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Gundlach: Tax Cut Timing Is ‘Strange’ and ‘Bond-Unfriendly’

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DoubleLine Funds CEO Jeffrey Gundlach says it’s “a strange environment [for] a tax cut.”

Discussing the Republican effort during a webinar with investors on Tuesday, he admitted that it also is “tough to opine about a tax plan that has not been finalized.”

However, the timing of the cuts and other moves are odd given the current state of the economy, Gundlach explained, versus that of around 30 years ago “when the economy needed a boost.”

Today, “We are in year eight or nine of an expansion, and [the economy is] picking up … and yet [we’re] cutting taxes,” Gundlach said.

“A tax cut will reduce revenue, and it will grow the deficit and therefore, it will probably grow bond supply, and perhaps boost economic growth,” the fixed income fund manager stated.

“And if it does … it is going to be bond-unfriendly. There’s anticipation of a bit more unfriendly bond environment” in the markets, he explained.

The reforms could also hurt buyers of municipal bonds in some markets, such as New York and California, if state and local income tax deductions are eliminated.

“It’s not really a tax cut at all relative to the buyers of the muni market,” Gundlach said. “For them, it’s really a tax increase.”

Commodity Window

Sharing charts on the low state of commodity prices, he shared: “We’re right at that level where in the past you would have wanted commodities instead of stocks.”

They could benefit from further economic growth and output gains. The global economy is “definitely hanging in there,” Gundlach stated.

“If you ever thought about buying commodities, … maybe you should buy them now,” he said, describing the low level of the S&P Goldman Sachs Commodity Index vs. the high level of the S&P 500.

Asked during the webinar about having 10% of a portfolio in gold, Gundlach explained that a broader investment of 10% to 15% in commodities would be preferable.

Yellen’s Future

“It looks like [Federal Reserve Chair] Janet Yellen is going to end up with a pretty good legacy,” Gundlach said.

Yellen, he explained, “got us off of zero [percent], and she started us on the wind down — the quantitative tightening — and so far, nothing has blown up,” he said.

Jerome Powell, poised to take over the role from Yellen if approved by the full U.S. Senate, may have some headwinds when it comes to the pattern of future rate hikes, he says: “I think Mr. Powell is going to find that attaining consensus among the Ph.D. economists is not going to be easy.”

As for what’s next for equities, “It is going to be very interesting to see how the markets can hang on to the easy gains that were made in 2017,” Gundlach said. “It’s just so far, so good. The Fed has tightened four times, they’ve embarked on quantitative tightening.”

He sees the U.S. dollar poised to move down, which is one reason he remains upbeat on emerging markets and bullish on commodities.

The dollar is likely to weaken, Gundlach explained, because Fed tightening could be less than anticipated.

As for the falling yield curve between the 2-year and 10-year Treasury yield, it’s “getting to the point where it’s worth watching,” he said.

With some market participants starting to “explain away the yield curve,” this could signal that the U.S. economy is in the middle of the tightening cycle, not the beginning, he added.

“It’s pretty relentlessly flattening,” explained Gundlach. If the yield curve were to go to zero “then we get a flashing yellow light for a recession.”

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