Gundlach: U.S. Economy and Stocks Could Be “Burnt Out”

Stimulative measures drive growth, and the U.S. economy and stock market have benefited from quantitative easing, lower rates, less regulation and tax cuts. But Jeffrey Gundlach admonished investors that too much stimulus can backfire.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on September 11. His talk was titled, “Miracle Grow,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation are available here.

Gundlach, an amateur gardener, said that he often uses Miracle Grow fertilizer to help his plants.

“But if you dump Miracle Grow on plants long enough it burns them out,” he said.

The growth of the deficit has been disconcerting. The deficit growth has been at levels that have historically been used to counter recessions, even though we have been in a nine-year-long period of growth.

The U.S. total debt outstanding and the total S&P return have moved up in tandem.

That has been “miracle growth,” he said.

What’s going to happen when the next recession happens? The deficit could “explode,” Gundlach said.

Let’s look at what Gundlach said the future holds for the U.S. economy and stock and bond markets.

A recession ahead?

Tax cuts, deficits and debt have been responsible for the surges in U.S. growth – as are the threats of tariffs, which accelerated growth forward, according to Gundlach. Real GDP growth, he said, is at 2.9% and may be as high as 3.8% for Q3. Nominal GDP has accelerated as a result of higher inflation.