Jeffrey Gundlach sees distorted market signals due to the Fed’s unprecedented money printing, a policy implemented by the Fed to counteract the negative economic impact from the 2020 pandemic great global lockdown, which sent economic indicators and financial markets into a tailspin.
Fed Chair Powell said its the Fed’s job to keep the economy in a “good place” for “as long as possible” in October 2019, in other words, that has entailed unprecedented monetary easing.
“Jeffrey Gundlach sees distorted market signals due to the Fed’s unprecedented money printing”
THE WEALTH TRAINING COMPANY
So in the wake of the 2008 financial crisis, the Fed in cahoots with the other G-6 central banks have perused a policy record low-interest rates (MP1) and trillions of dollars of asset purchases known as quantitative easing QE (MP2). But while MP1 and MP2 have succeeded in keeping the bull market stimulated global consumption remained lackluster even before the pandemic.
Then came the 2020 pandemic, a demand, and supply shock as global economies were in lockdown and the Fed’s response is version three monetary policy (MP3) which puts the government at the epicenter of capital distribution.
MP3, state capitalism, could be where we are at with fiscal and monetary policy working in tandem where the government supports consumption through universal basic income and chooses business winners and losers by deciding which business gets a credit lifeline.
“MP3, state capitalism, could be where we are at with fiscal and monetary policy”
THE WEALTH TRAINING COMPANY
Jeffrey Gundlach sees distorted market signals perhaps because the market has been replaced, maybe temporary, with central bank intervention
Price discovery doesn’t exist, we have central bank pricing through QE and it’s the central bank’s liquidity that now regulates investments rather than risk.
Jeffrey Gundlach, the CEO of $135 billion DoubleLine Capital, said in his most recent July interview that the Federal Reserve’s “most incredible fiscal lending” is the largest policymakers have ever deployed, even dating back to the financial crisis of 2007–2008.
“The Fed’s balance sheet swelled to a mind-boggling $7 trillion” – Jeffrey Gundlach
Jeffrey Gundlach sees distorted market signals because the price of risk-on assets is no longer driven by the fundamentals but by the central bank’s willingness to continue pumping the market with liquidity
“The Fed’s balance sheet swelled to a mind-boggling $7 trillion” said Jeffrey Gundlach.
Gundlach said the Fed has “decided that they want to pull out all the stops to reduce market and economic volatility” via unprecedented money printing. “‘What they’re doing is a bridge further than they have ever gone before”.
Jeffrey Gundlach sees the distorted market, particularly with corporate bonds as unprecedented Fed liquidity sends bond price spiraling and their corresponding yields tumbling
So Jeffrey Gundlach sees a distorted market view which is underscored by investors’ miscalculation of risk in the bond market.
Gundlach noted the weakest portion of the corporate bond market is low-tier investment-grade debt, commonly known as BBB, which, if re-rated to junk, could cause significant losses for investors who would have to dump into illiquid markets.
“The price of corporate bonds isn’t really real. No price discovery mechanism’s being pegged” said Jeffrey Gundlach.
Jeffrey Gundlach believes the Fed’s easy money policies have delayed the crisis, BBBs are the most significant risk in corporate debt markets and he remains skeptical of the stock market rally.