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- The US economy is likely to "hit a wall" by next spring, Jeffrey Gundlach warned.
- The DoubleLine Capital CEO sees financial pressures hitting consumer spending and tanking growth.
- The government may try to spend its way out of trouble, reigniting inflation, Gundlach said.
The US economy is barreling toward recession as consumers' finances crumble, and inflation could surge again, Jeffrey Gundlach has warned.
"I think the economy is going to hit a wall in the next six or eight months or so, and there's going to be a real shutdown in consumer activity due to all of these interest payments that have to be made," he told Fox Business Thursday.
The billionaire investor and DoubleLine Capital CEO noted that many Americans managed to put money away during the pandemic.
They took advantage of government-aid programs that included mailing stimulus checks to households, and offering emergency grants and loan forgiveness to businesses. All the extra cash boosted the economy and asset prices, stoking historic inflation last year.
However, consumers have virtually exhausted those savings, Gundlach said. They now face a "dangerous cocktail" of inflated living costs, steeper rents, larger interest payments on their credit cards, the resumption of student-loan repayments, and taxes coming due, he continued.
"Right now we're in a very tricky situation," he said. "We still have very high prices, but we don't have all of that funny money around anymore, and the excess savings are going negative."
Gundlach — whose nickname is the "bond king" — predicted the plethora of financial pressures would tank the economy. He warned the Federal Reserve, which has raised interest rates from nearly zero to north of 5% since last spring to bring down inflation, is at risk of overtightening and shouldn't lift borrowing costs any higher.
The fixed-income specialist also cautioned that once a recession strikes, inflation — which has slowed from over 9% at its peak last summer to about 3% — could morph into deflation. The government would likely respond with an excessive amount of fiscal stimulus that could reignite price growth, he said.
Moreover, Gundlach rang the alarm on the federal debt once again. The US government might decide to borrow heavily to spend its way out of a recession and combat deflation, which would be costly at interest rates higher than 5.5%, he said.
He emphasized that the government's interest payments are already exploding, and warned they could grow substantially in the coming years.