Everyone knows Michael Burry—who predicted the subprime mortgage crisis in 2008. Fewer people outside the industry know Jeff Gundlach: he likewise predicted the crisis mentioned above and has such an impressive track record in the markets that he earned the nickname king of bonds. Gundlach has long been skeptical of the economy’s overall trajectory. Now, however, his warnings have become more significant.

For Gundlach, rising interest rates could put the economy on a collision course. More than that: the latest rate hike could be only the first in a cycle of restrictive monetary policies—higher rates, recession, more corporate failures, and greater difficulty accessing inexpensive credit, including for companies involved in the AI cycle.

The Numbers Are Missing

Although everyone—including us—listens in reverent silence whenever Jeff Gundlach speaks about the state of the economy, a caveat is necessary. In the king of bonds’ latest public remarks, there were no figures. He did not say how many interest-rate hikes would put the economy on a collision course, nor did he discuss any timeline.

The warning nevertheless remains: contrary to what Kevin Warsh said during the latest press conference on the sidelines of the FOMC, the economy is not strong enough to withstand a cycle of restrictive monetary policy that will be necessary to bring inflation back to 2%.

“Something Big” Will Happen

Gundlach is vague, but he does not mince words. He speaks of something big that could happen to and in the markets, with corporate failures arriving at a sustained pace.

Moreover, the Treasury’s initiative to repurchase bonds in the market does not appear to have calmed the markets to any significant extent, raising further questions.

The path of least resistance for bonds is to continue rising [in terms of yields, Ed.]

The path of least resistance for bonds is to continue rising [in terms of yields, Ed.]

This is therefore an especially bleak picture, consistent with the views of many commentators, top-tier analysts, and Wall Street legends, though with one caveat. Several figures have gained popularity through catastrophic predictions that later came true—and therefore have an incentive to keep singing the same tune.

There Are No Free Lunches

The point remains the same: the Federal Reserve’s blanket is too short. Interest rates can be raised to counter inflation, but at the same time these measures have a significant impact on the economy. Rates can be left unchanged, but that would allow inflation to continue running.

And for Gundlach, the signs of a situation that promises nothing good can be found both in the valuations of AI companies, which he considers excessive, and in the stress signals that have already emerged—even in calmer times—from the private credit market.