Stock investors aren't paying attention to "demons on the horizon," Jeffrey Gundlach says.
The DoubleLine Capital boss sees a recession next year as companies and consumers feel the squeeze.
Gundlach warns that government spending during the next downturn could devastate the US dollar.
Jeffrey Gundlach issued a slew of warnings about the stock market, the US dollar, and an upcoming recession during the Future Proof conference last week.
The S&P 500 and Nasdaq Composite have surged 16% and 31% respectively this year, as investors price in the potential boost to companies from artificial intelligence and future cuts to interest rates. However, they're overlooking "demons on the horizon," Gundlach cautioned.
The billionaire CEO of DoubleLine Capital highlighted signs of a faltering US economy as a key concern. He pointed to a recent wave of corporate layoffs, and consumers feeling the squeeze from record amounts of credit-card debt as red flags. He also noted the chilling effect of higher mortgage rates on the housing market, and the challenge for small businesses of having to refinance their debts at much higher interest rates.
"The economy is definitely weakening," Gundlach said. "I look for one next year, and I think the indicators are getting really convincing in that regard," he said about the prospect of a recession.
The fund manager — whose nickname is the "Bond King" — also argued that economic growth has been shored up this year by a dangerous and unsustainable amount of government spending.
"The economy is only growing because we have a budget deficit that is 8% of GDP," he said. "It's about the same today as the depths of the global financial crisis."
Gundlach underscored that the federal government financed most of its spending at rock-bottom rates. However, the Federal Reserve's war on inflation has seen it hike rates from nearly zero to over 5% since last spring, meaning the government's interest charges on trillions of dollars of debt are poised to balloon.
"This debt coming due would be just devastating," Gundlach said. "The Fed can't have interest rates at 5%, 6% and hold them there for the next few years without bankrupting everything about this country."
"I think they want the economy to slow quickly, and I think they want rates to go back down, because if this happens on their watch, it's going to go down in infamy really," he added.
Indeed, Gundlach suggested the Fed might be done with its rate hikes, and predicted the central bank would make its first cut to rates in the first half of next year.
The veteran investor also rang the alarm on the greenback, warning the federal government is likely to spend aggressively during the next economic downturn and bring itself to the brink of financial collapse.
"I think the dollar weakens tremendously in the next recession," he said. "The response to the next recession is going to be a complete disaster relative to our fiscal position, and that's going to be the wake-up call where we realize the United States is bankrupt, that we cannot honor our liabilities."
Gundlach suggested that realization could lead to a "complete abandonment" of the dollar, and a wholesale rejigging of the US financial system, in line with the wider de-dollarization trend.
"If you don't see that coming now, you're just an ostrich with your head in the sand," he said.
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