Gundlach may have the last laugh, noting that his new fund complex, open only a few months, has passed the $1 billion in assets under management milestone, just “last night.”
He was the keynote address at the 2007 Morningstar Investor Conference, warning early that the mortgage securities market was “a total, unmitigated disaster.” That alarm was sadly true and three years later, Gundlach warns that, “deflationary pressure is undeniable.”
Gundlach is also very conscious about government debt and especially unfunded liabilities in Medicare and Social Security–”in 2009 [there was] $62.3 trillion in…promises to pay against a $14 trillion economy.” Further, that’s up “$36 trillion over the past seven or eight years” versus a total cumulative economy of $104 trillion over that same time.
But the debt that individuals in America have accumulated over the past six decades concerns Gundlach too. Using debt to fund lifestyles which he notes started in the 1950s when television assumed “mind control” of the American population, creating a culture of “consumerism” in which people borrowed to fund their lifestyle–is partly to blame for where the economy is now in America.
Tax receipts collected to fund Social Security and Medicare have been spent–so the question is, how do you payout the coming claims when there is no reserve for these future liabilities–a concern former Treasury Secretary Paul O’Neill spoke of to Wealth Manager in an exclusive interview recently. “Weekend Interview: Former Treasury Secretary Paul O’Neill.”
A “wonderful match”
Gundlach mentioned that the best performing asset class recently has been long-term U.S. Treasury bonds. They are “a reasonable investment right now.”
Gundlach spoke of a “new world scenarios” strategy in which buying select residential mortgage backed securities (RMBS), at a steep discount, which would provide an expected double digit return, combined with, basically its opposite number in terms of risk, long U.S. Treasury bonds makes a “wonderful match.” Why? Because of the deflation protection of long U.S. Treasury bonds combined with the inflation protection of these steeply discounted, high yielding RMBS.
He cautions, though that when buying sovereign debt from any country, including the U.S. “If sentiment changes,” meaning investors lose confidence in sovereign debt or if, “government default risk” rises, “sell sovereign [debt] including the U.S. immediately.” He is “watching this closely,” in his shop. There’s “not a lot of time,” when that happens–when sentiment changes prices can drop very steeply, very quickly. Gundlach cautions, “Watch for the dollar to drop.”
Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.