'I can’t even imagine Trump running for reelection if there’s a recession in the summer of next year,' says TruthGundlach. 'I don’t understand what he could run on.'
Gundlach speaking at the Sohn hedge fund conference this year. Photo: Bloomberg via Getty Images Bond market commentary tends to be a dry affair. But over the years Jeffrey Gundach, founder and CEO of the $140 billion bond-focused investment firm DoubleLine, has earned a reputation for talking about the intersection of financial markets and national politics in a trenchant, useful, and entertaining way.
I think maybe he’s playing a dangerous game of intentionally weakening the economy so the Fed cuts rates and monetary easings work with a lag. Cutting rates now would probably be beneficial in the summer of next year, ahead of the election. Also if you put on tariffs, or scare consumers, then maybe you can take the tariffs off and you’re moving consumption from today until 2020.
It seems like neither the stock market nor the bond market has quite recovered from Powell uttering that phrase at his press conference. But I can’t even imagine Trump running for reelection if there’s a recession in the summer of next year. I don’t understand what he could run on.Trump could pull a Lyndon Johnson and just say, I’m not running. Because he’d probably know he was going to lose. And you know, Trump doesn’t want to lose. That’s his reason for not running, he could do the most ridiculous thing ever.
I mean, it’s kind of shocking that anybody wants a ten-year bond yielding 1.5 percent when you could buy a six-month T-bill yielding two percent. I just find it remarkable. So maybe the Federal Reserve goes back to quantitative easing and follows Japan and the European Central Bank into the forever-monetization scheme of the debt. You know, in Japan, the government and the banks and insurance companies it regulates own over 90 percent of the bonds.
Right. Well, based on the Congressional Budget Office’s projections, the interest expense on the debt — and they’re using conservative calculations — is going to be 3.25 or 3.5 percent of GDP within eight years. Lately it’s been around 1.25 percent. Well, think about that — if you suddenly have 2 percent more of GDP going to interest expense.
In a broader sense, this comes around to the question of modern monetary theory, which has started cropping up in a big way in American politics as a means of funding massive new policy initiatives. What are the limits on having the Fed monetize debt? Is there actually a point where inflation kicks in? It certainly seems to have been scarce for a long time, even as the federal debt and the Fed balance sheet have expanded massively.
So this narrative that you can’t get to 2-percent inflation rate is odd. But it’s kind of a way for the Fed to not talk about tightening, thanks to what’s creeping higher on the inflation side. So I think the Fed pretty much understands that the debt issuance in the next recession is going to be completely impossible to place with United States citizenry. They have interest rates at this level, so they’re gonna have to figure out a way to, you know, get those bond yields manipulated.
Remember, the idea is that bond yields remain lower than inflation. So that would be a way of not having so many problems with the compounding of the interest. I mean, if the interest rate’s above the inflation rate, above the economic growth rate, obviously you’re just heading into a fatal compounding curve.
Yeah, I think the dollar would come down under that scenario and I think Ray Dalio’s paper that you referenced is highly logical. I mean, it’s really a fairly difficult conclusion to argue with — that we have $126 trillion of unfunded liabilities against a $19.5 trillion GDP, it’s pretty clear that those liabilities have to be defaulted upon or debased.
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