Gundlach: The Two Questions that Matter Most
Two questions stand out amid the complexity of the current economic and market environment, according to Jeffrey Gundlach, both of which relate to critical elements of fiscal and monetary policy and should guide portfolio construction for investors.
Gundlach, who is the founder and chief investment officer of DoubleLine funds, spoke to investors in a conference call last Tuesday. The title of his talk was the “The Decline and Fall of the Roman Empire.” The US economy, he said, is on a path that bears alarming similarities to the one that befell the Romans in the fifth century.
The slides from his presentation are available here.
Gundlach’s two questions were when the Fed will increase interest rates and what effect the end of fiscal stimulus measures will have on the economy. I’ll return to why he said those questions are critical to investor’s decisions, but first let’s look at Gundlach’s parallels between the US today and the Romans a millennium-and-a-half ago.
Republicrats and perpetual dictators
The Roman Empire was founded in 44 BC, when Julius Caesar was appointed as a “perpetual dictator.” Gundlach said that reminded him of what is currently going on in Washington, DC.
The US is not governed by a perpetual dictator per se, he said, but instead by a dual-party system he dubbed the “Republicrats.” The two parties squabble over who will be the president, and the result is policies that are “awfully unchangeable,” he said.
Those policies – specifically ones that have expanded the fiscal deficit – need to change in the next few years, he said, in order for investors to thrive in the investment markets. Republicrat-led deficit spending measures have driven each household’s share of the national debt from $20,000 to $84,000 since 2000, while median-household income growth has barely increased.
An important contributor to the fall of the Roman Empire was the lack of a middle class, thanks in large part to a lack of infrastructure spending and taxation policies that created a destitute underclass, according to Gundlach. He said taxes levied by the Romans were used to fund their military and to wage wars in order to defend their territory, which was almost as large as the continental US.
Similarly, the US has an “outsized” military budget of nearly $700 billion, Gundlach said. In a distant second place is China’s spending of $199 billion. We spent 5% of our GDP on the military last year, about twice the percentage spent by China, the UK or France.
“It’s really a problem when you are running this massive military machine,” he said. “It is one of the things that undoubtedly caused the very slow but inexorable decline of the Roman Empire.”