In his latest interview on RealVision conducted last Friday, Doubleline's Jeff Gundlach recapped the major points of his relatively bearish worldview, which are increasingly prioritizing political risk, with the ‘T-word’ now a factor for stocks, as the election gets closer and the potential for a President Trump.
Gundlach has been calling a Trump victory since the start and he outlines the likely market impact, as well as an economic bounce from the fiscal stimulus and the bond market shenanigans that might follow. With a long term need for l governments to really tackle the global debt problem against the backdrop of entitlement, the only play for serious investors here is defensive and Gundlach is more focused on where he can make money and for that he has the gold miners in his sights.
Here is a brief summary of his key points:
- Trump is elected, leading to more debt, and an even greater fiscal stimulus:
"I think Trump's going to win largely because there are many, many-- people have used the Brexit analogy and I think it's apt. Where people were almost afraid to say that they were for Brexit and then they ended up voting for it... Trump is the gateway to fiscal stimulus. He's absolutely promising to build roads and airports and walls, and I have observed that one thing I think we all know is that Mr. Trump is pretty comfortable with debt."
- Negative interest rates damage the real economy as they require higher savings, and are deflationary:
"You want to fight deflation with deflation. But they don't seem to understand that you do not increase consumption with negative interest rates, at least for a significant fraction of the population. You increase savings, and you necessitate savings because the 60-year-old man that wants to retire at age 70-- maybe an old school thought-- I need to save a million dollars and maybe I can make 5%, $50,000 a year. Little social security if I get it. I can get by."
- On the downside risk return skew in holding Treasuries, which may go from 1.25% to 1.00%, versus making 10% on gold miners:
"If you go 1% on Treasuries, you'll make about three points on the 10-year. That happens over the course of a year, you make 4.3%. I just think there's a lot of ways of higher probability of making 5% or 6% through rank speculations on volatile asset classes. Like at this point, I would even add gold miners. I actually said this in an interview with Barron's on June 27, I think it was."
- On his favorite recession indicator: the 12 month moving average in the unemployment rate.
"I'm not predicting a recession any time soon, in fact our early warning indicators are only now getting us a little bit of our antenna up. One of them is the unemployment rate versus 12 month moving average. For very understandable economic reasons, you never get a recession with the unemployment rate below it's 12 month moving average. Well, it's about to go above. There's a 9 basis point difference between the unemployment rate and its 12 month moving average. It doesn't guarantee anything, but unless that crosses over, you really can't have a recession."
- On America's biggest generation: the broke Gen-Xers:
"I met with a major demographer this week who showed me something that I knew, but hadn't focused on and didn't know it was this extreme. And that is the net worth of the Gen Xers compared to the same time in their life of the baby boomers. I mean, the Gen Xers are the people who, demographically, should be fueling discretionary spending, like luxury minus houses. Not starters not senior facilities, but what people used to call the McMansions and things like that. They should be fueling luxury goods. They're broke. They're in really poor financial condition, in terms of where they are. I mean they bought houses in 2006, they're way, way down. And they don't have the wherewithal to drive these markets."
- Gundlach then cites Karl Marx on prevailing topics like class wars, tech upheaval, robots, property relations and social tension.
"Karl Marx actually wasn't a communist by today's standards, he was just a political philosopher. And he came up with this theory of revolution and change, which is that you start out with a copacetic society, at some point you find a level ground, and you have property relations, so the rules of who gets the spoils of the economy. And then you've got the means of production, and that's the stuff being produced. And they're very harmonious. And everything's going along nicely. And society is going forward, people are relatively happy. But then something happens technologically and the means of production change. That's obviously-- we can identify the internet, social media, robots for sure. That changes-- but the winners start to change places with the establishment. The establishment is trying to keep the reigns of power and economic benefit, but you're starting to get guys that create an app, they can sell it for a billion dollars. They go from college student to billionaire in a year and that's great for them. But for a lot of people that had traditional jobs-- they're replaced by robots and they don't see any way that they're going to be able to tap into this.
So rather than keep pace with the evolution of the means of production, they fight it. And so the tension gets bigger and bigger and bigger. And it gets to the point where people start to realize that they're not alone in feeling this way.
Thankfully we don't live in a totalitarian regime, at least not yet. And if there's a king you can understand why people are nervous about saying something against the King. The King's probably going to chop your head off if you say something sufficiently negative about him."
- The bond kind has a few less than kind words about driverless cars, noting it will take longer to get them cleared for safety reasons:
"I think driverless cars are further away than people think. I think they're incredibly likely to happen ultimately. And again, massively problematic for jobs and for a lot of things, but I think it's going to take a lot longer than people think."
- On the fate of US GDP and the dollar, and why it could break to the downside
"There's this great belief that the dollar's going to strengthen because of the differences between our central bank policy, which is itching to raise rates-- and trust me, the day of the Brexit I said to my training staff, I said, when do you think we're going to talk about Fed tightening again? And the more junior guys were like 6 months minimum, and I said, within a month. Well it's happened. It's been less than a month and it's happened. We're already talking about the Fed raising rates. But it hasn't strengthened the dollar.
Some people that do economic analysis in a different way than I do, I'm not very familiar with their methods, they seem to be arguing to me quite strongly-- they expect quite a strong GDP report for the second half. Much stronger than GDP now, for whatever reason. I'm not predicting that's going to happen, this isn't my work. But it does fit together nicely in this puzzle. That if we got a strong GDP report for the second half - and a bounce back is sensible and frequent in the second half, even though they are seasonally adjusted, they seem to not get the adjustments right, maybe we'll be talking about raising interest rates in September.... So that could make my dollar breaks on the downside."
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Finally, butting it all together, this is how Gundlach is currently positioned in his master fund:
"I've been net short all year. The US stock market bid my macro fund and I'm doing great. I'm not having trouble at all making money on the short side. In fact, my longs are probably bringing the performance down. Because I'm net short 100% , but I have some longs against some shorts, and the shorts have just been fantastic. And I'm basically looking at these things that are viewed to be safe and they're not safe at all. I think the best way to play the short side is to buy stocks that are believed to be safe, but are very recession exposed."
Much more in the full 50 minute interview which can be watched on RealVisionTV.