Money & Markets - Gundlach: Corporate Debt is a Ticking Time Bomb

Article by JT Crowe in Money & Markets

DoubleLine Capital CEO and fund manager Jeffrey Gundlach is well-known for following his instincts, and his instincts are telling him that American corporate debt is one of the single biggest problems facing the stock market, and the biggest systemic risk facing the U.S. economy.

“I think the next recession won’t be anything like the housing crisis. I think it’ll be a corporate debt problem and an interest rate manipulation solution,” Gundlach said in a recent Fox Business interview. “I think given the fact that last year the national debt grew by over 6% of GDP while nominal GDP grew by 5%, it suggests that the entire economic growth of 2018 was an increase in national debt, that it was debt-based.

“So in the next recession, you would probably see an enormous increase in the national debt, perhaps as high as 10% of GDP, which would, under natural market forces, lead to higher long-term interest rates, exacerbating the recession.”

“Look at what’s happening in Europe — they’re talking about going more negative, more negative interest rates — and yet we have a system of corporate finance where there’s many fragile companies that should be gone. But they’re being kept going as zombie companies because of the interest rate situation that we’re in … . So yes, I was very concerned about the housing market in late 2006, but I’m much more worried today about the corporate bond market than I am about things like housing in the financial system.”

“And by the way, the stock market is in a bear market — it dropped over 20% in the fourth quarter, the New York Stock Exchange Composite is well off its highs and the global stock market is so far from its peak that it’s really an anomaly that the United States is hovering near its highs.”

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