In the face of a ballooning $33 trillion U.S. debt and the potential economic shockwaves from persistent high interest rates, billionaire investor Jeff Gundlach predicts that a recession could be on the horizon within the next year.
What Happened: Speaking to Yahoo Finance, Gundlach, who is widely known as the “Bond King”, expressed his concerns about the U.S.’s fiscal health in the face of escalating interest rates, reported Business Insider. The investor pointed out that as per Bloomberg, the annualized interest expenses on the U.S. debt exceeded $1 trillion last month.
“My belief is that we’re going to be in recession – if we’re not already in recession – we’ll probably be in recession by the second quarter of 2024,” he said.
He went on to speculate that the U.S. deficit could rise from 6%-8% of GDP to 9% in a recession, triggering further inflation and possibly driving interest rates higher in 2024.
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Gundlach argued that bonds yielding low returns are approaching maturity and will likely be reissued at roughly 5%. He further stated that this scenario, along with small businesses grappling with high-interest rates of up to 9% or 12%, might contribute to an economic slump.
Furthermore, Gundlach issued a warning about the fiscal impossibility if half of all tax receipts are used for interest payments, considering that mandatory spending accounts for 70% of the budget. He recommended that investors start distancing themselves from the US banking system in anticipation of the looming recession.
Why It Matters: Gundlach’s warning comes amid concerns over the U.S.’s escalating debt levels, which have been exacerbated by increased government spending during the pandemic. High-interest rates, coupled with the imminent maturity of low-yield bonds, could further strain the economy, leading to a potential recession.
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