One expert argues that life expectancy is up, so raising the retirement age is necessary to preserve benefits.
Yesterday Barry and I had the pleasure to meet Jeffrey Gundlach and attend the DoubleLine Luncheon at the New York Yacht Club. If you've never been, the club is on 44th Street (a block from my office) and you can tell it by the second floor windows which are shaped like the bow stern of a ship. The dining room has a three-stories high stained-glass ceiling and is laden with ornately carved wooden accents, maritime artifacts and models of all the yachts that have defended the America's Cup for the last century and a half. It's really a mind-blowing space that many native New Yorkers don't even know about.
Jeffrey Gundlach, who possesses one of the most fascinating investing intellects of our time, was there to greet the guests in a gray-checked suit with bright red tie and pocket square in the foyer. For the uninitiated, Jeffrey opened his own asset management shop, DoubleLine, in Los Angeles two years ago. Since then, he's raised about $16 billion starting from zero. This is an astounding feat and no one has ever seen anything like it in Wall Street history. On top of that, he's managed to absolutely crush his peers in the bond market year-to-date with an elegant risk-offsetting pairs trade that's meant bigger yields than most of his competitors without compromising on liquidity, credit quality or duration. More on that later.
Once we were all seated, it was a whirlwind through some of the most important charts and datapoints of the current market moment. I've got 5 pages of handwritten notes that I'll distill down for you guys below.
Anyway, let's get straight to the meat and potatoes...Just like my notes from the Rob Arnott lunch everything below is paraphrased unless it's in quotation marks, in which case it's a direct quote from the man himself. I've put these little nuggets in an order that I think adds clarity to the overall message. Hope this is helpful to you guys...
On Policy: "I'm not a policy maker, I am a steward of other people's capital and I'm here to outperform." The crowd had to practically sit on its hands to keep from applauding. (Josh's note: Jeffrey Gundlach has now set himself up as the anti-Bill Gross, who has now underperformed 80% of his peers year-to-date as he's become preoccupied with pitching policy solutions and making quasi-political pronouncements.)
On Government Revenue: In 1902, the Government only took about 10% out of the economy in the form of taxes, now it's more like 35%. Debt Ceiling on the same upward trend as taxation as a percentage of GDP, a complete farce, it is regularly "raised on an as-needed basis" and has no meaning at all.
On the 2012 Election: "This will be the most important election of our lifetime," he says that there are two parties: The Taxes are Too Dam Low Party and the Spending is Too Damn High Party - if either of the two parties gets a mandate from voters next fall is could be "a disaster".
On Entitlements: Retirement age simply MUST be raised, probably to 70 years old. FDR originally set the retirement age (for Social Security benefit eligibility) at 65 years old - but at a time when the average life expectancy was 61! So rather than being a softie, he actually was being rather tough. Nowadays, our life expectancy is 79, if you were to do what FDR did, you'd be setting retirement 4 years later at 83 years old!
On Discretionary versus Mandatory Government Spending: "What they consider 'mandatory' today could become discretionary' tomorrow." Even if you cut the entire Defense budget slice (from 20% of total spending) down to zero, you still don't even come close to making a dent in the deficit so at some point, the social security and income security (unemployment) entitlements are going to get touched.
On Tax Hikes: Because Corporate Profits are not doing anything for much of the country, corporate income tax hikes are actually possible. Even muni bond tax hikes (at a certain income level) are currently being discussed. There is a precedent for our current situation, 1940. During that year, tax receipts as a percentage of GDP exploded from the 6-8% range up to a whopping 20%.
On Income Inequality: Reagonomics and the idea that you could use deficit spending to "prime the pump" took hold in the early 80's. One of the unintended (or perhaps intended) consequences has been a massive increase in the top .1% of earners' share of total income. When factoring in capital gains, the top 1% of earners in this country are now 25% of total income. This means that some kind of wealth tax is almost a certainty going forward.
On Asset Allocation for the Ultra High Net Worth: Jeffrey says his own assets are now 2/3rd's outside of the "financial system" other than his ownership stake in DoubleLine. This means fine art, gold, gemstones, rental property etc. He says the ultra wealthy should have 50% of their assets outside of the financial system.
On Bull Markets and Bear Markets: If you study history, you'll see that "bull markets are about cooperation, bear markets are about divisiveness." Jeffrey says the Euro common currency came about in 1999 at the very peak of global cooperation, the fact that asset prices peaked around then too is not a coincidence. Right now divisiveness is everywhere and a global bear market is underway.
On the Euro Crisis: "I don't know what's going to happen in Europe but there is one thing I am certain about - eventually, someone is going to take a big loss. As investors, the most important thing we can do is to make sure that we aren't the parties taking that loss." He says DoubleLine's portfolios have zero European stocks, zero European bonds, zero european currencies, zero assets denominated in euro currencies - also, zero exposure to US bank stocks.
On Volatility: There is nothing magical about the 40 level for the VIX, and whether we are trading above it or below it doesn't necessarily signify anything important for stocks.
On Stock Indicators: "The single most important stock market in the world right now is the Shanghai Composite". It is an "excellent leading indicator for the S&P 500. Shanghai needs to improve before we can be bullish on US stocks."