Jeffrey Gundlach is a fund manager and the CEO of DoubleLine Capital. He is a fixed-income investor who is well known for his ability to stand apart from the crowd and follow his own instincts. During a June 12 Fox Business interview, he referred to corporate debt as one of the biggest problems facing the stock market.
Corporate debt
Gundlach believes corporate debt is currently the big systemic risk facing the 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. 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.”
He thinks the response by central bankers will be to artificially lower interest rates to shield the economy from the issue of compounded debt. In Europe, historically low (in some cases negative) interest rates have created a situation where companies have gotten bloated on cheap debt:
“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.”
The last refuge of perma-bulls
When asked about whether the high levels of cash being held by investors is a buffer against a runaway market exuberance, Gundlach responded he doesn’t believe this to be a reason to dismiss the possibility of a drop, pointing out that other indicators clearly point to a bear market:
“There’s always massive amounts of cash on the sidelines. The last refuge of perma-bulls is always 'well there’s all of this cash waiting to pounce into the market.' There was a lot of cash on the sidelines in 2000 too, and there was a lot of cash on the sidelines in 2007. So I don’t think that people hold cash waiting to go into a rising stock market, I think they hold cash for a variety of other reasons. I’ve never found that to be a convincing argument.
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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