The U.S. central bank will not join its counterparts in Europe and Japan. They will not opt for negative interest rates to stimulate the economy because these policies are failing in Europe and Japan.

The reason, he said, is that negative rates have backfired in Japan and Europe and are a recipe for deflation.

“I thankfully don’t think that the United States we will go to negative interest rates,” Gundlach, whose bond family has some $98 billion in assets under management, said at a public discussion in Manhattan with Jim Grant, editor of Grant’s Interest Rate Observer. Grant also thought that the Federal Reserve will resist negative interest rates.

Gundlach also predicted that, despite poor economic numbers, Europe would continue to pursue ultra-cheap money policies.

At some point, he said, when people realize that giving away money isn’t turning around the economy, there will be a painful moment when reality hits.

“That’s the moment where all hell breaks lose, because if negative interest rates are a problem and positive interest rates are a problem, you got a problem,” Gundlach said. 

He also complained about deflationary policies, arguing the Federal Reserve has been painting itself into a corner with various monetary policies.
Grant contended that, at some point, people will lose faith in money if monetary authorities keep issuing too much of it.

Grant predicted that over the next year bond prices will be lower and the yield will be higher.

“I agree with that, but the yield won’t be much higher,” Gundlach added.

Gundlach warned that too many people are buying bonds today in the expectation that inflation will never happen.

“I once knew a guy in the investment business who told me that when someone tells you that something will never happens, then it is about to happen,” Gundlach said.

Both complained about the lack of a standard backing the dollar since the U.S. government broke the last link to the gold standard in 1971.

That was when President Nixon famously announced that he had become a Keynesian in economics, justifying running deficits that had once been opposed by most Republicans.

But Gundlach noted that the love affair with debt spending continued during the Reagan years. And, while predicting that Donald Trump would be the next president, Gundlach noted that Trump is “quite comfortable” with debt. He cautioned that Trump would pursue the same protectionist policies used by Herbert Hoover in 1930—policies that many economists contend aggravated the global depression.

Gundlach recommended avoiding junk bonds and investing in mortgage REITs. Gundlach and Grant said they are optimistic about gold.

Gundlach complained that the problem with investing is that cycles change very slowly. Gundlach noted that he called the crash of 2008 about a year early.