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Jeffrey Gundlach, the CEO and CIO of DoubleLine Capital, and one of the 10 panelists in a recent Barron’s Roundtable of Wall Street’s smartest investors, has warned that the debt load is about to become a bigger problem.
Total corporate debt in the US has swelled from nearly $4.9 trillion in 2007 to nearly $9.16 trillion at the end of Q3 CY18, up 86 percent, according to data from the Securities Industry and Financial Markets Association.
"We are talking about the creation of an ocean of debt," Gundlach said, adding that the Fed is engaging in 'quantitative tightening’ that will create 'a problem for the stock market'. "The biggest risk is the corporate bond market. US junk-bond issuance has been prolific, and the quality has been poor. Many issues have been floated with no covenants [legal agreements regarding issuer behaviour]. The investment-grade corporate-bond market has also grown massive; it is much larger than it was going into the prior credit crisis," he stated.
Counters Trump on growth The investment manager also countered US President Donald Trump's claim that he’s presiding over the strongest economy ever, saying the growth is debt-based. “I keep hearing [President Donald Trump] say that this is the strongest economy ever, which isn’t true. We have floated incremental debt when we should be doing the opposite if the economy is so strong. In 2018, we increased the national debt by $1.27 trillion. The deficit officially was nearly $800 billion. US GDP is $20.66 trillion, so a $1.3 trillion increase in the national debt is 6 percent of GDP,” Gundlach explained.
US GDP growth He forecasts real GDP expansion of just 0.5 percent for 2019, adding: “I’m not looking for a terrible economy, but an artificially strong one, due to stimulus spending.”
US market to be a reverse of 2018 Gundlach expects further declines in the US stock market. He believes equities will be weak early in the year and strengthen later in 2019, a reversal of what happened last year. "Now, we are in a bear market, which isn’t defined by me as stocks being down 20 percent. A bear market is determined by the way stocks are acting," he added.
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