DoubleLine's Jeffrey Gundlach predicts possible recession in next 4 months

Author Erin Arvedlund

Erin Arvedlund is Pensions and Investments' enterprise editor based in New York. Prior to joining P&I, Ms. Arvedlund was most recently a business columnist at The Philadelphia Inquirer, launching her "Your Money" column in 2011. On May 7, 2001, Barron's published Ms. Arvedlund’s article "Don't Ask, Don't Tell: Bernie Madoff Attracts Skeptics in 2001." Her deep-dive investigation questioned Madoff's scheme, his demand for investor secrecy and his "enviably steady gains." That early work in covering Madoff laid the foundation for her first book, Too Good to be True: The Rise and Fall of Bernie Madoff, was published in August 2009. Arvedlund also wrote a book on the Libor scandal, Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions, published in September, 2014, covering how the London Interbank Offered Rate (Libor), a primary benchmark for short-term interest rates around the world, had been manipulated by major banks across the world.

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Mar 17, 2023

6 months ago

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Jeffrey Gundlach, founder and chief executive of DoubleLine Capital, predicts a recession could come within the next four months, saying the dramatic steepening of the U.S. Treasury yield curve typically precedes an economic downturn.

"In all the past recessions going back for decades, the yield curve starts de-inverting a few months before the recession," he said in a Twitter Spaces audio chat Thursday with Jennifer Ablan, editor-in-chief of Pensions & Investments.

Previously, Mr. Gundlach predicted a recession would arrive in the fourth quarter of this year, but on Thursday's interview, he said "it's too far out. I think it's within four months at the most. Almost every indicator is flipped into high probability. The only one that hasn't is the unemployment rate," currently at 3.6%. When that rate crosses over its 12-month moving average, "it's a reliable indicator you're on the doorstep" of recession, he said.

The inverted yield curve also signals a recession in the offing, said the Los Angeles-based fixed-income manager, noting the 10-year bond yield was 107 basis points below the 2-year yield a few days ago. "That's very concerning if you're looking for growth," as banks will tighten up their lending, he said.

DoubleLine managed $92.4 billion as of Dec. 31.

Mr. Gundlach also weighed in on the failure of Silicon Valley Bank, which collapsed after depositors rushed to withdraw their money and investors feared that losses in Treasuries and other bonds would sink the bank.

"I don't understand why nobody was paying attention to these portfolios at SVB when they're so easy to value," he said. With a succession of speedy rate hikes, "from peak to trough on long-term bonds, the drawdown was 50%. Why wouldn't a regulator be monitoring the portfolio?"

He called Silicon Valley Bank's failure "a rate policy collision with stupid accounting rules" for banks.

There are likely not many more bank failures to come, he said, and the Federal Reserve in response to the crisis will likely raise rates only 25 basis points at next week's meeting.

"By bailing out depositors at SVB, that's essentially a quantitative easing" by the Fed, he said. "Making those depositors whole is about the same as a month or two of reversing quantitative tightening."

However, "if we do get one more bank failure, then I think they'll stay on hold," and not raise rates, he added.

Mr. Gundlach also said Credit Suisse isn't a harbinger of things to come among other Wall Street banks.

"They've been uniquely bad. I'm surprised they haven't merged with UBS," he said.

Reducing credit risk

DoubleLine's current strategy was initiated about 18 months ago, he said.

"We started on a strategy of lengthening maturities and duration of portfolios about a year ago, reducing everything that has credit risk, increasing Treasuries and extending duration," he said.

The stock market is currently in a bear market, he said, and he would sell into any rallies.

Mr. Gundlach predicts the S&P 500 index will trade down to 3,200 (from 3,960 at close of markets Thursday) and reminded investors that "the goal for 2023 is survival, and losing as little money as possible."

His main worry is spreading geopolitical conflicts. "I think expanding wars worries me the most. The Fed is broke. The Fed's balance sheet is negative $1.1 trillion. There's nothing they can do to fight any problems except for printing money. They have nothing left. The Fed used to send money to Treasury. Now Treasury sends money to the Fed. We're at this point in time where we don't have any road left to kick the can on our mismanagement of finances and monetary policy."

Mr. Gundlach said he turned favorable on gold at $1,800 and "it hung around there for a long time. Clearly gold is an inflation hedge." If government spending continues, he predicts "the dollar will collapse under the weight of the deficit."

"I think gold is a good long-term hold, gold and other real assets with true value, such as land, gold and collectibles."

Author Erin Arvedlund

Erin Arvedlund is Pensions and Investments' enterprise editor based in New York. Prior to joining P&I, Ms. Arvedlund was most recently a business columnist at The Philadelphia Inquirer, launching her "Your Money" column in 2011. On May 7, 2001, Barron's published Ms. Arvedlund’s article "Don't Ask, Don't Tell: Bernie Madoff Attracts Skeptics in 2001." Her deep-dive investigation questioned Madoff's scheme, his demand for investor secrecy and his "enviably steady gains." That early work in covering Madoff laid the foundation for her first book, Too Good to be True: The Rise and Fall of Bernie Madoff, was published in August 2009. Arvedlund also wrote a book on the Libor scandal, Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions, published in September, 2014, covering how the London Interbank Offered Rate (Libor), a primary benchmark for short-term interest rates around the world, had been manipulated by major banks across the world.