It’s not all bad, Gundlach conceded. Lower interest rates have allowed companies and consumers to “refinance” debt they might have defaulted on in prior cycles.
But the long-term implications are clear. For the last decade, Gundlach has predicted the U.S. faces a moment of reckoning as successive refinancing requirement ultimately collide with a growing debt burden and government entitlements driven inexorably higher by aging demographics. “It’s getting very close,” he said.
During the last economic expansion, 2018 was probably the strongest year following former President Trump’s tax cuts. But as Gundlach remarked in earlier webcasts, the $20 trillion U.S. economy grew 3%, or about $600 billion, while the federal government added $800 billion in debt the same year.
Some economists are predicting the Fed will raise its Fed funds rate three times in 2022. The problem is that, over the last 40 years, the U.S. “economy caves” in at continually lower and lower levels of interest rates, Gundlach observed.
In the fourth quarter of 2018, the Fed funds rate reached 2.5% and economy activity stalled while stocks fell 19%. “We’re likely to see more uncertainty and stress,” he predicted.
Consumer sentiment was actually falling before the pandemic struck in February 2020, but it remains weak, despite massive government infusions of money directly into bank accounts of individuals and businesses. More than a decade ago when President George W. Bush started sending small checks during the 2001 and 2008 recessions, Gundlach worried that it would establish a precedent that would be difficult to break. That fear has materialized and, with every successive stimulus, the government “adds a few zeros.”
On the inflation front. Gundlach said DoubleLine expects supply chain bottlenecks to ease over the next year. However, he believes that the inflation baton could be transferred from automobiles, energy and other commodities to housing and wages. These latter two sectors are huge and display no signs of moderating.
“Under Jimmy Carter, we didn’t want inflation,” he noted. Now “we do” because there is so much debt.