“One cannot maintain this kind of trajectory,” said Gundlach. “It almost seems like the last five years was nothing but an illusion.”
Without the “super six” included, earnings growth across the world’s equities since the 2009 global financial crisis bottom approaches zero, he said.
The recent rally, noted Gundlach, has occurred with most institutional money on the sidelines and was instead driven by retail investors.
“There’s something unnerving going on in this rally. It seems to be driven by a lot of rampant speculation,” said Gundlach. “It sounds like the big, experienced smart money is skeptical of this little-guy created rally. ... I’m happy to watch other people push it higher on these valuation levels.”
An Unemployment Fire Looms
With some fiscal stimulus programs scheduled to end in July, including the massive Paycheck Protection Program that has accounted for 75% of small-business financing during the outbreak, Gundlach says that there will likely be another period of rising unemployment. Thus far, the majority of layoffs have been from very low-paying jobs in the services and hospitality sectors, said Gundlach.
White-collar unemployment will occur as employers consider whether workers who make more than $100,000 a year are pulling their weight.
The stay-at-home, work-from-home reality of the Covid-19 pandemic is exposing the ineffectiveness of many white collar and middle-management workers, even at DoubleLine, said Gundlach. Thanks to the shutdowns, management is able to get a better idea of who is actually doing the work, he said.
“I kind of learned who was really doing the work and who wasn't really doing as much work as it looked like on paper that they might have been," he said, adding that after assessing the middle-managment staffing at his company, "I’m starting to wonder if I really need them.”
Gundlach likened it to Warren Buffett’s famous investing quip, “when the tide goes out, you find you who’s swimming naked.” This time, the tide may be going out on middle management.
Congress acted to protect low-wage workers during the onset of the pandemic in their fiscal stimulus, but no such safety net is in the works for higher earners should a second round of layoffs occur, he noted.
A turnover in white-collar jobs will lead to wage deflation, which will be exacerbated by the shift towards more employees working from home. Tech companies will balk at paying a higher salary for workers in Silicon Valley when they may pay less for an employee of similar education and skill set in a lower-cost-of-living area in Idaho or Arkansas.
Gundlach also questioned the level of unemployment benefits being paid to American workers, noting that in previous downturns, no more than one in four unemployment claims ended up being approved. Today, over 75% are approved, suggesting that up to two-thirds of the unemployment benefits being paid would not have been justified prior to the crisis and that much of the stimulus is being “wasted.”
Gundlach also warned that when economic hopes begin to dim, democratic countries begin exploring anti-monopolistic actions like more stringently enforcing existing regulations or passing new, more effective anti-trust provisions.