Gundlach Lowers Recession Risk Odds, Warns on Credit Market

(Bloomberg) -- Jeffrey Gundlach said the odds of a recession have fallen and warned investors to steer clear of corporate debt because of rising risks of a weak dollar.

There’s a 35% chance of a recession by the end of next year, the bond manager said Tuesday. In September, he predicted 75%.

“We’re clearly at a lower level now,” Gundlach said in a webcast about the DoubleLine Total Return Bond Fund. That view is “based upon consumer confidence holding up. Based on the leading economic indicators have not gone below zero and they have always gone below zero prior to any recessions.” he said.

While the bull market shows no signs of abating, investors and analysts have been watching closely for any weakness in the economy. Gundlach’s forecast is in step with economists who see the recession odds at 33%.

Gundlach also reiterated long-standing warnings about the dangers in the U.S. credit market, particularly with BBB-rated debt.

On politics, Gundlach, chief investment officer of DoubleLine Capital, said it’s likely that President Donald Trump will win re-election because the economy will likely avoid recession and the field of Democratic candidates is weak. He said the strongest candidate would be Hillary Clinton, though he doubts she’ll enter the race. Gundlach was among the few money managers to accurately predict that Trump would win the 2016 election.

Speaking on CNBC on Wednesday, Gundlach said it’s hard to have confidence in Fed Chair Jerome Powell, because he’s reversed policies.

“He raised rates four times in 2018 and cut rates three times in 2019,” Gundlach said. “Basically, we’ve gone nowhere, just put ourselves on a wild ride, which I believe was unnecessary.”

Here are some other takeaways from the webcast:

• Gundlach focused a lot on credit risks. He said if BBB-rated debt was to be downgraded, these issues would fall from the investment grade category into high yield, which could cause forced divestments from fund managers
• “It’s certainly not too early to be acting on these facts,” he said, which are “pretty damning” for the asset class
• The Fed will probably remain on hold regarding rates until the second half of 2020, citing Fed funds futures. He said this is keeping the front of the yield curve flat
• Gundlach expects that, in the long term, rates will move higher. He cited the gap between the low unemployment rate and elevated deficit as a share of GDP, suggesting the latter will blow out in the next downturn
• Gundlach’s high conviction call for dollar softness also carries associated risks for investment grade credit. Unhedged foreign flows into U.S. corporate bonds because of global “yield starvation” would reverse in the event that the world’s reserve currency suffered a material bout of weakness

--With assistance from Millie Munshi, Melissa Karsh and Andrew Dunn.

To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net;Luke Kawa in New York at lkawa@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Alan Mirabella, Josh Friedman

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