Jeffrey Gundlach: QE will return to American by 2020

Jeffrey Gundlach has a history of good calls. Barron’s called him the “King of Bonds” in 2011, thanks to his $9bn TCW Total Return Bond Fund’s great ten-year track record.

In 2012, he shorted Apple before the share price fell by around a third. Early this year, he defied the consensus by predicting a fall in Treasury yields. He was right and the consensus was wrong.

So what’s he saying now? That the next few years will be “interesting”. When a “bond market maven” uses that word, “be scared”, says the FT’s Stephen Foley. “What is good for fixed income is rarely good for the economy.”

Gundlach’s main worry is that the American economy is failing to reach “escape velocity”. When he predicted lower yields this year, he had counted on poor growth and a weak housing market, alongside ongoing quantitative easing (QE), to prop up bonds.

Expect the recovery to remain weak, says Gundlach. “I would still be surprised to see full-year 2014 GDP exceed 2%.” The housing market looks structurally fragile. Stagnant incomes, high student debts and rising rents will hold back household formation and demand for mortgages. So US housebuilders look worth shorting.

Before too long, investors will suddenly stop believing that the US is reaching take-off speed. “It’s kind of like punching a pumpkin. It’s the same thing, the same thing… and then all of a sudden it caves in.”

Other looming problems include a soaring US deficit as baby-boomers drain social security funds, and ageing populations in China and emerging markets. Rock-bottom interest rates have stored up trouble for the future.

Corporate bonds, notably junk, have never been this overvalued, and firms have lots of debt to refinance. Given all this, another crisis is likely. By 2020, says Gundlach, the US Federal Reserve could once again be resorting to QE.