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Gundlach: Short Term Rates Headed to Zero, More QE Likely

Submitted by Taps Coogan on the 6th of March 2020 to The Sounding Line.

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Jeffery Gundlach, founder of DoubleLine Capital, recently spoke with CNBC about the collapse in treasury yields, the massive volatility caused by the Coronavirus outbreak, and the outlook for the economy. Mr. Gundlach says that he expects the Fed to cut rates again soon, possibly by another 50 basis points in just two weeks, eventually bringing short term rates to zero. He also excepts more QE and warns that the Coronavirus situation is probably worse than we realize.

Some excerpts from Jeffery Gundlach:

“If we look at history, once the Fed does a panic inter-meeting rate cut, particularly when it is 50 basis points, …they typically cut pretty quickly again, even at the very next meeting. So, I am in the camp that the Fed is going to cut again, perhaps even in two weeks, and that we will see short rates headed towards zero… I am not sure… that they will cut to zero immediately, but I think we have another rate cut coming.”

“In the meantime, treasury bonds are not really a place to make money anymore. They’re a place to not lose money and that’s what’s happening. At 90 basis points, even if they go to zero, you’re not even looking at a 10% rate of return over a one year time period…”

“Small business activity is going to contract. I think it is foolhardy to think anything other than that this is going to take a major hit to short term economic growth. Maybe grocery store sales will go up on a short term spike, but all other kind of social activities grinding to a standstill…”

“I think cutting rates was justified for sure. I don’t like the way in which it was done… The Fed in their most recent press conference took a victory lap… that they were in a good place, that policy rates were appropriate, and I thought that was a little bit of hubris at the time… Nobody knows what’s happening here so caution is appropriate…”

“I don’t think calling the direction of interest rates is not that meaningful right now. You don’t make any money regardless. You’re just better off staying in cash than owning a 10-year treasury… It’s a place where you just have return-free risk… I think the thing you’re supposed to own, and I’ve talked about this for two years now, is gold… Gold is doing super well even with the dollar unchanged over the past 14 months or so and gold is at a record high in Euro and many other currencies. I think it is almost a certainty that gold is going to go to an all-time high versus the dollar as well..”

“Jay Powell has said in plain English, repeatedly, that he doesn’t really like negative interest rates. He’d rather do large scale asset purchases which is obviously quantitative easing (QE). They’ve been expanding their balance sheet over the last six months in response to the repo crisis. That has slowed down. The balance sheet is not expanding in recent weeks and you’ll notice that the stock market is not doing well. It is amazing how well correlated the Fed’s balance sheet is to the S&P 500… It’s almost a constant and now that the Fed is not expanding their balance sheet, we see that the market is basically unchanged over the past 25 months… So, the Fed will do large scale asset purchases, which means that they will help with the fiscal stimulus. It will be trotted out to confront the economic weakness we are confronting…”

Whether the Coronavirus outbreak gets worse or not, the dawning sense of panic that is settling over markets aught to reinforce just how imprudent the last decade of monetary policy has been. We have consciously mis-priced risk as part of a deliberate strategy to create a financial market led economic expansion. We did so in the immediate aftermath of a ‘Great Recession’ caused by the conscious and intentional mis-pricing of risk in an overly financialized economy.

Undoubtedly, we are about to make all the same mistakes again and the worse this market correction is, the more policy makers will attempt to defy it.

There is much more to the interview, so enjoy it above.

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