Given that Jeff Gundlach called Donald Trump’s election win in 2016, business networks are in the habit of badgering him for predictions about 2020.
Just recently, for instance, CNBC’s Scott Wapner asked Jeff to weigh in, and while Gundlach was reluctant to call it this early in the game, he did offer some interesting comments about the president’s penchant for saying things that aren’t necessary true about the economy.
“That’s what he’s about: bragging about the economy”, Gundlach said of Trump, before delivering the following rather scathing assessment:
He keeps talking about how the jobs have never been created so much ever in history. Except for one little fact: If you take the number of months Trump’s been in office and take the average nonfarm payrolls and compare it to the same number of months at the end of the Obama president, there were more under Obama!
He wasn’t done. Jeff went on to critique the role of social media in the post-truth era. “It’s unbelievable the twilight zone that we’re sort of living in, where people just say things and it gets repeated”, he lamented. “I think probably we’re numb to that because of social media.”
That was on May 7. Fast forward six weeks and Gundlach delivered a fresh interview, this time with Fox Business. Suffice to say he had something very interesting to say.
Specifically, Jeff told the network that Trump might actually drop his bid for a second term.
“I am not even sure he’s going to really run”, Gundlach said. “If the economy goes into recession and he can’t pull out by removing the tariffs, there’s very little for him to run on.”
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As you can see, Gundlach was not impressed when Fox reminded him that Trump kicked off his reelection bid in Orlando on Tuesday night. Rather, Gundlach just cited Lyndon Johnson and said “things can change.”
He went on to reiterate that as long as the economy holds up, Trump will probably win, but that’s a big “if” right now, and the president isn’t helping his own cause by keeping trade tensions on the boil.
Remember, one of the primary reasons Trump has stayed on Jerome Powell’s case is that the president believes the Fed could doom his reelection chances. With the curve having inverted, the “normal” lag between inversion and recession does not bode well for Trump.
In March, Deutsche Bank looked at the history of 3m-10y inversions and elections. Here’s an excerpt from that note:
Figure 1 is the [3M-10Y] curve 18m before [an] election. The x axis shows the 10y minus 3m yield curve in basis points. The dots on the positive side of the y axis are labeled with the President’s name, and occurred when the President of the same party as the previous term was elected – i.e. the incumbent’s party won again. The dot on the negative side of the y-axis, are elections where a President from a different party to the incumbent President won the election. The red dot is the median for each occurrence – when the incumbent’s party won again, and when they lost.
The straightforward takeaway is that the red dots (the medians) do in fact suggest that a flatter curve 18 months prior to an election “implies some greater propensity for the curve to foretell a change away from the incumbent President’s party”, Deutsche Bank’s Alan Ruskin said.
Ruskin continued, noting that “currently, the curve’s message is rather simple and suggests that come the 2020 election, the electorate may well be demanding new economic ideas in the face of a slowing economy, that in turn may produce more ‘out of the box’ thinking than in traditional campaigns.”
Unfortunately, Trump has exhausted the capacity of fiscal policy with his misguided plunge into late-cycle stimulus. “Coming as it does against a backdrop of unusually large cyclically adjusted budget deficit for at least the next 5 years, this is otherwise, a far from propitious moment to ‘prime the pump’!””, Deutsche’s Ruskin exclaimed, underscoring the point.
He’s right. And as we said in March, that means Trump will invariably lean even harder on the Fed.
With rate cuts now in the cards, the president looks like he will indeed get some help from monetary policy. But if that doesn’t work, Trump will either have to figure out a way to resort to even more fiscal stimulus (deficits and discipline be damned) or, as Gundlach suggests, drop out, assuming the economy rolls over.
There is, of course, another possibility. Trump may just refuse to lose, Erdogan-style. But we’ll leave that discussion for another time.