Gundlach: Inflation Not on Our Doorstep

Jason Stipp: Jeffrey another area, that we spoke about in a recent interview with you, was your take on inflation and deflation, as well as the dollar. And you had mentioned at the time, when there was so much pessimism about the dollar, that you actually saw the underpinnings of a rally in the dollar. Now, we've certainly seen some safety buying of the dollar recently. How is your thesis about inflation, deflation, and the dollar playing out since that last conversation that we had?

Jeffrey Gundlach: Well, right, I'm glad you remember that. It was an awfully lonely voice, mine was, back there talking about a big dollar rally. And I didn't talk about a small one. I talked about what I termed a "monster dollar rally" coming on the horizon. And, lookie here, we're in the middle of a monster dollar rally, thanks to the immense weakness in the European currency.

The dollar is clearly still the beneficiary, as is the Treasury bond market, is still the beneficiary of flight to quality. I think investors really have to pay attention. Some people think that that might change sometime soon, as the world wakes up to the deflationary consequences of our debt burden in the United States, but it hasn't happened yet.

I still remain, in spite of the fact that many investors are looking for inflation to come soon, I still am totally unconvinced that inflation is on our doorstep. I think that deflationary forces of excessive debt remain the most important factor in the market. And we have seen some fairly relaxed inflation data, and we've seen some pretty weak commodity prices, in the last several weeks, all consistent with a growing awareness of the deflationary, or at least the dis-inflationary, consequences of the United States debt burden.

So it's still deflation first. Maybe inflation comes down the road. It is possible, and even likely, that at some point, in order to paper our way through these multiple tens of trillions of dollars of promises to pay in the United States, that we'll be tempted to run the printing press. But that's not happening yet, and an important monetary growth measure, M3--which was discontinued by the Fed some years ago that some private economists track--M3 is shrinking, and that is another significant dis-inflationary source.

And so, for the time being, Treasury bonds are benefiting from a flight to quality. The dollar, as you suggest, is benefiting from that. And gold has done remarkably well as another harbinger of the sort of anti-paper currency mood among global investors. Dollar is strong, so for the gold price to be pushing to new highs, albeit not with a lot of momentum, it's still pushing new highs in dollar terms, shows a very widespread demand for diversification away from paper assets.