The Federal Reserve has little justification to raise interest rates amid a deflationary global backdrop, bond expert Jeff Gundlach said.
“There was a year, 1937, when the Federal Reserve tightened credit conditions prematurely and it led to the second leg of the Great Depression,” said Gundlach, who confessed to being “worried” that the Fed would do the same thing even though there are no inflationary pressures that would indicate a need for tightening.
The head of DoubeLine Capital, who was nearly alone in predicting that government bond yields would fall in 2014, also said he doubts that the European Central Bank’s foray into quantitative easing will work.
“The Europeans have decided to do quantitative easing, and I expect they’ll have very little success,” Gundlach said, speaking Tuesday at ETF.com’s Inside ETFs conference in Hollywood, Fla. “You wonder if all the king’s horses and all the king’s men will be able to keep Humpty Dumpty together.”
The various cross-currents have created some notable market moves.
Oil prices have plunged and the U.S. dollar, after years of being suppressed by Fed policy, has become a strong player on the global currency stage.
Gundlach said he believes the greenback will continue that role. Interestingly, he also sees gold, a traditional inflation hedge, as another positive story for 2015.
“Gold does act as a safe haven, and it seems like gold is predicting trouble correctly,” he said. “I’m bullish on gold. I increased my position in gold a couple weeks ago.”
As he addressed the conference, the stock market was in the midst of an aggressive selloff triggered by weak economic data. The numbers showed a decline in business investment, which Gundlach attributed to falling energy prices.
He predicted that crude would not return to its lofty price range, and that in turn would zero out capital investments from energy companies. He specifically disputed a prediction from noted oil man T. Boone Pickens, who said recently that oil was heading back to $100 a barrel.
“He knows more about energy than I do, but I know a lot about markets and I just think he’s wrong,” Gundlach said.
“I don’t think it’s going to rebound quickly,” he added. “It’s dropped enough that there’s somebody out there that’s on the edge of bankruptcy…This is enough of an event that it truly classifies as a black swan.”
Gundlach sees the biggest long-term market risk being the amount of debt companies have piled up in the low interest rate environment that the Fed has created. However, he believes that the full disruption probably won’t be felt for several years.