Jeff Gundlach: "If Oil Drops To $40 The Geopolitical Consequences Could Be Terrifying"

In a recent interview with FuW, DoubleLine's Jeff Gundlach explained his concerns about the oil market not being "unequivocally good" for everyone...

Question: The crash in the oil market is already causing jitters in the financial markets around the globe. What is your take on that?

Gundlach: Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.

What would that mean for stocks?

Gundlach is right historically...

Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the 'difference this time' is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.

So is the 45% YoY drop in oil prices about to 'cause' contagion risk concerns for the world?

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Of course Gundlach is not alone in this rational concern...

"In its November 14, 2014 Daily Observations ("The Implications of $75 Oil for the US Economy"), the highly respected hedge fund Bridgewater Associates, LP confirmed that lower oil prices will have a negative impact on the economy.

After an initial transitory positive impact on GDP, Bridgewater explains that lower oil investment and production will lead to a drag on real growth of 0.5% of GDP.

The firm noted that over the past few years, oil production and investment have been adding about 0.5% to nominal GDP growth but that if oil

levels out at $75 per barrel, this would shift to something like -0.7% over the next year,creating a material hit to income growth of 1-1.5%."

-- Mike Lewitt, The Credit Strategist

Source: Bloomberg