He then revealed a chart from the Congressional Budget Office showing that interest expense on the federal debt would rise from 1.25 percent at present to 3.0 percent over the next seven years—and that’s making the heroic assumption of no recession between now and 2026.
That increase in federal debt service cost is equivalent to 1.75 percent of GDP and some of it will be drained out of the real economy. “All this could require some form of QE,” he predicted.
Yet another reason for concern is the rise of the “crackpot MMT” ideas, which are being used “to justify a massive socialistic” spending scheme. These folks believe it’s fine to keep leveraging up your economy as long it keeps growing. “What happened when the economy turns down? There are a lot of lags there.”
Even mainstream economists don't give Gundlach much confidence. The Fed has hundreds of Phd.'s in economics and back in 2007 they didn't seem to have the foggiest idea of what a sub-prime mortgage was.
Gundlach, who predicted President Trump’s surprise 2016 election, said that next year’s election could be even wilder. “You ain’t seen nothing yet,” he noted. And if there is a recession, anybody but the current president could get elected.
With bigger deficits and higher inflation likely, advisors might want to consider long-dated TIPs. He didn’t rule out a boycott of long-term Treasurys at some point.
He also advised investors to be long-term bears on the dollar. President Trump said he’s “address” the trade deficit problem. “He did. It’s up $100 billion,” Gundlach observed.
When it comes to equities, Gundlach reiterated his conviction that emerging markets equities will beat their American counterparts. Since the downturn began, EM stocks are beating their American counterparts. That's unusual early in a market downturn and could be a harbinger of things to come.