Submitted by Taps Coogan on the 22nd of May 2019 to The Sounding Line.

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Jeff Gundlach, founder of DoubleLine Capital, and Danielle DiMartino Booth, CEO of Quill Intelligence, recently spoke to an audience of investors. The wide ranging discussion covers the reasons behind the dovish pivot by the Federal Reserve, the swelling national debt, and rising corporate debt. It also contains political considerations which we don’t focus on here at The Sounding Line.

 

Some excerpts from Jeff Gundlach:

“Last year, in the best reported GDP of recent years and nominal GDP above 5% for the first calendar year in a while, the national debt grew by more than $1.2 trillion, which happens to be more than 6% of GDP. So, the national debt grew more in calendar year 2018 than nominal GDP. What that says, with the mathematics of GDP calculation, if the national debt had stayed stable and not risen, economic growth in 2018 would have been negative. Negative. We now have $123… trillion of unfunded liabilities in the United States. That’s almost 600% of GDP. One way to think about that is, if we actually decided to fund those over a 60 year time period, …we would have to take 10% of our GDP in today’s dollars and save it. Instead, we are borrowing 6%. So we’d have to have a switch from negative 6% to plus 10% for 60 years. That would be a depression for 60 years, in terms of living standards, because you are having to save all this money….”

“There is a really big dilemma here on interest rates because the experience of the fourth quarter had a lot to do with China slowing down and re-stimulating, but it also had a lot to do with the market sending the message that ‘no mas’ for the economy on interest rate increases and certainly ‘no mas’ on QT. Because isn’t it interesting that when QT went to its maximum potential of $50 billion per month in October the stock market peaked three days later…”

“… The latest idea being promoted by some mainstream economists, which is let’s just follow the ECB and the BoJ and we can just borrow to infinity with interest rates at zero. Which, I think is true. I guess you can borrow to infinity if interest rates are at zero, but it creates what you’ve seen in Europe. How’s the European banking system doing? …I think if interest rates were allowed to price, like soybeans are allowed to price on a commodity exchange… interest rates would rise. However, if interest rates start to rise, they might have to go to zero (due to Fed manipulation). So we are in this really weird world where almost anything can happen. I can argue for the 6% 10-Year in 2021… I can also argue for the 0% 10-Year because of the manipulation. So really, what you want to do is bet on this unstable situation devolving into one of the binary outcomes…”

“I think, basically, that the bond market is very worried in its heart-of-hearts that the next recession should have interest rates going higher and at the same time… they’re worried that they’re going to get manipulated to zero. So they kind of sit there at the midpoint of these two… really binary outcomes. We should either be at 0% or 6% and we’re at 3%, right in the middle.”

“I met with a Swiss life insurance guy and he said (with regards to zero interest rates): ‘It’s really depressing because we understand as executives of this company that our definition of success is to extend the time to bankruptcy… Bankruptcy is certain. We are trying to get there as slowly as possible.'”

Some excerpts from Danielle DiMartino Booth:

“I think… Jay Powell has his eye right now on the credit markets… When General Electric’s bonds were downgraded by Moody’s on Halloween, and within 14 days the junk bond market shut down, and then we had 41 record days that followed with no issuance at all, I think that’s what scared him. Spreads gapped out, outflows were beyond anything he could comprehend… Listening to bond traders in November and December, some of these bonds were trading by appointment only, against the backdrop of some $244 some-odd-trillion of debt worldwide… There’s been no beautiful deleveraging… What happened in the stock market is not what scared Jay Powell. What happened in the credit market however, that really was game over for him and he had no choice but to running back in because there is not a person in this room including (Jeff Gundlach) who can say what the end game looks like if we start to see a daisy-chain of liquidation in the corporate bond market in the United States today. There is simply too much junk out there and the rating agencies have been just as egregiously derelict in their duty as they were leading up to the subprime crisis…”  

There is much more to the discussion, so enjoy it above.

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