New Debt King: Entering "Capital Preservation" mode, risk positions have been cut to "historical lows," with possibilities including "Federal Reserve rate hikes, US recession, and soft default on US bonds."

DoubleLine Capital founder and CEO, the “new bond king” Jeffrey Gundlach, issued a stern warning in a recent in-depth interview: The 40-year decline in U.S. interest rates has come to an end, massive debt is pushing the economy toward an unsustainable brink, and the frenzied private credit market is brewing a liquidity disaster reminiscent of the subprime mortgage crisis in 2006.

On March 27, in a deep dialogue hosted by renowned financial host Julia, Gundlach shared striking views on the global macroeconomy, the Federal Reserve’s monetary policy path, private credit risks, and future asset allocation directions.

As one of Wall Street’s most influential fixed-income investors, Gundlach made it clear during the lengthy conversation that risks in the current financial environment are clearly accumulating. He not only overturned the market consensus expectation of an “imminent rate cut” by the Federal Reserve, but also proposed extreme scenarios where U.S. Treasuries could face “restructuring” or “soft defaults” in the future.

“Because of the debt burden we carry and the way we are currently financing the government through a $2 trillion deficit, this is completely unsustainable. If something is unsustainable, it must stop,” Gundlach set an extremely cautious tone right from the start.

The Federal Reserve has no secret; the next move will not be a rate cut but an “interest rate hike.”

In response to the current market’s fervent expectations for the Federal Reserve to cut rates this year, Gundlach poured cold water on the idea. He bluntly pointed out that the Federal Reserve has never been a leader in interest rates but rather a follower.

“I think we should abolish the Federal Reserve and use the two-year Treasury yield as the short-term interest rate.” Gundlach sharply indicated that if we compare the federal funds rate over the past 30 years with the two-year Treasury yield, the trend is clear: when the two-year Treasury yield rises above the federal funds rate, the Federal Reserve must raise rates, and vice versa.

He detailed the recent market dynamics:

“Right before the Federal Reserve announced it would keep rates unchanged, everyone was saying ‘The Fed will cut rates twice this year.’ I said, no, they won’t. The two-year Treasury yield is above the federal funds rate. Given the current position of the federal funds rate, and the fact that the two-year Treasury yield is over 25 basis points above the upper limit of the federal funds rate, you cannot expect to see a decline in the federal funds rate.”

Gundlach predicted that if oil prices remain high (for instance, WTI crude around $95 per barrel throughout the summer), “the Federal Reserve will absolutely raise rates. You will hear more and more about this, and it has already begun. Perhaps the Fed’s next move is to raise rates.”

Private Credit: A “Complete Disaster” Repeating the 2006 Subprime Crisis

When discussing the hottest asset class on Wall Street—private credit—Gundlach used some of the harshest language of the entire event, directly comparing it to the subprime market that led to the 2008 global financial crisis.

“Last year, I told people, I feel like I’m in 2006, with all the bubbles.” Gundlach stated that the current size of the private credit market, estimated at $2 to $3 trillion, is “strikingly similar” to the scale of the subprime market before the onset of the global financial crisis in 2006.

He completely tore apart the façade of private credit’s “low volatility, high yield,” pointing out that its valuations are entirely opaque and constitute a false prosperity. He shared a shocking industry insider detail:

“I have a very large insurance company client with eight managers holding exactly the same position. The same position, one valued at 95 and the other at 8.”

Gundlach noted that the essence of private credit is packaging illiquid assets for investors who need periodic redemptions, and this fundamental mismatch is destined to collapse. He warned:

“When you ask for a redemption of 14%, and they only give you 5%, what you need to do next is request a redemption of 40%. In June 2026, you will see some quite insane redemption requests. Private credit must undergo a significant shakeout.”

Capital Preservation First: Dump U.S. Assets, Heavily Invest in Emerging Markets and Gold

Due to concerns about rising long-term interest rates and a credit crisis, DoubleLine Capital’s current risk exposure has dropped to its lowest level in 17 years. Gundlach made it clear that times have changed, stating, “We have left the world of ambition, the world of hype,” and capital preservation is now the top priority.

In light of the S&P 500 Index’s price-to-book ratio being more than twice that of other regions around the world, Gundlach offered a disruptive “outlier” asset allocation suggestion: completely abandon U.S. stocks.

• 40% investment in non-U.S. stocks: “I have always advised American investors that the stocks they should hold should be 100% non-U.S. stocks, especially emerging market stocks denominated in local currencies. For example, Brazil, Chile, and Southeast Asia.”

• 25% investment in short-term fixed income: Fully allocated to bonds with maturities under ten years and higher credit quality.

• 15% investment in commodities: Including 10% linked to the Bloomberg Commodity Index and 5% directly allocated to gold.

• 20% held in cash: Waiting to make moves when asset prices become cheaper in 2026.

Regarding gold, Gundlach is extremely optimistic:

“Gold is real money. Central banks will become a huge source of demand for gold… Gold is no longer just for survivalists or quirky, crazy speculators. It is a real asset class.”

Endgame Simulation: $40 Trillion Debt Overhang, U.S. Treasuries May Face “Direct Rate Cut” Restructuring

Concerning the deepest macro concerns, Gundlach attributed them to America’s increasingly swollen debt black hole. Currently, U.S. national debt has reached $39 trillion, and Gundlach believes, “When it hits $40 trillion, it could become a psychological threshold.”

