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Round Table Prime – 2022

Round Table Prime: The Macro State of Play With the Fed in Transition

(DoubleLine Round Table Prime: Global Macroeconomy)

In this segment of DoubleLine’s Round Table Prime, moderator and DoubleLine Deputy Chief Investment Officer Jeffrey Sherman and panelists James Bianco, Danielle DiMartino Booth, Jeffrey Gundlach, Ed Hyman and David Rosenberg analyze the macroeconomics shaping their investment and risk management theses. This edition of Round Table Prime was recorded Jan. 4, 2021.

James Bianco is President and Macro Strategist at Bianco Research. Danielle DiMartino Booth is CEO and Chief Strategist of Quill Intelligence. Jeffrey Gundlach, host of Round Table Prime, is Founder and CEO of DoubleLine Capital. Ed Hyman is Chairman and Head of Research of Evercore ISI. David Rosenberg is President, Chief Economist and Strategist of Rosenberg Research & Associates.

Monetary and Fiscal Stimulus

With Federal Reserve officials signaling a transition from more than a decade of extraordinary accommodation to address inflation, Jeffrey Sherman starts off the discussion by asking the panelists for their outlooks for U.S. monetary policy (3:32). James Bianco observes that “when people are asked, what are the biggest problems in the economy, prices and inflation are now replacing COVID as No. 1. Forty percent of the country rents and has less than $1,000 savings. They are very unhappy about inflation.” This puts the Fed in a tough spot. “Now you’ve got a position where, if you address what the 40% want, you might make markets unhappy. If you acquiesce to markets, you might make the 40% unhappy.”

Jeffrey Gundlach expects the next Consumer Price Index print to be 7% (7:03). “If you’re an intelligent 12-year-old, you’d be able to say, if you curtail productive capacity while simultaneously spraying trillions of dollars, do you think prices might go up? This is just another example of the Fed being embarrassed. Remember ‘Subprime is contained,’ ‘Inflation is transitory’? You couldn’t see this coming?”

Danielle DiMartino Booth argues the disparate impacts of fiscal and monetary policy on households in different income strata put the Fed in dilemma (9:35). “The fiscal impulse was so massive that helped the lowest end of the income strata, and obviously the highest end has been helped as never before through Fed policy filtering through that 1%. But it’s the 40% … that are stuck in the middle who are really paying this inflation. They’re not getting – let’s call it a family of four – they’re not getting $1,100 in child tax credit in cash; they’re not getting more than $1,100 with the Oct. 1st increase in supplemental nutrition assistance benefits, what we used to call food stamps. But your average family who qualifies for both was getting $2,200.”

Fed policy, Ms. DiMartino Booth comments (10:27), “has managed to create wage inflation that’s going to be sticky because so many people have retired. Rental inflation that’s going to be sticky; that’s your biggest line item, and 40% of Americans rent. And these are the people in the middle of the income ladder that are being slammed. They are calling their politicians. They understand what’s happening. The people at the top don’t care. The people at the bottom don’t care as long as nothing changes. That’s what makes Joe Manchin the most important man in America today because he’s the moderate in the middle that’s trying to make sure that we step back and say, ‘This is a little bit of fiscal insanity.’”

David Rosenberg, however, lays asset inflation at the feet of the Fed but not consumer inflation, and he sees the potential for inflation to be transitory, i.e., limited to a couple of years. “There’s nothing here that says it’s going to be permanent,” Mr. Rosenberg says (12:43). “We can understand we had massive fiscal stimulus bumping into a supply shock.”

“The key for the Fed is to make sure inflation expectations don’t get out of control,” Mr. Rosenberg says (13:47). “And there’s really no signs of inflation expectations getting out of control. One of my favorite indicators is the two-to-five-year University of Michigan inflation expectation metric, which has been stable at under 2½%. But certainly, the Fed now has to sound very tough on inflation. What they end up doing, who knows? They barked like crazy, they were going to raise rates four times in 2016, and Janet Yellen ended up raising rates once.”

The mistake of the Fed was its policy choice of quantitative easing. “QE is just there to juice up financial assets, and they created a monster across all the risk asset classes,” Mr. Rosenberg says. “That to me is going to be the big risk, and then the second-round impact on the economy and then on inflation if we end up having these bubbles burst.

