Gundlach on Donald Trump, China and Fed Policy
September 15, 2015
by Robert Huebscher
Charlie Munger: Invert And Use “Disconfirming Evidence”
Despite grabbing most of the headlines and leading in many of the polls, Donald Trump is not expected to win the Republican nomination. But Jeffrey Gundlach said that Trump has done the electorate a “big favor by bringing up issues that have been conveniently buried for quite some time.”
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call on September 8. Slides from that presentation are available here . The focus of his talk was DoubleLine’s flagship Total Return Fund (DBLTX) and its related exchange-traded fund.
According to Gundlach, Trump is right when he asserts that China’s infrastructure is better than that of the U.S. Quoting Trump, Gundlach said that China’s “130 shiny new airports” and “cities with glistening buildings” outclass the “collapsing bridges” and “airports that are a joke” here in the U.S. And, ironically, according to Trump, the U.S. owes China more than $1.4 trillion.
“There seems to be something really weird about this picture,” Gundlach said. “I’m glad to see Mr. Trump is talking about these things simply because these are facts that have been there for all to see but getting very little reporting.”
But Gundlach also criticized Trump, calling him a “full-on protectionist.”
“We all learned in high school that it was a bad idea in the wake of flagging global growth to go to protectionist steps,” Gundlach said. Gundlach called out Trump’s plans to “build walls to keep people out and put tariffs and taxes on other countries.” Those steps might help our country’s competitiveness, but they would not increase global economic growth, Gundlach said.
Gundlach’s comments about Trump were a sidelight to his main message – the assertion that the Fed should not raise rates and his prediction that it will not. I’ll discuss the reasoning behind that thesis along with Gundlach’s assessment of relative valuations in the bond market.
What the Fed should – and will – do
Economic weakness, market vulnerabilities and a lack of inflation argue against an increase in interest rates, and Gundlach cited numerous examples of each.
“I don’t think the Fed will be able to raise interest rates this month, and I don’t really think they’re going to raise them this year,” he said. “And if they do, I think it will be a real problem.”
Gundlach harkened to the 1970 cult-movie classic, The Rock Horror Picture Show, which included the song “Dammit Janet.” The data, Gundlach said, is “screaming ‘Dammit Janet’ don’t raise rates.”
According to Gundlach, the World Bank and the IMF also advised the Fed against raising rates, which could risk global turmoil in the financial markets and in the emerging markets in particular.
Indeed, the odds of a rate increase in September are only 30%, Gundlach said, based on pricing in the Treasury market.
One key reason, according to Gundlach, is lack of growth in nominal GDP, which is growing at only 4.1% annually. That’s less than the rate of 3.7% in September 2012 when the Fed began its third quantitative easing program (QE3). Gundlach said his team at DoubleLine has shifted its focus to nominal (instead of real) GDP because “we don’t live in an inflation-adjusted world.”