Stimulative monetary policy by the Federal Reserve Board is creating major distortions in the financial markets, according to DoubleLine CEO and CIO Jeffrey Gundlach. In a webcast yesterday, the bond fund manager said that even while Fed policy has triggered a rebound in junk bond prices, the default rate of these securities could double in the next few years.
Gundlach gave attendees a wide-ranging overview of topics, including the presidential election, consumer sentiment, the labor market, the current level of stock prices and global currency markets. It’s been a year of extremes. For example, growth in the basis measure of money supply, M2, has hit a historical high while the velocity of money, a measure of how fast money changes hands, reached a historical low. That has never happened before.
Regarding the presidential election, he maintained that President Trump is still the favorite to be re-elected. However, he produced a chart showing how the president’s popularity has fluctuated in fairly close correlation to America’s incidence of the novel coronavirus. If the nation were to experience another spike in cases, Trump’s re-election prospects could be jeopardized, Gundlach said.
Starting his presentation with a look at the global economy, Gundlach described the economic environment as strange. Early in 2020, global GDP was expected to grow by 3.0%. Now it is expected to shrink by 3.9%.
Global trade has slumped by about 60%. The changes in both the three-month and 12-month averages in trade declines closely mirror the fall in cross-border economic trade during the financial crisis 12 years ago.
Sadly, the picture in America is worse. U.S. GDP is expected to decline about 5.0% this year, according to data compiled by DoubleLine and Bloomberg. “That’s pretty strange because the U.S.” fiscal and monetary policy response was among the strongest in the world, Gundlach said.
There also is another disconnect: The U.S. stock market has outperformed most equity markets in the world, he noted.
But if the U.S. entered the recession in a relatively healthy position with an 3.7% unemployment rate, that masked certain underlying weaknesses. Gundlach pointed out that the index of Leading Economic Indicators had been declining for nearly two years before the recession began in March.
Among sentiment indicators, Gundlach observed there is a high dispersion of results. More consumers say jobs are hard to find even though more than 10 million new jobs have been created since the economy bottomed in May.
“It’s foolhardy to believe the economy can sustain this kind of shock” and then recover back to normal with only a single round of fiscal and monetary stimulus, he said. The ongoing ripple effects of the March lockdowns are simply too powerful.