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cried wolf and lose credibility if they don’t follow through. So
they’re going to raise rates unless the markets freak out.
Now, what’s curious is, the markets that I have already referenced
— commodities, including oil, and junk bonds — are fully freaking
out. Leveraged money loaded up to the gills on a credit overload
from a year ago. They’ve been freaking out for a year and a half.
New bank loans are issued at around $0.99 on the dollar. An index
constructed by Standard & Poor’s of the 100 most liquid names is
trading with an 88 handle today. That’s down 11 points from date
of issue. That’s a huge decline, one which cannot be attributed
to interest rate fears because the index constituents are floating
rate loans. People are avoiding bank loans due to fears of a credit
overload being followed by sustained low commodity prices, a
development that threatens rising default rates.
Now the default risk is more concentrated in junk bonds than it
is in bank loans. The latter are higher up in the capital structure,
and the energy sector is less involved in bank debt than in high
yield bonds. So if you’re at the Fed, you’ve got to ask yourself a
question: with bank loans and junk bonds tanking in the past 18
months, why you don’t think of that as a signal? Well, I guess it’s
because equity markets are more visible.
So I think the Fed is going to raise rates, and if they do, as I’ve
said all year, they will do so for philosophic reasons as opposed
to fundamental reasons. They want to prove that they aren’t
manipulating the markets and that they have some objectivity.
And they want to avoid becoming the boy who cried wolf. They’ve
said all year they’re going to raise rates in 2015. They want to do
it so they say, “See, we did what we said we were going to do”.
The Fed thinks that the markets have calmed down to the point
where if they raise rates and if they talk gently enough about the
future, then the markets will continue to cooperate. That’s why
they think they have a window.
Stephen Renna: Well, obviously, you’re not particularly sanguine
about the Fed strategy, and I do recall former Fed Chair Bernanke
often saying in news briefings that we can’t do it all with just
monetary policy. So the Fed’s basically shot all its bullets from
a monetary standpoint. Bernanke also would point to the fiscal
side of the equation. The question I’m getting at is what do
you look at as the way out of this low growth cycle with very
accommodative monetary policy?
Jeffrey Gundlach:
I think you’re going to see louder cries for fiscal
stimulus. You’re seeing it in Europe for sure. You had a fellow named
Wolfgang Munchau write an op-ed piece in the Financial Times
saying that QE isn’t really that effective anymore because there
aren’t enough bonds for investors to buy. I could go on for two
hours about how weird that logic is. So they’re saying instead, the
ECB should send every single person 5,000 Euros. Just send them
money. And he said if that doesn’t work, we should send another
check for 5,000 Euros.
This is a legitimate person in a legitimate publication. We’re not
talking about the Onion or Mad Magazine. We’re talking about the
Financial Times, and they’re printing, giving respect to this idea
that the Central Bank should just send people money. And we did
that already in the United States. We did it twice. It wasn’t 5,000
Euros, it was $500. That was George W. Bush who gave most
citizens $1,000 over like a one year period, and that amount was
too small to move the needle very much because conditions were
too tough at that time. But now people talking about 10 times that
twice in the Eurozone. And today, there’s an article that somebody —
and I think it’s Finland — says that they should give every citizen
$10,000 a year as a basic income stipend.
Now, the budget deficit in the United States has gone way down
from the horrific levels that we saw in the credit crisis where you
had 10% of GDP just about in the budget deficit. Now, its way
down, GDP is bigger and the deficit is down to a $400 billion
handle. And so, you have vastly lower deficits. The deficit represents
only two point something percent of GDP. I could imagine there
could well be some talk about increasing fiscal stimulus.
In fact, some people advocate raising policy short-term interest rates
as a sort of through-the-side-door means of fiscal stimulus. They
say the Fed raising rates would help the economy by increasing
money going to savers and, therefore, effecting in essence a
transfer of money from the Treasury to savers. In the process, the
government would increase the budget deficit to pay the additional
interest. The problem is, giving money to savers is not going to
support the economy. Do you know why? They’re savers. They
have savings. If they were inclined to spend their savings, they’d
be spending their savings. Giving them a little bit more return on
their savings is very unlikely to move the needle very far in terms
of consumption. In fact, I would argue that the incremental return
would act as a disincentive to spending savings because savers
would want to continue enjoying those better returns.
A much more effective approach, although a little bit radical, would
be something along the lines of the Munchau or Finland proposals.
Borrow money, thereby increasing the deficit, and give the cash
to people who lack savings, to people whose incomes have been
falling, people who are having a hard time making ends meet.
CREFC Exclusive Interview with Jeffrey Gundlach