Be Alert and Alarmed!

Be Alert and Alarmed!

If you think Sydney’s record auction clearance rate is high, have a look at the number of billionaire hedge fund managers warning the US Federal Reserve to wait before raising rates, lest it be a mistake from which reversal will not be easy nor pretty.

Earlier this year, we quoted Ray Dalio from Bridgewater Associates at the Davos Economic Forum; “We’re in a new era in which central banks have largely lost their power to ease.”

“If you get a downturn in the economy, the effectiveness of monetary policy will be less.”

He did say the U.S. economy was fine for now, but added later that it won’t last forever. “I worry about the downside because the downside will come,” Dalio said.

He also said that the Federal Reserve should wait until it “sees the whites of the eyes of inflation” before raising interest rates.

More recently, Stanly Druckemiller the trader under George Soros, who sold the British Pound that broke the Bank of England and forced the Sterling out of the European Exchange Rate Mechanism, noted;

“One of the things I would say is about 80 per cent of the big, big money we made was in bear markets and equities because crazy things were going on in response to what I would call central bank mistakes during that 30-year period. And probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004. I recall very vividly at the end of the fourth quarter of 2003 calling my staff in because interest rates, fed funds were one percent. The nominal growth in the U.S. that quarter had been nine percent. All our economic charts were going through the roof, and not only did they have rates at one percent, they had this considerable period – sound familiar? – language that they were going to be there for a considerable time period.”

“Now, the fed will say well, you know, if we didn’t have rates down here and we didn’t increase our balance sheet, the economy probably wouldn’t have done as well as it’s done in the last year or two. You know what, I think that’s fair, it probably wouldn’t have. It also wouldn’t have done as well as it did in 2004 and 2005. But you can’t measure what’s happening just in the present in the near term. You got to look at the long term.”

“And to me it’s quite clear that it was the Federal Reserve policy. I don’t know whether you remember, they kept coming up with this term back at the time, they wanted an insurance policy. This we got to ensure this economic recovery keeps going. The only thing they ensured in my mind was the financial crisis. So, to me you’re getting the same language again out of policymakers. On a risk-reward basis why not let this thing a little hot? You know, we got to ensure that it gets out. But the problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there’s one thing that doesn’t diminish, which is unintended consequences.”

And now we have DoubleLine Capital’s Jeffrey Gundlach;

From Bloomberg: “Jeffrey Gundlach, the bond manager who has beaten 99 per cent of his peers over the past five years, said the full impact of the Federal Reserve’s “extreme policies” have yet to be felt in the market.”

The Fed has been “very well-intentioned,” Gundlach said, speaking in an interview on Sunday on Wall Street Week. “The ultimate consequences of all these extreme policies have yet to be felt and will be felt.”

“The central bank has kept rates in the U.S. near zero and embarked on unprecedented monetary stimulus since the 2008 financial crisis. Known for his contrarian views and top returns, Gundlach said rating the Fed very highly at this point is “sort of like a man who jumps out of a 20-story building, and after falling 18 stories, says, ‘So far, so good.’”

“Gundlach…said last month that if the Fed increases interest rates by mid-year, they would have to reverse course.”

On Sunday, he said that the probability of a rate increase by the Fed in June is very low, because the economic data doesn’t support such a move.

“I think the Fed would like the data to corroborate their ability to raise interest rates but it isn’t there yet,” he said.

Gundlach also cautioned investors that some mall real estate investment trusts are in a “death spiral.”

The manager also had a warning for investors seeking to be contrarian when it comes to betting against the U.S. dollar.

“Don’t do it,” he said. “The dollar, which has been a world leader, is going to be a world leader.”

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.