(Kitco News) – The state of the global economy has emerged as a primary concern in the minds of investors around the world, and according to one CEO, prolonged higher interest rates in the U.S. could lead to a recession as soon as this year.
According to Jeffrey Gundlach, the chief executive of investment management company DoubleLine Capital, there are signs of trouble brewing in the U.S. economy – including rising credit card delinquencies and softer retail sales data – which suggest the possibility of an economic contraction is more imminent than the risk of an inflationary rebound.
"There's a lot of recessionary signals out there," he said while speaking at a webinar hosted by David Rosenberg, founder and president of Rosenberg Research. "There's more of a recessionary feel than an inflationary feel.”
The ‘Bond King’ added that he was staying away from the riskiest parts of the corporate debt market, such as triple-C rated companies' bonds and private credit investments, as he expects companies' debt defaults to surge.
When it comes to private credit, Gundlach warned that investors looking for higher returns in private markets rather than in public debt markets run the risk of remaining stuck with illiquid assets in case of a sharp economic slowdown.
"There is no factor on which private credit looks better than public credit at the present moment,” he said. “It's riskier, it doesn't have the same reward, it's the absolute worst.”
For this reason, Gundlach said DoubleLine is heavily exposed to U.S. government debt.
"We have more Treasuries now in our strategies than we've ever had," he said, despite concerns over rising U.S. debt levels and soaring government interest debt payments caused by higher rates.
Gundlach suggested that, over time, a growing debt burden could lead to the need to restructure U.S. government debt, which is why he focuses on low-coupon Treasury bonds.
“I've got this crazy idea that I want to buy only the lowest coupon Treasuries ... because if I have a very low coupon Treasury, I don't have to worry about being restructured," he said. "I worry that the federal government might be forced to restructure the Treasury debt.”
As for other trades that Gundlach is eyeing, he said, “Commodities could be your real asset play,” during a separate interview with DoubleLine Captial portfolio manager Sam Garza.
“Gold is getting long in the tooth… I think it's up about $40 today,” he said during the May 23 interview. “It’s just amazing. Gold was one of my number one recommendations for 2024, but I sure as heck didn’t think it was going to go up 25% in three months.”
When asked if he had any speculation on why gold has gone on this run, Gundlach said, “I think there is just growing awareness that developed country governments are completely out of control.”
“I feel like the average person is starting to realize the gravity of this problem… that we are running on a debt-based scheme with no end in sight,” he added. “And I just think that people are starting to think that, ‘Maybe I should own something that is real money.’”
“It’s probably not a coincidence that Bitcoin is up a lot too, on a year-to-date basis,” he added. “They are both part of the same phenomenon. Also, the animal spirits were out there, too with Nvidia momentum. Bitcoin certainly plays into that as well.”
Gundlach also warned that Social Security will run out of money within four years if the program isn’t restructured. “I’m going to say that Social Security runs out of money without a restructure by 2028,” he said.
