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.

Gundlach also mentioned taking advantages of any dips in the U.S. Treasury market, especially 10-year U.S. Treasuries. Gundlach noted he had been buying 10-year Treasuries when the yield hit 2% a few weeks ago, which he said "represent reasonable value." The Fed is explicitly supporting the U.S. Treasury market, via QE, and that should keep the lid on interest rates for the time being.

With yields so low, investors are scrambling for yield any place they can get it to obtain income. While it might not make sense to buy bank stocks or tech stocks that have high yields, it could make sense to buy companies like Campbell's Soup ( CPB) or Kraft ( KFT) for income.

Touching on his Japan trade -- Gundlach advised going long the Nikkei and short the yen late in 2012 -- he noted that Japanese stocks, which are still down 45% from their highs of 1989, represent a better value now than U.S. stocks, and the long-term trend is in favor of Japanese stocks. "I think you're better off for the rest of 2013 if you own Japanese stocks," Gundlach said.

While he wouldn't say when it would happen, Gundlach does think that eventually something will go wrong with quantitative easing, comparing it to a high school chemistry experiment that eventually goes wrong. Fiscal policies such as the recent tax hikes and sequestration could add up causing problems down the road, and when that happens it's going to be very bad for the U.S. economy.

"When you try to push problems into future, you increase the severity of problem," Gundlach said, noting that is exactly what the Fed is doing with quantitative easing.

While the benefits of quantitative easing are clear when it comes to the stock market, and with the Fed not stepping off the gas anytime soon, stocks may continue to go higher, though Gundlach said now is not a great entry point for the U.S. stock market. When the negative side of QE shows itself, stocks will have a huge correction.

What happens then is anyone's guess.

-- Written by Chris Ciaccia in New York

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