Gundlach Predicts Trump Victory; David Rosenberg Not So Sure
Jeffrey Gundlach, who famously predicted Trump’s victory in 2016, says the president will secure another term. David Rosenberg acknowledged that possibility, but is not so sure of the outcome. Both offered their predictions for the post-election economy and markets.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. Rosenberg is the principal of Toronto-based Rosenberg Research & Associates, which he founded after working for a decade as chief economist and strategist at Gluskin Sheff & Associates. The two spoke earlier today via a webinar hosted by Rosenberg Research.
Neither Gundlach nor Rosenberg endorsed either candidate, and Gundlach did not say who he would vote for.
In 2016, Gundlach was one of few to predict Trump’s victory. He made that prediction before the primaries, when the odds for Trump rising to the presidency were extremely small. He also predicted the urban unrest that would ensue under Trump’s term.
Gundlach has far less conviction in his prediction than he did in 2016. The loser will contest the result, he said, and Americans will be unhappy, which could lead to rioting and looting, particularly if Trump wins. Republicans won’t riot, he said.
Even if Biden wins, Democrats won’t win the Senate. Gundlach said a Biden victory will be out of protest from those who believe Trump is a “monster.” Kamala Harris is more candid than Biden, but couldn’t get more than 2% of the primary votes, so her policies are not too popular, he said.
According to Gundlach, the polls have gotten far less accurate over time. That trend is intentional. “Polls don’t gauge opinion,” he said, “they guide and influence it.”
Trump will win the Midwest states with a historically high Black vote (for a Republican), Gundlach predicted. The COVID
lockdown will be blamed for the Democratic defeat, he said, because of partial enrollment at universities that prevents students from voting. That college vote will be a “fraction” of what it normally would be.
Gundlach said there is a “bizarre narrative” that Biden is a “known quantity” and Trump is a “loose cannon.” Trump exaggerates and has “his own style,” he said, but has been consistent in his policymaking: imposing tariffs, avoiding wars, cutting taxes and regulations, and peace initiatives in the Middle East. Trump is the “non-volatile” choice, while Biden represents uncertainty, through his unclear positions on Supreme Court packing, filibusters, and fracking.
He called Biden an “unknown” and “dangerous” choice.
Rosenberg and the need for aggressive fiscal policy
Rosenberg did not make an election prediction, but offered a clear view of the potential for a stagnant, deflationary economy.
According to Rosenberg, if Trump wins there will be a Republican Senate, resulting in fiscal gridlock. There will be inadequate stimulus to revive the economy.
He said that real GDP growth in Q3 would have been -6% instead 33% (annualized) were it not for the federal stimulus measures.
It’s hard to believe Trump could win being down 10% in the national polls, Rosenberg said. We will have Florida results early, according to Rosenberg, and if Trump doesn’t take that state, he will be in “serious trouble.”
With Trump and a divided Congress, we will have “nothing,” at a time when we need coordinated policy. We could get hit with additional waves of the virus. But if the lockdowns being imposed in Europe work, he said, it would bode well for the U.S.
If we don’t have a fiscal response, it will be a difficult for the markets. It will be better if we have a red or blue “wave,” Rosenberg said. Tax hikes are not coming soon, but will in three or four years; tax cuts could come soon with a red wave.
Nancy Pelosi’s $3.5 trillion fiscal package will come “right away” with a blue wave, he said. “We will get tremendous spending, financed by the central bank’s balance sheet.”
No matter what you think of stimulus, it will drive aggregate demand. Without strong fiscal support, Rosenberg warned that Americans would face a “huge” number of evictions.
Gundlach’s investment recommendations
Gundlach offered some investment advice, consisting of allocations to bonds, cash, gold and stocks.
He hates long-term bonds, but you should still own some, he said, because we could face deflation. You could get a 30% capital gain on 30-year Treasury bond, which yield 1.6%.
You should also own cash, he said, as a hedge against deflation.
But investors also need an inflation hedge in case the Fed monetizes it federal deficit. That hedge could be bitcoin or gold, because the dollar will suffer under that regime.
“When deficits explode,” he said, “it is a headwind for the dollar.”
As a bond investor, he said he was looking for rates to rise from their spring lows. But the Fed won’t let them rise further.
Gundlach agreed with Rosenberg that fiscal stimulus is needed to avert an economic disaster. He said there would be a lot of problems – not just evictions – including higher unemployment
Longer term, he forecast that the economy will contract based on what we have learned about the work-from-home environment. Companies will downsize as workforces become more efficient. Indeed, he said that has already happened at DoubleLine.