“We’ve had three years of incredible monetary stimulus that started at the beginning of 2019,” Mr. Rosenberg says (16:38). “And that’s going to be shifting in the coming year. And we’ve had unprecedented fiscal stimulus in these past two years that went overboard, but that’s not continuing. So if the fiscal stimulus that caused the inflation is not continuing, and the Fed is shifting gears, why would you therefore believe that inflation is going to be a permanent problem?”

For his part, Ed Hyman, Chairman of Evercore ISI and Head of Research (18:43), notes that money supply leads by a year and half, and in terms of money supply and rising loan activity, he sees “a lot of fire is in the hole here that’s going to keep the economy going.”

“M2 in the past two years has increased 40%… and bank loans in the past month, which is the transmission of velocity, they’re growing at an 18% annual rate in the past month,” Mr. Hyman says. “So, it’s pretty clear to me that we have a theory that inflation is a monetary phenomenon, we have an extreme amount of money that’s been pumped into the system, on top of … the fiscal stimulus … but then you also see that this money is impacting the economy everywhere – where there’s art prices, stock prices, real estate prices, employment, wages, rents…. I think that the surprise this year is that this year is going to resemble last year. Inflation is going to be a problem. The way that the view of Fed watchers had to move to the view of a more hawkish Fed, that’s going to happen again this year.”

Labor Markets and Wages

Turning to labor markets, including elevated quit rates reported by employers, wages and changing work environments (29:02), James Bianco focuses on the unknowns of a changed world. “The biggest event of this generation was we sent everybody home for nearly two years. It has changed a lot of things that we don’t understand. There is a perception on Wall Street that ‘Oh, if X happens and Y happens, we’re going to go back to 2019.’ We’re not going back to 2019. I’m not saying it’s going to be bad. I’m just saying that whatever is the new environment for work, whatever the new environment for the office is, is to be determined. And I think when we look at these quit rates and when we look at the change in the labor market, that labor has more control over management, over wages and everything else, that there is a fundamental change that’s going on in the economy.”

Danielle DiMartino Booth notes (30:39), “When you add the 1½ million spouses who have dropped out of the labor force because the fiscal safety net has been widened to the extent that it has to the 3½ million early retirees, you get this round 5 million number. In November, we had 4½ million people quit their jobs. You have this massive slice who has dropped out of the labor force that has empowered the skilled laborers who have stayed in the labor force. Because at the same time, we’re seeing job openings begin to decline in fact at a dramatic pace, which means we’re likely at full employment.”

Ms. DiMartino Booth warns of the disparate effects on different parts of the workforce (31:11). “If you have a job and you have skills, you are employable, and you can hopscotch all you want to the next higher ticket. But if you’ve been out of the labor force for two years, nobody wants to hire you,” she says. “At last check, according to Sen. Manchin, there is no child tax credit that’s being sent out Jan. 15. That’s gone. So there is going to be a shock to a lot of the lowest-income earners in the very beginning of this year. In addition to that, the IRS begins to accept applications for income tax refunds on Jan. 31. That’s the day that the window opens. So, a lot of these lowest-income families are going to go and expect that couple thousand-dollar tax refund. Somebody’s going to have to explain to them that they’ve been taking that credit in cash since July of 2021, and ergo their refund isn’t what they expected to be to pay off their credit card debt.”

David Rosenberg questions the idea that the U.S. has reached full employment and expresses skepticism about the idea that elevated quits will solidify into elevated early retirements (34:19). “The Atlanta Fed wage tracker is the gold standard and a leading indicator,” Mr. Rosenberg says. “And it’s showing actually that the only wage growth outbreak that we’re seeing is among youth in leisure/hospitality, unskilled and uneducated, barely more than 20% of the workforce.

“I don’t buy into the Great Retirement theme,” Mr. Rosenberg says (34:40), “because when you look at the data from the Fed’s survey of consumer finances, the median household has maybe two years of a 401(k) plan they can burn through before they can come back to work…. We don’t know, once the pandemic is fully in the rear-view mirror, how many of these people come back into the labor force.”

Ms. DiMartino Booth agrees (37:51) but adds her concerns about “accelerated level of automation in the economy, and a lot of the jobs that are going to be desired are not going to be there. We’re 8 million jobs below where we were pre-pandemic trend in terms of job creation.”

