Round Table: "Dishing the Dirt" - Debt, Inflation, Reflation and Taper 9-30-2021

For decades, governments of developed economies have covered their fiscal deficits with debt financing - in a forgiving context of tame consumer and producer prices. In this edition of DoubleLine’s Round Table Prime, moderator and deputy chief investment officer Jeffrey Sherman, U.S. government bond portfolio manager Greg Whiteley and global bond portfolio manager Bill Campbell discuss the debt, inflation and monetary picture arising from the world’s fiscal and central bank policies, and the implications for global markets. This edition of Round Table Prime was recorded on Sept. 30, 2021.
For the near term on the U.S. front, Mr. Whiteley takes note of a conjunction of reduced bond buying by the Federal Reserve with reduced Treasury issuance: “Looks like Treasury issuance is going to drop between $600 billion and $1 trillion over the course of the next year.” The upshot for Treasury yields, per Mr. Whiteley (6:20): “I think the net impact on rates is going to be pretty mild.” With respect to the multiple debates over whether the U.S. stands on the precipice of secular change in inflationary regime, he warns investors to be ready to invest in a world where the answer to that question remains unknown for the foreseeable future. For example, citing Fed Chair Jerome H. Powell’s “inadvertent” admission to the same effect, Mr. Whiteley says (25:45), “The Fed, an organization that employs 700 Ph.D. economists, doesn’t know how inflation works.” That said, Mr. Whiteley warns that Fed policymakers are placing much heavier emphasis on achieving maximum employment as opposed to inflation targets (44:31).
Mr. Campbell’s longer-term view is based on the advent of stimulus first in the U.S. and Europe, and then in 2Q2022 in China ahead of Xi Jinping’s unprecedented third term as leader (37:19). Mr. Campbell weighs the idea that the world stands on the “precipice” of uncontrolled inflation if governments don’t regain control of the fiscal and monetary “firehose” (7:33) opened in 2020 to fight the growth gaps caused by the COVID-19 epidemics. Hints of this might be visible in the FX markets in light of moderating versus aggressive fiscal policies by countries in both developed and emerging markets. For example, he contrasts the “stark differences” in the performance of the currencies of Canada and Australia, both commodity exporters (9:10). After spending aggressively to offset COVID-19’s economic effects, Canada, Mr. Campbell points out, is working to bring the government deficit back to 1% of GDP by 2025. “Lo and behold, they have had flat to positive year-to-date FX performance,” he notes. In contrast, while Australia has continued to run a 5% spending deficit, the Aussie dollar has marked a 5.5% drawdown.
• This material contains the opinions of the manager as of the date it was recorded and such opinions are subject to change without notice.
• The material represents DoubleLine’s intellectual property. No portion of this presentation may be published, reproduced, transmitted, or rebroadcast in any media in any form without the express written permission of DoubleLine. To receive permission from DoubleLine, please contact [e-mail].
• The views and forecasts expressed in any materials on this website are as of the date indicated, are subject to change without notice, may not come to pass and do not represent a recommendation or offer of any particular security, strategy, or investment. DoubleLine has no obligation to provide revised assessments in the event of changed circumstances. There can be no assurance that the strategies described will achieve their objectives and goals.
• DoubleLine® is a registered trademark of DoubleLine Capital LP.
• ©2021 DoubleLine