As high interest rates have pushed up the borrowing costs of the US government, the annual interest expenditure on US debt has soared to more than $1 trillion last month. This situation has also caused an increasing number of market participants to sound the alarm bell.
On Wednesday Eastern Time, Jeff Gundlach, the "debt king", stated in an interview that the US $33 trillion debt mountain is becoming increasingly worrying and the US economy may fall into recession at some point next year.
High interest rates will lead to economic recession
Gunlak warned that under the pressure of a high interest rate environment, the United States may find it difficult to avoid an economic recession. He said, "My belief is that we are about to enter a recession, and if we have not yet entered a recession, we may enter a recession in the second quarter of 2024
He also added, "Our lives are all linked to low interest rates. Now, we are aware of the consequences of high interest rates, and the idea that we will avoid an economic recession has become weak
Given concerns about economic recession, Gonlac is not optimistic about the US technology giants, known as the "Magnificent Seven" - Apple, Microsoft, Google's parent company Alphabet, Amazon, NVIDIA, Tesla, and Meta - in terms of investment advice, despite their recent good performance.
He believes, "In the upcoming recession, they (the Big Seven) are clearly the worst performing. No matter who leads into the recession, they will inevitably lead when the economy declines. I want to stay away from them and choose an equal weight basket instead of a market weighted basket. I will definitely leave the US banking system
Interest on US debt is growing explosively
Gunlak also emphasized the serious impact of a high interest rate environment on the US fiscal situation.
He said, "The reason why I am worried that high interest rates will continue for a longer time is already clear, which is our financial situation, but this issue has not been given enough attention. The interest expenditure on debt is growing vertically
He warned that in an economic recession, fiscal issues will become more severe, as changes in the economic environment will clearly have a significant impact on the fiscal situation. Once the US fiscal situation deteriorates further, it may lead to inflation.
Gunlak predicts that this may ultimately push the US fiscal deficit from 6% to 8% of GDP to 9%, while a larger deficit may exacerbate inflation and lead to a rise in Federal Reserve interest rates in the second half of 2024.
Gunlak also mentioned the burden that high interest rates bring to small and medium-sized enterprises in the United States: We are facing a huge problem because low interest rates have been maintained for so many years, almost a decade, and now the Federal Reserve has raised interest rates for a longer period of time. This also affects small businesses, who used to only need to pay 4% interest rates, but now they need to pay 9% or even 12% interest rates. If our interest rates continue to be higher, it will obviously bring more serious problems
Gunlak warned that the US debt figure is approaching a critical point.
Five years from now, assuming our interest rates are higher and longer in duration, with a 6% interest rate and a deficit of 9% of GDP, 50% of all tax revenue will be used to pay interest. Of course, this is not possible because 70% of the budget is mandatory, "Gunlak quoted the Congressional Budget Office's forecast, We are really close to that moment, we senior colleagues have been talking about it for decades. We are basically at a moment where this is not a problem for our grandchildren, not for our children, but for ourselves