Easy monetary policies during the post-crisis period have propelled equity prices higher and driven bond yields lower. But as central banks reverse their quantitative easing (QE) and raise rates, this “Goldilocks era” will come to an end, according to Jeffrey Gundlach.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on December 5. His talk was titled, “So Far, So Good,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation are available here.
Markets may give back some gains, but a recession is not imminent. “We do not see anything that indicates a recession in the next six months,” he said.
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The main theme in the bond market, Gundlach said, is central bank policies. The Fed is raising rates and quantitatively tightening, which it euphemistically calls “normalization.” But the European central bank (ECB) is still easing.
I’ll review what Gundlach said about central bank policies, global economic performance and the likely direction of interest rates.
The global economic outlook
A key issue, which Gundlach has explored in prior webcasts, is why the ECB is easing while the Fed is tightening. He said the ECB is still expanding its balance sheet by approximately a billion euros per month. Mario Draghi has said the ECB will not raise rates above zero until well past the end of its QE, despite the fact the global economy, according to Gundlach, is “looking better than it has in recent years.”
Gundlach presented data on the developed economies, showing which were contracting, expanding or accelerating. For the first time since the global financial crisis (GFC), he said, none are contracting and many more are accelerating than are expanding. Reported economic indicators, he said, are coming in better than expected, based on the Citibank “surprise index.”
Even China is “doing just fine,” according to Gundlach. He said its GDP, which is usually a source of skepticism, has been growing at 6.8% to 7% for the last five years. But other data sources (e.g., electrical power usage and rail freight) corroborate and even suggest that those GDP growth rates may be understated.
What is responsible for this growth? Gundlach said it is stimulative monetary policies, despite the fact that they don’t make sense in Europe. Looking across global central banks, he said, in aggregate their balance sheets have being going up constantly since the GFC, except for small “blips” in 2009 and 2013. That growth has paralleled increases in equity prices.
Read the full article here by Robert Huebscher, Advisor Perspective