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Transcript The Fourth Turning

With: Jeffrey Gundlach, CEO and CIO, DoubleLine Capital Portfolio Manager, Litman Gregory Masters Alternative Strategies Fund

Date: November 14, 2019

Audience: I have two questions. One is for the next recession. Is it going to be another Great Recession? Or is it going to be a mild and short one?

Second question is, given that the aging population is not just a European or Japan phenomenon, it’s more like a global phenomenon, does that mean that going forward into the future, we are going to have older people that tend to consume less? Does that mean we’re going to have less or low demand, meaning low inflation and then low growth? That will become a long-term new-normal. Thank you.

Jeffrey Gundlach: All those points have some validity, but I think it’s a little bit too in-a-laboratory.

I think what’s also part of that – and everything you’ve said taken individually is true – but the other aspect of this demographic shift that you’re talking about is “social tension.” It’s really easy to see it. That, “Okay, Boomer!” stuff that’s going on out there.

I asked my 35-and-younger employees, “What is your attitude about baby-boomers?” The word, “Hate,” comes up a lot.

“I hate them!” They can sort of see. Look at Mayor Pete as a good example of this. Here’s a guy whose entire adult life has been lousy economics. Recessions and Great Recession and lost money in real estate. All this stuff.

They realize that this debt-based policy – and maybe it’s in their subconscious not very top-of-mind – but they know that these debt-based policies have really screwed the younger generation.

By the day, they’re increasingly losing confidence and faith in established institutions. That’s what this whole political environment is about.

The laboratory thing would be right if all the coefficients stayed the same. But I don’t see that happening. I think there’s going to be – essentially – generational warfare. The policy of spending many-many times more money on retirees than you do on young people for investments for the future is going to have to be thrown out the window.

It’s pretty bad. I think it’s like 8- or 9-times that we spend on people over-65 versus people under-25. It’s an amazing bulge.

I think it’s classic. If you want to learn about this, there’s a great book by Neil Howe called, “The Fourth Turning.” It was written in the 1990s. In that book, based upon demography – and he’s the leading demographer, I think, in the United States – said there should be a credit-crisis in the United States around 2006. That’s pretty good.

He bases all of this on “Turnings.” That’s a way of viewing history where you have cycles. There are four cycles that societies and cultures go through. The fourth turning is the one we’re in. It’s one where you throw everything away. You have to start over.

The fourth turnings in the past – not to be apocalyptic about it – were the Civil War and WWII.

It doesn’t have to be that bad, but I can almost guarantee you that the property-relations and tax-code – the way that we view our economy – is going to be completely ripped up by 2027. That’s the big thing that I think about at the beginning of policy. Not just about, “Older people don’t borrow a lot of money.”

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A basis point is a value equaling one on-hundredth of a percent (1/100 of 1%)
A Below Investment Grade bond or Junk Bond is a bond with a rating lower than BBB
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in the CPI are used to assess price changes associated with the cost of living; the CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
Curve Steepener A strategy that uses derivatives to benefit from escalating yield differences that occur as a result of increases in the yield curve between two Treasury bonds of different maturities. This strategy can be effective in certain macroeconomic scenarios in which the price of the longer term Treasury is driven down.
Drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity.
Gross Domestic Product (GDP) is the market value of the goods and services produced by labor and property in the United States.
A Leverage Ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations. 
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The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. 
Quantitative Easing (QE) is a monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.
Quantitative tightening (QT) is a contractionary monetary policy applied by a central bank to decrease money supply within the economy. 
A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.
Yield Curve: A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. The curve is used to predict changes in economic output and growth.

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