The resilience displayed in the presidential campaign by Vermont Sen. Bernie Sanders makes him the single biggest threat to the financial markets in 2020, DoubleLine CEO Jeffrey Gundlach said in a webcast yesterday.

Though Sanders is slightly behind former Vice President Joe Biden, Gundlach believes the democratic socialist has the most momentum and enthusiasm of any Democratic candidate and that should propel him to the nomination. Even though Biden has staged a comeback in the race and leads in many national polls, Gundlach doesn't believe he will win the nomination.

He suspects that at some point Democrats will start to doubt Biden's ability to hold his own on the same stage with President Trump. In recent months, Democrats lost confidence in Sen. Elizabeth Warren's ability to win national election, while many of her left-leaning supporters appeared to shift their loyalty to Sanders.

Four years ago, pundits said there was "no way" President Trump could win the nomination, much less the presidency, but they were wrong. The same might be true for the Vermont senator. Sanders "is authentic," Gundlach said.

And that means a lot for the markets and the American political scene. "Risk markets will have to deal with a scare."

For Sanders to defeat President Trump, there would need to be some serious event that makes mainstream voters question the viability of capitalism, and that seems unlikely.

DoubleLine lowered its odds of a 2020 recession from 65% last summer to about 35% as the economic climate improved in the fall.

Even though the Leading Economic Index (LEI) of indicators has remained positive, Gundlach noted it is approaching negative territory thanks in part to a manufacturing recession. The strong stock market, however, is keeping the LEI up.

Consumer confidence is another indicator that has "really held up," but that's often the case shortly before a recession begins. Meanwhile, consumer expectations already are "starting to fade."

During the late stages of previous periods of economic recovery, the markets were worried about the Fed raising interest rates. This time the mood is very different, and the Fed seems more focused on rekindling wage inflation, which is ticking up.

One thing that is different in this cycle is that it would take less of an increase in interest rates to destabilize the economy, Gundlach said.

Current Fed Chairman Jay Powell is unlikely to experiment with negative interest rates, Gundlach added. If the economy deteriorates further, he will be far more inclined to resort to asset purchases.

Still, former Fed chairs Ben Bernanke and Janet Yellen have both said that the Fed shouldn't rule out turning to negative interest rates in the event of a downturn. Gundlach maintained that this would be a major mistake and added it could potentially threaten the U.S. banking system.

Indeed, one reason U.S. interest rates haven't climbed further is that yield-starved foreign institutional investors have flooded into U.S. markets to buy bonds without hedging its positions. German insurers and Swiss banks aren't buying U.S.bonds "because they are greedy," Gundlach said. They are simply desperate to match assets and liabilities.

Were the U.S. dollar to continue its decline, many foreign institutions could decide to sell their positions.

That, coupled with the possibility of trillion-dollar federal budget deficits for the rest of the decade, is a major reason Gundlach believes the long-term trend for interest rates is higher.

Scanning a variety of financial markets over the last year, Gundlach observed that many bond markets had positive returns in 2019. Both gold and fixed-income securities performed very well over the last year and that's highly unusual. The two best country performers in the global bond market were Greece and Turkey.

Significantly, most stock markets besides the U.S. large-cap market have remained beneath the high they reached in early 2018.