Bond king Jeffrey Gundlach, Founder and CEO of Doubleline Capital, said in an interview with Yahoo Finance that he is bracing for a hard economic landing.
“We have been preparing for a hard landing at DoubleLine,” he said.
Gundlach said his firm has been preparing for a period of very weak economic growth – triggered by aggressive Federal Reserve interest rate hikes combined with a stubborn inflation – by increasing their exposure to the relative safety of Treasury securities.
Gundlach says that he feels it doesn’t matter if the landing is hard or soft, because either way, the markets are going to have to endure a sharp economic downturn, and they are not prepared for it.
Gundlach said, “People are always asking me this question: how bad the recession is going to be. It doesn’t matter as long as we’re going into recession. You have to have certain degree of protection. “
“In either case, you need an umbrella,” he added.
Equity markets have remained optimistic about any landing scenario this year, outside of a recent spate of volatility over the persistent nature of inflation lately. Year-to-date, the Nasdaq has gained 11% on hype over artificial intelligence, as Microsoft (MSFT), Google (GOOG, GOOGL), and Nvidia (NVDA) have seen shares rise.
The S&P 500 has risen 4% as a potential rebound in the Chinese economy following a lifting of China’s stringent zero-Covid policies has spurred investor optimism.
However at the same time there are signs of the negativity Gundlach is describing bubbling up in spots. This week JP Morgan strategists pointed to the yield curve continuing to remain inverted, and how investors should not ignore the reliability of that signal’s track record.
A yield curve inversion signals that long-term interest rates are falling below short-term rates. It means investors are putting more money into longer dated bonds, due to fears of near term economic prospects.
Gundlach noted the yield inversion is “absolutely” a reliable indicator of a coming recession, adding, “When it first inverts you have got to be on watch.”
In addition, there has been pressure on corporate profits this week in big names like Walmart (WMT) and Home Depot (HD), which is not likely to go unnoticed by investors.
Gundlach observed, “We could see some real Interesting, painful outcomes coming in the next recession, whether it’s very severe or not.”
