Gundlach – Rates Will Remain Low in 2014
By Robert Huebscher
March 18, 2014
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Slowing economic growth, low inflation and a lack of motivated sellers will keep interest rates depressed, at least for the rest of this year, according to Jeffrey Gundlach. But investors should prepare for an eventual rise in rates, he said, because he is skeptical of the Federal Reserve’s ability to successfully exit from quantitative easing (QE).
Gundlach, the founder and chief investment officer of Los Angeles-based Doubleline Capital, spoke with investors in a conference call March 11.
His talk was titled “What Hath QE Wrought?” and the slides from his presentation are available here.
His title was taken from the first words transmitted via the telegraph by its inventor, Samuel Morse, in 1844, “What hath God wrought?” Those words, Gundlach said, foretold the electronic and telecommunications revolution that transformed society over the next 170 years.
QE might not leave as many positive benefits as did the invention of the telegraph, Gundlach fears.
If the Fed is able to “just exit from the bond-buying exercise, exit from stimulus, without any economic volatility, then we have an invention that’s as good as the telegraph,” he said.
“It would be a perfect way of countering deflationary forces and deleveraging during economic crises,” Gundlach said. However, “I really am skeptical,“ he said.
Let’s look at Gundlach’s assessment of the economy and fixed-income markets and his outlook for several key asset classes.
The message from copper and China
Gundlach often takes a contrarian position with respect to market sentiment. But he isn’t with regard to the outlook for China.
China will suffer slower-than-historical growth, he said, and signs of that are already showing up in the price of copper, a key industrial commodity. Copper prices have fallen 10% in the last week, to levels not seen since 2010.
“A lot of people point to China as something to worry about in 2014,” he said. “A lot of people cried wolf on that for the last few years. But it seems like it might be shaking up here. I agree with the consensus that China is a variable that has to be watched.”
He doubts that China will achieve the consensus forecast of 7.5% growth this year. Even if it did, Gundlach said that would be its slowest growth in the last 24 years. “China really seems overdue for something of a significant setback economically,” he said.
Gundlach said recent declines in the Shanghai index reinforce his view of unfavorable growth in China’s economy.
China’s currency has also weakened since the middle of February. The danger for the U.S. is that other countries – particularly the Asian emerging markets – could respond to Renminbi devaluation by allowing their currencies to weaken. This would lower the cost of goods imported into the U.S., as Asian countries essentially export deflation to the U.S. Gundlach did not reference this scenario in his talk, but it is consistent with his outlook for low inflation in the U.S.
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