Gundlach’s Warnings & Fear Mongering: Several Years In The Making

The trade war takes center stage as global markets attempt to parse out the potential impact. But before we get to that I want to introduce the latest commentary from Jeffrey Gundlach. Gundlach is the founder and chief investment officer of DoubleLine Capital. He spoke via a webcast with investors on September 11, 2018. His talk was titled, “Miracle Grow,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation: here.

“The growth of the deficit has been disconcerting. The deficit growth has been at levels that have historically been used to counter recessions, even though we have been in a nine-year-long period of growth. The U.S. total debt outstanding and the total S&P return have moved up in tandem.  What’s going to happen when the next recession happens? The deficit could “explode.”

Tax cuts, deficits and debt have been responsible for the surges in U.S. growth – as are the threats of tariffs, which accelerated growth forward, according to Gundlach. Real GDP growth, he said, is at 2.9% and may be as high as 3.8% for Q3. Nominal GDP has accelerated as a result of higher inflation.

“But if you dump Miracle Grow on plants long enough it burns them out,” he said.

Essentially what Gundlach is citing or “fear mongering”, as he has done for several years now, is that the economy’s growth trend is due to actions of over stimulating or pulling forward growth at a great expense to our future. The debt has simply grown too large, too quickly and can’t be offset by long-term growth. We can’t pay down this debt quickly enough to stem the inflationary impacts that will make the deficit that much more problematic, should inflation creep higher near or mid-term. Never mind the eternal trajectory of bond yields.  Pulling up the chart of the 10-year yield, well…one must believe that based on Gundlach’s perspective that the chart is a lie, history has lied and the future must differentiate from the past.

I’ve just as much concern about the national debt and fiscal policies as Gundlach. In fact, it is mathematically improbable, as nobody likes to hear the words impossible (just un-American), for the United States to pay off the national debt by traditional means. Revenues coming into the coffers minus expenses, unfunded liabilities, add in a little population growth and the inevitable recession here and there…ultimately the math simply doesn’t work for national debt repayment of some $22trn. As such, what will be left for remedying the situation comes down to social program reforms and what is likely to be a rocky future for MOST Americans. The mathematical and structural equations that underpin the U.S. economy don’t lie; we lie to ourselves, as it is the more palatable perspective of the day. So while I agree with the problematic future, the causations or reactions from debt is not an outlier or rationale for fear-mongering, at least at the corporate level.  But I digress…

In Gundlach’s latest rant, which undoubtedly aims to warn and educated the masses about the pending doom in the equity market and economy, the fund manager goes on to describe the emerging market crises. He aims to use the emerging market decoupling from the U.S. as a warning sign and something of an anomaly for remembrance.

“One of the things we will remember most about 2018 is that incredible divergence between the U.S. and global stock market returns. If it gets worse in the emerging markets, then it “has to be a global situation.” 

The reality is this is less than anomalistic and has happened before. There is historical precedent for U.S. markets decoupling from troubled emerging markets. If you go back to the mid-90s there was an emerging market rout of over 30 percent, According to PNC Financial’s Jeffrey Mills.