It may be hard for President-elect Donald Trump to get a debt-based boom going with government debt at current levels, DoubleLine CEO Jeffrey Gundlach told clients on a webcast yesterday. That said, the fixed-income expert expects that congressional Republicans were likely to take Trump’s proposed defense and infrastructure spending plans and “give it a try.”
At a time when GOP leaders in Congress and the unorthodox president-elect are testing each other—and clashing over issues like the Russian hacking of the election and the nomination of Exxon Mobil CEO Rex Tillerson as Secretary of State—it remains to be seen how their relationship evolves. Gundlach's belief is that they won't challenge Trump on some of his signature issues like defense and infrastructure spending, even if the latter conflicts with sentiments among fiscal hawks in the party.
The bigger question is will it lead to stronger economic growth through debt increases. One hasn't heard much about debt-to-GDP levels recently because it has been relatively stable since 2011. But that could soon change as the population ages and more people start using entitlements. If interest rates go to the 5 or 6 percent range in the next four to five years, serious problems could surface, Gundlach predicted.
“It would absolutely be a problem for the [federal] debt,” Gundlach said. But the efficacy of every incremental dollar of debt can become less effective. Some, like former Fed official Lacy Hunt, believe the multiplier effect from debt-financed government spending is actually negative.
This is why comparisons between the president-elect and Ronald Reagan could be “missing the point,” said Gundlach, who accurately predicted Trump’s upset victory.
Circumstances were very different. In 1981, the debt-to-GDP ratio was 31.1 percent; today it’s 105 percent. Household debt-to-disposable income stood 65.7 percent 35 years ago; now it’s 103.6 percent.
People hope Trump can “wave a magic wand” and stop manufacturing job losses, but Gundlach noted many jobs were being lost to automation and robots, not just foreign countries. Since NAFTA was passed in 1993 there has been a 27 percent decrease in manufacturing jobs from 16.8 million to 12.3 million.
Meanwhile, the bond market has woken up to the idea that a Trump administration could be quite unfriendly to bonds, Gundlach said. Though he thinks 10-Treasurys have probably peaked in the near term at 2.5 percent, the path to the 5 or 6 percent area by 2020 could spell problems for equities, housing and junk bonds, among other asset classes.
Defense spending has been steady for years and probably will start to move up in the next few years. There is also a crying need for rehabilitated infrastructure. But where is the money going to come from?
Gundlach was also dismissive of the Trump rally in equities, noting that it was very common for stocks to rally between presidential election and inaugurations only to tail off in the first year of a presidential term.