Charting a New Path

The first day of the 2010 Morningstar Investment Conference saw speakers and panels weigh in on a wide variety of issues investors face as governments and financial professionals clamber for solutions to the ongoing global economic turmoil.

Gundlach Looks Ahead
DoubleLine's Jeffrey Gundlach used Wednesday's keynote session to explore the potentially devastating imbalance between the United States' gross domestic product and its projected outlays. While some analysts have suggested solutions such as increasing GDP growth, lowering interest in government debt, or a transfer of foreign capital, Gundlach argued that each of these is either unrealistic or has already been done. Instead, he said, the country must prepare for fundamental and wholesale legislative solutions.

"Policy change must happen," he said.

Gundlach laid out three possibilities for relief:
1. Increase taxes or cut spending.
2. Print more money.
3. Default.

At least part of the first option, he said, is inevitable."I think you have a tax increase coming and a radical policy shock that will affect investments and the economy," he said. A country digging itself out of a financial hole with spending cuts, however, is nearly unprecedented in world history. The British pulled it off in the 19th century, but required nearly 100 years to do it and had a major tailwind in the form of the Industrial Revolution.

The second option, he said, is technically possible but would accomplish very little. He cited the country's $50 trillion in credit-market debt and $50 trillion in unfunded promises, both of which contribute to a debt sum that would result in massive inflation were it addressed by printing more money.

While pointing out that the U.S. is not alone in its ever-increasing inability to pay its debts, the U.S. is the only one that has not ever defaulted on its loans in the past. That streak, he said, will soon end.

"I think ultimately some type of polite default, at minimum, has to happen," Gundlach said. "You cannot pay all of these entitlements as they currently stand.