A key indicator on the future direction of wages, according to Jeffrey Gundlach (39:35), will be the Atlanta wage tracker: “In the last six months, every (age) cohort, including 55-plus, has started to edge higher, and I think this is really critical to watch every single month because that’s really the wage inflation answer if those other cohorts start to rise.”

As a bottom-up observer of employers, Ed Hyman says (41:18), “The evidence that wages are going up is undeniable in every cohort. I think the biggest event of last year would be that Deere settlement where they got a 40% pay increase.” ISI Evercore, Mr. Hyman says, tallies layoff announcements, which have dropped to zero, and he sees the unemployment rate “getting into the 2s” this year.

Housing

With year-over-year home price appreciation of 20% and rising rents, Jeffrey Sherman (46:03) poses the question, how does the worker keep pace with the rise in housing costs?

“I think what’s going on with the housing market is the interest rates are so darn low. Here we’re talking about CPI inflation of around 7%, Atlanta wage growth at 4.3%, and the 30-year fixed rate mortgage closed the year at 3¼% so you have negative real interest rates,” says Jeffrey Gundlach (50:25). “If you have confidence that your wages are going to go up faster than your mortgage rate, it’s basically free money. And the (single-family home) supply is right back down to its lowest level. It’s a couple of months.”

David Rosenberg observes (55:39), “The excess of prices over income adjusted for interest rates, for both equities and residential real estate, is around 20%. That is the excess over and beyond where interest rates are. So, this is basically called speculation…. We have a bubble in speculation in both asset classes. And let’s see what the Fed does next year. They’re barking. Will they bite?” The answer will be fateful for housing, “the most interest-sensitive sector that there is.”

On rentals, earlier during the panel (17:17), Mr. Rosenberg sees relief on the way for tenants. “If you take a look at what’s happening in multifamily permits, starts, units under construction and completions, and there’s lags involved here, we’re going to be faced with a deluge of rental supply in the second half of next year.”

Stock Valuations, the Real Economy and Stock Market Vulnerability

After James Bianco notes the Russell 2000 market cap index has a $2.4 trillion market cap versus Apple’s market cap of $3 trillion, Jeffrey Gundlach notes (26:08) that illustrates “this sort of medieval, feudal society that we’ve turned into…. Some people are doing outstandingly well and that others are on a safety net being created by those doing outstandingly well, and we continue to hollow out the middle.”

The panelists discuss how much tightening would tank the economy and with it risk markets. “We’ve seen the movie repeatedly,” Mr. Gundlach says (58:51), “and every time the movie plays, ever since 40 years ago, it takes less and less of a fed funds level to make the economy buckle. The last one, it took only 2½% or so. My theory is based upon what’s been happening in the bond market over the last several months; it looks like it’s going to take something like 1¼ to break the economy.”

Noting that the market is pricing in a terminal federal funds rate of 165 to 170 basis points, Mr. Bianco says (1:00:26), “The Fed’s latest dots are around 250…. But let’s remember the history of the Fed. They are very, very skilled at raising rates too much and breaking something.

“I look at the long rates as not so much as a metric of what we think about inflation, but we do think about the Fed breaking something,” Mr. Bianco says (1:01:23). “And the signal in the market that you’ve gone too far has been an inverted yield curve.… A couple of rate hikes, a little bit of a rally in the 10-year, and you’re inverted by the middle of the year.”

 

Round Table Prime: Tour d’Horizon of Global Markets and Asset Classes

(DoubleLine Round Table Prime: Market Outlook)

In this Markets segment of DoubleLine’s Round Table Prime, moderator Jeffrey Sherman and panelists James Bianco, Danielle DiMartino Booth, Jeffrey Gundlach, Ed Hyman and David Rosenberg discuss equity, bonds, currencies, commodities asset classes. This edition of Round Table Prime was recorded Jan. 4, 2021.

James Bianco is President and Macro Strategist at Bianco Research. Danielle DiMartino Booth is CEO and Chief Strategist of Quill Intelligence. Jeffrey Gundlach, host of Round Table Prime, is Founder and CEO of DoubleLine Capital. Ed Hyman is Chairman of Evercore ISI and Head of Research. David Rosenberg is President, Chief Economist and Strategist of Rosenberg Research & Associates. Jeffrey Sherman is Deputy Chief Investment Officer of DoubleLine Capital.

