Jeffrey Gundlach, who famously predicted Donald Trump’s victory in 2016, said that the president will defeat the presumptive Democratic nominee, Joe Biden, in November. He also dimmed the expectations of fixed-income investors when he said to avoid short- and long-term bonds.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call at 4:15 pm on August 11. The focus of his talk was DoubleLine’s fixed-income closed-end funds, DBL, DSL and DSY. There were no slides accompanying his presentation.
I’ll come back to Gundlach’s political predictions, but first I will review his remarks about his funds, the economy and the capital markets.
DBL is the closed-end version of DoubleLine’s flagship total-return mutual fund, DBLTX. Interestingly, Gundlach said it has a duration of zero, because some of its assets, like collateralized loan obligations (CLOs) and asset-backed securities (ABS), have durations of -5 and -6, respectively. They move in the opposite direction of Treasury bonds. The fund, he said, may be volatile but it is not correlated to bonds.
As with most closed-end funds, Gundlach said that price movements – and whether they trade at a premium or discount – are mostly a function of supply and demand on the NYSE.
The DoubleLine closed-end funds traded at extreme discounts in March. That could happen again. He said it was because, “fear and loathing overwhelmed the demand.” Gundlach noted that similar price dislocation happened in gold a few years ago and in Delta Airlines’ stock in March.
Gundlach reassessed his mortgage-backed holdings in March and April based on the expectation that many mortgages will not get paid due to economic hardship resulting from the pandemic.
Bond market outlook
Emerging markets were incredibly weak in March and early April, according to Gundlach, and had very poor liquidity. The same was true in the Treasury market.
“I have never seen what happened in terms of liquidity in the Treasury markets in March in April,” he said.
Gold prices recently hit a new high in dollars and in other currencies, he said. It held up well until the dollar fell about 10%.
“Most markets are in a reversal stage,” he said, noting that gold was down in price the day he spoke.
His prediction of reversals extends to the bond market.
“I am not interested in long- or short-term bonds,” he said. “With the $1 trillion July deficit, we will have a deficit of 50% of GDP.” Gundlach expects the 30-year yield to increase from its current level of 1.2% based on the need for Treasury issuance.
It is not possible to unwind the fiscal stimulus enacted in response to the pandemic, according to Gundlach. “We can’t pay back today’s unfunded liabilities, which are 750% of GDP. We need to default or restructure the unfunded liabilities.”
The most attractive part of the yield curve is two-year bonds, with a 0.14% yield only slightly less than the 10-year bond yield of 0.63%. He doesn’t like TIPS, given that real rates are so low, although he noted that TIPS have done well given that real rates have dropped.
The U.S. is not doomed to a “lost decade” like Japan because of our demographics and population growth, he said, but rates will stay near zero. He expects the Fed to not raise rates for quarters, if not years, to come.
Most markets have “lost their momentum,” he said. “Interest rates will rise until the Fed institutes yield-curve control.” (Yield-curve control is commonly understood to mean open-market purchases of longer-term Treasury securities by the Fed to depress interest rates on that part of the yield curve.)
The rally off the March lows is “due to reverse,” he said, “as is the case with gold.”
The demand for yield is “unbelievable,” he said, with seven to 10 over-subscribed new issues in the investment-grade bond market. That same issuance is true with ABS, high-yield and emerging-market bonds.
“That high demand contrasts to the lack of liquidity a few months ago,” he said.
The prices of high-yield and investment-grade bonds are “fixed” by the Fed, he said, so there is no “market signal” and the market is distorted. The parts of the market that are not supported by the Fed are more fertile for active managers, according to Gundlach.
“Edicts” by the government lead to risk in any sector of the bond market, Gundlach said, in reference to actions by the Fed to purchase assets such as high-yield bonds. “I’m afraid those edicts keep getting extended.” He said he is most afraid of risks in the commercial real estate sector, due to the work-from-home movement and the depressed demand for travel.
“You have to go to the areas where the damage has been observed and the Fed has not manipulated the price.” That, he said, is how he manages his funds.
Inflation over the next three to five years depends on whether the federal debt is monetized, i.e., if the Fed “funds things directly.” That could easily happen, he said, by “declaring its liabilities are legal tender.”
In spite of the outsized deficit, the economy is not inflationary. It is actually deflationary, as COVID-19 has depressed wages.
Companies will “right-size” their operations, he said, by reducing their headcount and footprint. It will be disruptive, he said, and will be deflationary.
Gundlach recommended that investors break their portfolio into three pieces: a signification cash position to guard against deflation; gold for long-term value; and stocks, because they will do well if there is inflation.
Political prediction
Trump will defeat Biden in November, according to Gundlach.
The polls are very “squishy,” he said, because of the “toxic environment.” Two-thirds of conservatives and moderate conservatives have lied about their support for Trump, Gundlach maintained.
Gundlach based his prediction, in part, on the fact that Biden can’t get above a 50% favorable rating. “There is a lot time until the election,” he said, “and a lot of market volatility to come. This volatility will be much greater than previous presidential elections, which are typically volatile.”
Kamala Harris, whose vice presidential nomination was announced shortly before he spoke, “is not a good pick. She is too charismatic and dominant with her personality,” and will overshadow Biden. Gundlach said he was not surprised by that pick, since Biden has promised to choose a woman of color.
“My base case is that Donald Trump will win re-election,” Gundlach said.
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Jeffrey Gundlach, who famously predicted Donald Trump’s victory in 2016, said that the president will defeat the presumptive Democratic nominee, Joe Biden, in November. He also dimmed the expectations of fixed-income investors when he said to avoid short- and long-term bonds.