Why Gundlach Predicts a Trump Victory

May 13, 2016 at 10:20 AM
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DoubleLine Capital CEO Jeffrey Gundlach says Federal Reserve Board Chair Janet Yellen will have a tough time raising interest rates this year. He also believes Donald Trump is likely to win the race for the White House.

Talking about hawkish sentiment on the Fed during a conference call Thursday, Gundlach said there is "some rebellion showing up at the Fed."

Yellen, he says, is "the biggest dove," and he sees just a 50% chance of for one rate hike this year.

While two members of the Fed have been discussing the need to raise interest rates perhaps twice this year, "I think one hike will be challenging enough," said Gundlach.

"Yellen has capitulated to the bond market, about half of the time this year," he added.

As for the presidential elections, Gundlach thinks Donald Trump could win as the Republican candidate. The businessman has been "underestimated" for months, Gundlach said during an interview with Reuters after the conference call; plus, Trump is the "better campaigner."

"People are going to start putting greater focus on Hillary. Voters are going to say, 'No. I don't want this,'" he told Reuters. "Hillary is going to evolve into an unacceptable choice. If she is such a great candidate, how come [Bernie Sanders] is beating her?"

(While Clinton is the likely nominee, Sanders has won several recent primaries and performs better than Clinton against Trump in some national polls.)

Unfunded Liabilities

During the conference call, Gundlach was asked about Britain's upcoming vote on whether to exit the European Union and insisted that such a move toward protectionism "will not happen."

He is more concerned with unfunded liabilities on the U.S. government's balance sheet, which some economists say are valued at $120 trillion in today's dollars, according to Gundlach.

"This will come into focus … we're just in a quiet period right now," said the DoubleLine executive. In 2018, 2019 and 2020, he says, high levels of debt tied to quantitative easing will be "rolling over."

"A Trump win could bring huge increase in the budget deficit and could produce some short-term economic gain but then compound our problems," he explained during the conference call.

"If you think this election cycle is crazy, you haven't seen nothing yet!" Gundlach said, referring to a fiscal crisis tied to entitlement programs and other government commitments.

Gasoline on a House Fire

He then turned to negative interest rates being implemented by some major central banks, notably in Japan, which are "backfiring." Currencies strengthen and stock markets weaken on such moves, he points out.

If the Fed were to implement negative rates in the United States, Gundlach said, "I am not sure what I am going to do… But I don't think it will happen."

"The evidence shows that negative interest rates do not work," he explained. "They cause stronger currencies and negative stock markets for sure. They are the definition of deflation."

The bond specialist says that while the U.S. won't move toward negative rates, central bankers in Europe and Japan might "go a bit more, but they can then expect more of the same — stronger currencies and weaker stocks," he explained

"When the central banks see that negative interest rates have the wrong effect … there will be a great awakening. I think about this as the next wave of investing," stated Gundlach.

"It's like putting out a burning house by pouring gasoline on it," he said. "And I'm thankful that we don't expect it to happen in the United States."

Stocks and Bonds

Turning to equities, the Standard & Poor's 500-stock index has been trading near 2,050 for a while, Gundlach says.

"It's tough to get much of a rally off of price to earnings this high with earnings falling and the Fed itching to tighten with GDP growth already projected to decline," he told Reuters.

"I'm sticking with my '2% upside and 20% downside' prediction on U.S. stocks," he explained. "It's working. I can see it going to 1,600."

In discussing trends affecting Puerto Rican municipal bonds, he says these securities "are priced for default and risk."

Meanwhile, "I worry about Illinois' muni bonds, which are not priced for anything like the Puerto Rican scenario and are trading 30 points higher," the bond executive explained.

When asked if he was bullish on emerging market debt today, he replied, "Less so than in the past. I'm overweight but less and less exposed in our core [DoubleLine] fund than before."

As for the long-term direction of Treasury yields, he explains they will likely rise over the next decade. U.S. 30-year Treasury yields, 10 years from now, could move past 6% vs. their recent 2.6% performance.

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