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Over the past year, a fierce debate has been going on in Wall Street offices and executive boardrooms across America. The world’s top investors, economists, and business leaders can’t decide if the resilient labor market and robust consumer spending will enable a “soft landing” for the economy—where inflation is tamed without a recession. Or if sky-high prices and rising interest rates mean a “mild” recession, a “garden variety” recession, or even something akin to a “variant of another Great Depression” is on the way.
But DoubleLine Capital founder and CEO Jeffrey Gundlach told Yahoo Finance Wednesday that the debate is pointless, the inflation outlook is “darkening,” and Americans need to prepare for an economic downturn no matter what.
“People are always asking me this question: ‘How bad is the recession going to be?’ It doesn’t matter. As long as we’re going into a recession, you have to have a certain degree of protection. If it’s raining a half an inch an hour, you need an umbrella. If it’s raining two inches an hour, you still need an umbrella,” the billionaire investor known as “the Bond King” said. “In either case, you need an umbrella.”
Gundlach has warned a recession could be on the way for over a year now, noting that Federal Reserve interest rate hikes will increase costs for consumers and businesses already struggling with inflation.
On Wednesday, the bond market veteran added that rapidly increasing borrowing costs have the potential to cause increasing defaults in some U.S. companies as the economy slows this year. As Fortune previously reported, many so-called zombie companies have been able to survive off cheap debt over the past decade, using the junk bond market to fund unsustainable business models.
“What’s going to happen when you get parts of the economy in a recession and the payments for these companies are going higher? I think the answer is there will be more defaults,” Gundlach said. “You put that together with the [slowing] economy, with the credit quality being low, and we could see some real interesting, painful outcomes that are coming in the next recession, whether it’s very severe or not.”
After Gundlach founded DoubleLine Capital in 2009, which now manages roughly $100 billion in assets, he quickly outperformed his rival bond-fund managers, and was anointed with the title of “King of Bonds” by Barron’s in 2011—which has since been shortened to “Bond King.” That title was affirmed when the previous “Bond King,” Pimco’s cofounder and former bond-fund manager Bill Gross, famously told Gundlach in 2014 that he was the LeBron James to Gross’ Kobe Bryant.
Gundlach’s status on Wall Street these days is undeniable, and he went on to dish out some advice for investors on Wednesday, arguing U.S. Treasuries may be the safe haven of choice amid a “protracted bear market” in stocks. He said that DoubleLine has incrementally increased Treasury exposure, decreased credit exposure, and upgraded the quality of its bond portfolio over the past year.
“I always say, ‘Don’t listen to what I say, look at what I do.’ And we started de-risking, if you will, in the fourth quarter of 2021,” he told Yahoo Finance, adding that he has “been preparing for a hard landing” for some time.
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