Jeff Gundlach Shows Why US Growth Is So Expensive
Southern California is home to a trio of important bond funds: PIMCO, TCW, and DoubleLine Capital. All of these have executives who routinely comment on the global financial system, although PIMCO and DoubleLine usually get most of the attention.
At Newport Beach based PIMCO, which manages $1.8 trillion, co-Chief Investment Officer Mohamed A. El-Erian acts as a sort of wise man for both his firm and for a variety of blue-chip news outlets (and the co-CIO and founder Bill Gross is a regular on CNBC and other financial broadcast outlets).
Bond fund managers tend to be very macroeconomic and global in their outlook. They can see wheels within wheels and large-scale patterns because bonds are how countries, states, cities, and companies all fund themselves. If something is going right, bond markets can tell you. And if things are going to go wrong, bond markets can send the signals. Just ask Greece. Or California, which has one of the lowest credit ratings of any of U.S. state.
At DoubleLine, which has been growing at a furious clip since its founding two years ago — assets under management are nearing $50 billion — CEO Jeff Gundlach provides regular downloads on the state of U.S. and world economics, as well as the condition of markets. Gundlach made headlines recently after his Santa Monica home was broken into and $10 million in art and his 2010 red Porsche Carrera were stolen. (The art as eventually recovered. Not sure about the Porsche.)
He had made headlines before for his controversial departure from L.A.-based TCW, which was bought earlier this year by the Carlyle Group, a private equity firm. (DoubleLine is also based in L.A.)
And he made headlines Tuesday for his latest presentation. You can review it here at Business Insider. It's 69 slides long and failry dense, so be forewarned.
One slide in particular jumped out at me and perfectly captured, in a way I hadn't thought about yet, our current low-growth U.S. economy. We're doing well these days to see the economy expand at a rate of 2 percent on average. This has economists worried. It's also one of the main reaons why the unemployment rate is at 7.7 percent nationally and 10.1 percent in California. GDP growth at that rate can't deliver the 300-400,000 jobs per month that we need to lower unemployment at a faster pace.
(Streettalklive Note: I have to admit that I was flattered that Mr. Gundlach used my chart in his client presentation.)
I call this phenomenon "stuckflation," a reference to 1970s era "stagflation," with the difference that this time around, we haven't seen interest rates go sky high. But that's part of the problem. The Federal Reserve has kept short term rates near zero for years now and shows no signs of raising them any time soon. But even this Zero Interest Rate Policy, or ZIRP, hasn't delivered the strong monetary stimulus the economy needs. We're stuck. It's stuckflation.
The U.S. has also borrowed liberally since the financial crisis in 2009. If you look at Gundlach's slide — the one that really grabbed me — above, you can see how the debt has served as a way to "buy" growth. Total debt has increased by 45 percent. Growth, measured as real GDP (which runs slightly higher than nominal GDP because it's inflation adjusted) has only increased by 7.1 percent. That's a little like paying a 38 percent premium for relatively weak growth.
Growth wasn't the only objective of that borrowing, of course. The economy had to be supported as the consumer basically exited stage left, taking with him 70 percent of all economic activity. But the idea of running big budget deficits, at both the federal and state level, is to hold things together until growth returns and the economy can grow itself out of whatever deep debt hole it had to dig.
But as Gundlach rather incisively points out, this time the story is different. The borrowing didn't create the robust post-recession growth. And that's because the last recession was a financial crisis and a financial crisis usually takes a lot longer to resolve than a typical recession, which is generally followed by recovering GDP growth in the 4-5 percent ballpark.
Gundlach's chart is a good chart. It contains a critical insight. And it's worth thinking about rather seriously as the U.S. prepares to raise its debt ceiling yet again, with total debt now running at $16 trillion — essentially 100 percent of a nearly $16 trillion economy.