One day before the Fed’s June statement, Jeff Gundlach once again accurately predicted the somber mood that would ensue as a result of Yellen’s Wednesday decision and press conference when he correctly said that “Central Banks Are Losing Control.” Today, in the aftermath of James Bullard stunning U-turn where he cast aside years of fake hawkishness and emerged as the market manipulating dove he had been all along, Gundlach appeared on CNBC, to discuss many things, among which his latest take on central banks.
Specifically, he said that central banks are “out of control” because they don’t understand the consequences of their own policies. On CNBC’s “Halftime Report“, the DoubleLine bond guru projected that markets are likely to see another round of negative interest rates before central bankers realize they aren’t working and that fiscal stimulus may be the better option. “The policies that they’re implementing don’t have the consequences that they’re looking for,” he said.
Gundlach pointed out the chart which we said back in 2010 is the only one that matters: the S&P’s liquidity “flow” manifested by the Fed’s balance sheet overlaid on top of the Fed’s balance sheet:
He said that “it’s really uncanny how the S&P500 rallied when they were doing QE and expanding their balance sheet, and how the S&P never goes anywhere when they stopped expanding their balance sheet. They stopped QE3 back in December of 2014 and the S&P500, the DJIA, the Nasdaq are all exactly the same when they stopped expanding their balance sheet. The S&P has been dead money for 18 months.”
That – once again – resolves the whole “flow vs stock” debate.
So what went wrong? According to Gundlach, chief among central bank mistakes was negative rates.
“When you go to negative interest rates, you do not stimulate consumption, you necessitate saving,” Gundlach said. “You cannot fight deflation with deflation. Negative interest rates are the definition of deflation. You cannot put out a fire by pouring gasoline on it,” he added.
He then referred to something we first showed in October, namely that
negative rates actually encourage saving, something we showed in “BofA Looks At Europe’s Record €2.6 Trillion In Negative-Yielding Debt, Is Shocked At What It Finds“
Too bad not more people, or central bankers for that matter, noticed it at that time.
He also said that central bankers will probably still believe in negative interest rates for some time, but will come to the conclusion that “they just haven’t done enough of it.” Luckily this is increasingly a position that only discredicted Keynesian hacks like Paul Krugman now endorse. Eventually, he added, those bankers will figure out the actual consequences of their policies, and call for fiscal stimulus: “When that comes, that’s when the game will change,” Gundlach said.
That will be when the helicopter money, which we first predicted in March 2009 is inevitable, will arrive.
By observing the dramatic change in the Fed’s demeanor this week, Gundlach also said that the Federal Reserve has actually gained “a little bit” of credibility this week by “at least acknowledging reality” about tepid U.S. economic growth, he said. It was unclear if fringe “tinfoil” site who have said that all along will be elevated in status (we certainly hope not).
Unfortunately for the Fed, it’s too little too late, as it means normalization is and never was an option, something else we have claimed all along. It also means that a return to ZIRP, NIRP and more QE, if not helicopter money, is now officially back on.
Gundlach then redirected the conversation to the topic of markets and specifically Donald Trump.
As we first reported two months ago, Gundlach believed and still believes that Trump is going to be the next president of the United States, and the immediate aftermath will be “pretty scary.” While Gundlach emphasized that he does not support political candidates, his analysis leads him to believe Trump will win the White House. “People aren’t getting along, they’re not happy because of technology taking jobs, and sort of this long, slow grind of a new economy. And so they’re looking for change, and I think Trump is going to win on the basis of that. And he will be quite a bit like Ronald Reagan.”
From a trading perspective, Gundlach said Trump is “bonds negative and stocks positive” as Trump would promote fiscal spending and facilitate direct monetization of the US debt, aka “chopper money.” If Clinton were to win, she would mean the opposite for the markets, he added.
So what happens after November 8? “Things are going to get pretty scary, and I think it’s going to present quite a good buying opportunity because I think when Donald Trump is inaugurated, I think that he’s going to initiate a very large deficit spending program.”
Well, they always said buy when there is blood on the streets. Only in this case it looks like it will be literal…
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