DoubleLine CEO Jeffrey Gundlach believes there is a 40 percent to 45 percent chance of a U.S. recession in the next 6 months and a 65 percent chance of one in the next year.
The widely watched fixed-income investor said on a webcast yesterday that Europe and other parts of the global economy have displayed chronic weakness since the first half of 2018 and now the slowdown in those economies is starting to show up in America.
In the Eurozone, new export orders have fallen more than one-third since early 2018. South Korea, which is one of the world’s leading exporters, so its equity market can be viewed as a proxy for global trade. South Korean stocks surged about 40 percent following President Trump’s election victory and then give all of the gain back in the last year. “We are starting to see real effects” of the global slowdown and tariffs have “something to do with it,” Gundlach said.
Gundlach said it was “extremely probable” the Federal Reserve would have to cut interest three or four times in the coming months. However, he doubted they would announce a rate cut when they meet next week. A more likely date to lower rates probably would come at the Fed meeting in July. A cut by September is “almost a lock.” He added it was possible one of the rate cuts could be 50 basis points.
The U.S. central bank faces a difficult “balancing act.” He thinks the Fed will focus on inflation in their remarks next week, though he said they could also blame global trade frictions for “their muddled message” and all-around confusion. There is a “huge diversion,” he observed, between the Fed’s upbeat outlook for the U.S. economy last year and where they are now.
Trump “kind of folded” on his threat to raise tariffs on Chinese goods and services by 5 percent a month, Gundlach said, voicing worries it “may embolden China” to take a harder line. But the president is highly unpredictable.
Gundlach noted there is a theory Trump is “so diabolical” he might be trying to force Fed Chair Jay Powell to cut interest rates. Another theory is that the president might raise tariffs further this year to slow the economy so he can cut them in 2020 to jumpstart business activity as he runs for re-election.
As for equity markets, Gundlach noted that every time there has been a recession since 1990, three of the world’s four major stock markets reached a peak that it has never since surpassed. In 1990, it was Japan, followed by the Eurozone in 2010. Emerging markets almost rose beyond their 2007-2008 high in the last two years, but they didn’t make it. The implication was that such a fate might await U.S. equities following the next recession.
“The FANGs are underperforming,” he said, and that’s “not a good sign.”
When the next recession arrives, Gundlach suspects the trillion-dollar federal budget deficit could become a serious problem. That deficit is currently 4.7 percent in an economy that is still growing.