As for equities, a huge stimulus from a blue wave will help earnings and fuel further speculation, according to Gundlach. Wall Street has abetted that trend by creating retail products, for example to support option buying.
The S&P 500 P/E ratio could hit 30, he said, “which is not a great entry point.”
Rosenberg – fear deflation
Rosenberg said investors should focus on deflation. There was a partial inflationary thrust from commodities in the last several months, but that is not an accurate harbinger of the future. There is too much idle labor capacity, he said, “with the best of the economic news behind us.”
“This is still a world of deflationary pressure,” Rosenberg said.
Europe and Japan have shown that debt does not drive inflation. Over the next five to 10 years, productivity will suffer and GDP growth will be closer to 1%. It could take to 2025 to close the output gap. Demographics in North American also do not bode for inflationary pressure.
Like Gundlach, he said that that if there is debt monetization, it could change his opinion with respect to inflation.
“It’s very clear it is ineffective to create inflation with excessive debt,” Rosenberg said.
The virus will govern the near-term course of the economy. “We can’t seem to beat this thing because it’s so bloody infectious,” he said. “I don’t know how we’re going to get out of this.”
All of that has an impact on aggregate demand, according to Rosenberg.
The big risk in the markets is the virus, Rosenberg said, particularly if there is no vaccine. “We have been the beneficiaries of the government stuffing money in people’s pockets,” he said. Without a proper stimulus, he said we could face a double-dip recession, which would mean a 20% market correction. “The market is like Pavlov’s dog, waiting for a stimulus.”
“I am in the global deflationary camp,” he said. “It is a high-conviction call.”
He doesn’t think Treasury bonds will make a lot of money, but are an important “ballast” for the portfolio to preserve capital.
Treasury bonds are valuable because of their guarantee of getting paid.
Gold and other asset classes
Gundlach said he was positive on gold from summer 2018 to mid-2020, but not very interested in it now. It is a good way to hedge some of your tail risk, he said, especially if there is monetization. It will go up substantially over “a number of years,” he said.
He called U.S. stocks a “momentum market,” the thinnest in history, driven by the “super-six big tech” and vulnerable to anti-trust regulation that would be highly destructive to the market.
U.S. equities have outperformed the rest of the world for last 10 years, Gundlach said. He has a very strong conviction that the dollar will weaken over a multi-year timeframe and investors will do better in other economies. Look at India (for its reforms and demographics) and broadly emerging markets, he said, primarily in Asia. He does not like Europe because of its demographics and Brexit-like EU secession threats.
Rosenberg also likes emerging markets, but not Latin America. He likes India, as well as China, for its infrastructure investments, as well as Southeast Asia more broadly. We are 10 years away from China becoming the world’s biggest economy, according to Rosenberg.
When it comes to retail investors, Gundlach said there will be year-end selling among closed-end bond funds. Those funds could be priced to big discounts to their NAVs. Those are too small an opportunity for institutions. Closed-end funds have credit and leverage risk, but some yield 8% to 9%, and could go higher if there is year-end selling.
A revolution in the works
Gundlach warned of an existential threat to our democracy.
Americans are strongly committed to democracy, he said, but we should rethink the benefits of capitalism, given China’s success with totalitarianism. China, he said, has built superior infrastructure and has had faster economic growth than the U.S.
Our outcomes are inferior to those of China, he said.
We will see big changes in the way we govern and in our political and cultural institutions, according to Gundlach.
We are in the early innings of that change, and it is being driven by the level of discord we face.
Gundlach warned that wealth inequality is behind this discord. He said our means of production, which are changing rapidly due to technological innovation, are out of sync with property relationships and how the benefits of society are split.
“If we voted for the Constitution today,” he said, “part of the Bill of Rights would not be approved.”
It is plausible the U.S. splits into more than one country, he said. Some people want to riot and loot, favor endless immigration, homelessness and hate the police; others have very different views. Those with those opposing views are saying, “Go ahead, be my guest, but I don’t want to be a part of it.”
Gundlach is already seeing this in migration trends. There are three times as many people moving out of San Francisco than five years ago. He said you can’t get a moving company in that city.
“It‘s already happening,” he said.
People have one foot on the pier and the other in a row boat, he said. They need to make a decision or they will end up in the water.