Gundlach: Investors are asking the Wrong Question
March 12, 2013
by Robert Huebscher
If you’re trying to assess the Federal Reserve’s so-called exit strategy from quantitative easing, then you’re asking the wrong question, according to Doubleline’s Jeffrey Gundlach. Quantitative easing is a permanent policy tool, he said, and investors should be asking what that means for their investment strategy.
Speeches by Fed Chairman Ben Bernanke and minutes of the Fed’s meetings have made it “crystal clear” that the Fed will not deviate from the “Big Easy,” Gundlach said.
Big Easy, Gundlach’s reference to quantitative easing, was the title of a presentation he gave to investors on March 5. Gundlach is the founder and chief investment officer of Los Angeles-based Doubleline Capital. Copies of the slides from his presentation are available here.
The exit strategy is essentially inconsequential, he said. “I don’t really care what the Fed’s ultimate strategy is because it’s not relevant to today’s investment horizon,” Gundlach said.
Gundlach identified a number of consequences of continued quantitative easing and their implications for investors. For example, he was bullish on Treasury bonds, Japanese stocks and silver – but not on gold.
Let’s look at what Gundlach said of what the Fed’s strategy means for the markets. I’ll also revisit one of Gundlach’s most noteworthy – and correct – predictions: that Apple’s stock would eventually decline to $425.
Life in the Big Easy
Although he accepted quantitative easing, Gundlach did not approve of it.
Quantitative easing has provided “incredibly easy money through circular financing schemes aiding and abetting the deficit spending everywhere you look,” Gundlach said. Not only is it the Fed’s chosen policy tool, but quantitative easing has also been applied by the Bank of England, the European Central Bank, the Swiss central bank and, most recently, the Bank of Japan.
“The Big Easy is all about central balance sheet expansion,” he said.
Since the onset of the financial crisis, the Fed and the Bank of England have increased their central bank balances by approximately 15% of GDP. The Bank of Japan increased its balances at a slower pace until February 2012 and accelerated after that, Gundlach said. U.S. easing amounted to a boost of approximately 3.5% of GDP annually, he said. Without this expansion, “you would have much lower GDP, perhaps because you would have less borrowing and less fiscal stimulus by that amount.”
In the week before Gundlach’s speech, the newly released Fed meeting minutes revealed an internal debate about the merits of quantitative easing and balance sheet expansion. But Gundlach said it was “ridiculous” to be worried about that.
“I would hope that at these Fed meetings they are talking about the merits and potential negative consequences of quantitative easing,” he said. “What if they weren’t talking about it at the Fed meeting? That would be the cause to be super-worried about what’s going on – if they’re running these experimental policies and extraordinary measures without anyone even worrying about it.”
“The Fed is going to keep this going not for months, but for years,” he said. “As investors, we just have to accept that.”
Gundlach said the Fed would not hesitate to increase its bond-buying if interest rates start to rise, “simply because the math of the debt-to-GDP ratio argues that it needs to do that to keep the deficit from really exploding due to interest expense.”