The Bond King went on an interview with VirtuMindShare’s John Shay and discussed a few key facts that would surprise you about the United States, it’s economy and the markets. Here are a few of the essential aspects to know about the state of the United States right now.
The United States Treasury is Issuing Debt at $120 Billion Per Month and The Federal Reserve is A Large Buyer
When you hear the the United States is monetizing its debt, what that essentially means is that the Treasury Department is issuing debt and pushing it out into the marketplace and that the Federal Reserve is purchasing it. Shay asked Gundlach what he thinks about this activity that looks like it will go on into the forseeable future. Shay further asked if there were risks with these activities.
The Bond King responded by noting that the “risk is that how do you extricate yourself from continuing those programs in perpetuity?” The regular purchases of government debt, at this level, is highly unusual activity, and can pose significant risks. The other key point shared here was that no one else is genuinely stepping it to purchase these treasuries besides the Federal Reserve.
That is another issue as it may show less confidence. Further, the fact that foreigners have been selling Treasury bonds for years, may add more credence to this matter. While the Treasury bonds may be the risk-free rate, the issue is that individuals are not obtaining the right enough yield in a market environment where assets are going up.
Interest Rates Are Likely To Rise Amid Debt Issues
Interest rates are likely to rise with these types of activities. Investors expect inflation and may continue to sell Treasuries, thereby influencing interest rates upward. According to the fundamentals, Gundlach believes that interest rates on the ten-year treasury should be at 3% right now.
The current market is not free in the general sense of the word. Rather, the present markets are suppressed due to regular government intervention. That is creating a disconnect in the markets, and that is why market participants see that asset prices across the board are rising.
The Debt Problem Is Getting Out Of Hand
Gundlach notes that in the last twelve months, the debt has been over 14% out of hand. But he goes to state that number is phony. The current debt aspects do not factor in defense spending, disaster relief, parts of the stimulus relief that are likely to be recurring over time. That shows that the real growth in debt over the past year has been around 23% of GDP.
Federal Government spending, according to Gundlach, is 8 trillion per year, “which is shocking because that is 40% of GDP.” The issue is that 57% of that funding is borrowed money. It is necessary to repeat that 57% of that funding is borrowed! That is equivalent to third world countries.
Fundamental Issues Abound in the Economy and the Markets
One can note that issues such as crumbling infrastructure, money printing, growing inequality are all issues that stem from present government actions. At the same time, “we have a massive amount of people that want to immigrate into [the United States].” The massive immigration, in itself, is another issue to be concerned about as it may mean more stress on the system. But American policies encourage various types of immigration which fundamentally can create more economic problems.
There Are Three Options to Fix the Economic Troubles
Gundlach notes that we can fix the economic system in three ways. Either “restructure or default on the $163 trillion worth of unfunded liabilities, inflate the debt away, or create a new economic paradigm.” Gundlach notes that as we try to “work through the existing paradigms of our current economic system, it isn’t working, and when you get to a certain level of brokeness, then you may think about a new economic system.”
Optimism In The Short Term May Create More Hazards
There is seeming excessive risk taking in the markets and by consumers with spending and borrowing. While, short term data shows that savings have gone up, excessive spending will roar back as optimism remains supreme. This is seen in the speculative housing frenzy and the price rise of risk assets generally. But taking away the koolaid or the massive support infrastructure provided with low interest rates, stimulus, and other efforts to prop up demand can easily trigger a cascade of fiscal desperation.