Economic recession possible in 2022 as consumption weakens

  • The economy could be on the brink of a recession as “crabbing consumers” lack new stimulus, Doubleline’s Jeffrey Gundlach told CNBC on Friday.
  • He said indicators of a recession in the bond market were starting to seep in and could be exacerbated by interest rate hikes.
  • “It’s a prelude to panic, and unfortunately that’s where I think we are right now with credit spreads,” Gundlach said.

The dreaded ‘R’ word is starting to be talked about more and more on Wall Street as investors grapple with accelerating inflation, the prospect of higher interest rates and falling stock prices:


recession

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Billionaire bond investor Jeffrey Gundlach believes the discussion is warranted as he sees a number of recessionary indicators beginning to percolate through the market, according to a Friday interview with CNBC.

On the one hand, consumer sentiment dipped to a new decade low on Friday, and that was a reliable leading indicator of where the economy is headed going forward, he said. The decline in sentiment, combined with a lack of further economic stimulus for the consumer and an expected period of quantitative tightening by the Fed, does not bode well for the overall economy, according to Gundlach.

Another recessionary indicator to watch is the yield curve, which tracks the difference between short-term and long-term interest rates. An inversion of the yield curve, in which short-term rates are higher than long-term rates, has historically proven to be a reliable warning that a recession is imminent.

“The yield curve already puts us on watch. Once you get the yield between the 10-year treasury and the 2-year treasury below 50 basis points, you’re on recession watch. And that’s where we are,” Gundlach explained.

Things aren’t made any easier by the Fed’s current positioning, as the central bank continues to expand its balance sheet through bond purchases and has yet to raise rates, he said.

This means that if a recession were truly imminent, the Fed would have less firepower to mitigate economic damage because it does not have the option to cut interest rates.

“I think the Fed should have stopped quantitative easing not next week, not tomorrow, not yesterday, but a year ago. And what we’re seeing is the consequence of all this excessive stimulus,” said Gundlach, adding that “the Fed is obviously behind the curve.”

Another recessionary indicator that catches Gunlach’s attention is that credit spreads are starting to slowly widen, indicating less confidence in some companies’ ability to service their debts.

It also suggests that credit markets are on the verge of a crisis that could hamper a company’s ability to take on debt at favorable prices.

“It’s a prelude to panic, and unfortunately that’s where I think we are right now with credit spreads,” Gundlach said, warning that a likely further widening of credit spreads would have a negative impact. on the stock markets.

“We have enough recession potential with the yield curve flattening, and with the consumer sputtering based on sentiment, where inflation is, the consumer not having stimulus. I think the likelihood of “Weaker economic activity later this year is pretty high,” he said. .

Despite his gloomy economic outlook, there is one area where he thinks it’s normal to start buying slowly: emerging market stocks. Gundlach described their relative valuation against US equities as “out of kilter,” and that amid recent weakness in equities, emerging markets appear to be the only area making much progress.

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