Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.

Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.

But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.

Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%.

He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%.

Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150.

Let’s look at his forecasts for 2017, including the one which he called “the chart of the webcast.”

Doomed by debt?

The U.S. household debt-servicing ratio is at its lowest level since 1980, according to Gundlach, despite what he called an “explosion” in private-sector debt. That ratio would change adversely if rates rise, he cautioned, although that might be offset by an increase in income.

Public-sector debt is at 75% of GDP, not including the portion of the debt owned by the Fed, he said. Gundlach has warned of fiscal debt problems, as he has done in the past, but pointed out that since 2011 federal debt has “leveled out” as a percentage of GDP. But he warned that Trump’s policies would lead to a “steeper slope upwards” as compared to the congressional budget office (CBO) debt projections, which show a 141% debt-to-GDP ratio by 2046.

Trump may deliver the tax cuts he promised to the rich in return for infrastructure and defense spending, Gundlach said, and that would lead to structural debt problems – it would get us to the 141% level sooner than in 2046, he said. Those spending initiatives will not kick in this year, he noted, and might take as long as two years to get going.

Gundlach offered data showing that the deficit will increase faster than it has in the post-crisis period, although those projections were made prior to Trump’s victory, and that the portion of the deficit allocated to mandatory (entitlement) spending has grown steadily over the last 50 years.

The recession watch

The historical pattern has been that a recession has occurred during the first term of a new president, especially when following a two-term presidency. But Gundlach said that the leading economic indicators (LEIs) are positive, and there has never been a recession without those indicators going negative. CEO confidence is “moving up” and consumer confidence is “exploding,” he said, which further supports his prediction that a recession is not imminent.

“President Trump will lead to a breakout of the ‘forever 2% GDP growth’ we have seen for six to seven years,” Gundlach said. “Animal spirits have been stirred.” He noted that a small-business sentiment report released that day was the most bullish it had been in a long time.