U.S. Equities

In discussing U.S. stocks (4:09), Ed Hyman estimates corporate earnings will be up 30% year-over-year in the fourth quarter and takes note of the Atlanta Fed’s estimates of 7% nominal GDP growth in the quarter. Looking forward, he notes immense monetary stimulus is in the pipeline, with the Federal Reserve’s balance sheet on track to peak at $9 trillion in the spring. Mr. Hyman sees stock prices likely headed higher in 2022 on the strength of continued earnings growth in 2022.

In contrast, David Rosenberg sees the price-to-earnings multiple as key for the direction of stocks, and the multiple is very sensitive to interest rates. (7:28) “If the Fed moves rates up, earnings might do fine,” Mr. Rosenberg says. “But I’m expecting that the multiple is going to contract.” Mr. Rosenberg’s outlook also includes a view of slowing global economic growth in 2022, which he says could become “the year of the great mean version” after three years of 20% annual gains for the S&P 500.

Without calling for a stock market direction in 2022, James Bianco boils down the stock rally in 2020-2021 to powerful money flows, especially into exchange-traded funds (11:42). The source of that big wave of money, he says, was excess savings, which stemmed from Americans spending less due to pandemic-related shutdowns and stimulus checks. “That excess savings number,” Mr. Bianco says, “has essentially dried up now.”

In the event of a market corrections, Ms. Danielle DiMartino Booth is on the lookout for the potential offsetting impact of target date funds and their quarterly rebalancing into stocks if corrections alter their weightings between bonds and equities (19:29).

International Equities

The panelists also turn to equity markets outside the U.S. (21:20). David Rosenberg notes that almost two months ago his allocation “models flipped from being underweight to overweight Europe…. If you believe ratios mean revert, which they do over time, you’d want to be taking profits in the U.S. and allocating them abroad.” “I would say wide swaths of Asia, after the year they had last year,” he says, “offer tremendous relative value.”

Mr. Gundlach says (27:42) DoubleLine bought European equities in 2021. “It didn’t exactly work, but it didn’t not work either, because they’ve stopped seriously underperforming, which is a really interesting sign. When the next recession comes, whenever it is, I think you’re going to see the United States tremendously underperform.”

The “not-faint-of-heart,” Mr. Gundlach says, “should start thinking about emerging markets, and I say ex-China. I refuse to invest in China, in particular given the geopolitical rivalry that’s going on. You might go up a lot in price and then wake up one day and it’s been confiscated by the Chinese Communist Party.” He adds that DoubleLine has not yet bought EM equities, but he thinks “that’s the next great trade. I’m jumping the shark a bit, but I would say, looking at the entry point to emerging markets is really going to be `the’ trade.” The EM trade, he says, needs the dollar to start falling to pay off.

The Fed and the Markets

Danielle DiMartino-Booth, who for a decade served as advisor to Richard Fisher, then-President of the Federal Reserve Bank of Dallas, points out that four Federal Reserve district presidents with hardlines are joining as voting members of the FOMC. Given their potential quorum with Christopher Waller, Ms. DiMartino Booth warns (18:44), “We are going into a year when the hawks will rule.” Taking note of the Fed’s shift toward reigning in QE, she adds (19:09) that Fed Chair Jerome Powell realizes that such a voting bloc could mount “a power play against him that would be very public and damaging to his leadership.”

Among the underappreciated influences on monetary policy in 2022 might be target date funds, according to Ms. DiMartino Booth (19:29). If the stock market experiences corrections this year, massive flows into target-date funds and their quarterly rebalancing into stocks could offset Fed attempts to implement less accommodative monetary policy, pushing the Fed to tighten policy further, against a backdrop of layoffs in the wake of massive M&A activity. “You could see earnings rising, financial conditions tightening and these passive flows offsetting the Fed – that makes the Fed do something that makes something break.”

Ed Hyman, however, suggests (31:26) that the sheer size of the Fed’s balance sheet, $9 trillion, might compel the Fed to pursue “easier monetary policy than is generally discussed…. The problem is, if the Fed starts to raise the funds rate very much, they invert the yield curve.”

Fixed Income

With respect to the fixed income universe, David Rosenberg pointed to low Treasury yields and low inflation expectations two to five years out surveyed among consumers by the University of Michigan’s Survey of Consumers (25:12), which at 2.4% is lower than before the pandemic struck. “You’re not buying bonds on inflation, which is a lagging indicator. You’re buying on (inflation) expectations…. Maybe what the market is thinking is the Fed is going to pull a classic policy mistake, overtighten, create the conditions for asset deflation that then will have a spinoff effect on the economy and on aggregate demand, and within two years, we’re back talking about deflation again.”

Jeffrey Gundlach agreed (26:19) that scenario is “completely plausible” and explains in part why “as much as I despise the value proposition relative to just about anything of the 30-year Treasury, I actually think investors should own some of it. Investing is not about deciding what your maximum-probability idea is and going all in. Some people do that, and they have great years, great decades, and then they go out in a blaze of glory because you’re going to be wrong on your maximum-conviction idea from time to time, at least. And so, I actually still believe that investors should have 25% in long-duration Treasuries as much as I hate them – because we know that when this thing rolls over, you’re probably going to have a moment where the long bond goes below 1%. And when it does, you’re going to have that 25% type of gain.”

The underlying context of low prevailing interest rates and their sustainability is the subject of much discussion by the panelists. Jeffrey Gundlach notes various indicators, including the copper-gold ratio, argue for a 10-year Treasury yield of at least 3% (15:29). He suspects unhedged foreign buying of U.S. assets explains at least in part low U.S. yields. But what if foreign buying and QE reverse? Speaking of the Treasury market two days into the new year, Mr. Gundlach notes (17:25), “Two robins don’t make a spring in here 2020, but the long end is having trouble. And if that goes higher, that’s going to be really a problem for all of these speculation assets.”

On the currency markets (47:41), James Bianco sees the dollar struggling in terms of its purchasing power and brings up cryptocurrencies (49:56) as an alternative to the buck. In fact, Mr. Bianco attributes recent headwinds facing precious metal prices as a consequence of the adoption of crypto as a dollar alternative.

Given his view that China has already overtaken the U.S. in productive capacity and will in the future surpass the U.S. by conventional accounting of gross domestic product, Jeffrey Gundlach believes, as part of his multi-year outlook, that the dollar will cease to be the world’s sole reserve currency (51:56).

Commodities

The commodities market (42:08), moderator Jeffrey Sherman notes, had one of its better years in 2021, “in the face of a stronger dollar. Usually, they tend to have an inverse relationship.”

David Rosenberg does not allocate to commodities at present, given that he does not foresee sustained inflation and he expects China’s economy, which is the world’s largest consumer of commodities, to continue to slow. Ed Hyman takes a monetary point of view.

Mr. Hyman notes that monetary policy has lags of about 18 months and the Fed’s balance sheet is likely to peak at $9 trillion in the spring. While not bullish on commodity prices, he is not bearish either given the monetary stimulus in the pipeline.

Jeffrey Gundlach is neutral on commodities “for now,” given their 80% move off the lows in mid-2020. However, Mr. Gundlach is impressed by commodities’ resilience after that move, and given his outlook on dollar’s ultimate loss of sole reserve currency status, is bullish on commodities over the long term.

 

DoubleLine Round Table Prime 2022: Best Ideas

(DoubleLine Round Table Prime – Best Ideas for 2022)

In the Best Ideas segment of Round Table Prime, moderator Jeffrey Sherman and panelists James Bianco, Danielle DiMartino Booth, Jeffrey Gundlach, Ed Hyman and David Rosenberg share some of their favorite investment ideas for 2022. Skip Intro (3:14). This episode of Round Table Prime was recorded Jan. 4, 2022.

James Bianco is President and Macro Strategist at Bianco Research. Danielle DiMartino Booth is CEO and Chief Strategist of Quill Intelligence. Jeffrey Gundlach, host of Round Table Prime, is Founder and CEO of DoubleLine Capital. Ed Hyman is Chairman and Head of Research of Evercore ISI. David Rosenberg is President, Chief Economist and Strategist of Rosenberg Research & Associates.

 

 

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