DoubleLine Funds’ Jeff Gundlach doesn’t expect the Federal Reserve to unwind its quantitative easing (QE) program without doing some damage to the markets and the economy.
But if the Fed can pull it off, he thinks it could go down as one of the greatest discoveries of our time. He said it would be likened to Samuel Morse’s telegraph, which he argued was one of the most important inventions of all-time. [“What hath God wrought?” was the first message sent out by Morse on his telegraph.]
In a new presentation, Gundlach reminded us that QE has made the Fed by far the largest single holder of U.S. debt in the world. It’s also currently responsible for 70% of the purchases of Treasury and agency securities.
It will be a little while before we know if the QE-unwind dodged all of the downside risks. Like most, Gundlach believes the Fed will continue to actively keep rates low even as it tapers its current QE purchases.
There are, however, signs that QE hasn’t been as successful as hoped. GDP growth continues to be low in the U.S. Real total household wealth has stagnated and real median household income has actually been declining. Meanwhile, the income share of the top 5% continues to grow, reflecting the worsening inequality problem in the America.
Gundlach offered his perspectives along with a series of charts and diagrams that support his thesis. He opened with four slides ominously forecasting ballooning deficits thanks to onerous entitlement spending.
What follows are the first three sections of Gundlach’s presentation. Anyone serious about the markets and the economy should spend a few minutes with this.