Gundlach Reveals His Top Trade For 2019
Never one to shy away from voicing his often radical, contrarian view (he was the first to correctly predict Trump would become the next US president back in mid-2015), DoubleLine’s Jeff Gundlach was the last to take the mic at today’s Ira Sohn conference, where like most other high caliber hedge fund managers, he revealed his top trade.
Starting off in typical whimsical fashion, he prompted a gasp of surprise from the audience when he urged those present to short the 12 low-polling democrats – perhaps on PredictIt – calling them the 1%-ers, in reference to their 1% polling rating.
“No Joe, I don’t want you grabbing my shoulders or giving me an Eskimo kiss,” Gundlach said of Joe Biden while showing a slide with several pictures of Joe Biden being very close to women, titled “Space Invaders”, suggesting that he probably does not see the former vice president emerging as the next leader of the “free world.” He continued the political theme, saying “at least Trump can’t go right at him with a nickname Groping Joe.” Think about how that would sound coming from Trump, the DoubleLine CEO said.
Gundlach also had some choice words for the “1/1024th” candidate, Elizabeth Warren, saying “it’s like being trapped with a mother-in-law from hell. Who wants four years of this? Who wants even four hours of this?”
Gundlach then turned to his favorite topic, the soaring US public debt, and took yet another victory lap, saying that four years ago at this very podium he predicted Trump would win, and that the debt level would explode, and with over $22 trillion in Federal debt today, he was also correct in this particular forecast, although one hardly needs to be a rocket surgeon to figure out the trajectory of US public debt.
Of course, there was a trade off, because if national debt did not explode higher, Gundlach said US GDP would be negative the last three years.
Gundlach also touched on a familiar topic from his latest DoubleLine presentation, namely the surging US debt interest, and echoed what we said last week, warning that he is “concerned” about the future direction of interest rates (as were we back in March).
As a reminder, last week we showed a chart from the latest Presentation to the Treasury Borrowing Advisory Committee, which showed the OMB’s forecast for annual US debt issuance, broken down between its three component uses of funds: Primary Deficit, Net Interest Expense, and “Other.” We said that chart was “troubling” because while in 2019 and 2020 surging US interest expense is roughly matched by the other deficit components in the US budget, these gradually taper off by 2024, and in fact in 2025 become a source of budget surplus (we won’t be holding our breath). But the real red flag was that starting in 2024, when the primary deficit drops to zero according to the latest projections, all US debt issuance would be used to fund the US net interest expense, which depending on the prevailing interest rate between now and then will be anywhere between $700 billion and $1.2 trillion or more.
Of course, both the current national debt and interest expense are tiny compared to what they would look like should MMT eventually become the monetary ideology du jour, and it is no secret that Gundlach does not harbor too many warm feelings for the “Magic Money Tree”, saying that MMT “It’s not modern, it’s not monetary and it’s not much of a theory,” which he may have borrowed from a recent GaveKal blog post.
Countless political and macro tangents aside, Gundlach – who at last year’s Ira Sohn said to buy oil producers and short Facebook – did in fact have a top trade reco for 2019: arguing that since interest rates cannot maintain the low volatility they’ve experienced in the past eight years for an extended period of time, his investment thesis was simple: buy interest-rate volatility on long-maturity U.S. Treasuries via a put-call straddle on TLT.
Quoted by Bloomberg, Gundlach said that “all one needs is a 50 basis-point change in the long-bond in the next year to make money on this trade. Six months from now, if volatility has doubled, investors would have a 40 percent gain even if interest rates haven’t moved”, he said.
“Just the volatility doubling sometime in the next year is very likely to make you money,” he said.
Of course, if rate vol doubles, central banks will be scrambling to mute it as the cascading effect would promptly lead to tremors across all other asset classes, from equities to FX, so in effect Gundlach is urging investors to fight the Fed (and other central banks, who are now all in on vol suppression).
Gundlach’s final words were also familiar to those who follow his public statements: “Respect everyone. Know life is unfair. Take risk. Step-up in the tough times. Face down bullies. Lift the downtrodden. And never, ever give up”…. which of course was not only pulled from his own April 6 tweet, but was also apparently borrowed from the UTexas 2014 commencement speech delivered by Naval Admiral William McRaven.[youtube https://www.youtube.com/watch?v=yaQZFhrW0fU]
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