Stop me if you’ve heard this one before: Jeffrey Gundlach believes the U.S. is headed toward a recession.
In comments made during a Tuesday evening webcast, the DoubleLine founder and CEO, often a reliable market pessimist, reiterated calls made in recent months that growth will turn negative in the near future. However, unlike the calls he’s made earlier this year, this one offered no strict time frame for a contraction or claim that it is imminent.
“It isn’t imminent, but the conditions for a recession are ripe,” Gundlach said, pointing to declines in new orders by the Institute for Supply Management and delivery delays, a persistently inverted Treasury yield curve, and tightening lending standards.
In March, Gundlach warned investors that leading indicators showed “momentum is building” for a recession. He later doubled down on Twitter, saying the inverted Treasury yield curve was sending “red-alert recession signals.” Those comments came after he made calls in February and January that economic conditions would deteriorate enough to cause the Federal Reserve to start lowering the federal funds rate before the end of the year.
Most of the indicators cited by Gundlach, perhaps with the labor market and consumer expectations as exceptions, “look pretty bearish.” Any rise in unemployment in the coming months is “probably a recession signal.”
At the same time, the public is just beginning to feel the financial crunch, said Gundlach, citing surveys that registered a deterioration in financial sentiment among households, and a marked “deterioration” in white-collar, upper- and middle-management jobs hollowing out a key portion of the economy. Higher-income people are starting to feel negative after-tax income and salary growth.
Tightening lending standards and contracting loan growth will start to squeeze financially fragile businesses, said Gundlach, and the pace of failures will likely accelerate. At the same time, risky assets built into banks’ investment portfolios, like commercial real estate, could precipitate more bank failures.
Inflation Eases
But Gundlach wasn’t all negative on Tuesday. He also noted progress being made in the Federal Reserve’s fight against inflation, marked by a decline in the money supply and stabilizing hourly wages.
While strong employment numbers will likely support a hawkish Fed, Gundlach believes interest rate hikes are probably done for the time being.
Gundlach also offered up his preferred portfolio—one that is, unsurprisingly, heavy in fixed income.
“I think bonds are a superior asset class right now,” he said. “I advocate creating a 30%-60%-10% portfolio—30% stocks, 60% bonds, 10% real assets—and the real asset I like is gold, which is up this year but has had a hard time staying above $2,000.”
Addressing the Debt
Looming behind all of the economic data Gundlach served up in his presentation was a dire warning for investors and policy makers: Act on the budget deficit and the national debt.
“Now we have abandoned fiscal rectitude once again. Here we are in an economy that’s supposedly growing, but we have a 7.3% budget deficit as a percentage of GDP, and you can see that it’s climbing very quickly,” he said. “We can guess, with the bill that just passed, that we won’t see much movement in a positive direction of trying to balance the budget, so we’ll probably be headed towards a bunch of bigger deficits as a percentage of GDP—particularly if we go into a recession.”
At the same time, persistently higher interest rates are increasing the cost of servicing the growing debt, said Gundlach. With the probability of recession going up, the time to address deficits is now.
“The way the debt ceiling discussions went down shows that even politicians have to start admitting that these issues have to start getting addressed, and not 10 years from now. They have to be addressed in the next two years,” he said.
