Jeffrey Gundlach, chief executive of DoubleLine Capital, believes that an economic recession is not on the table in the near-term but that one could occur towards the end of next year.
‘This wonderful year of 2017 may continue for two more months… but I believe we’re going to start looking for trouble in the second half of 2018,’ said Gundlach.
‘I’m actually starting to think that we may see a recession a year from now.’
Speaking at the Schwab Impact conference in Chicago attended by sister title Citywire USA, Gundlach highlighted two economic indicators that hold strong historical correlations with recessions: widening high yield spreads and a commodity bull run.
‘I think high yield spreads widening is one of the leading indicators that something bad is happening,' he said.
‘Every time there is a recession high yield spreads widen first and by a lot. We’re not there yet but I have a feeling it’s going to start happening.’
Spreads on high yield have widened 59 basis points since October lows, according to Bank of America. In recent weeks investors have pulled money from high yield funds, with $6.7 billion exiting in the week ending November 15.
Gundlach said some investors had bought into high yield without understanding the risks involved.
‘The most dangerous thing that can happen is that people buy something that they think is safe, even though the name junk doesn’t sound safe, and all of a sudden they look at their statement and there is a negative sign,' he said.
He said a slight commodities rally was already underway too, and while this was a buying opportunity in the short-term, it could signal a recession if investors went too far.
‘The idea that a commodity bull market may give forth to a recession is completely consistent with history,’ said Gundlach.
‘The movement so far actually isn’t that small and if it’s starting to the upside, A. You should buy in and B. You should start to think about what that means for the gray-shaded area coming soon to a theater near you.’