment ‘Shock’

Claims for unemployment insurance benefits rose during the pandemic, of course, and they have not yet normalized. State unemployment has begun to return to normal levels, but that’s “a mirage,” he said, because of federal stimulus benefits.

Pandemic Emergency Unemployment Compensation (PUEC), which lengthens benefits for people who have exhausted the number of weeks for which they can claim state unemployment; Pandemic Unemployment Assistance (PUA), the program for self-employed, part-time and gig workers; and Mixed Earner Unemployment Compensation, which provides benefits for those who earn money from a mix of employment and self-employment — all are set to expire on Sept. 6. This could be “a shock to the economy,” he said, as it will cut into disposable income.

That shock may reverse some of the trends such as in housing and automobile scarcity. This, Gundlach says, may be “the best argument that inflation may be transitory — but it also has implications that the economy would go into a significant reversal.”

Pictured: DoubleLine CEO Jeffrey Gundlach (Photo: Alex Flynn/Bloomberg)