Investor warned about the impact of higher interest rates, making the current federal deficit “unsustainable”
Faced with several uncertainties looming over the economy and markets, billionaire investor Jeffrey Gundlach, known as the “Debt King”, is worried, like many others, about a possible major economic crisis in the United States.
In an interview with CNBC on Wednesday night (1st.Nov), he warned about the impact of higher interest rates for an extended period, which would make the current federal deficit – which will reach almost US$ 1.7 trillion in 2023 – “totally unsustainable”according to him.
“Interest rates higher rates over a prolonged period means we have a huge interest expense problem in this country that will be, I believe, the next financial crisis.”declared the investor.
Indeed, it is worth remembering that with US budget expenditures reaching unprecedented levels, the US Treasury is expected to borrow more than $1 trillion per year. treasuries short-term until the end of 2023, as the government seeks to increase its liquidity reserves.
Additionally, it’s important to note that the debt burden (the interest on state loans) doubled between 2015 and 2023, and some economists predict it will become the government’s top spending item by 2051.
Regarding investments to be prioritized in this context of high rates, Gundlach stated that he was not in favor of maintaining a large amount of liquidity, despite current high yields.
“I believe rates will fall when we enter a recession early next year”he predicted. “I don’t like liquidity because I believe that the interest rate, which is currently very attractive, could decrease substantially next year”he added.
Therefore, he recommends turning to short-term bonds to obtain high yields: “I would prefer to invest in securities lasting 2 to 3 years. At least you get a return of around 8% for more than 6 months”he declared.
Furthermore, while rate futures markets suggest the Federal Reserve will cut rates by about 50 basis points next year, Gundlach estimates the central bank will go much further: “I believe rates will remain high for an extended period, which is not my base case, but I recognize it is a possibility; But if the economy behaves as I predict, the Fed won’t cut rates by 50 basis points, it will cut them by 200 basis points.”he explained.
Finally, it is worth mentioning that Gundlach is far from the only big name in finance to have warned of a potential crisis related to US debt and high interest rates. JPMorgan chief Jamie Dimon and billionaire investors Stanley Druckenmiller and Ray Dalio have also sounded the alarm in recent months about the deficit.
Another more controversial name, Peter Schiff, also spoke this week about US debt, which he described as a “Ponzi pyramid” ready to implode that will trigger a financial crisis worse than that of 2008, and potentially more serious than that of the 1930s.
With information from Investing Brazil.
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