Gundlach: We Are On The Road To A Large Debt ProblemAdvisor Perspectives
When Donald Trump was campaigning, he said he would eliminate the national debt in eight years. But it has increased by $2 trillion in the first two years of his presidency, leading Jeffrey Gundlach to conclude that we are “on the road to a large debt problem.”
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on March 12. His talk was titled, “Highway to Hell,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation are available here.
Highway to Hell is a 1979 song from the rock group AC/DC. Gundlach said it illustrates the perdition that awaits the U.S. economy if policymakers continue to allow an unchecked growth of federal deficits.
Deficit warnings have been a common theme in Gundlach’s webcasts. In 2011 and 2012 he warned that harmful effects – specifically high interest rates – would come by the end of the decade. We are on schedule, he said, and unless the Fed takes drastic action, that fate awaits our markets.
But a spike in interest rates is not certain, he said. The Fed has demonstrated that it can take drastic action and can quickly adapt to evolving market conditions.
The Fed’s attitude changed 180 degrees since December, when it said its quantitative tightening (QT) was on “autopilot,” reducing the balance sheet by $50 billion/month. Now, Gundlach said, a plan is being discussed to stop QT by the end of the year, which will eliminate about a third of the planned balance-sheet reduction.
The markets rebounded as a result of the Fed’s about face, Gundlach said. Now central banks are talking about using quantitative easing (QE) as a regular policy tool against weakening economies.
Indeed, he said, the narrative has turned to a coordinated slowdown, as economic data across the globe has been disappointing, with metrics below their 12-month averages. Some emerging markets are “okay,” Gundlach said, including Brazil, Peru and Uruguay, but globally “it is flashing red. Global data changes are the worst they have been in seven years.”
That slowdown has been driven by the falloff in global trade, according to Gundlach. That contraction is similar to the lead up to the two last recessions, and the next one, he said, could be a year or two away.
Forecasting the next U.S. recession
Gundlach’s primary recessionary signal is the Conference Board leading economic indicators, which he said are falling sharply, “but from a very high level.” They are still positive, which means they are not a precursor to a recession. “There is nothing imminent forecasting a recession,” he said, “but possibly in 2020.”
The job market is tight, he said, and wage growth could approach 4%. “That could change the psyche of investors,” he said, raising inflation expectations. The Fed has said it would not be concerned if inflation goes above 2%, and Gundlach said that 2% could become a “floor,” instead of a trigger for policy adjustments. “The Fed wants investors to be more comfortable with inflation approaching 3%,” Gundlach said.
Consumer confidence rebounded with this year’s uptick in the stock market, Gundlach said. The Conference Board consumer expectation metric is at 131, one of its highest readings ever. One of the most important things to watch are real-time consumer expectations, he said. “If those start to drop, it would be a strong signal of an impending recession.”
The National Federation of Independent Business (NFIB) planned hiring data “rolled over,” Gundlach said, which is troubling, as are retail sales data. Six-month retail sales were down 1.6% in December, the worst one-month decline since the global financial crisis.
Gundlach highlighted one anecdote. There are more $100 bills than $1 bills in circulation. But 20 years ago the number of $1 bills was double the $100 bills. If there is no inflation, he asked rhetorically, why do we need so many 100 bills? His conjecture was that people have a greater need to move large amounts of cash quickly.
Read the full article here by Robert Huebscher, Advisor Perspectives