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.