Submitted by Taps Coogan on the 23rd of September 2019 to The Sounding Line.

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Jeffery Gundlach, founder of DoubleLine Capital, spoke with CNBC before last week’s Federal Reserve rate cut to explain why the Fed may need to start doing what he terms ‘QE Lite’ and to share his view that money managers in Europe are realizing that negative interest rates are a permanent feature of the monetary system.

Some excerpts from Jeffery Gundlach:

“One thing that might have to happen here is that the Fed might have to start ‘QE Lite’ as I call it, meaning that they go back to expanding their balance sheet in line with the increase in the currency to get the free reserves in the system higher than where it seems to be at this toggle point right now… There’s not enough reserves in the system to provide enough liquidity, clearly. What they used to do before the Global Financial Crisis, again I call it ‘QE Lite,’ was expand the balance sheet in line with growth in the currency. The can always do some sort of permanent repo facility and the like, but it just seems to me that the Fed is almost anxious to start increasing their balance sheet again…”

“Look what Draghi just did last week. He said 20 billion euros of QE per month on an open ended basis… I was in Europe at the time… and I was meeting with a lot of very very major asset allocators and I noticed a real change in sentiment regarding what’s happening with negative interest rates and ECB policy… There has been a pivot away from the idea that the circumstance that we’re in, with the ECB and the banking system there, is temporary. The last time I was in Europe, there was this feeling that negative interest rates were sort of a novelty that you had to kind of… suffer through and endure if you were a financial institution. But the mood now seems to be that there is an awareness growing that this is a fundamental policy, that central bankers want to get the inflation rate substantially higher than the interest rate… I think they are starting to realize that this debt problem that we have in the developed world is really starting to show up in the financial system.”

“…Weirdly, there is a contradiction between the long term problem being exacerbated by short term solutions. The way that central planners are dealing with the long term problem of negative interest rates being fatal to the banking system is, weirdly, more negative interest rates because they think that is going to help in the short term… This is a theme that I have been thinking about a lot as this year has progressed. Eventually, a lot of short term solutions that exacerbate long term problems lead you into a reality where finally enough short term things lead to the long term, the future, being now. I think that is starting to happen.”

There is more to the interview, so enjoy it above.

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