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DoubleLine Portfolio Manager breaks down inflation concerns

DoubleLine Portfolio Manager Vitaliy Liberman joins Yahoo Finance’s Julia La Roche to discuss housing, mortgage rates and infrastructure.

Video transcript

ZACK GUZMAN: I'm very excited to remind you that we have exclusive coverage from DoubleLine Capital's investor days culminating in an interview tomorrow with founder Jeffrey Gundlach. And we're kicking things off right now. Yahoo Finance's Julia La Roche is out there in LA. Want to send it to her to kick things off. Julia?

JULIA LA ROCHE: Well, thank you so much, Zack. And I'm pleased to be here at DoubleLine's headquarters with Vitaliy Liberman. Vitaliy is a portfolio manager looking after mortgage backed securities. Vitaliy, great to be with you. I think it's an important time to have a discussion about rates and the economy and frame up your overall view right now.

VITALIY LIBERMAN: Thank you. So I think it's important to understand that the way the markets trade today has to do a lot with the narrative and sentiment, not necessarily the underlying economic data. We can see it's in today's trading activity or particularly investors reactions to the better than expected, the worse than expected data, where that kind of developments or those kind of developments usually get discounted quite heavily.

So what that means is that there are certain narratives in the marketplace that are going to play out over the next, let's just say quarter, until economy stands on its own two feet as government pulls away from some of the programs that it's instituted to support it through this difficult time.

JULIA LA ROCHE: Let's talk about some of those narratives, and including in the space that you look after, agency mortgage backed securities. And the housing market has been so active right now. And to what extent has that been fueled by the fed here? And what do you think happens when they start to kind of pull back there?

VITALIY LIBERMAN: Yeah, I think that that's one of the areas that's going to be heavily affected by the fed's activity. It really has to do with the nature of housing market in that being non tradable goods, they're most affected by flow of funds. And given the high level of liquidity that exist in the marketplace and coupled with high saving rates and low overall interest rates, that certainly gave a boost to housing market, particularly given that there are changing trends in terms of how people assess and view their houses or their dwellings in terms of the go forward kind of dynamics.

So in the past, if we thought about the urbanization, now we're going to talk a little bit more about more of having a yard, or having a nice house, that became a lot more important. So I think those trends are going to persist here until A, interest rates rise if that's the case, or if that pulls away potentially the kind of level of rates that exist in the housing market could increase. And therefore, that could dampen the housing activity on a go forward basis.

JULIA LA ROCHE: As it relates to rising rates, what's kind of your framework? What are the things that you're looking at? And what's kind of your outlook there?

VITALIY LIBERMAN: So I think that, again, the narrative is that rates are going to rise, and I agree with it, for a little bit. But then once the economy gets to stand on its own two feet, I think the broader trends that existed prior to the pandemic, that of demographics, I mean 65 years old and higher is the largest or fastest growing demographic, in terms of the overall productivity kind of enhancement, the information technology, software, and so on. And certainly the level of debt.

Remember, we're going to exit this pandemic with debt to GDP ratio, total debt to GDP ratio, of about 370%. That is significant. So I think that is one area where investors might be surprised in terms of the level of rates that we're ultimately going to achieve.

JULIA LA ROCHE: There's a lot of discussion these days about inflation. We got the CPI print this morning. Can we talk about inflation and what kind of risk that poses to the housing market if those rates go up?

VITALIY LIBERMAN: Yeah, of course. So clearly the inflationary pressure on the surface is beneficial from the standpoint of the pricing of the houses. Clearly the costs are one of the beneficiaries of the rising overall prices. And they, as we've seen, have benefited significantly. The housing market was on fire. But again, the housing market is a function of affordability or overall mortgage rates as well as overall trend in people's ability to afford such products.

And I think if rates are to rise here, that premise will be challenged because houses will not be affordable. And we've seen this before. I mean, think about circa 2006 kind of experience when prices got to the point where essentially they become mostly unaffordable. And that really kept the growth rate in terms of the pricing in the housing market down.

JULIA LA ROCHE: You're talking about affordability when it comes to housing. And it does make one wonder, how sustainable is this current run up that we're seeing? And at what point do we think that those prices might start to come back to Earth?

VITALIY LIBERMAN: So I think that-- actually the one interesting thing about the housing market, it's still reeling from the previous 2008, 2000 kind of nine great financial recession. And there is an imbalance between the units that were put in place versus what demand might be. And I think the positive dynamic is still going to be sustained for a bit and perhaps further than the rest of the economy from the standpoint of the imbalances the pandemic has created.

So I still have a positive view on the housing market for let's just say next several years. But again, it's all going to be contingent upon the ultimate rates and the affordability, wage growth, and other factors that allow for people to participate in the housing market.

JULIA LA ROCHE: And one more question before I let you go. Where are you seeing opportunity right now? And what is the opportunity that is most interesting to you and your space?

VITALIY LIBERMAN: What's interesting about this episode is I've mentioned to you that essentially debt is at the highest level it's ever been in absolute terms, in relative terms to GDP. Yet when you look at the spreads, they're are also at the all-time [? tides. ?] That's actually inconsistent. Typically what we see is that spreads, or credit spreads, essentially widen out in response to the increase in debt because clearly risk of imbalance are rising.

So I think that it would be important for investors to exercise caution, not to chase high trends right now. Play defense. Because it's very easy for this hot trend to reverse itself once the economy has to stand on its own two feet. And unless we think that we're going to go the route of USSR, where government is going to become de facto economic agent, economy will have to stand on its two feet. And at that point, you have to reassess what's true and what's illusionary.

JULIA LA ROCHE: Exercise caution. Well, Vitaliy Liberman, portfolio manager for agency mortgage backed securities here at DoubleLine, I thank you so much for your time. And thanks for having us here. Really looking forward to these discussions.