So what did the Other Bond King think about this week’s negative US bond commentary from Standard & Poors? Jeffrey Gundlach (DoubleLine) doesn’t exactly disagree with their take, but makes the case that the ratings firm is focusing on the wrong question altogether…
“The debate over getting our debt under control really came to a crescendo yesterday with S&P’s action,” Gundlach said. “But if you think about it, it really was a silly thing to do. Can the U.S. pay its debt? Of course the U.S. can pay its debt, if by nothing else than by printing money.”
The real question, Gundlach asked, is can the government pay its debt absent a “money printing exercise?”
“Most people are looking at S&P’s [outlook downgrade] as a negative when it comes to treasury bonds, but it’s the exact opposite,” he said. “As this Sword of Damocles in the form of a possible rating downgrade hangs over our head, it forces politicians to get serious, finally, about raising taxes and cutting spending. I was very skeptical until a few weeks ago, and after what happened yesterday, I think they’ll begin moving in the right direction.”
The Bond Prince (I think that’s what you’re supposed to call him in case you think His Majesty Bill Gross might be listening) makes his final point very clear:
“In any kind of deficit cutting exercise, like we are now heading into, stocks are the losers and bonds are the winners.”
Now keep in mind that DoubleLine is a bond shop – there is some bias here. But also keep in mind that DoubleLine is aggressively pushing toward being more of a “multi-strat” house and Gundlach told Barron’s recently that he does want to buy equities when they get “cheaper”.