He was critical of comments made last month by U.S. Treasury Secretary Steven Mnuchin implying that U.S. wages could rise without a corresponding jump in inflation.
“It’s a little disconcerting that a secretary of the Treasury doesn’t think inflation is inflationary: Of course inflation is, and rising wage inflation is, inflationary,” said Gundlach. “If we raise tariffs, if we raise the prices on goods, that as well is inflationary.”
Gundlach, the manager of the DoubleLine Total Return Bond Fund (DBLTX), also sounded alarms over the size of the U.S. budget deficit, projecting that it will rise as high as $1.3 trillion in 2019 as the effects of lower tax revenues and increased spending combine with the higher cost of debt servicing.
“The deficit is expanding even though we’re late in the economic cycle and it should be shrinking in Keynsian terms,” said Gundlach. “We already have our deficit expanding, and we’re heading into a compounding cycle with entitlement programs that I’ve been talking about becoming a problem.”
The growing debt supply combined with the Fed’s quantitative tightening will serve to lift bond yields, perhaps beyond the 3 percent threshold, he said.
“If quantitative easing was a tailwind for financial assets, then clearly, quantitative tightening will necessarily be a headwind,” he said.
Thanks to the weakening dollar, investors may still find opportunities in risk assets overseas, he said, while projecting declining returns in Europe, Japan and emerging markets.-