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Gundlach – Don’t Plan on Tapering

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Investors face many concerns as the new year approaches, but a recurrence of May’s “taper tantrum” should not be high on their lists, according to DoubleLine’s Jeffrey Gundlach. With the majority of Fed governors staking a dovish position, “quantitative stimulus is likely to remain with us longer than people think,” Gundlach said.

“Like it or not, we have to deal with this,” he said.

Gundlach spoke via conference call with investors Dec. 10. He is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. Copies of the slides from his presentation are available here.

Gundlach stressed that presumptive Fed Chair Janet Yellen has said it is “imperative” not to prematurely take away the central bank’s stimulus. He said that quantitative easing (QE) and “meddling with the economy” will last a lot longer than consensus expectations.

I’ll review what Gundlach said about a number of trends related to the deficit and entitlement spending, the impact of Obamacare (including some claims that I didn’t agree with) and the outlook for a number of fixed-income asset sub-classes. First, here are a few more predictions he laid out in regard to the Fed’s actions.

Papering over tapering

In previous talks, Gundlach has asserted that the Fed’s bond-buying program effectively funded the growth in the federal deficit. This year, however, the deficit has shrunk. Gundlach said the Fed could have reduced its bond buying by 30% this year and achieved the same level of deficit funding.

The increase in bond buying, relative to the deficit, explains why at least some markets performed well in 2013, according to Gundlach.

Gundlach said that approximately 70-75% of all Treasury bonds are owned by central banks, with the Fed having the largest holding – $2.1 trillion of a total $16.8 trillion. The Japanese and Chinese central banks each own about half of what the Fed holds.

A fear that weighs on the markets is a lack of bond-market liquidity. A spike in rates, some fear, would trigger selling by mutual funds and other institutional investors. With banks constrained by regulations and unable to purchase riskier debt, rates could spiral upwards. Gundlach allayed this fear, noting that mutual funds own a very small percentage of government bonds.

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