Tough stuff from leading prognosticators in response to comments on Wednesday from Federal Reserve Chairman Ben Bernanke.
Granted, most aren’t known for their sunny optimism; but even for them it went beyond the pale. Jeffrey Gundlach doesn’t like bond alternatives; Bill Gross doesn’t like the Fed; Marc Faber doesn’t like Obama and Peter Schiff doesn’t like anybody. Judging from Wednesday’s and Thursday’s stock sell-off, they might be on to something.
The Dow Jones industrial average plunged 353 points, or 2.3%, to 14,758 points. The Dow has lost 560 points in the past two days, wiping out its gains from May and June. The Standard & Poor's 500 dropped 40 points, or 2.5%, and the Nasdaq fell 78 points, or 2.3%.
The lifeblood of America’s ailing economy—the Fed's emergency monetary infusion via quantitative easing—may be “anemic, oxygen-starved, or even leukemic,” bond king Bill Gross warned in his June missive to PIMCO shareholders. Things haven’t gotten any better since.
Gross (left) told Bloomberg on Wednesday he thought Bernanke "might be driving in a fog" and said of Vice Chairman Janet Yellin, “I think she is a Siamese twin in terms of policy."
Schiff, the outspoken president of Euro Pacific Capital, was asked by the Breakout website what Bernanke could have done that would please the legendary bomb thrower.
“He could have resigned,” Schiff (right) shot back. “He’s basing his forecast of an improving economy on a housing market that was only rising because the Fed was able to blow more air back into the bubble.”
Bernanke didn’t specifically mention tapering in Wednesday’s comments because he can’t, according to Schiff.
“He knows he can’t do it. If the Fed does not start buying more than $85 billion a month of mortgages, we could have mortgage rates back above 5% by the end of this year. This whole new mini-housing boom could then be a brand new bust.”
Dr. Doom himself, Faber, editor and publisher of the aptly named "Gloom, Boom & Doom Report," recently predicted the sell-off in Japanese equities. Now he has a warning for all investors about the U.S. markets, the Fed and the rest of the world, according to Talking Numbers.
“[The Fed] will talk without giving any precise answers,” Faber (left) said. “I think the bond market has already weakened significantly from the July 2012 lows, in terms of yield. If the Fed indicated that it would begin tapering, equities would be more vulnerable than bonds.”
When asked about riots in emerging markets recently, and whether that made U.S. securities safe, Faber offered a glimpse of the positive before reverting to his usual pessimism.
“Yes, I would not be overly negative about U.S. bonds,” he conceded, “but it’s a more complicated question for equities.
“If someone says Mr. Bernanke has stayed to long, my view is that Mr. Obama has done the same,” Faber added with flourish.
As for specific investment moves, DoubleLine Capital founder Gundlach (left) had harsh words for bond investors (recognizing he has a dog in the hunt).
"The basic viewpoint is that the financial markets, and certainly bond alternatives, are all balancing, somewhat precariously, on a very narrow base, which is zero interest rate policy,” he told CNBC. “Everybody is trying to find ways of getting yield and trying to find ways of avoiding a lousy asset class. They’re wrong, bonds are not a lousy asset class.”
The flight to bond alternatives—like dividend-paying stocks, mortgage REITs and master limited partnerships—“is going from the frying pan into the fire.”
“It’s really a fundamental mistake that investors are making,” Gundlach asserted. “They say ‘hey, I don’t want to own bonds because yields are too low, and that means that they must rise soon.’ But while bond have had modestly negative returns, these bond alternatives have had horrible returns. If the low interest rate premise is incorrect, these things will fall more than bonds.”
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