DoubleLine’s Gundlach Contradicts Bill Gross, Says Inflation Unlikely

Developing countries better fiscal stewards than developed countries, star manager says

A web seminar hosted by DoubleLine Capital’s Jeff Gundlach, titled “Mirror, Mirror on the Wall,” was a whirlwind trip around the globe to where the star fixed-income manager sees problem and potential.

Jeffrey Gundlach“If you look into a mirror, obviously everything looks backwards,” Gundlach (left) said, when explaining the title. “It’s a way to get a very different view of the world and what’s happening in it.”

Covering the early 1980s through the present, Gundlach noted the paradigm has shifted dramatically in the past five years.

“Over the majority of the time period, we’ve seen a benign inflation period characterized by stable to falling interest rates,” he said. "It’s quite likely interest rates will now rise and boost the returns of government instruments.”

Employing sculpture as a metaphor, he noted the fragility of many of the pieces of famed artist Anish Kapoor, even though many of Kapoor’s pieces are reinforced with steel.

“I’m similarly impressed by the fragility of our economic system, even though it’s been reinforced with so many heavy measures by governments around the globe, ECB bond-buying programs and zero interest rate policies here in the U.S., for instance.”

Raising the issue of long-term spending patterns versus tax receipts, he noted that very small gaps between the two, if they persist over an extended period of time, will create “some very large deltas.”

As for federal spending as a percentage of GDP, he noted the consistency among presidents since Ronald Reagan, despite the difference between political parties.

As to the question he often gets about the possibility of inflation, he argues that inflation cannot occur unless there are corresponding increases in median household income, which he says is now falling. It’s a point that puts him in contrast with PIMCO’s Bill Gross, who recently argued that “the age of inflation is upon us.”

As to who the public blames for the fall in median household income, recent surveys find Congress tops the list, followed by financial institutions, George Bush and President Obama.

“What’s interesting is that only 8% blame themselves,” he added. "It seems to be everybody else’s fault.”

He then turned to a chart of rising prices for popular items over time. While the cost of a new car was relatively flat since the late 1970s, and food only grew somewhat, the cost of medical care rose 600% and the cost of college tuition and fees rose 1,115%.

“Believe it or not, food is the real concern, especially in developing countries,” Gundlach argued. “In these areas, 40% of a person’s income will typically go toward food. If it goes high higher, it will have an outsize impact, and riots and other forms of civil unrest could occur.”

Commenting on the global economy, Gundlach noted that the discussion used to be about basket cases like Argentina and other developing countries. In keeping with his “mirror” theme, he reminded listeners that developed countries are now the biggest debtors.

“Developing countries are now better fiscal stewards than developing countries, and this has played out in Europe.”

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