When the second round of quantitative easing is completed on June 30, it will represent "the moment of truth for this year's investments," the CEO of the fixed-income investment management firm DoubleLine Capital, which has almost $10 billion in assets, told CNBC's "The Strategy Session" Thursday.
"What does the economy really have when you take away the stimulus and the QE2? QE2 was obviously designed to help the economy," Jeffrey Gundlach said.
"If it [QE2] helps the economy and it helps stocks and it helps commodities, ergo when you take it away you might go in the other direction, which I think will be the case," he added.
In addition, Gundlach went on to say, if lawmakers remain serious about attacking the budget deficit you will start to see an austerity program.
"Austerity is negative for the economy. GDP [gross domestic product] in the United States is about forty-five thousand dollars per capita and what we're really doing is living like a fifty thousand dollars per capita by printing or borrowing 10 percent of GDP essentially."
"If we go and start paying down that debt or just stop borrowing it, it will be negative for the economy and my view is that is going to happen," he added.
"All you really need to do is cut your standard of living by about 10 percent in the United States ... we need to do this soon or the compounding curve really does kick in," Gundlach said.
Since dual risks of deflation and inflation have been a concern for the company, its strategy is to "tilt the mix:" part of its portfolio protects for deflation and part of the portfolio will do well in an inflationary outcome, he explained.
When the Fed is buying treasuries, market participants think of it as an inflationary policy because it's money printing. People in the bond market don't like to see "blatantly inflationary policies," Gundlach went on to say.
"So, when they stop buying bonds you actually have a weaker economy and you actually have more fiscal prudence," he concluded.
Separately, after appearing on "The Strategy Session," Jeffrey Gundlach continued the conversation off-air about why the U.S. housing market won't be rebounding anytime soon.
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