“Deflation is not off the table,” said Jeffrey Gundlach, CEO and CIO of DoubleLine Capital, at a briefing in New York on Thursday.
Gundlach (left) opened up wide-ranging remarks with macro-economic views on the risks investors face now: “With so much debt, public and private…minor weakness in economy” could cause deflation, he explained. In the “[Great] Depression, there was a 300% ratio of debt-to-GDP;” this fell to “130% in 1951…[increased to] 276% in 2001,” and hit a whopping “353% in 2009,” his chart showed. “How will that issue affect the investing environment?” he asked.
There are now “$70 trillion unfunded promises to pay [U.S. liabilities including Medicare and Social Security, Treasury securities etc.], against $7.9 trillion of publicly-held Treasury debt,” Gundlach said. In his view, we “can no longer hide problems in Social Security,” Gundlach said, adding that the “deficit numbers are not showing the Social Security liabilities—a $1.6 trillion budget deficit versus $3.6 in Social Security liabilities.”
One solution, Gundlach said he’d read, was to, “gradually raise the retirement age to 69—by 2075. This is not a 2075 problem,” he exclaimed, to lots of laughter.
Anyone who has heard Gundlach speak, read his research or spoken with him in the last four years knows he was early to speak of the credit crisis and financial disaster. He called the mortgage markets an “unmitigated disaster,” during the first half of 2007. And he was proved right. That’s why when he speaks about the investing environment, so many listen. The Drawing Room at the Palace Hotel for the small lunch briefing was packed with institutional investors, family office executives and reporters.
“There must be a massive policy shift,” Gundlach opined, speaking of the debt to GDP ratio, the tax situation in the U.S. He remarked about the election of a Republican majority in the House of Representatives in November and then the tax cuts in December. Saying he likes a nice “long time horizon,” he lamented that we, “must shorten the investment horizon.” We “had [a similar] problem back in the late 1930s-early 1940s,” with the “300% ratio of debt-to-GDP,” he mentioned above. "We solved that," he explained, with “a humongous tax increase. Now we have the same problem—but we never cut the taxes. How do we solve that?” he asks. It’s much harder to boost taxes from a higher base.
Gundlach mentions that “81%” of participants in a poll in The Wall Street Journal said they would favor a “surtax on earnings of $1 million or more.” And “68% are in favor of raising taxes on $250,000 or higher wage-earners,” he said. Really, Gundlach added, we are “headed for 'The Taxes Are Too Darn Low Party,’ but don't be surprised if it doesn't win.”
Unemployment Much Higher Than Figures Show
There has been, contrary to other economic recoveries, Gundlach noted, “no job growth since end of the recession.” And unemployment, he said, is vastly understated. He’s said this before: while the government’s public figures are 8.9% as of February, Gundlach asserted that the real numbers a much, much higher once you account for the long-term unemployed and underemployed; that’s really “16% or 17%;” and if you count the people who have been “conveniently” categorized out of the work force and not counted, it’s “really 24% or 25 % unemployment.”
This is, Gundlach said, “Starting to have societal impact.”
The ‘Good News’
The "good news is, manufacturing is flat out good! Jobless claims today were in the 400,000 zone, better, but the global economy is not showing it,” noted Gundlach, moving on to speak of asset classes.
Looking at commodities, he said, “gold, I don't mind; I own shares from late ’90s. I don't really like gold so much…it's just so heavy,” Gundlach said, tongue-in-cheek. He likes “gemstones better, noting that you can carry a couple million dollars’ worth in your pockets. “All the gold [that’s been] mined fits in a 67-foot cube, so the argument is scarcity.”But Gundlach points to Warren Buffett’s remarks about gold: “’Would you rather have 10 Exxons, plus all the farmland in U.S. plus a couple-trillion dollars left over?’”
Silver, of course, is something else altogether. It has had quite a run, and as Gundlach put it, “When silver outperforms gold it's time to get out of commodities,” noting its “17 to 37 run-up in six months.”