In the last three recessions, the deficit expanded by about 9% of GDP. At some point in the next four or five years, it’s possible that this shortfall could go to $4 trillion or higher, he said.
But this entire “debt-based scheme” will have to change in the next five years. “On the other side, you’ll get the first turning” where things will fall back into place, Gundlach said, referring to a theory of history that holds events follow a pattern of four phases: chaos, awakening, unraveling and crisis.
Getting there will be painful, but it’s bullish for bonds, Gundlach said.
Is a recession coming? Gundlach pointed to numerous indicators that say the economy could be on the front edge of a downturn.
In recent months, the bond market has witnessed a “de-inversion of the yield curve,” which Gundlach says suggests there could be a recession in next year's second quarter.
Moreover, when one examines the U.S. economy at the state level, 32 states are exhibiting negative coincident economic indicators, statistics that change simultaneously with general business conditions like industrial production and unemployment. Gundlach said when that many states are in negative territory, a recession is usually near.
On a positive note, DoubleLine sees the Consumer Price Index coming in at 3% or thereabouts for the next few months and falling to around the 2.5% area by the middle of 2024.
The supply chain bottleneck that plagued the reopening of the economy in 2021 and 2022 is a thing of the past today. Gundlach cited a New York Fed bottleneck index that was as negative as it has ever been.