Jeffrey Gundlach, co-founder of DoubleLine Capital LP. (Photographer: Andrew Harrer/Bloomberg)

Gundlach Calls MMT ‘Complete Nonsense,’ Joining Naysayer Chorus

(Bloomberg) -- Add Jeffrey Gundlach to the list of critics of modern monetary theory.

MMT is “complete nonsense” that’s being used to justify a “massive socialist program,” Gundlach, the co-founder of DoubleLine Capital, said on a webcast Tuesday.

Economists who embrace MMT contend that because the U.S. borrows in its own currency, it can print dollars to cover its obligations, and can’t go broke. “The problem with that is it’s a completely fallacious argument,” Gundlach said, adding that MMT could lead to a “significant boycott” of long-term bonds.

“This argument is ridiculous,” he said. “It sounds good for a first-grader. What happens when the economy turns down?"

With his remarks, Gundlach joins an array of financiers and economists who are weighing in on a theory that got little attention until a band of liberal Democrats including Rep. Alexandria Ocasio-Cortez were elected. Gundlach indicated that MMT may end up being more than just a theory if the U.S. falls into a recession next year.

“That means anybody other than an incumbent president would win, which kind of means that we’re headed toward this experiment of modern monetary theory,” he said.

While criticizing the proponents of MMT and their ilk, Gundlach said events like the college bribery scandal stand to tarnish those in the financial world.

"On this bribe thing, it really doesn’t do all of us in the world of finance a lot of reputational good,” he says.

The scandal would be perfect fodder for Democratic Senator Elizabeth Warren and “her crowd,” he said.

‘Shocking’ Debt Growth

The Los Angeles-based fund manager also blamed President Donald Trump for the “shocking” growth in the U.S. debt burden. He noted the “incredible increase” in corporate and government debt, with federal deficits only poised to grow. Gundlach spoke a month after the Treasury Department said total U.S. public debt had climbed to a record above $22 trillion.

“This is something that is getting more and more attention, and I think it has to,” said Gundlach, DoubleLine’s chief investment officer. “It’s really shocking that the president ran on the promise of eliminating the national debt, and here it is at $22 trillion and going higher by about $1.5 trillion a year in a growing economy.”

Gundlach said Trump’s failure to rein in the budget or trade deficits means the “next big move for the dollar is down.”

The greenback has climbed over 6 percent in the past year, gaining against all of its Group-of-10 peers and foiling bearish Wall Street forecasts. Hedge funds and speculators have held a net long position in the dollar since June, according to Commodity Futures Trading Commission data.

‘Over’ Bet

The budget deficit could hit 11 percent of gross domestic product in the next downturn "and I’ll take the over," he added, suggesting that 13 percent is more likely.

Among his other remarks on the webcast:

  • Gundlach also sounded the alarm on the U.S. corporate debt market. He said most BBB debt would be junk if graded on leverage metrics, and will be re-rated to that level in the next downturn. On the one hand, ratings agencies have been listening “with sympathetic ears” to executives saying debt metrics will improve. On the other, the fourth quarter saw many A rated credits downgraded to BBBs.
  • He credited the rebound in the stock market to a “remarkable, 180-degree turn” by the Federal Reserve, saying that Chairman Jerome Powell’s “60 Minutes” appearance was intended to cement the Fed’s U-Turn. Still, he expects stocks to fall below the December lows over the course of 2019.
  • While Gundlach thinks the Treasury curve will meaningfully steepen, the Fed could upend that view should the central bank pursue unconventional policies on the scale of Japan’s. He sees the Fed’s upcoming dot plot as capitulating to the market.

©2019 Bloomberg L.P.