Jeffrey Gundlach: 10 Troubling Economic Signs to Watch

2. Consumers are piling on debt.

Contrary to some expert views, rising consumer credit isn't a positive sign for the economy, Gundlach said, adding that inflation is causing people to take on more debt.

“People do not wake up and say, 'I’m going to run up my credit card today.' They're running it up because of inflation, food prices, energy prices, higher rents, higher used car prices until recently etc. ... They're buying certain necessities on borrowed money and next month they're going to have to do it again but pay the interest," he said. "As the Fed raises interest rates the interest payments will go higher on revolving credit."

Delinquencies are rising in the consumer market and are most pronounced in credit cards, according to Hsu. “The consumer is triaging its liabilities," the portfolio manager said.

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3. Strong jobs data this week could mean a bigger rate hike.

If the employment data to be released Friday comes in at and or higher than expectations, "it's a lock" that the Fed will raise its benchmark interest rate by another 50 basis points, Gundlach said.

Gundlach showed a chart of data since 1987 showing that the Federal Reserve's target interest rate closely follows the 2-year Treasury rate.

While the chart showed a rate above 4.8% as of Monday, and the upper bound of the Fed's target rate at 4.75%, he noted that as of Tuesday, the rate on 2-year Treasurys had climbed to 5.01%.

"So it's gone up another 25 basis points in just the last couple of days," corroborating forecasts that the federal funds rate will again move higher when central bankers meet later this month, he suggested.



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4. Leading economic indicators look ominous.

"The leading economic indicators are now very recessionary," and "the momentum continues to be gathering on the downside," Gundlach said. "It looks to me like maybe we're two months into a recession," although more corroboration is needed, he added.

Gundlach cited various indicators suggesting a recession is near or perhaps here already.

The Purchasing Managers' Index suggests "the recession's going to start, like, today," and the Institute for Supply Management's New Orders Index also indicates "we're very close to a recession," Gundlach said.

The 2-year/10-year Treasury yield curve typically steepens before a recession, and that hasn't happened yet, "so that's one indicator that suggests the recession probably isn't upon us now but is likely to be upon us sometime in the months ahead," he said.

ISM manufacturing prices paid data do suggest that inflation will come down, he noted.

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5. The Fed expects unemployment to rise.

While unemployment is now at a low 3.4%, the Fed's rising unemployment forecast indicates “a recession, and not a real mild one,” according to Gundlach.

Gundlach also cited economist Danielle DeMartino Booth as saying that 74% of the U.S. population live in states with job losses. "So the aggregate data looks pretty strong, obviously, but there's definitely dispersion among the states,” he said. “The conditions underneath the surface are nowhere near as strong as this very low unemployment rate suggests.”

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6. Fed tightening is a negative sign for FANG stocks.

The FANG+ index, comprising about 10 tech stocks including Meta, Apple, Amazon, Netflix, Microsoft, Google and Tesla, closely corresponds to the Fed balance sheet, according to Gundlach.

With the Fed committed to quantitative tightening, he said, "one should not own the FANGs based upon this very powerful correlation."

The FANGS were high flyers and people got slammed in them, and that will happen again as the Fed raises interest rates, Gundlach said.

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7. An increase in volatility looks likely.

The VIX, the CBOE's volatility index, often moves in fairly in sync with the 12-month U.S. recession probability, but not this time, Gundlach said, noting that the VIX now looks "really depressed versus the recession probability.

He expects the VIX to rise, noting that “we know from history that the VIX goes up typically when the market is losing value.”

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8. Rising mortgage rates are making housing less affordable.

Housing affordability is at a record low, with housing less affordable now than in 2006, the previous least affordable housing market, but "without the garbage financing" in the market then, Gundlach said.

Prices are appreciating but there's little affordability as new mortgages are now being written at 7%, a big increase over the previous 3% on long-term mortgages. Monthly payments for first-time homebuyers have risen significantly in the past year and a half, he noted.

Risk is low for mortgage-backed securities, and "mortgages offer some of the best risk-adjusted yields in memory," he said.

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9. It's time to exit lower-level high-yield bonds.

For investors owning the lower reaches of high-yield bonds, it's an "excellent time to get out of it,” Gundlach said.

"You've been lucky to be a survivor this long," he added.

Gundlach cautioned to look for rising defaults in corporate high-yield bonds, given that banks have tightened lending standards. He showed a chart indicating that defaults in corporate high-yield bonds historically have risen when banks tightened lending standards, with a 12-month lag.

High-yield defaults will be somewhat delayed by previous low interest rates, although that's not the case with bank debt, he said. Once that delay is over for high-yield debt, however, if the economy is struggling with high interest rates and weak GDP, "we will have the highest default volume of all time. That's the conclusion I've come to thinking this problem through." <

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10. The U.S. deficit and Social Security need fixing fast.

The U.S. government needs to get serious about its unfunded liabilities, which are seven times the country's nominal gross domestic product, and about addressing the Social Security funding issue Gundlach suggested.

"I feel like we're getting to a moment of awareness on the deficit situation ... prompted by the Social Security trustees themselves admitting that under the current condition they're going to run out of money in about nine years. And of course that prediction does not assume a recession, which is almost a metaphysical certitude sometime in the next nine years," he said.

"So they're probably going to run out of money for Social Security, not by the 2024 election but I'm going to go out on a limb and say it has to be addressed by 2028," Gundlach said.

As for the federal deficit, “It's no longer your grandchildren's problem, it's our problem in real time, in just a few years, and we will address it," he added.

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