PANC 2015: Featured Speaker from DoubleLine Capital
There are multiple reasons why the Federal Reserve will not raise rates for the foreseeable future, said Jeffrey Gundlach, chief executive office and chief investment officer at DoubleLine Capital, speaking at the initial session at the 2015 PLANADVISER National Conference in Orlando, Florida.
“One week before the Fed meeting on September 17, [Federal Reserve Chairman] Janet Yellin would have predicted she would raise interest rates,” Gundlach said. “Every risk asset class has gone down every day since then. Thank God they didn’t raise rates, because it would be worse.”
The U.S. economy seems to be entering a “new phase,” he said. “Janet says she needs greater confidence inflation will go to 2% but that it will actually be weaker in the next few months. Global market conditions continue to deteriorate. I applaud the Fed for not cheerleading the markets. At least they are getting a dose of reality that the economy has been weakening. There are troubling developments in the markets. In September 2012, the Fed started [quantitative easing] QE3 at the rate of $85 billion a month. Now market indicators are worse than they were in September 2012.”
NEXT: Leading indicators
Gundlach then pointed to numerous indicators that point to
weakness in the U.S. and global economies, starting with the Goldman Sachs
Financial Conditions Index. “It’s worse than it was in 2012 and in 10 years.” The
Bloomberg Financial Conditions index is now in negative territory, he added. Commodity
prices are at a multi-year low—the same as they were in 1995. “Junk bonds are
extremely sensitive to the economy and are now at a price of 36.4, a five-year
low,” Gundlach said.
“Emerging market equities are at a six-year low and heading lower,” he said. “Why
hike interest rates when emerging markets is in a free fall? Inflation expectations
are at zero for the next two years. The bond market is yelling at the Fed that inflation
is at a seven-year low.”
Gundlach also noted the Price Stats, which gauge increases in consumer prices,
are now at -1.1%. The Employment Cost Index , at -0.2%, is at its lowest ever,
he said.
The U.S. Dollar Index rallied by 25% in 2014 and is now moving sideways, “causing big problems for China since their currency is loosely pegged to the dollar,” Gundlach said. “The trade-weighted value of the Chinese Yen increased 30% over the past five years. It will be tough for China to go from an overbuilt economy to a consumer economy, especially since their population growth will be zero for the next generation. China has been the engine of global growth, but its market crash last year was akin to what happened in the U.S. in 1929” with the start of the Great Depression. China’s construction was 20% to 30% a year. Now it’s -11%, he noted.
NEXT: Global growth projections
As for emerging market currencies, Latin America’s declined 25% in the past year, he said. Brazil is expecting -2.2% economic growth in the next year. “Overall, global growth could be 1%, and it always has a dispersion around it, which means that that there will be plenty of countries that will be negative,” he said.
The JPMorgan Emerging Market Bond Spread is at 437.87, “a critical level and likely to spike,” Gundlach said.
“In the U.S., the stock market is worried about corporate earnings,” he said. “Between 2002 and 2007, the market grew nonstop, but it has been sideways since 2014, and it is down year-to-date because there is no earnings growth, indicating it will change direction. The S&P 500 had a massive spike downward in August. Today it is at 1932. Biotech, another driver of the economy, went up five times since 2012. Now it is declining. How can the Fed throw an increase against these conditions?”