The slow-growth U.S. economy is living on cheap money as is the bull market, which is in its last stages, warns bond manager Jeffrey Gundlach, CEO of DoubleLine Capital.
Gundlach said in a Webinar this week that the wide-open money spigot will continue for the foreseeable future. That’s because the Fed and most other major central banks in Europe and Japan are committed to easy money, according to Grundlach.
He called these policies “circular financing schemes” and said “we certainly have the Big Easy going on in the financial system.”
Gundlach illustrated his warnings by entitling his session “The Big Easy,” showing New Orleans flooded and warning that central banks are flooding their countries with currency. Central banks, he added, have committed themselves to continuing the policy in the foreseeable future. He said Japan has a government that is “committed to inflation” as a way of restoring its economy. The prime minister of Japan “ran on a platform of increasing the inflation rate,” Gundlach said.
The central banks, he cautioned, “have a tiger by the tail.” This is a reference to a phrase used by Austrian economist F.A. Hayek. He warned in the 1970s that, once central banks commit to expansive monetary and currency debasement policies, they are riding a tiger and it is painful to jump off.
Gundlach contended that it will be years before the Fed turns away from cheap money. “There is absolutely no idea of slowing down or stopping quantitative easing as far as the eye can see,” he added.
Gundlach also mentioned analogies to the Fed policies of 1972. That’s when the Fed also pursued easy money policies that led to a stock market crash in 1973-74 and stagflation for the rest of the decade. Meanwhile, today’s Fed said it could not see “any negatives” in pursuing this policy, Gundlach noted.
The Fed recently said that it is going to continue its expansive policy of buying bonds and injecting liquidity into the system. Through its Federal Open Market Committee, the central bank announced it will continue its “highly accommodative stance of monetary policy” for some time, until the economy recovers.
“In particular,” the Fed recently wrote, “the Committee decided to keep the target range for the federal funds at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds will be appropriate at least as long as the unemployment rate remains above 6 ½ percent.”
So will the Fed ever reverse this virtual zero percent interest rates? Gundlach said it could only happen when there is some market blowup.
And will the bull stock market pop as in 2008?
Gundlach said the bull market is in its seventh inning and when the game ends it will be “unpleasant.”