DoubleLine Gundlach warns of recession, "cocktail of economic risk"

DoubleLine CEO Jeffrey Gundlach warned investors Tuesday that the United States was not equipped for the recession as it was increasingly indebted.

"Any thoughtful person would be concerned," said the so-called "king of bonds" in a webcast. "It sounds like a pretty bad cocktail of economic risk and long-term risk for the bond market."

The billionaire investor said that the United States was "running out of tools" to dry up the economy during the next recession. He pointed out the Federal Reserve's decision to leave interest rates unchanged and a conciliatory turnaround that boosted equities this year.

The Fed said it would not raise rates for the remainder of 2019. Even with a record unemployment rate, "it seems like the economy can not handle a federal funds rate of 2.5%, "he said.

Mr Gundlach also said that the bulk of the US gross domestic product (GDP) was the amount borrowed by the country. He compared the problem of spending to the maximum of a credit card.

"The growth of the economy is simply the growth of the debt," he said. "That's what's really responsible for GDP growth."

In the first quarter, US GDP grew 3.2%, according to the Bureau of Economic Analysis. This marks the best GDP growth to start a year in four years. Despite GDP growth and strong employment, Gundlach said the United States would face a "dangerous" economic period.

The risk of recession within two years is "extremely high", while there is about 50% chance of recession within a year, he said. Over the next six months, Gundlach has estimated the probability at 30%.

He has doubled the warnings against the corporate bond market. Mr Gundlach said the possibility that a third of BBB rated corporate bonds would receive downgrades looked like the group of risky securities that exploded during the financial crisis.

"It's not so different from the subprime," he said. "Do not take the pennies in front of a steamroller – fundamentals are poor and valuations are high."

In an interview with CNBC last week, Gundlach warned that the BBB rated bond market is now larger than the high yield bond market. He pointed to Morgan Stanley's figures that "45%, not only of the BBB, but of the entire corporate bond market, would be the wrong bill at the present time".

Gundlach manages the $ 50 billion DoubleLine Total Return Bond Fund. His five-year performance is one of the best in his class, but is behind most of his peers in 2019 with a gain of only 2%, according to Morningstar's ranking.

The investor said expect the stock markets to become negative at some point this year and "end the year with little progress".