Gundlach on Why Quantitative Easing Will End Badly

NEW YORK (TheStreet) -- Jeff Gundlach, CEO and chief investment officer of Doubleline Capital, spoke about quantitative easing and said he doesn't know when it will end. But when it does, he said, it won't be pretty.

Gundlach, who manages DoubleLine Total Return Bond (DBLTX), said the four major central banks around the world -- the Bank of Japan, Federal Reserve, Bank of England and the European Central Bank -- are all firmly in easing mode, expanding their balance sheets at an average rate of 3.5% per year. Many have talked about when the central banks, particularly the Fed, will end quantitative easing, or QE. But this is the wrong question. The Fed will continue to expand its balance sheet not for months, but for years.

"It's not slowing down anytime soon," Gundlach said during a presentation.

Gold has historically done well in times of balance sheet expansion and easing, but not in the past year or so and it's now at the lower end of its range. Gundlach suggested that now would be a "reasonably good entry point for gold." Doubleline actually owns silver, because it has a higher beta than gold, and QE does help commodity prices. SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) are the two biggest gold and silver ETFs, respectively.

The Fed will continue to do QE until negatives reveal themselves, and both Fed Chairman Ben Bernanke and Vice Chairman Janet Yellen, who Gundlach believes will be the next chairman, have noted in the past that the benefits still outweigh the negatives. Bernanke has repeatedly said inflation is not high in the U.S. if you look at the Consumer Price Index (CPI). But that's debatable, especially when looking at things like medical care, and the cost of college tuition, which are up 597% and 1,115% respectively, in the time frame Jan. 1, 1978, to Sept. 30, 2012. Conversely, the cost of a new car, food and energy during that time frame are up 95%, 243% and 366%, respectively.

In addition to mentioning gold in order to take advantage of QE, Gundlach mentioned that buying real estate would make sense, especially as the supply of homes on the market continues to be low because so many people are still underwater on their mortgages. The housing market has improved with certain geographies doing well, such as Phoenix, Miami, and even Detroit. Housing is likely to go higher, with limited supply in strong markets, and the housing rally will continue for some time.

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