The Bond King’s Bearish Bulletin: Jeffrey Gundlach Calls for a Recession in H1 2024

With only a couple of months left in 2023, it’s time for the experts to issue their predictions for the coming year. Perhaps, then, it should be alarming but not too surprising that DoubleLine Capital founder Jeffrey Gundlach is bracing for a bumpy ride in 2024’s first half.

Gundlach is known as the “bond king” as he’s a billionaire bond trader who correctly predicted the housing-market crash in 2007. Moreover, Gundlach has raised some of the same concerns that Crush the Street publications have cited in 2023: the steepening yield curve between the 10-year and 2-year Treasury bonds, the pivot from falling to rising unemployment rates, and so on.

Indeed, it’s been a reliable recession predictor when the yield curve goes negative and then rises sharply back into positive territory. Similarly, when the U.S. unemployment rate bottoms out in the 3’s and then heads back up (it’s at 3.9% right now), recessions have historically followed.

On that topic, Gundlach apparently expects the unemployment rate to move higher. “I really believe that layoffs are coming… We’ve seen hiring freezes, and now we’re starting to see layoff announcements… They’re out there [for] financial firms and technology firms, and I believe that’s going to spread,” he warned.

Courtesy: True Insights, Jeroen Blokland

As Jeroen Blokland pointed out, there’s typically a two-year lag between Federal Reserve tightening cycles and pain in the U.S. labor market. So, surely it’s not just a coincidence that we’re 1.75 years after the Fed’s first interest-rate hike and the unemployment rate is starting to move up.

Then, there’s the government’s penchant for borrowing and spending money. This would already have been a problem during the low-interest-rate regime of 2020 and 2021. Now that it’s late 2023 and the Federal Reserve has ramped up borrowing costs, the government will have a hard time servicing its debt because the interest payments will be so high.

As you might expect, Gundlach stated this argument much more concisely than I ever could. “Higher-for-longer means we have a massive interest expense problem in this country that is going to be, I believe, the next financial crisis,” he explained.

There’s data to back up this contention. The Cato Institute estimates that federal interest payments doubled between 2015 and 2023, and the government is expected to pay $640 billion in net interest this year. It’s also believed that interest payments – not defense or Social Security – will become the government’s single biggest expense by 2051.

Courtesy: Bloomberg

Gundlach isn’t alone in sounding the alarm on federal deficit spending. Other famous financiers from Jamie Dimon and Stanley Druckenmiller to Ray Dalio have also issued cautionary signals. Now, it’s just a matter of waiting for the other shoe to drop.

And, if Gundlach is correct, that other shoe will drop in the coming months. “I do think rates are going to fall as we move into a recession in the first part of next year,” he predicted not long ago.

Since he’s the “bond king,” it makes sense that Gundlach would recommend his go-to trading asset of choice. Specifically, he suggests that investors move into bonds with maturity dates of “about two to three years.”

Personally, I see a much better reward-to-risk balance with gold than with debt notes issued by the same government that caused all of these problems in the first place. So, Gundlach can hold federal debt notes with massive counterparty risk if he wants to. I’ll stick with something much more tangible and reliable, instead of counting on a government that’s irresponsible.