Influential bond investor Jeffrey Gundlach, the CEO of $150 billion DoubleLine Capital, sees trouble brewing in the debt market, despite interest rates hovering near historic lows.
In a recent discussion with Yahoo Finance, Gundlach compared the current expansion to the boom that took place nearly 100 years ago. But the next decade will be the opposite of the roaring 1920s, he said, as the debt bomb the U.S. is sitting on becomes untenable in the next economic downturn.
"It's pretty interesting because the 20s in the 20th century, the 20s were super boom times. And weirdly, I think the 20s this time will be very much different than that, with real turmoil," the 60-year-old billionaire said in a recent wide-ranging interview with Yahoo Finance.
In Gundlach's view, the 2020s will see "the crescendo" of many unattractive trends that have been talked about for years, but finally come home to roost.
"[We're] going to have to face Social Security, health care, all of these things, deficit-based spending — all of that is going to have to be resolved during the 2020s because the compounding curve is just so bad," the billionaire added.
According to the Congressional Budget Office, the federal deficit will top $1 trillion every year beginning in 2022. Yet Gundlach said the agency’s forecast may be too rosy, given that it assumes a "pretty benign future" with no recession and interest rates that are not very high.
Interest costs to the government, as a percentage of gross domestic product are expected rise from 1.25% to at least 3% by 2027. “That's a big, big increase. And that's coming,” the investor told Yahoo Finance.
“And when you do that, it kind of says, ‘Hey, GDP is going to be knocked by 2%-2.5% because we have to pay interest,’” he added.
Debt, recession and downgrades
The bond investor, who has been critical of Fed Chair Jay Powell, thinks that the central bank is aware of this outcome — one reason why there’s been talk about large scale asset purchases in the next recession, he said.
It’s “because they know that this problem is going to really hit the headlines when the next economic downturn comes, and I think it's foolish to believe that there will be no economic downturn for the next ten years considering where we are right now,” he added.
Gundlach is one of a few investors who sounded the alarm in subprime that led up to 2008's credit crisis. In June 2007, he said subprime "is a total, unmitigated disaster, and it's only going to get worse."
He successfully navigated the credit crisis for his clients and put money to work in beaten-down mortgage bonds in 2009 and significantly outperformed.
But Gundlach believes the next crisis will be more severe — and it will be in corporate credit, where companies are holding record levels of debt on their books. He also pointed out that the corporate bond market "probably significantly overrated, which sounds a lot like subprime in 2006."
When the next downturn hits, companies won't address their leverage ratios, and there will be "en masse downgradings" in the investment-grade corporate market, resulting in "significant divestment of a lot of naive money,” the investor warned.
For that reason, Gundlach argued that now is the time for investors to be playing defense. He recommended that "corporate bond exposure should be at absolute minimum levels right now.”
It's also Gundlach's contention that in the next recession, U.S. stocks will get "crushed" and never recover to pre-crisis levels in the remainder of his career.