Gundlach: We Are on the Road to a Large Debt Problem

At 1:30pm ET on March 13, the next-to-last paragraph was corrected to read, “Approximately 55% of BBB-rated bonds…” It previously read, “Approximately 55% of high-yield bonds…”

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.”