DoubleLine CEO Jeffrey Gundlach thinks the next recession will be “a very ugly experience,” a view he shared with his clients yesterday in a quarterly webcast. It’s a point of view that flies in the face of recent economic statistics, since many indicators in the current economy suggest cause for more optimism: Employment is strong. Equity markets are booming. And the quit rate remains high, meaning people remain confident about their ability to find a new job, start a new business or retire. Finally, aggressive Federal Reserve tightening has not triggered the recession many anticipated.
Yet Gundlach’s perspective apparently is shared by millions of Americans in consumer confidence surveys. Consumers’ view of the future is bleak, even though their expectations about the present aren’t so bad, he noted. When the opposite happens—they see the present as bleak and they’re optimistic about the future—it’s usually a recession indicator, he said.
In an interview last month with David Rosenberg, founder of Toronto’s Rosenberg Research, Gundlach acknowledged that most economists and money managers had incorrectly expected a recession for the last 18 months. Why were so many experts wrong? He says it’s largely for two reasons.
First, there were the long-term effects of massive fiscal and monetary policies administered during the Covid-19 pandemic. Second, he said, as the nation emerged from the pandemic, it endured a more staggered “rolling recession,” one that allowed the economy to “pass the baton” from the goods sector to services without suffering a real recession.
Most of the indicators from the National Bureau of Economic Research currently are pointing to either an economic slowdown or a recession. Only nonfarm payrolls don’t. Small business sentiment, typically a key driver of the economy, is suffering from the dire outlook of small entrepreneurs. That outlook is understandable, Gundlach noted, since many business owners shut down some or all of their operations in the wake of the pandemic, and others are still struggling.
Past Is Not Present
He also thought the “Great Moderation” of the last decade is over. “The template of the 2011-2019 [period] is not going to be helpful in thinking about the future,” he said during the webcast.
Gundlach didn't dwell on it, but the cost of servicing America's burgeoning federal debt is exploding. Treasury bonds that were sold at 0.5% to 2.0% from 2010 through 2021 are coming due every month and being refinanced at rates of 4.0% 5.25%. The cost cost of servicing federal debt now exceeds defense expenditures and is headed higher.
The title of his presentation was “1968.” He began by noting some of the similarities between that period—its political tensions and social upheaval—with today’s world. A New York Times headline on January 1, 1968, proclaimed “World Bids Adieu To A Violent Year,” not realizing that the months ahead would see a surge in violence that made 1967 pale in comparison.
Students at Columbia University occupied five buildings and briefly kidnapped the dean of Columbia College before the university asked the New York City Police Department to remove them, an effort that required 1,000 police officers with clubs to finish the job. Later in August, at the Democratic National Convention in Chicago, local police and the National Guard “went on a rampage” against protesters, Gundlach noted. This year, some expect another showdown at the Democratic convention, again in Chicago, led by protests against U.S. policy in the Israel-Gaza conflict.
There are economic parallels between the two eras as well. Gundlach noted that today the younger generation is protesting against “lopsided” mortgage rates. In the last four years, the cost of a mortgage as a percentage of disposable income has jumped from the high teens to the 30% area, a trend that also occurred in the late 1960s. Mortgage protesters aren’t out in the street, but a strike in the home buyer market appears to be gaining momentum, as the percentage of all-cash or mostly cash offers surges even as total sales remain weak.
The economic volatility that began in the late 1960s continued for more than a decade, culminating in a rough period. From 1978 through 1981, it “never felt like you were out of a recession,” Gundlach said.
In fact, there was a famous double-dip recession: 1980 saw the first one, and that was followed by a more severe recession in 1981 that took unemployment to 11%.
During that period, the yield curve was inverted for 180 weeks. So far it has inverted for 101 weeks, and yet there hasn’t been a recession.
On the inflation front, Gundlach said some measures like core personal consumption expenditures are moving toward the “Fed’s comfort zone,” but the central bank needs this to offset the dramatic increase in auto insurance. Apparently, driving changed for the worse during the pandemic.
There are more uninsured motorists; carjackings and car thefts are up, he said. Anecdotal evidence indicates drivers have grown more lax in obeying simple rules, such as heeding red lights.
But one of the big fears is that, come the next recession, the Federal Reserve will find its inflation-fighting tools are less powerful than they were in the past. Gundlach thinks the Fed’s influence beyond the short end of the yield curve, which it controls via the fed funds rate, will wane. In particular, he suspects it could lose control of the long end of the bond market, which is critical for many parts of the economy, ranging from mortgages to pensions and life insurance policies.
If that happens just as the U.S. is dealing with an entitlements crisis while dysfunctional gridlock and an impotent central bank are in place in the nation's capital, the next recession could indeed prove nasty, despite all the upbeat equity market and jobs statistics we’ve seen in recent years.