When DoubleLine CEO Jeffrey Gundlach recommended buying Japanese equities earlier this year, he was called an idiot. After all, everyone knows that Japan is where capital goes to die.
Gundlach expected Japan's Nikkei stock index to rise to 13,000 in yen by year-end 2013. It is already there.
Gundlach told a group of advisors in New York City today the almost 50% jump in Japanese equities in local currency since late last year is the direct result of the Bank of Japan deploying a quantitative easing strategy three times the relative size of America's Federal Reserve.
Currency debasement in Japan is the "only policy tool left," he said. The insular nation has terrible demographics, no immigration policy and huge government debt that's more than twice the percentage of the U.S.
Total debt in Japan is about 500 percent of GDP; in contrast, it is about 300 percent of GDP in the U.S. But there is an amazing paradox in Japan. The government is trying desperately to rekindle inflation in Japan and yet their Treasury bonds are rallying while equities soar. Go figure.
Quantitative easing in the U.S. could well be here to stay for the foreseeable future, Gundlach said. The $85 billion that the Fed is minting to buy Treasury bonds is almost identical to the amount of the U.S. federal budget deficit. Around the world, most central banks are following their lead.
That's why QE won't end any time soon. But Japan has displaced the U.S. as the "pace car" of the QE race. Gundlach thinks eventually the yen/dollar exchange rate could go to 200.
QE has not created commodity inflation, Gundlach said, adding that equities and bonds in the U.S. have dramatically outperformed commodities in the last two years. Fed Chairman Ben Bernanke has declared there are "no observable negative consequences" from QE and his possible successor, Fed Governor Janet Yellen, has said it could go on until 2023. In fact, gold is down 17% from its highs and Gundlach said it could fall to $1,200 at which point it would be a buy.
Unlike Japan, which has exhausted all its options, the Federal Reserve is still trying to "thread the needle" in the hope that loose monetary policy and nascent signs of a stronger recovery can spark a combination of growth and inflation that will take nominal GDP up to the 7% area. But as it looks right now, 2013 could well be the seventh straight year of nominal growth below 5%.
One area that has experienced dramatic inflation is New York City real estate. Giant buildings are being constructed, often for Chinese and Russian investors. Apartments are selling for $50 million to $90 million while realtors are making charming marketing pitches like "millionaires need not apply." Steve Cohen, a hedge fund manager whose SAC Capital has been beleaguered with multiple insider trading indictments, has an apartment on the market for $115 million.
A progressive tax for high-end real estate in certain places could become a distinct possibility. Gundlach quipped that it would be "almost like a jerk tax." Donald Trump beware.