One of Warren Buffett’s more pungent observations holds that when the tide goes out, we’ll find out who is wearing a bathing suit. DoubleLine CIO Jeffrey Gundlach told advisors on Tuesday that when the next economic downturn arrives, more than a few corporate bonds could find themselves dangerously exposed on some variant of Buffett’s proverbial “nude beach.”

Conventional wisdom contends that the U.S. economy is the envy of the world, growing at or near 3 percent with unemployment at the lowest level since Neil Armstrong walked on the moon in 1969. But both Gundlach and economic consultant Danielle DiMartino Booth believe there are numerous problems lurking beneath the surface of the American business climate.

Both experts were interviewed by DoubleLine deputy CIO Jeffrey Sherman, who asked Booth about her take on the U.S. economy and whether anything had changed in the last four months when markets were spooked about a looming global slowdown. The big change, she said, was “liquidity, liquidity, liquidity.”

Worried about a serious deterioration in growth, China’s leaders decided to “throw gasoline on the fire” with new stimulus, she said. That sent a signal to American CEOs that they could revert to their default strategies for capital allocation—the stock buybacks that have fueled this decade-long bull market run.

Policymakers, in Booth’s view, are being “prodded and pushed” to keep the party going. Back in September 2017, Booth noted the U.S. auto industry was in a recession. Then fiscal stimulus and other factors managed to maintain sales at a reasonable level. But over the last nine months, Booth argued the economy has seen corporate layoffs increasing, while activity in the auto and rail sectors are moderating and prices in the big oil rig market “are crashing.” None of this has stopped the U.S. stock market from staging “the most violent, rapid rebound” in history since Christmas Eve.

From Gundlach’s perspective, it seems like we “are living in a twilight zone.” A key Citibank measure tracking changes in monthly data and comparing them to 12-month moving averages has “cratered since the beginning of 2018.” This index tends to lead GDP.

Still, Gundlach pointedly did not predict a recession. But the conversation on the economy is approaching the absurd, he argued. Last Friday, Vice President Mike Pence spoke in glowing terms about the roaring economy and then called upon the Federal Reserve to reduce the Fed funds rate by 100 basis points.

Gundlach called the vice president's performance "embarrassing." Others have also noted the incongruous disconnect between the Trump administration’s constant calls for lower interest rates and simultaneous boasts that the current economy is the greatest in history. Statistics indicate that the U.S. created more jobs in the 26 months before Trump took office than it has since in the 26 months since January 2017.

What about the roaring bull market in equities? It “hasn’t gone anywhere in 15 months,” observed Gundlach, who did not back away from an earlier prediction that the S&P 500 would fall below the 2,350 level of Christmas Eve.

Gundlach noted that his favorite equity market index, the NYSE Composite, peaked in January 2018 and failed to return to its high last October or in recent weeks, when certain other indexes did set new highs. Like Booth, he believes the volatility global markets experienced in the fourth quarter were strongly related to China slowing and stimulating.

Another disturbing development is that any talk about the national debt has disappeared from anyone’s radar screen. Markets have prompted Fed chairman Jay Powell to reverse course and become “policy fluid,” Gundlach said. “Once you do that anything can happen.” Around the world, some central bankers think they should decide the price of mortgages. “Why shouldn’t the Fed determine the price of soybeans?” Gundlach asked rhetorically.

Both Booth and Gundlach cast some doubt that the 3.2 percent GDP growth number for 2019’s first quarter was as strong as it looked. Among the fishy statistics was the GDP deflator. “A lot of math went into that number but not a lot of strength,” said Booth, who has written recently about consumer weakness.

Gundlach interpreted the upbeat reaction to a surge in consumer borrowing as a sign of complacency and denial. “Everyone says it’s a great thing because it shows consumers are feeling great,” he noted. “Consumers are actually falling behind.” That is showing up in weak retail sales.

At this point, Sherman brought up the state of the credit markets. Booth, who had served as an advisor to former Dallas Fed President Richard Fisher, commented that current Fed chairman Jay Powell comes out of the private equity world and is focused on the credit markets. What happened last fall when the S&P 500 fell 19.8 percent isn’t what scared Jay Powell, she said. What left him queasy was that 14 days after GE bonds traded into junk territory on Halloween, the junk bond market “absolutely shut down.” It stayed shut—with not a single issuer able to sell new junk bonds—for 41 days.

A huge amount of triple B-rated debt (one level above junk) “lives in the private equity world,” Booth continued. “Some junk bonds trade by appointment only. No one knows what will happen if we see a daisy chain of liquidations.”

Gundlach added that if the rating agencies applied traditional yardsticks, 45 percent of triple B bonds would be rated as junk today. With uncertainty so pervasive, he maintains that the bond market is very worried that in the next recession, interest rates could head higher. For this to happen, the Fed would have to lose control of the bond market, an event some have prophesied.

Come the next recession, there are likely to be calls for more QE, or its distant cousin MMT (Modern Monetary Theory) or a Universal Basic Income (UBI), which is garnering a favorability rating north of 40 percent in many polls. Gundlach noted that obscure presidential candidate Andrew Yang wants to give every American, including Jeff Bezos, $1,000 a month. Yang doesn’t believe it will act as a disincentive to work. “What he is saying is they’ll buy more organic vegetables.” Gundlach suspects they’ll “buy more beer.”

That said, he voiced sympathy with millennials laden with student loan debt. They see corporations getting big tax cuts and billionaires on Wall Street getting bailed out. With millennials wielding more electoral clout, Booth jokingly predicted that by election day, there might be a bipartisan agreement to forgive all student loan debt.

Sherman noted that the Fed had typically lowered the Fed funds rate by 4.0 percent to 5.0 percent in recent recessions. Were it to do so next time, it would require negative rates.

Experimenting with negative rates in America could prove catastrophic in Booth’s view. That’s because there are so many different federal and state financial entities here. “You are talking about trillion-dollar industries [and entities] that would disappear overnight” like the state of Illinois. Pensions would be screwed in many places.

Insurance companies would also be victims of negative interest rates. Gundlach related a conversation he had with a Swiss insurance executive, who said “our definition of success is trying to [extend] our bankruptcy.”

At the end of the event, Gundlach was presented with four dark clouds on the horizon—U.S. municipal pension finance, the European banking system, American corporate debt or student loans—and asked what would be the next shoe to drop. Problems in municipal finance are underappreciated, he acknowledged.

The corporate bond market will become an immediate problem when “GDP goes negative,” he said. “Like Warren Buffett says, when the tide goes out,” it could become “a nude beach out there.”

But the European banking system, already shaky, is his worry No. 1. Unlike America, Europe doesn’t have any room to cut interest rates. Short of a debt jubilee in which a huge amount of European debt was forgiven, it's hard to imagine what the ECB could do.