DoubleLine Capital CEO Jeffrey Gundlach said Federal Reserve Chair Jerome Powell has become “policy-fluid.” This stance, the Fed’s limited toolkit and other factors — such as ballooning U.S. debt — mean the U.S. economy will be quite vulnerable when the next recession hits.

“Any thoughtful person would be concerned,” he said during a webcast on Tuesday. Combining these issues with the impact of tariffs, “It’s sounding like a pretty bad cocktail of economic risk, … and risk to the long end of the bond market.”

The Fed’s dovish position on interest rates of late may have boosted stocks, but it gives it less room to maneuver on the downside. “It seems like the economy can’t handle a 2.5% fed funds rate,” Gundlach said.

The Bond King puts the odds of a Fed rate cut over the next 12 months at roughly 70%.

As for the chance of a recession in the next two years, he said that “would be extremely high.” “For the next 12 months, I’d give you a recession probability that’s 50-50. Next six months, I’d probably have it down at 30%.”

Speaking about the U.S.-China trade war, the wisdom of Trump’s approach “depends on the outcome,” Gundlach said.

“Tariffs loom very, very large,” he added. “This is a standoff of the two largest economies in the world, which doesn’t sound like a good thing. We are headed for [more] volatility in bonds and stocks as well, I think.”

Drowning in Debt

Overall, the DoubleLine leader stressed the problem of having a national debt level equal to or greater than GDP.

“We are in a debt-based economy,” Gundlach said. “We need to stop it. That will be painful. But the longer the delay, the greater the pain.”

U.S. growth, he explained, seems based completely on government, corporate and mortgage debt.

“Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased,” Gundlach said. “One thing everybody seems to miss when they look at these GDP numbers … is that the growth in the GDP [which] looks pretty good on the screen is really based exclusively on debt.”

With financial markets “addicted to Federal Reserve stimulus,” he described “very, very dangerous times” ahead when the next U.S. recession hits.

Plus, Gundlach added, the bond market is “extremely exposed” to a downturn in the U.S. dollar. Foreign buyers, he explained, have been purchasing holdings of U.S. Treasuries without currency hedges. And they are “unlikely to up their buying” in the future. 

Meanwhile, interest payments on the debt are expanding, according to projections from the Congressional Budget Office. “They are looking to go from 1.25% of GDP to 3% in the next six or seven years,” he said. “And that comes right out of economic growth. Why are we not talking about it?”

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