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Gundlach Channels ‘Rocky Horror’: ‘Janet, Don’t Raise Rates!’

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Not many fund managers like to quote Ernest Hemingway in their investor presentations, much less refer to the cult-classic film “The Rocky Horror Picture Show.” But that’s just what DoubleLine CEO and Chief Investment Officer Jeff Gundlach did during a webinar late Tuesday.

Plus, the fixed-income expert wove in some critical analysis and praise of Republican presidential candidate Donald Trump, while walking participants through a multitude of (roughly 70) statistical slides on the state of the economy.

Yellin’ at Yellen

Quoting from “The Rocky Horror Picture Show” and referring to Federal Reserve Board Chair Janet Yellen, he stated: “Look at the charts. Dammit, Janet, don’t raise rates!”

Gundlach discussed a chart that shows arbitrage pricing of the Treasury yield curve (or Fed fund futures). “The odds for a [September] hike are 30% …,” he said. “It’s a heavy, heavy underdog.”

Among the many reasons he reviewed as to why now was not the time to raise rates was the current nominal gross domestic product, which had a year-over-year growth rate of 3.7% in June. (Usually, the Fed tightens when this figure is above 4%, he says.)

The Fed has a “‘watch out’ signal” rather than an “all clear,” the fixed-income expert said.

“As I said in June and at other times, I do not see the Fed raising rate this month or year,” Gundlach explained. “If they do, it’s a real problem.”

China, Trump & Trade

Without a rate hike this month, what’s likely to happen to the U.S. equity markets? They will be heavily influenced by what happens in China, he believes.

“The Chinese economy has clearly been weakening,” Gundlach said. “And the [official] GDP is only a guidepost, the leaders admit. It’s probably under the 7.7-8% target.”

As other experts point out, “When the Chinese market sneezes, all others catch a cold,” he reminded listeners. “They are the global engine of growth.”

With conditions as volatile as they are right now worldwide, “We have the leading Republican candidate, it’s not a coincidence, as a protectionist. It’s not good economically to go this route. But this is resonating,” Gundlach said.

When it comes to Trump’s push for the building of a wall along the border with Mexico and imposing different taxes and tariffs on imports from other countries, he stated: “Yes, it raises good points on the unlevel playing field, but a shutdown of trade will not help growth. It could help us in terms of our relative position, but not systemwide for the global economy.”

Yet Trump’s emphasis on issues like China’s development of 130 new airports and lots of “shiny buildings” – which stands in sharp contrast to the fairly dismal state of the U.S. infrastructure – is something to be appreciated, Gundlach says.

He also shot down the argument that China is selling U.S. Treasuries to support its currency: “This is wrong,” Gundlach explained, while discussing a chart that outlined the maturity structure of U.S. debt held by foreigners.

According to June 2014 figures from the Federal Reserve, which he referred to, nearly 66% of U.S. Treasury holdings by foreigners have maturities of four years or less.

While discussing economic weakening and volatile markets in China, Gundlach mentioned an uptick in arrests there. He also shared a quote from a character in Hemingway’s novel “In Our Time:” ”I’m going to stay with you. If you go to jail, we might as well both go.”

Energy Prices, Puerto Rico

As for oil prices, Gundlach sees West Texas Intermediate crude trading in the near term at about $55 per barrel and is very bearish on the commodity, given the fact that supply and demand are so out of sync.

“I do not see a big oil rally. There’s a big mismatch” in production and consumption, and production in recent months has “come down a little but not much, Gundlach explained.

He is bullish, though, on Puerto Rican bonds, which have constitutional protection. Thus, investors could be paid 85%-100% along with 8% a year.

“The period of maximum rhetoric harming the bonds has passed,” Gundlach said.

— Check out BlackRock’s Rieder: Fed Should’ve Hiked Rates Months Ago on ThinkAdvisor.


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