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Stepan Lavrouk
Stepan Lavrouk
Articles (344) 

Jeffrey Gundlach: Nominal GDP Would Be Negative If the US Did Not Take on Debt

The bond king weighs in on the troubling state of the national debt

December 02, 2019

You won’t see him on CNBC’s Mad Money anytime soon, but Jeffrey Gundlach is actually one of most influential bond market players in the world as his Doubleline Capital has $120 billion in assets under management. Although his outlook is quite broad and he doesn’t discuss specific stocks very often, Gundlach’s commentary is always very insightful and often contrarian. Here’s what he had to say on a recent interview with Yahoo Finance.

On the Federal Reserve’s activity in 2019

“What definitely helped 2019 was the massive U-turn by the Federal Reserve. It’s really hard to believe how things have changed over the last 12 months in terms of the Fed’s outlook and their behaviour. A year ago, the Fed was in ‘automatic QT,’ [quantitative tightening, or the shrinking of the balance sheet] and they said so in the December conference that they would be on autopilot QT - no matter what the data said! And then the markets tanked. They also said that they would have sequential rate hikes in 2019 and 2020, and that changed a few weeks later too, because markets were tanking.”

Gundlach also pointed out that the Federal Reserve not only stopped shrinking its balance sheet, it began actively expanding it again, in a move that was labelled "not QE4," but essentially amounts to the same thing. This has prompted a vigorous debate over what the role of the Federal Reserve should be. Prominent investors like Howard Marks (Trades, Portfolio) have stated that the role of the central bank is not to support equity markets and keep the bull market going at any cost, it is to target inflation. I agree with this assessment. Federal Reserve Chair Jerome Powell’s pivot over the last year has shown the priorities of the central bank have significantly diverged from its mandate.

On the state of the U.S. economy and the national debt

“The growth in the national debt is substantially higher than the growth in nominal GDP. It’s pretty amazing when you think about it. We talk about how the economy is so good - in terms of employment, that’s true - but in terms of other things the economy is not so good. And if we weren’t expanding the national debt at all - if we were just keeping it constant - we would actually have negative nominal GDP right now. It’s a sobering thought! That the entire expansion that we’ve had in the recent several quarters is all debt-based. The national debt and the deficit as a percentage of GDP are at levels that, historically, have been associated with the depths of a recession.”

I have written in the past about the buildup in corporate debt in developed economies, and in particular about the rise of "zombie firms" - companies that are so laden down with debt that they cannot service their obligations. This is one reason why I believe the Fed cannot allow rates to rise significantly - it would be too much of a burden for these businesses, which now represent - by some estimates - as much as 14% of the S&P 1500. This is not a conspiracy theory! Powell himself has said that the level of business debt in the U.S. is such that many companies would come under “severe financial strain if the economy were to deteriorate.” As such, Gundlach’s point should be taken very seriously and that down the line, the buildup in the national debt will have very serious consequences for investors and non-investors alike.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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