The headline from bond maven Jeffery Gundlach’s recent FT interview is that he expects to see manipulative quantitative easing in the year 2020. But to certain hedge fund insiders Gundlach’s interview reveals a key yet little discussed economic concern that has been a significant topic of speculation.
Gundlach: US federal deficits continue to climb
In a brazenly candid interview, one of the top performing bond managers considers, among other items, topics that have been part of hedge fund modeling: US federal deficits that continue to climb and compound meeting retiring baby boomers who will shortly be a drain on a social security “trust fund” that is without funds.
Certain quantitative hedge fund professionals have been feverishly running calculations on the topic since 2010 to attempt and determine “the point of implosion” where a shift in the balance of world power takes place. Other factors being considered in this formula, not addressed in the Gundlach interview, are the derivatives that underlie the world financial system imploding, the US losing its status as the reserve currency of choice, and a shift of power in Asia and the middle east.
Gundlach: Probability of negative market impacts
Differing calculations place the probability of negative market impacts starting in 2015 and varying to 2023 depending on a number of difficult to predict political factors. In these calculations that math of the debt crisis and the impact of retiring seniors on the social security system is the easiest to determine because, even using optimistic numbers, the math reaches a point of implosion. The most difficult to predict is the human political reaction to solving the problem.
A primary point of this research has been conducted by Boston University’s Larry Kotlikoff, who recently penned an article in the New York Times on the topic titled “America’s Hidden Credit Bill.” Kotlikoff argues that the US, like so many corporations today, is using fraudulent accounting. He points out the US is not booking the promise of medical care to seniors as an expense, but tallies their social security payments as revenue.
The glossy mainstream media has been generally silent on the issue. Kotlikoff is documented in an e-mail to have been called a “nutjob” by journalists at a major media outlet when asking for a hearing on the topic. This occurred at the same time major hedge funds were seriously looking at his math and concluding that, even if it did have minor issues, he was still generally on point. The topic was first publicly raised by Bloomberg’s Peter Coy in 2011.
Gundach’s openness on the serious issues facing the US economy comes after unusual public candor was exhibited at the Morningstar Conference on the topic. Although it wasn’t reported in the mainstream press, discussions that previously were limited to behind the scenes whispers and closed door meetings were suddenly being discussed in front of financial advisors, a notoriously optimistic group of people many of whom care not to discuss risk management solutions for difficult economic straights ahead.