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Great thoughts as always from a recent Morningstar interview with Jeff Gundlach, the former TCW bond fund manager who now runs his own firm DoubleLine. Gundlach says there is “scant” evidence of inflation and that deflation remains the primary risk:

“I agree that the inflation case looks compelling on the surface of it. The Fed has run up trillions of dollars in stimulus and guarantees, has printed a trillion-plus dollars via quantitative easing, and seems to be gearing up for QE2. Chairman Ben Bernanke himself vowed in 2002 to drop money from helicopters, should need be, to fight deflation. With a called shot like that, no wonder many investors see inflation as the policy-choice end game. And they may be right.

The problem, though, is that the markets and the economy to date have offered scant evidence to support the inflation case. Stocks are down over the pastΒ 10 years. Real estate is down hard over the last five years. Commodities are down sharply over the last two years. Instead of spiking to double digits, bond yields are hugging the ground. M3, which is now calculated only by private economists, is down nicely over the past year. And of course money velocity is moribund: Society has looked into the debt abyss and decided enough is enough with the debt-based consumer economy. So, deflationary forces still prevail. What could shift the balance of forces in favor of inflation? A well-meaning movement to cut the deficit has at long last arrived, maybe. But cutting the deficit that is supporting the consumer economy will directly depress gross domestic product. If that causes not just a look but a step or two into the deflationary abyss, then maybe the inflation case will move to center stage.”

Read the full interview here.

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