Tags: gundlach | turmoil | recession | debt

Gundlach: 'Turmoil' to Accompany Next Recession

By    |   Wednesday, 13 February 2019 06:37 PM

Billionaire investor Jeffrey Gundlach warns that skyrocketing debt will only make the next recession that much worse.

“The biggest risk – and it may not materialize for a little while longer — when the next recession comes, there's going to be a lot of turmoil because the corporate bond market is extraordinarily leveraged,” Gundlach told Yahoo Finance’s “The Final Round.”

Citing a study conducted by Morgan Stanley, Gundlach noted that if you were to use leverage ratios alone, 45% of the investment grade bond market would actually be rated junk, Yahoo Finance explained.

The bond king also warned of potential problems in the market for U.S. government debt.

“Also during the next recession, we’re going to have an extraordinary national debt problem because the national debt is growing at a very rapid rate already,” said Gundlach, chief investment officer of DoubleLine Capital, which oversaw about $121 billion as of Dec. 31.

The national debt has passed a new milestone, topping $22 trillion for the first time.

The Treasury Department's daily statement showed Tuesday that total outstanding public debt stands at $22.01 trillion. It stood at $19.95 trillion when President Donald Trump took office on Jan. 20, 2017.

The debt figure has been rising at a faster pace following passage of Trump's $1.5 trillion tax cut in December 2017 and action by Congress last year to increase spending on domestic and military programs.

“If we’re growing [debt] at 6% of GDP, which is what we’re really growing at in terms of national debt during fiscal 2018, during a 3% real economy, then what’s the debt going to grow by during a recession?” he said. “Well typically, the debt-to-GDP ratio goes up about four percentage points during a recession. So it suggests the national debt would grow at around a 10% annual rate if we go into a normal average type of recession. That’s obviously a really big problem.”

Gundlach spoke just two weeks after he warned underlying data in consumer confidence suggest a recession is coming.

Gundlach tweeted late last month after the Conference Board’s confidence survey for January showed the widest gap between current sentiment and expectations since March 2001, the first month of the U.S. recession that year, Bloomberg reported.

Gundlach tracks confidence as a leading indicator of recession. In a Jan. 8 webcast, he said consumer expectations were “flashing yellow” for recession.

Known as a contrarian, he was one of the few money managers to predict that Donald Trump would be elected president and that stocks would fall last year.

Gundlach isn’t alone in his warnings about the economy.

Recession risk is real, according to Nobel laureate Robert Shiller, and one might come as soon as this year, Bloomberg reported.

Whether the U.S. will experience a contraction has become one of the hottest debated topics among investors amid uncertainty surrounding U.S.-China trade talks, deteriorating earnings forecasts and slowing growth around the globe. The ambiguity caused the almost decade long rally in U.S. stocks to come within a whisker of its end in December.

“It seems like there has to be an elevated probability of a recession this year or next year,” the Yale University economics professor said during a panel discussion at the InsideETFs conference in Hollywood, Florida.

“There are these signs that show people are worried. It’s also the longest bull market in the stock market,” he said. “There’s a spirit of thinking –- it aught to come to an end soon.”

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Billionaire investor Jeffrey Gundlach warns that skyrocketing debt will only make the next recession that much worse.
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Wednesday, 13 February 2019 06:37 PM
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