The day of reckoning for many overleveraged American companies is fast approaching, DoubleLine CEO Jeffrey Gundlach said Tuesday on a webcast. That’s a major reason why the talented fixed-income manager thinks the junk bond universe could expand dramatically during the next economic downturn.

If this happens, the fallout could spill over into many global bond and equity markets. As far back as 2012, Gundlach was warning of a debt trainwreck unfolding late in the decade, when all the 10-Treasury debt issued between 2008 and 2011, when the federal government was running trillion-dollar deficits, had to be refinanced. Then in 2013, many American companies embarked on debt-financed stock buyback programs.

For corporate America, strong balance sheets will be the key to survival over the next four years as there are many companies that didn’t borrow to repurchase shares. But as the bond market confronts wave after wave of corporate and Treasury debt refinancings the picture won’t be pretty for companies that leveraged themselves to repurchase their shares. Buybacks have turned many parts of the equity market into an “ever-thinner residual” that shares characteristics with collateralized debt obligations (CDOs), Gundlach said.

The rudest surprise could hit investors who buy the first serious decline in high-yield bonds when they suddenly look like a bargain. Gundlach predicted these investors could face the same fate as those who bought subprime bonds in the early stages of the financial crisis.

“People who buy the dip could turn into sellers,” he said, adding “that’s exactly what happened with subprime.”

There is about $1.8 trillion in triple B-rated corporate debt (one level above non-investment-grade) and much of it could be reclassified as junk, Gundlach said. After all, 62 percent of triple B debt would already be rated junk if traditional leverage measures were applied.

If prices for these bonds start slipping, Gundlach questioned “who is going to buy [them]?” He openly wondered what might happen if there were a buyers’ strike during a recession. It is worth noting that in November the booming junk bond market ground to a halt and not a single issue was sold during the month.

One major indicator of a recession is widening spreads between Treasurys and high-yield bonds. Gundlach noted they widened significantly in December and have tightened in recent days. And if there is a silver lining, it's that they resemble the period leading up to the 2001 recession more than the period before 2008 crisis. At present, the relationship still could be “a false positive,” he added.

Few triple B-rated bonds matured in 2018, but that is changing. In 2019, fully $619 billion of investment-grade debt needs to be refunded, followed by $714 billion in 2020, $707 billion in 2021, $606 billion in 2022 and $505 billion in 2023.

Credit downgrades could exacerbate any liquidity problems.  This is happening at the same time the Fed is engaged in quantitative tightening, or deleveraging its balance sheet, while the supply of Treasurys “is exploding,” Gundlach noted.

The Federal deficit is significantly larger than the government is reporting, Gundlach said, noting that it grew $1.27 trillion in the last fiscal year when flood relief payments, various military and off-balance sheet Social Security payments are factored in. According to his calculations, federal debt grew at 6 percent last year, topping nominal GDP growth of 5 percent. It raises the question, “are we growing at all” or “just adding debt,” he said. For the current fiscal year, the real deficit is on track to reach $1.832 trillion.

While most other economic measures like the Conference Board's Leading Economic Indicators point to a slowdown, not a recession. Gundlach has in the past said the Fed is on “a suicide mission,” trying to raise interest rates while debt is ballooning simultaneously. One implication of his reasoning is that the bond market is likely to demand higher interest rates on its own and doesn’t need the Fed to force the issue and exacerbate what could be a major global debt problem.

Fed chairman Jerome Powell is demonstrating increased sensitivity to markets, as indicated from his remarks Friday at an American Economics Association panel with former Fed chairs Ben Bernanke and Janet Yellen. Any suspicions that Powell might be less inclined than his predecessors were dashed. According to Gundlach, he did “a complete capitulation.”

Still the damage inflicted by Powell’s talk of multiple interest rate hikes has been done. “Just ask the S&P 500 on October 3,” he said. That was the day the index peaked and the day Powell said the Fed rates were “a long way from” neutral.

One year ago, Gundlach said the S&P 500 would post its first decline in a decade in 2018 and he was right. He has also predicted the S&P has put in its high for the cycle. That remains to be seen and he acknowledged people who bought the fourth quarter dip in equities “are feeling good today.”

But one aspect of the recent correction is different this time. Usually, when markets turn down, the S&P 500 outperforms emerging markets. Since the S&P entered a sharp correction in the fourth quarter, emerging markets have performed much better. Gundlach said it could be “a harbinger of change.” As for Europe, he said it “seems to always be a value trap.”

Recent conversations among economists have obsessed over the relationship between a yield curve inversion and recessions but Gundlach questioned whether the connection was as powerful in today's near-zero interest rate environment as it was in past cycles. Japan has experienced six recessions since 1990, many without inverted yield curves, in extremely low interest rate conditions.

Many observers also viewed the December jobs report as a positive signal that a recession was far off in the distance. Looking behind the numbers, Gundlach said it appears many of the jobs are going to older people who can’t afford to retire, comparing it to the phenomenon in the late 1960s when many housewives felt compelled to re-enter the labor force to make ends meet.

Other December economic news revealed the largest layoffs ever recorded among construction workers, though this data series is only 13 years old. Mortgage applications were at their lowest levels in 18 years, confirming the weakness in housing.

However, consumer household debt is much lower than it was in 2008. Gundlach didn’t say it, but Americans may be in a better position to handle the next recession than they were a decade ago.