We are in a “fourth turning,” according to Jeffrey Gundlach, where institutions will be challenged, and profound structural changes will unfold.
The concept of the fourth turning was pioneered by Neil Howe. It is the final stage (or “turning”) of a societal cycle, when a crisis emerges. In this case, the fourth turning began with the global financial crisis. According to Howe, it will end when the boomer generation retires from public life and leadership. Millennials will become the new leaders, according to Howe, and the cycle will restart with a first turning.
But before that happens, more crises will unfold.
Gundlach said the fourth turning will force a default or restructuring of our unfunded liabilities “in the relatively short term.” By 2032, he said, we will be in the first turning.
Gundlach spoke to investors via a webcast, which he titled “Cave People,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.
The idea for the title came from when Gundlach was told about people in Modesto, CA who were living in elaborately furnished caves. In Plato’s Republic, he said, there are references to people who were chained and forced to live in a cave. One of them escaped and was blinded by the sun. That person returned to the cave and told those there of the world outside. But the cave dwellers refused to believe him and would not leave.
Similarly, he said, many market participants refuse to accept reality. Although Gundlach did not say this, the implication is that most people are unprepared for the consequences of the fourth turning.
Gundlach covered debt and deficits, recession indicators, the inflation outlook, and the bond market.
Debt and deficits
The administration just forecast a 6.1% deficit (as a percentage of GDP) for 2025. With the deficit already at 6.3%, he said that forecast is “scary,” since we are supposed to be in an expansion, when deficits should be a lot lower.
“We are going to double-digit deficits,” he said, “which is a problem because of interest rates.”
From 1970 to 2015, unemployment was low when deficits were low and vice versa. But in 2015 that pattern broke; unemployment was low and deficits rose. Over the most recent three recessions, there has been a 9% increase in the deficit instead of the average of 5% since 1970. The next recession could see a 10% or greater increase in the deficit, Gundlach predicted.
He said, it looks like we are on track for interest payments as a percentage of federal revenue to reach a new high. This is why the Fed is eager to cut rates, he posited. The Fed is faced with a wall of maturing bonds, many with low coupons. Those bonds will need to be refinanced with now-higher coupons.
This is turning into “an absolutely critical problem,” Gundlach said.
The recession outlook
Gundlach cited many ominous signals of a recession, but stopped short of predicting that one was imminent.
Money supply growth, as measured by M2, turned negative at the end of 2022, but the recession that many expected did not ensue. The problem, according to Gundlach, was that the money supply was already at a high level, and there was ample liquidity to support economic growth.
The yield curve has been inverted since 2022 and has been de-inverting, which is a recessionary signal. But it needs to be flat or upward sloping to be a strong predictor of an imminent recession according to Gundlach. Based on the 2-10 spread, which is -41 basis points, he said it is likely the Fed will cut rates.
Read the full article here by Robert Huebscher Advisor Perspectives
