Jeffrey Gundlach highlights his concerns in his latest Double Line webcast.
He starts his presentation by outlining the supply-demand imbalance in the US labor market.
“There is a shortage of workers because small business has to compete with government stimulus cheques” he said.
Jeffrey Gundlach highlights his concerns about masses of people now dependent on state welfare.
“A lot of people are wondering whether the stimulus will be extended again, it is supposed to roll off come September, and we will see if that continues, it will distort so many economic statistics” said Jeffrey Gundlach.
The treasury 10-year yield, at 1.29% at the time of me writing this piece, is out of context from many indicators, according to Jeffrey Gundlach.
“There is a shortage of workers because small business has to compete with government stimulus cheques”
Jeffrey Gundlach highlights his concerns about the ballooning US public deficit, which he believes is the sole reason driving economic growth in the world’s largest economy today
Jeffrey Gundlach notes that if we take the more flattering nominal GDP data, which is higher due to inflation picking up, then nominal GDP is expected to be 10.4%.
But Jeffrey Gundlach notes that deficit spending is causing volatility.
“We continue to run over 20% over GDP budget deficit” he said. “If we had no deficit spending there would be no nominal growth in the US” he added.
So, Jeffrey Gundlach highlights his concerns in terms of an economy fueled on debt.
“If we suddenly took deficit spending to zero, we would certainly have negative 10% economic growth, so we are living for sure on an unusually fueled economy” said Jeffrey Gundlach.
“This of course has been aided and abetted by Fed’s balance sheet. We see an explosion in the Feds balance sheet. A little over a year ago the Fed balance has gone from 4T dollars to 8T, just about double” he noted.
“The Federal government continues to spend about 45% of its GDP, and more than half continues to be borrowed money” said Jeffrey Gundlach.
“If we suddenly took deficit spending to zero, we would certainly have negative 10% economic growth, so we are living for sure on an unusually fueled economy”
Jeffrey Gundlach highlights his concerns that the trajectory of public spending, financed by even more borrowing, is an unsustainable path
Approximately 70% of all government spending is going to be financed by extending the debt even further noted Jeffrey Gundlach. The US National Debt is now 28.4T dollars, which represents 85,492 dollars per citizen or 222,794 dollars per taxpayer, according to the debt clock.
“One-third of all household disposable income represents transfer payments” said Jeffrey Gundlach.
Jeffrey Gundlach notes that this has distorted returns on deposit accounts and fixed income.
Bank deposits are now offering negative real interest rates when you factor bank commission charges. “Depositors are subsidizing the banks’ profitability” said Jeffrey Gundlach.
“By far the most profitable economy is China that is because we have given money to people at some level it has been spent on goods made in China” – Jeffrey Gundlach
Jeffrey Gundlach highlights his concerns that the public deficit is also fueling a balance of payments deficit
“By far the most profitable economy is China that is because we have given money to people at some level it has been spent on goods made in China” he said.
“So, it is no surprise we have a large increase in our trade deficit. The strong GDP growth in 2021 will be tied to the trade deficit”. If Jeffrey Gundlach is right, then the above dynamics could be a strong headwind for the US dollar.
Jeffrey Gundlach sees inflation overshooting as he notes food prices are higher, manufacturing inventories are near 20-year lows, and used car prices have nearly doubled.
Jeffrey Gundlach highlights his concerns about a depreciating dollar
He thinks if the USD depreciates, then it becomes hard to monetize debt. “USD going down is the linchpin to everything” he said.
He thinks ultimately gold will go much higher in the long term as the USD depreciates and sees a 40% chance transitory inflation will not play out.
“Junk bond spreads could widen in the event of an economic setback” warned Jeffrey Gundlach.