In a quarterly performance call on Tuesday for the RiverNorth/DoubleLine Strategic Income Fund, fixed income manager Jeffery Gundlach scoffed at Standard & Poors’ outlook downgrade on Monday of U.S government debt.

Jeffery Gundlach“The debate over getting our debt under control really came to a crescendo yesterday with S&P’s action,” Gundlach said (left). “But if you think about it, it really was a silly thing to do. Can the U.S. pay its debt? Of course the U.S. can pay its debt, if by nothing else than by printing money.”

The real question, Gundlach asked, is can the government pay its debt absent a “money printing exercise?”

“Most people are looking at S&P’s [outlook downgrade] as a negative when it comes to treasury bonds, but it’s the exact opposite,” he said. “As this Sword of Damocles in the form of a possible rating downgrade hangs over our head, it forces politicians to get serious, finally, about raising taxes and cutting spending. I was very skeptical until a few weeks ago, and after what happened yesterday, I think they’ll begin moving in the right direction.”

Recent quantitative easing action in the form of QE1 and QE2 were bad for bonds, according to Gundlach, because bond buyers do not like inflationary moves by central banks. It’s therefore no surprise that Treasury yields rose once the policies were implemented, even with government repurchase programs, because investor fear overrode such actions.

“Now, however, you’re seeing yields fall as the market begins to price in the end of QE2,” he says.

Going forward, attempts to close corporate tax loopholes and shrink the so-called “tax gap” (the difference between what should be collected in taxes by law and the amount actually collected by the IRS) will negatively affect price/earnings ratios, and therefore hurt stocks.

“In any kind of deficit cutting exercise, like we are now heading into, stocks are the losers and bonds are the winners.”

Gundlach is the co-founder, CEO and CIO of DoubleLine. He was formerly with TCW where he was chief investment officer and head of fixed income activities. Morningstar nominated Gundlach for Fixed Income Manager of the Year for multiple years, and he won the award in 2006. In 2009, he was nominated by Morningstar for Fixed Income Manager of the Decade.