Long-term investing is dead: Gundlach

By Vikram Barhat | April 25, 2012 | Last updated on April 25, 2012
3 min read

Borrowing from Shakespeare to analyze debt is a rare skill, but one that is within the grasp of Jeffery Gundlach, chief executive officer and chief investment officer, Doubleline Funds.

“What’s done cannot be undone,” he said, quoting the Bard at the annual Investment Management Consultants Association (IMCA) 2012, in National Harbor, Maryland. “If you have tears, prepare to shed them now.”

Not surprisingly, his presentation carried more than a few references to Shakespeare’s comedies.

“Greece came in the news a little over two years ago; at the end of 2009 nobody knew that Greece had a debt problem [because] they lied about it,” he said. “They’d been hiding the magnitude of their debt.”

In spite of the fact that central banks have been “going crazy expanding their balance sheets to absorb all this debt,” the yields continue to rise.

Policymakers, both in the U.S. and elsewhere, have got it wrong about using more resources to solve debt problems. “All these resources are [nothing but] just more debt; how can you possibly solve a debt problem with more debt?”

The skyrocketing unemployment rate in Spain, he said, is a sign that things are far from being manageable in Europe. “When you have 45% of the youth unemployed, they have a lot of time on their hands to throw rocks and Molotov cocktails because there’s nothing better to do but try and bemoan the situation.”

Gundlach was equally critical of U.S. government spending, targeting defense and Medicare as the worst sinkholes.

“One of the reasons we have a debt problem is the defense spending; the U.S. has about $700 billion of military expenditure. [As the number one spender] the U.S. spends more on the military than number two through 18 combined,” he said. “And what’s really gotten out of control is healthcare and Medicare outlays [which is] remarkably high and gobbling up a huge share of the GDP.”

Some of the other factors contributing to the U.S. debt build up include growing food stamp participation and increased disability enrollment since the recession started. The U.S., he said, has only been able to absorb these expenses thanks to its higher debt ceiling.

“Debt ceiling is a good conceptual idea, but if you’re going to raise it [repeatedly] then it’s just a phony ceiling,” said Gundlach. “They have raised it twice since [last summer] and no one really talked about it, particularly the most recent one which was kept down low very well.”

With all the debt building up, one thing that’s been saving the U.S. is low interest rate policy that has cushioned the debt blow, a tactic that’s been employed throughout the developed world.

“So the interest on the U.S. debt is actually isn’t that bad, it’s only a little bit higher than it was in the ‘90s,” he said. “But there’s no way they are going to go out and raise interest rates [without racking up a huge deficit].”

He said the bottom line for investors is that they can no longer have a long-term investment horizon, which is widely considered the key to success.

“It’s nice to be able to invest for 5 or 10 years, but we can’t do this anymore because there’s a massive policy change coming down,” he said. “The good old days of stable rules, stable tax policy, nominal positive GDP, all that was brought up by guardrails of debt—they’re no longer available as policy tools.”

Investors will need to keep track of all this and hope for things to change. And when the change does come, investors will have two options.

“Either you have to avoid all financial assets, particularly bonds because of an inflationary world, or you need to understand you’re in a long period of a sub-par growth in a zombie situation, in which case income-based investments would be your bet.”

Gundlach said things that are unsustainable must ultimately be resolved, but warned they can last longer than expected. In certain ways, they already have. At this point, it’s too early to tell how long before things change.

Until then, Gundlach’s advice to investors, by way of yet another Shakespeare quote, is: “Have more than thou showest, speak less than thou knowest, lend less than thou owest.”

Vikram Barhat