NEW YORKNEW YORK (Reuters) - Guggenheim Partners Global Chief Investment Officer Scott Minerd warned on Monday that the U.S. economy is on a collision course due to excessive corporate debt and said he has prepared by buying higher credit-quality investments.
"Corporate credit is clearly the big excess that needs to be flushed out of the system," said Minerd at the Reuters Global Investment 2019 Outlook Summit.
General Electric Co is just one example of a broader problem, he said. Its stock fell as much as 10 percent on Monday when GE Chief Executive Officer Larry Culp said he is pursuing assets sales with "urgency" to reduce its high debt. Yields on GE bonds, which once had the highest investment-grade ratings, have spiked sharply higher in recent weeks.
"There are chinks in the armor and things are going to give," Minerd said.
Guggenheim expects $1 trillion of investment debt will be downgraded to junk status as the Fed raises rates and the economy slows over the next two years.
That has prompted him to move up in quality, buying ostensibly risk-free 30-year Treasury "STRIPS" securities. He and said he started on Friday liquidating holdings in one investment-grade company, which he declined to name.
Minerd said it would be premature now to stop hiking interest rates but added that the U.S. Federal Reserve will struggle to engineer a soft landing in coming months because of the extent of corporate indebtedness, an analysis he said he has shared as a member of the Federal Reserve Bank of New York's Investor Advisory Committee on Financial Markets.
"We're in the process of slowly killing the expansion," he said. "Any attempt to rein in credit is ultimately going to blow up."
A recession may not materialize until 2020, Minerd said. And the Fed may hike rates up to five times until the end of 2019 unless oil price declines or another factor cause them to scrap such plans.
The rate hikes will keep the U.S. dollar strong as higher yields attract capital and put more pressure on emerging markets struggling to repay debts in dollars.
Minerd, a veteran investor who helped Italy restructure its debt in the aftermath of the European currency crises of 1992 and 1993, said there is an above-50 percent chance of Italy pulling out of the euro or another "catastrophic" outcome.
Brussels, he said, should allow Italian leaders to stimulate growth in their economy using deficit spending on the condition that higher tax revenues that result are used to pay down debt. But he said such political will may not exist in the European Union.
"Italy has catastrophic risk written all over it," he said.
"The scale of the problem if Italy blows up - it's really hard to imagine how there's a way to get the genie back in the bottle."
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(Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and Cynthia Osterman)