Wildfires have long ravaged Southern California, but DoubleLine Founder and CEO Jeffrey Gundlach lived for three decades in Santa Monica on the Pacific coast and never thought they’d reach his house. One day in January he awoke to find himself in the evacuation zone.

After he spent four hours that day loading his U-Haul, the wildfires decided to go elsewhere. That experience of perception and reality serves as an anology to where the disrupted American economy sits today.

Late last week, Gundlach and Quill Intelligence’s Danielle DiMartino Booth discussed some of the binary choices, like currency debasement versus wealth confiscation, that the developed world faces. One recurrent theme during their 90-minute conversation was the fashion in which the explosion of debt and credit in the last 50 years has changed the way American consumers transact, spend and borrow.

Signs of strain were surfacing even before the pandemic. Gundlach noted that, even in the pre-Covid world, the price of luxury cars had dropped nearly 50% over the prior year. When he asked people in the business why, they responded that lending standards had been tightened.

The notion that people were buying Lamborghinis on credit astonished him. He recalled shopping with his mother in Buffalo, N.Y., as a child shortly after the first credit cards became common in the early 1970s. Times were tight and they were forced to not buy certain items they wanted. When he suggested she put it on her credit card, he was admonished and told to never put food on plastic.

His mother viewed that as the first step on "a slippery slope." Back in those days, auto loans didn’t even exist.

Economic statistics are all over the map these days, and some estimates project that the U.S. savings rate has climbed to the 19%-20% area. Booth asked Gundlach if the pandemic might make savings great again, since it is clear people are saving more and making do with less.

“A lot of people are going to have to learn to live with less,” he said. Simply put, you can’t take 20% of the labor force, have them produce nothing, and expect that “nothing changes.”

Strange things are happening in the bond market as investors scrounge for yields. June was one of the highest months for junk bond issuance in history and bankruptcies also set a record, Booth said. “What the hell is going on?” she asked.

Last week, Amazon, a single-A rated credit, looked to sell six-year bonds with a 3.0% coupon. The issue was oversubscribed by 10 to 1 and is likely to come to market with a coupon closer to 2.75%.

The trouble arises, in Gundlach’s view, thanks to Federal Reserve policy that has been allowed to get so large that “there is a perception, probably a misperception,” that the prospects of all these layers of stimulus and debt going bad is “so frightening, so economically devastating, that it wouldn’t be allowed to happen,” he explained.

But something insane is already happening, Booth said. Airlines got bailed out so they could keep their employees on the books for a few more months. Unfortunately, the sad truth is they’ve already been fired ahead of time in pre-announced layoffs, she said.

Why did this happen? Gundlach said policymakers reasoned that they can’t let all these people go. “You are going to lose them anyway,” he said. “The only way out is bankruptcy.”

The Federal Reserve’s charter doesn’t allow it to purchase bonds, but it is doing so. “When someone is doing things outside their charter,” he said, it means they are likely to do it again.

The price the Fed is paying for junk bonds “isn’t the market price—it’s a target price,” he argued. In all likelihood, it’s higher than investors are likely to receive in the event of bankruptcy.

Inequality, Booth declared, is moving from an abstract subject of academic debate to an American reality. Ultimately, this money-printing cycle leads to social unrest. Gundlach said the record of history—the collapse of the Roman Empire, the French Revolution and the Weimar Republic—is a perfect one.

When the money-printing experiment crumbles under its own weight, Gundlach said, the people who were poor starve to death, the people who were middle-class turn into the poorest and the people who are near the center of the printing mechanism “get ridiculously wealthy because they make sure the money trucks make extra deliveries to their houses.”

As perception and reality diverge, partial truths are seen as universal truths. There is an idea, partially true, that people who are on the winning end up “pay hardly any taxes at all,” he said.

This notion has become so ingrained in the public’s mind that Gundlach says he often encounters educated, upper-middle-class people who can’t believe he pays 50% of his income to the federal government and the state of California. They’ve never seen his tax filings, but they’ve read that Mitt Romney paid 14% of his 2011 income in taxes, so they extrapolate that factoid to all wealthy, successful people. “It gets people angry,” he said, even if they are wrong.

Then there’s the white-collar job market. Unemployment first hit people on the bottom on the income spectrum, but Gundlach expects layoffs to start climbing their way up the income ladder. “I think it’s going to get a lot worse” and put fear in “middle-management type of people,” he said. They will realize that “the skill set they developed may not be in demand” any more.

When it comes to the labor market, Booth said that disparities in different jobs statistics are glaring. “Confidence in jobs security and prospects for jobs are in different zip codes,” she said.

It’s one thing when a retailer that was struggling for years and already was closing stores finally goes out of business in an expedited manner, she commented. “It’s another thing when Wells Fargo” announces it is going to layoff tens of thousands of people.

As the interview came to an end, Booth asked Gundlach whether his investment advice would simply be “diversify, diversify, diversify.” He responded that it would be more of a barbell.

He considers equities seriously overvalued and noted that if former vice president Joe Biden is elected and raises the corporate income tax rate, after-tax corporate profits would suffer an immediate decline. Absent manipulation from the Fed, “stocks would be in serious trouble,” he said, adding that in recent years the only companies to produce signiicant profit growth were the Big Six tech companies—Apple, Amazon, Microsoft, Alphabet,  Facebook and Netflix.

But he expects government and central stimulus to remain in force. That’s why financial asset inflation is likely to persist. If you are going “to add a couple of zeros” to other asset classes, you should probably expect to add them to equities, he said.

Earlier this year, Gundlach said he thought equities would take out their March 24 lows. In this discussion, that question wasn't addressed.