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.