In a session that at times struck as Shakespearean tragedy, Doubleline Funds’ Jeffrey Gundlach took to the stage for the opening keynote Tuesday morning at IMCA’s annual conference in National Harbor, Md.
Punctuating his comments with quotes from the bard, Gundlach offered sobering testimony about the current debt and deficit crisis in the United States and abroad.
“At the beginning of the last decade, federal employees had an average salary and benefits worth $76,000, compared with $45,000 for the average private sector worker,” Gundlach, Morningstar’s fixed income manager of the year in 2006, told audience members. “Today, it’s $126,000 in pay and benefits, which is now double what the average private sector worker makes.”
There is “no such thing” as the government creating jobs, he bluntly stated. Federal employees, net-net, do not pay taxes, they just refund part of the tax money that is given them as salary, which has little to do with actual wealth creation.
“As the debt grew to $200 billion, no one really noticed,” Gundlach explained. “When it got to $400 billion, no one really noticed. Then it got to $500 billion and people started to notice, but then Dick Cheney said not to worry about deficits. Today, it’s in the trillions.”
He recounted failed efforts to rein in spending, noting that each time it was tried bond yields fell and the economy was negatively impacted.
“Last summer we went through the debt ceiling fight, which was very high profile. But it’s actually been raised two times since, which was kept on the down-low. The last time was supposed to take us through the election, but we won’t make it and something will have to be done in the fall, which will be very interesting.”
He then moved to a discussion of the widening wealth gap, one that began in 1980 with so-called “voodoo economics.” Noting an age of prosperity from 1949 through 1979, he said that beginning in 1980, productivity went “through the roof” but hourly wages remained static, with much of the benefits of productivity going to the wealthiest individuals.
“We actually saw negative movement in the lowest quartile and an explosion of income in the top quartile,” he added. “The last time we saw that was in the 1920s when we also were taking on large amounts of debt. One fundament rule I have for investing is that bull markets create wealth through cooperation. Bear markets are characterized by a lack of cooperation and wealth destruction. We don’t see much cooperation presently.”
He pointed to the fact that in 1975, 45% of women with children worked. Today, 71% of women with children work, which he said was symptomatic of a lower standard of living for the middle class.
“Government is struggling to keep up, but it only comes up with random solutions that seem to be arrived at by simply spinning some giant wheel," Gundlach said. "But I’ll bet dollars to doughnuts we will see tax increases soon in this country. As far as spending restraint, 80% of the population opposes cutting Social Security, Medicare and Medicaid, so that’s very difficult politically.”
In the presentation's only real ray of hope, Gundlach noted the country has been in this situation before. In 1940, tax receipts were only a tenth of the national debt, meaning if interest rates went to 10%, tax receipts would all go to servicing the debt. In the 1950s, that ratio was lowered to 1:2.
How did we do it?
“Massive tax increases,” Gundlach said, before adding that in 1980 we “rolled the rock all the way back down the hill again.”
“If you have tears, prepare to shed them now,” he said, quoting from the third act of Julius Caesar.
He then began a discussion of stimulus action and the markets, noting the artificial nature of the stimulus in propping up asset values.
“I compare the S&P 500 to the Shanghai index; I think the Shanghai market is one of the most important in the world for equities by proxy of what China’s economy is doing. When you compare the two, Shanghai is drastically weaker. The same goes for emerging markets and of course Europe. What we’re seeing is that the S&P 500 is pretty much living on stimulus.”
So when will the Federal Reserve raise interest rates?
“The Fed can no longer do what it once could, which is to take preemptive strikes against inflation,” he said. “They will stay low for as long as we are in this debt morass. Jobs have snapped back less and less since the late 1980s. Do you think it might have something to do with this debt experiment we’re in? What do you think I think the answer to that question is?”
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