Underestimated Risk of Recession and Its Consequences
Star investor Jeffrey Gundlach urgently warns that the stock market is underestimating the risks of a possible recession, which could have significant implications for investment decisions, particularly in the bond market. His assessment is based on several factors.
Gundlach sees a recession already beginning in the USA, exacerbated by the high level of debt and fiscal challenges. The rising deficits and the associated debt burden could lead to a “reckoning” – a kind of accounting or crisis in the US debt market.
Warning Signals in the Bond Market
Traditionally, long-term US government bonds (Treasuries) were viewed as safe havens (“flight-to-quality”). However, Gundlach notes that these bonds are increasingly failing to deliver on that safety promise: they do not respond as expected to interest rate cuts and are showing increased volatility.
The yields on Treasuries are at around 4%, the highest in 20 years, putting pressure on investors and raising doubts about their status as a risk-free investment. Additionally, the proposed “One Big Beautiful Bill Act” (OBBBA), which will generate an additional $2.4 trillion deficit over the next decade, is further eroding confidence in the US bond market.
Implications for Investors
In light of these developments, Gundlach advises increasing the inclusion of foreign currencies in portfolios and broadening risk protection. He generally recommends that investors diversify away from dollar-denominated capital towards alternative investments outside the USA.
A potential capital outflow from the USA by large groups of investors could affect global financial markets – particularly emerging markets could suffer from capital outflows; simultaneously, the dollar could lose strength in favor of commodities or other currencies.
In summary, Jeffrey Gundlach warns that the stock market is currently underestimating the danger of an impending recession and its negative effects on the bond market. This necessitates greater caution from investors and strategic adjustments to their portfolios in favor of greater risk diversification beyond the traditional US bond market.