U.S. Growth Thanks to Debt, Not D.C.
My audience may remember how early 2018 I referenced Jeffrey Gundlach, chief executive officer at DoubleLine Capital for saying he believed the market would gain 15 percent before finishing in the red. He certainly called the loss for the year. I enjoyed the opportunity to meet Gundlach in Carlsbad, CA late February this year at a forum for financial advisers where I acknowledged him for the great call. I follow Gundlach for a number of reasons. He is known to be a billionaire in his own right, he oversees more than $130 billion in assets at the firm, according to Yahoo Finance, and he is definitely his own man. Which means, he doesn’t have hierarchy dictating to him that he must constantly beat the drum that everything is just fine, because no matter what, it’s always stocks for the long haul.
Gundlach’s remarks in his investor webcast on May 14, 2019, are particularly noteworthy. You will see that his observations mirror my own. President Donald Trump began declaring, and repeated often since then that, “We have the ‘greatest economy’” ever on Fox News, October 16, 2018. And a lot of people back up his claim. But some observers see things vastly different.
In his webcast, Gundlach said that U.S. growth is derived “exclusively” from government, mortgage, and corporate debt. In fact, had it not been for the debt increase the economy would have already contracted. “Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased,” said Gundlach. “One thing everybody seems to miss when they look at these GDP numbers … they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt – government debt, also corporate debt and even now some growth in mortgage debt,” said Gundlach.
“If those non-Treasury debt categories had not grown, either, GDP would have been very negative,” Reuters reported May 15, 2019, from an email following the webcast. Had the U.S. Treasury avoided increasing its debt then nominal GDP would have been negative in three of the last five years, Gundlach opined, “even with all of the exact mortgage, corporate, and student loan growth that occurred.” He really drove home his point with the math. He asserts nominal GDP growth was 4.3 percent, but that is more than offset by the 4.7 percent growth in total public debt.
Gundlach said again that he doesn’t see the U.S. headed into recession anytime soon, but there are some weaknesses showing up in the U.S. economy. Against the debt drama and Wall Street “addicted to Federal Reserve stimulus,” these are “very, very dangerous times” for the next U.S. recession. He went on to point out the Citi Economic Data Change Index released May 15, 2019, which has fallen to its lowest level since the financial crisis.
Meanwhile, thanks to softer rhetoric by President Trump who, according to me, seems motivated to keep stock losses at 5 percent or less, there are fresh woes over fears Italy’s fiscal situation after Rome said it could break EU fiscal rules to spur employment contends Reuters In a separate May 15, 2019, article. And then there’s China data revealing surprising weak retail sales and industrial output growth.
The good news is investors don’t need to see the future to prepare for it. For all the “monetary central planning, financial engineering, political lily-gilding can’t hold back the forces of creative destruction forever,” David Stockman wrote to subscribers May 15, 2019. So, by analogy, we all know that football teams typically have eleven men on offense as well as the exact same number of players on defense. To be prepared for the good, the bad, and the unforeseen in 2019, now is the time for investors to develop your defensive strategies.
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