Tuesday, June 29, 2010

Jeff Gundlach: The US will 'Politely Default' on its Debt

The Las Vegas Strip World of Coca-Cola museum ...

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By Robert Huebscher

Today’s economic problems, it seems, can be understood through the lens of pop artist Andy Warhol.  Warhol, who DoubleLine’s Jeff Gundlach calls an “absolute futuristic genius” in his ability to depict trends in American consumerism, showed through his illustrations of everyday objects, such as Coca Cola cans, that products used by the upper crust of society were accessible to anyone in America.  That accessibility made it natural for consumers to borrow money to improve their standard of living, leading to a three-decade long explosion in public debt.

Gundlach delivered the keynote address at last week’s Morningstar Investor Conference in Chicago.  He is the chief investment officer of DoubleLine, the firm he founded after leaving TCW last year.  DoubleLine now manages just over a $1 billion in bond funds, mostly in mortgage-backed securities, where Gundlach’s expertise is highly regarded.

Gundlach’s presentation shared a similar theme with many he gave while he was at TCW, documenting the immensity of U.S. debt obligations and the lack of options for alleviating that burden.  As he has stated in the past, he does not consider inflation to be a threat in the capital markets today.  He cited six options open to policy makers, but believes a seventh – some form of default – is most likely.

As would be expected from one who manages large fixed income portfolios, he sees opportunities in the bond market, particularly in long-term US Treasury securities and in certain types of mortgage-backed debt.

At the end of his talk he sounded an ominous warning that if inflation were to occur, it would happen very quickly.

Jeff Gundlach: The US will 'Politely Default' on its Debt

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