Gundlach: Federal Debt is on a Suicide Mission
The federal deficit and the cost to service that debt are rising at the same time. This historical anomaly is putting the U.S. on a “suicide mission,” according to Jeffrey Gundlach.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on June 12. His talk was titled, “Push Me, Pull You,” 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.
“The federal debt is exploding,” Gundlach said.
He showed the Congressional Budget Office (CBO) projections, illustrating that our federal debt-to-GDP ratio will be 125% by 2030, and it is accelerating at a very steep slope. It is now approximately 80%.
It is very unusual to see this deficit expansion so late in the economic cycle, according to Gundlach. Historically, the deficit expands when the Fed funds rate is being cut, which is typically during or following a recession.
“This is almost like a suicide mission,” he said. “At some point, with debt and its service cost increasing, there will be a collision. There could be a solvency problem.”
Gundlach did not elaborate on what he meant by a solvency problem. It is generally accepted that the U.S. can effectively print as much money as it needs. A federal bankruptcy is impossible. But excessive debt could lead to other problems, such as high inflation or, like Japan, an extended economic slowdown.
The other problem, he said, is that the deficit is not expanding for a “great reason.” There has been no extra spending on infrastructure like there was, for example, in the 1950s and 1960s, he said. “We are way behind on investing in infrastructure,” which he said is obvious when you look at our airports compared to those in China.
Let’s look at Gundlach’s comments on the global economy, the likelihood of a U.S. recession and the bond market.
Slowing global growth and the next recession
The title of Gundlach’s talk was a play on the name "pushmi-pully" (pronounced "push-me—pull-you"), a character originally from the Doctor Dolittle series of children’s books, and featured in movies since. The character has two heads, and only one is used for speaking, reserving the other one for eating. The metaphor applies to the macro environment, according to Gundlach, which is being pulled in two directions. Both real and nominal GDP are going up in the U.S., but economic growth is slowing elsewhere.
Nominal GDP growth has been pushing the 10-year Treasury yield higher, he said. But the German 10-year yield, which is at 50 basis points, is pushing it down.