Gundlach Slams Fed for Putting Brakes on Rate Hikes

Jeffrey Gundlach

Bond guru Jeffrey Gundlach, wary of burgeoning government debt, criticized the Federal Reserve for backing off on its rate-raising regimen.

Federal Reserve Chairman Jerome “Powell used to be disciplined and pragmatic,” DoubleLine Capital Chief Executive Officer Gundlach told a group of investors in New York Tuesday. But now Powell is a creature of “fluidity,” he added. “So we can go on borrowing to infinity.”

Certainly, the current low-rate environment is an inducement to add more debt to the balance sheet, for both Washington and other borrowers, notably corporations.

Powell had been embarking on a campaign to hike rates, with four increases last year. But in January, amid concerns about a slowing domestic economy and sliding stock market, he relented and indicated that the tightening would be halted for now.

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“He’s not going to raise rates for five years,” Gundlach speculated. And he observed that President Donald Trump’s business career was marked by large leverage and bankruptcies of his casino companies. Trump, up for reelection next year, has been calling on Powell and the Fed to lower rates.

“Donald Trump loves debt,” Gundlach said. “So I knew we’d see expansion of the deficit” when Trump took over.

Pointing to the $1.2 trillion increase in the national debt in fiscal 2018, Gundlach noted that the US government’s borrowing amounted to 6% of the country’s gross domestic product (GDP), which last year increased by 2.9%. In other words, he said, “the debt grew more than GDP did.”

Amid the steady expansion of Treasury bonds needed to fund the government, he said that now-quiescent interest rates were sure to grow more turbulent. He suggested that investors take advantage of this higher volatility by an investment maneuver called a put-call straddle, using the iShares 20+year Treasury Bond exchanged-traded fund (ETF).

With such an option, an investor in effect is positioned on either side of the ETF’s price. The hope is that the ETF’s price rises or falls from the option’s strike price by a sum that exceeds the premium paid to buy the option. Should long-dated Treasury bonds, which underlie the ETF, move more than half a percentage point, the trade will be profitable, he said.

Gundlach takes a pessimistic view on US economic growth prospects this year. He termed the recent first-quarter GDP increase of 3.2% “fishy.”

If the economy slides in 2020, Gundlach said, “Trump will blame Powell.” The problem with that election stratagem, he said, is: “How many people even know that the Fed exists?”

Tags: Donald Trump, DoubleLine Capital, Federal Reserve, Jeffrey Gundlach, Jerome Powell

New Jersey may have one of the worst-funded public pension programs in the country, but its investment returns in 2018 outshone many peers, and its funded ratio improved a bit, too.

The Garden State’s risk-averse policy shielded itself from harm last year, according to the State Investment Council’s most recent report. A 9.06% return shaved $12 billion from funding deficits, now at $130 billion. One reason is its move into alternative investments and global growth assets, and away from hedge funds, which had been underperforming.

While New Jersey’s pension plan remains terribly underfunded, it nonetheless beat its 7.5% long-term benchmark, which is a plus for Gov. Phil Murphy, a Democrat. The underfunded pension was a big challenge that Murphy faced when he took over from Chris Christie last year. Under Christie, a Republican, the funded ratio bottomed out at 31% in 2017. Thus far on Murphy’s watch, it rose to 38.4%—not great, but still a step in the right direction.

A lot of the gain had to do with reallocation of assets into alts and others. Last year, the Federal Reserve’s interest rate hikes and US trade tensions with China spooked the stock market, and many an institutional investor suffered significant losses (just ask hedge funds).

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Most of the money is now in its total global growth portfolio, which accounted for 58.31% of the total portfolio as of February 28. Stocks are in the total real return element of the portfolio, which only consists of 8.72% of the $76.1 billion pension fund’s assets. The rest is in bonds, and alternatives such as private equity; which has returned a steady 10.01% over the past 10 years, and real estate, to which the fund allocates 19.75% of its assets.

Real estate and private equity returned 11.98% and 17.52% in 2018.

That said, the investment council still has more work to do, and so does Murphy, who has hired a financial adviser to determine which state-owned assets can be used to shore up the retirement system. He also wants the state to kick in $3.8 billion, or 70% of its promised contributions to the fund, according to the governor’s proposed state budget.

Last year, the plan only got 50%, and it’s only getting 60% of what it’s owed this year.

“What we need to do is get to the full actuarial required funding,” Mark Magyar, associate executive director of the New Jersey Senate’s Democratic majority office, told CIO on behalf of Senate President Stephen Sweeney.

Sweeney, a Democrat, says a pension overhaul is the best thing for the plan and its members. He wants to put new hires into a “stacked” hybrid plan, where all workers will get a defined contribution account up to the first $40,000 of income, then be moved into a cash balance account, where they are guaranteed either a 4% annual return, or 75% of the pension systems yearly earnings.

“It is a true hybrid,” Magyar said.

Another reform-related shift would be merging the health benefits plans for school employees into the state’s health plan, moving health benefits from a platinum level to gold level. In a statement, Sweeney said that move will save more than $1.5 billion annually for property taxpayers, and “tens of billions of dollars in the years ahead.” He also said it would help get the pension system to full funding by fiscal 2023, meaning that the state will be pitching in all the money it’s supposed to.

“Every year you don’t get to full funding [it] adds to your costs,” Magyar said. “I’m glad we did well last year, but it doesn’t change any fundamentals of our goals.”

Murphy and unions are opposed to Sweeney’s proposal, but New Jersey and its 38.4% funding ratio can’t waste any more time. Investors are wary of a downturn to come in the next year or so, as the Fed’s “patient” approach has calmed anxiety for now. That doesn’t mean something can’t happen tomorrow, which the state, and many like it in terms of funding levels, is not prepared for.

Murphy and the New Jersey Treasury were unable to be reached for comment.

Global Equity Performance Disrupts New Jersey’s 29-Month Positive Return Streak

Tags: Alternatives, New Jersey, New Jersey State Investment Council, Pension, Phil Murphy, Private Equity, Real Estate