Typically, influential bond investor Jeffrey Gundlach travels to New York City in the new year to attend a roundtable hosted by financial publication Barron’s. But not this year.
Instead, the billionaire CEO of $149 billion DoubleLine Capital skipped the event to launch his firm's inaugural "Round Table Prime" at DoubleLine’s Los Angeles headquarters. The firm’s event featured an "eclectic mix" of industry leaders like David Rosenberg, Danielle DiMartino Booth, Steven Romick, Jim Bianco, Ed Hyman, and was moderated by deputy CIO Jeff Sherman.
DoubleLine began rolling out its three-part and three-hour long series on Thursday, with a group discussion of the global macro economy. Separate talks about the markets and "best ideas" for 2020 will drop within the next two weeks.
Kicking off the conversation, David Rosenberg, the chief economist for Rosenberg Research and Associates, said his expectation for 2020 is that all central banks "will remain extremely accommodative" — including the U.S. Federal Reserve.
"My sense is that although the Fed would like to not have to ease policy and of course they are premising it on the current rose economic outlook, I think that is going to be challenged,” Rosenberg said.
He added that “the biggest stress test is going to be whether or not the U.S. consumer, which was resilient last year, in the face of weakness in almost every other part of the economy, is going to remain resilient.”
Rosenberg's view is that the economy is going to be weak, and deflationary pressures will intensify. That will keep central banks worldwide in accommodative mode as they find ways to ease policy even further.
‘Arsonist and firefighter’
Meanwhile, Danielle DiMartino Booth, the CEO of Quill Research made a point about how Fed Chair Jerome Powell "has completely broken with precedent" when it comes to his predecessors at the central bank, who in the past embraced the role of both the "arsonist and the firefighter."
DiMartino Booth, who previously worked at the Federal Reserve Bank of Dallas, noted that Powell “has chosen to break with his predecessors and try to get out in front of credit volatility, keep it contained at all costs.
She added: “And as we are discovering, that is backing him into a very big corner because the only thing being debated right now on Wall Street is how big the Fed's balance sheet is going to get." DiMartino Booth said she presumes that it will surpass $4.5 trillion "fairly quickly" as risks to the economy surface.
"[There] will be pressure on Jay Powell to continue growing that balance sheet in addition to the fact that these fresh geopolitical tensions have put rate cuts back on the table if you're looking at bond market probabilities."
DiMartino Booth believes the Fed is "unwillingly" easy at the moment, given the upcoming general election — which is likely to be hard-fought and polarizing.
"I don't think Powell wants to be seen as helping the presidential election in any way, shape or form, but that's now where his focus is," she said.
Gundlach, who has criticized Powell and graded him with a 'C-'during a recent Yahoo Finance interview, predicts that Powell— who has struggled with his messaging — will want "to say as little as possible."
"The market had been, kind of leading the Fed, but now, both the Fed's idea of being on hold, which is their strong desire, like 'Do no harm,' sort of a Hippocratic oath for Jay Powell,” the billionaire said.
“So, I think what he's looking to do is to hope things hang together, and be able to get through  with rates pretty much on hold the entire year,” Gundlach added.
This thesis is being "ratified" by the bond market with the two-year Treasury yield consistent with a Fed funds rate that’s hovered near unchanged for some time, he added.
Later in the conversation, Jim Bianco, the founder of Bianco Research, warned of the perils of quantitative easing (QE) on the banking system.
"An addendum to what [Jeffrey Gundlach] has talked about — you're right, if you look at Japan has done QE the longest, their banks have done the worst, and after the financial crisis, Europe went into negative QE rates, and they struggled. The U.S. only did QE and then stopped, and we went back to our highs," Bianco said.
He noted that Australia and Canada, which have never done QE or engaged in negative rates, those bank stock indexes "are way through their old highs from 2007.
"[They] have been performing in-line with what you would expect sock markets to perform. The further you get away from QE, the better the banking system would be, and at the top would probably be the Australian banking system right now. They have got nowhere near what we are talking about and they are doing much, much better, orders of magnitude better than everybody else."
Will growth hold up?
Elsewhere, Evercore ISI's chairman Ed Hyman expects that with an election year, the Fed "desperately wants to be on hold.” He also thinks there's a risk that inflation could pick up, but that's "just a risk," he added.
Citing Milton Friedman, Hyman noted that monetary policy works with a one or two-year lag, which makes it difficult for central bankers "because they are trying to drive over here and it takes them a year or two to know if they have made the right court correction."
That said, Hyman has a "strong feeling" that the economy will "do better than expected" because of the Fed's rate cuts in 2019 in addition to the increase in their balance sheet.
"Because it was said, about the same time they did the QE for the report market, not only did bond yields go up, but stock prices went up, w hick was sort of a shock," Hyman explained. "So you have an unusual increase in stock prices and consumer net worth is up over 10%. I think they are loading up the economy to do better in the first part of 2020."
Not everyone agreed during the roundtable, especially the state of the economy. A portfolio manager with First Pacific Advisors (FPA), Steven Romick, doesn't think the economy is "quite as strong as people think."
"Because a lot of this growth has been brought thorough excess leverage around the globe. You have sovereign leverage has increased, state and local leverage, underfunded pension plans, corporate leverages," Romick said.
He added that if housing was removed from the equation, other key indicators of consumer debt — like credit cards, auto loans and student obligations — have all ballooned to new heights.
"It's scary," Romick said.
Despite a healthy labor market and accommodative monetary policy, “you have the average new car loan is now 69 months. You look at recent securitizations, the average used car loan is 63 months, and that's for a used car. It's already a few years old."
Romick said he has a "great concern" that current arguments about how to help indebted consumers “will alchemize into reality,” and that people proposing bailouts are “betting trillions of dollars in the process."
In fact, he said it reminded him of the boardgame “Monopoly,” where the instructions state that the bank never runs out of money — and never goes bankrupt.
Instead, the banker can issue new money on slips of ordinary paper.
"We believe there's going to be something bad in the future; I don't know how to opine as to when that might be."
The full roundtable video can be seen here: