'Bond king' warns of looming recession and wave of company defaults

It’s not every day that a globally renowned “bond king” warns of a looming recession.

In a recent interview with Fox Business, DoubleLine Capital founder and CEO Jeffrey Gundlach said high interest rates and stubborn inflation are already taking their toll on consumers and businesses.

As early red flags, Gundlach pointed to a wave of “concerning” economic data over the past month showing a broad slowdown in consumer spending and manufacturing.

The billionaire thinks Americans are bearing the brunt of higher prices and record credit card debt, which has reduced their purchasing power and ability to prop up the economy.

“All of these things are up tremendously, the things you have to buy,” Gundlach said, citing the massive spike in insurance rates as an example. “Those credit card bills are really starting to add up.”

If consumer spending dries up and recession hits, it's small businesses that will take the heaviest blow, according to Gundlach.

“You’re not going to take out Tesla necessarily—they might have other problems, but it’s not going to be because of interest rates. What you take out is the people, small businesses, medium businesses,” he explained.

Recession or not, the consumer is under pressure

Gundlach isn’t the only one warning about the possibility of a recession.

If first-quarter economic data are any indication, economist David Rosenberg says the U.S. economy could be on track for a recession as soon as this year

In fact, he estimates there's an 85% chance of a recession in the next 12 months—the highest odds since the 2008 financial crisis.

“Our conviction that the recession has been delayed but not derailed is still running at a high level,” he told Yahoo Finance.

As Creditnews recently reported, Bloomberg’s Edward Harrison believes Wall Street is vastly underestimating the threat of a recession, given the recent uptick in the unemployment rate.

Harrison showed that, outside of the pandemic, U.S. unemployment has risen by the most since 2010 when the economy was still recovering from the financial crisis.

Meanwhile, economists at U.S. Bank see no signs of an imminent recession but warn that consumer spending has clearly suffered. That’s a problem since more than two-thirds of U.S. GDP is driven by the consumer.

“[A] big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing,” said Rob Haworth, a senior investment strategy director at U.S. Bank Wealth Management.