Remember all the Federal Reserve’s talk about reducing its bloated balance sheet? It’s not happening.

The Fed has now indicated that it will cease quantitative tightening by year-end after modestly shrinking its balance sheet from $4.5 trillion to $3.5 trillion. The Fed's decision to throw in the towel on QT might be the most telling signal about what American central bankers think abut the current state of global fixed-income markets.

“Maybe they are realizing there isn’t anybody to buy all the bonds,” DoubleLine CEO Jeffrey Gundlach said in a webcast on Tuesday.

In his presentation dubbed “Highway to Hell” after the AC/DC song, Gundlach expressed criticism of both Fed chairman Jay Powell and President Donald Trump. Investors are likely to pay the price. Gundlach said that there may or may not be a recession in 2020. But we are still in a bear market, one in which the S&P 500 will fall below its Christmas Eve trough level of 2,350.

Fed chairman Powell’s “turnaround is remarkable.” It took only a few signs of a slowing U.S. economy—and a big drop in equity prices in December—for Powell to completely reverse his outlook for future interest rate increases. So much for the view that Powell would be the first Fed Chairman since Paul Volcker who wouldn’t be intimidated by the financial markets.

During the campaign, President Trump “promised he’d eliminate the national debt [in eight years],” Gundlach noted. “Now we’re adding a trillion dollars a year.”

Over the last year, the narrative has gone from one of a synchronized global expansion to one of a global slowdown. All the surprises in the economic data are coming in to the downside, Gundlach said, although things are not as bad in emerging markets.

The data in Europe “just keep getting worse,” he continued. The falloff in Germany and Italy continues, and their PMI numbers are “awful.” Only France’s PMI numbers are slightly positive and the idea that France can keep the Eurozone in the green seems questionable.

“Global trade has gone negative but we are not in a global recession,” Gundlach said. Others are predicting the Eurozone will fall into a recession this year.

No recession is imminent in the U.S., but the Conference Board’s Leading Economic Indicators have fallen about 50 percent from 7 to 3.5. Gundlach noted they have gone negative before every other recession has started—and right now they are down but a long way from negative. For the first quarter of 2019, the Atlanta Fed is predicting GDP to fall to the 0.3 percent area. But one-time problems like the government shutdown and nasty winter weather are influencing that number and many economists expect a rebound in the second quarter.

Despite the stock market’s impressive rebound this year, many of the market leaders, particularly some FANG stocks, are still down nearly 20 percent. Moreover, he maintained that the S&P 500 would “take out” its December lows earlier in 2019 than it did last year in December.

The job market remains tight and employers are finding filling the slots they have to be an arduous task. That’s why wage growth is starting to take off. But Gundlach maintained the single biggest problem is, sadly, the quality of labor.

The Fed is suggesting that even if inflation were to trend up to the 3 percent area it wouldn’t be a problem. That’s based on the logic that inflation “needs to atone for its past sins” of ultra-low inflation early in decade, a dubious proposition. In Gundlach's view, the fact that there are more $100 bills in circulation today than $1 bills “belies the conventional wisdom” that there is no inflation.

Consumer confidence has rebounded smartly with the stock market. But he observed that while consumers have a rosy view of the present they remain gloomy about the future.

And with the prospect of trillion-dollar deficits looming out there as far as the eye can see, it’s little wonder why. The total debt-to-GDP ratio stands at 210 percent of GDP, up from 170 percent before the Great Recession.

Back in 2011 and 2012, Gundlach noted that the trillion-dollar federal deficits from the Great Recession would moderate to manageable levels until the end of the decade. That’s when the costs arising from baby boomers taking Medicare and Social Security would start to spiral out of control—at the same time as all the 10-year Treasurys sold from 2008 through 2011 needed to be refinanced. Now those bills are just beginning to come due and some projections call for a string of federal deficits exceeding $2.6 billion in the middle of the next decade.

The problem in Gundlach’s view is one of insufficient taxation or overspending. In all likelihood, it’s both. Since 2015, federal taxes have gone from 18 percent to 20 of GDP. Between 1930 and 1945, taxes went from 5 percent to 20 percent of GDP. By the mid-to-late 1940s, the working poor were taxed at a 20 percent rate. While the ultra-wealthy faced a 91 percent rate, nobody paid it thanks to all the loopholes. All this was half a century before entitlements and other mandatory spending consumed two-thirds of the federal budget, or $2.5 trillion annually and counting.

Republicans and Democrats alike couldn’t care less about the deficit. “It will probably change all at once,” Gundlach noted. In 2012, 82 percent of Republicans and 62 percent of Democrats said deficit reduction was important. Today, those numbers have fallen to 54 percent and and 44 percent, respectively.

It reminded Gundlach of the man who jumps out of the Empire State building and says after the first 85 floors, “So far, it’s OK.”

Deficits explode during recessions. He noted that three years after the 2001 recession, the deficit equaled 5.8 percent of GDP and after the 2008 recession it was 8.8 percent. “Long-term rates will have to go up in the next recession,” he said.

He then revealed a chart from the Congressional Budget Office showing that interest expense on the federal debt would rise from 1.25 percent at present to 3.0 percent over the next seven years—and that’s making the heroic assumption of no recession between now and 2026.

That increase in federal debt service cost is equivalent to 1.75 percent of GDP and some of it will be drained out of the real economy. “All this could require some form of QE,” he predicted.

Yet another reason for concern is the rise of the “crackpot MMT” ideas, which are being used “to justify a massive socialistic” spending scheme. These folks believe it’s fine to keep leveraging up your economy as long it keeps growing. “What happened when the economy turns down? There are a lot of lags there.”

Even mainstream economists don't give Gundlach much confidence. The Fed has hundreds of Phd.'s in economics and back in 2007 they didn't seem to have the foggiest idea of what a sub-prime mortgage was.

Gundlach, who predicted President Trump’s surprise 2016 election, said that next year’s election could be even wilder. “You ain’t seen nothing yet,” he noted. And if there is a recession, anybody but the current president could get elected.

With bigger deficits and higher inflation likely, advisors might want to consider long-dated TIPs. He didn’t rule out a boycott of long-term Treasurys at some point.

He also advised investors to be long-term bears on the dollar. President Trump said he’s “address” the trade deficit problem. “He did. It’s up $100 billion,” Gundlach observed.

When it comes to equities, Gundlach reiterated his conviction that emerging markets equities will beat their American counterparts. Since the downturn began, EM stocks are beating their American counterparts. That's unusual early in a market downturn and could be a harbinger of things to come.