In an interview with Finanz und Wirtschaft, DoubleLine CEO Jeffrey Gundlach expressed concern for U.S. equities as a result of the levels of government and corporate debt, arguing that investors must “brace for significant disruptions.’

Here are highlights from Gundlach’s comments:

• Investors should begin preparing for the next downturn now, even though we can’t know when it will come: “If you don’t start preparing now, you will maybe do better while the economy continues to do okay, but whatever gain you get from that will be overwhelmed by problems with your investments in the downturn.”
• Diversification is key: “You should own your house free and clear if you can. People should not own stocks if they have a mortgage.”
• Liquidity will be very challenging in the corporate bond market, and it will be difficult for investors to make adjustments to their portfolios when the downturn is underway—so preparation is key.
• The U.S. corporate bond market is “rated higher than it deserves to be. Kind of like securitized mortgages were rated way too high before the global financial crisis. Corporate credit is the thing that should be watched for big trouble in the next recession.”
• “In the next recession, corporate bonds will collapse, and buybacks will stop. The dollar has already topped. It may begin falling in earnest during the next downturn and US equities will lose the most.”
• It’s difficult to find value in the market “because the policies of the central banks have pushed valuation to levels that historically are associated with avoidance rather than allocation.”
• The level of national debt is unsustainable, but policymakers think the Fed will monetize it: “People have given up on the idea that we’re going to pay our debt back,” says Gundlach.
• A recession isn’t coming imminently: “The indicators aren’t pointing in that direction strongly enough. They are a lot weaker than they were a year and a half ago. But they’re not universally corroborative.” He believes that negative signs will probably emerge first from consumer confidence, which will fall with unemployment and lead to a reduction in personal spending.” Recessions, Gundlach argues, “are highly psychological.”