Remember all the Federal Reserve’s talk about reducing its bloated balance sheet? It’s not happening.
The Fed has now indicated that it will cease quantitative tightening by year-end after modestly shrinking its balance sheet from $4.5 trillion to $3.5 trillion. The Fed's decision to throw in the towel on QT might be the most telling signal about what American central bankers think abut the current state of global fixed-income markets.
“Maybe they are realizing there isn’t anybody to buy all the bonds,” DoubleLine CEO Jeffrey Gundlach said in a webcast on Tuesday.
In his presentation dubbed “Highway to Hell” after the AC/DC song, Gundlach expressed criticism of both Fed chairman Jay Powell and President Donald Trump. Investors are likely to pay the price. Gundlach said that there may or may not be a recession in 2020. But we are still in a bear market, one in which the S&P 500 will fall below its Christmas Eve trough level of 2,350.
Fed chairman Powell’s “turnaround is remarkable.” It took only a few signs of a slowing U.S. economy—and a big drop in equity prices in December—for Powell to completely reverse his outlook for future interest rate increases. So much for the view that Powell would be the first Fed Chairman since Paul Volcker who wouldn’t be intimidated by the financial markets.
During the campaign, President Trump “promised he’d eliminate the national debt [in eight years],” Gundlach noted. “Now we’re adding a trillion dollars a year.”
Over the last year, the narrative has gone from one of a synchronized global expansion to one of a global slowdown. All the surprises in the economic data are coming in to the downside, Gundlach said, although things are not as bad in emerging markets.
The data in Europe “just keep getting worse,” he continued. The falloff in Germany and Italy continues, and their PMI numbers are “awful.” Only France’s PMI numbers are slightly positive and the idea that France can keep the Eurozone in the green seems questionable.
“Global trade has gone negative but we are not in a global recession,” Gundlach said. Others are predicting the Eurozone will fall into a recession this year.
No recession is imminent in the U.S., but the Conference Board’s Leading Economic Indicators have fallen about 50 percent from 7 to 3.5. Gundlach noted they have gone negative before every other recession has started—and right now they are down but a long way from negative. For the first quarter of 2019, the Atlanta Fed is predicting GDP to fall to the 0.3 percent area. But one-time problems like the government shutdown and nasty winter weather are influencing that number and many economists expect a rebound in the second quarter.