Doubleline Capital's Gundlach and Loomis Sayles' Fuss say the recent rally in yields is unlikely to continue, thanks to the Fed.
Both say the Federal Reserve will make sure that any rise in rates will be slow and controlled. Gundlach and Fuss said that the consequences for global markets and the economy will be dire if the central bank fails.
"People have been saying that the Fed thinks the economy is self sustaining, and that means lack of support for bonds," said Gundlach. "But the whole structure of the financial markets has been balanced on top of low interest rates."
And now, the whole economy depends on it.
But ZIRP and QE are quack remedies. They're like bloodletting...which actually makes the patient worse and prevents him from getting better. Since QE & ZIRP don't work, the economy doesn't recover...and so it needs more 'help' from the Fed. Bloomberg reports:
Manufacturing (NAPMPMI) in the U.S. unexpectedly shrank in May at the fastest pace in four years, showing slowdowns in business and government spending are holding back the world's largest economy.
The Institute for Supply Management's factory index fell to 49, the lowest reading since June 2009, from the prior month's 50.7, the Tempe, Arizona- based group's report showed today. Fifty is the dividing line between growth and contraction. The median forecast of 81 economists surveyed by Bloomberg was 51.
"Manufacturing is really stymied by slow corporate spending and government spending cutbacks," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who was the only analyst in the Bloomberg survey to correctly project the drop in the index. "Manufacturing will grow at a modest pace this year" although it "is unlikely to accelerate in coming months," LeBas said. "This is part of the slower expansion we'll have in the second quarter."
All the Fed can do is to retard the process of recovery...by depriving small and medium businesses of the real savings (credit) they need...by shifting resources from productive businesses to government and big zombie corporations ...by making saving unattractive...by encouraging speculation rather than genuine capital formation and long-term investment...and by increasing the total amount of debt in an already debt-drenched society.
None of this helps a recovery. In fact, it slows it down. It makes the economy weaker... Which is just great from the Fed's perspective. If the economy did recover - even a little - inflation and interest rates would rise.
And then what? Then, as one central bank governor put it, the economy that came to depend on wild turkey would go cold turkey. It wouldn't be very pleasant. The Fed couldn't keep going with zero interest rates and bond buying - not with the CPI going up. It would have to cease and desist.
Mr. Bernanke & Co. would be stuck, trapped between the Scylla of a collapsing economy and the Charybdis of out-of-control inflation. Their meddles would begin to look like big mistakes.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.