He shattered the long-held market inertia—the notion that economic recessions lead to falling interest rates. Gundlach warned that in the next recession, due to the deficit sharply widening, long-term Treasury rates will not only not fall but will actually rise. Currently, the U.S. Treasury pays $1.4 trillion in interest annually, “heading toward $2 trillion in interest expenses.”

When asked about the possibility of a recession, he pointed out:

“I certainly think there is a significant chance that the powers that be will announce a recession starting at some point in 2026. I would give it at least a 50% probability.”

If long-term interest rates rise to around 6%, interest expenses will explode. Gundlach outlined two potential endgame scenarios for resolving this crisis: Inflation devaluation or soft defaults (debt restructuring).

Even more shocking, he believes the likelihood of the U.S. government forcibly changing Treasury rules to directly lower coupon payments is much higher than the market anticipates.

“I think investors need to consider the idea that the creditworthiness of U.S. Treasuries may come into question. People don’t like to hear this. They think it’s a radical idea.”

To mitigate this “rate cut” restructuring risk, Gundlach’s team has taken extreme defensive measures: shorting all long-term Treasuries and converting all must-hold Treasuries to those with the lowest coupon rates in the same maturity range (like 1.5%) to prevent high-coupon Treasuries (like 6%) from being forcibly cut by the government, which could lead to a collapse in principal.

At the end of the interview, Gundlach predicted that a “restructuring” or large “reset” (the fourth turning) of the American system might occur around 2030. Until then, his strategy can be summed up in four words: “Wait for excellent opportunities.”

Full interview transcript follows:

Jeffrey Gundlach
Because of the debt burden we carry and the way we are currently financing the government through a $2 trillion deficit, this is completely unsustainable, so change must occur. If something is unsustainable, it must stop, and this situation must stop. And the politicians, of course, show no willingness to control spending. Therefore, it will ultimately have to be enforced by the market. So, the current environment risks are clearly accumulating, and I am very interested in taking low-risk strategies in the coming months and quarters.

Julia
Jeffrey Gundlach, founder and CEO of DoubleLine Capital. It’s a great honor to have you on our show today. Thank you very much for taking the time to join me.

Jeffrey Gundlach
Thank you for inviting me, Julia. It’s been a while since we last chatted.

Julia
It has indeed been a while. It’s been five years since we last spoke. You are one of my favorite people to talk to in the investment world. Again, it’s an honor to have you, Jeffrey. A lot has happened so far this year. I can hardly believe we are about to finish the first quarter. I’ve been telling my guests that so much has happened and there have been so many changes. Indeed, a lot. Since it’s been a while since you were last on the show, let’s start with the macro picture and discuss your current framework for viewing the world, your assessment of the economy and the markets, and what you are focused on. Jeffrey, one of the hallmarks of this show is that you can elaborate as much as you like when discussing the macro picture; take as much time as you need.

Jeffrey Gundlach
Okay. Well, the economy seems to be slowing down. Interestingly, bond yields are rising, Treasury yields are rising. While the economy is slowing, one of the core ideas I have been developing—actually over the past five years or so—is that we are no longer in an environment of long-term declining interest rates, particularly for long-term rates. I reached this conclusion about four or five years ago. At the time, I faced a lot of opposition. They believed rates would remain low for a long time due to generational reasons. But I think there are long cycles in interest rates that generally last about 40 years. Interest rates bottomed around 1945 and then began to rise in the 1950s, peaking around 1984. After that, rates started to fall and continued until 2000. I have always believed that the long-term downward trend in long-term interest rates has certainly ended due to interest expenses on Treasury debt. Interest expenses have exploded due to the continuously increasing $2 trillion budget deficit and higher rates. You know, the Federal Reserve raised short-term rates from zero to 5.375%, resulting in a significant increase in interest expenses. Therefore, the U.S. Treasury is currently paying about $300 billion in interest annually. Now it is about $1.4 trillion, and it seems there is no end in sight.

Jeffrey Gundlach
Deficit spending. So we continue to add about $2 trillion in debt each year, and the average rate on maturing Treasuries is around 3.8%. So, given that the two-year Treasury yield is around 4% and the 30-year Treasury yield is close to 5%, if we continue as is, those maturing bonds will be replaced by higher-yielding new bonds.

Jeffrey Gundlach
I am very interested in the “taper tantrum” and “tariff tantrum” that happened about a year ago. Interestingly, during the “tariff tantrum,” the S&P 500 dropped 18%. If you look back at the S&P 500’s 13 pullbacks or bear markets over the last few decades, in each of the first 12, the dollar was rising, typically by about 8% to 10%. I find it very thought-provoking that the dollar actually declined when the stock market fell 18% last year. This confirms my view that when markets are weak or the economy is weak, rates do not fall.

Jeffrey Gundlach
What is really interesting now is that it is hard for people to discern the real reasons for rising rates. Everyone will say it’s oil prices, and of course, there is some truth to that. But it’s a pattern. Many patterns are being broken. In the past, when Treasury yields rose, spreads on credit products typically narrowed. But in March of this year, it was one of the worst months in a long time. I mean, the two-year Treasury yield rose 60 basis points this month, yet spreads on credit products widened rather than narrowed. So we are beginning to see financial conditions truly tightening. Therefore, I have always believed that we will face an environment that is very unfavorable for financial assets. I know I sometimes catch replays of your Saturday morning show, I think it was the one with Chris Weiland. I think I started watching it. Maybe it’s just confirmation bias because I agree with a lot of what he says. But last year, I told people I felt like I was in 2006, with all the bubbles, all the, you know, the digital technologies with AI and the narrowness of the market. Making money was too easy last year. I mean, even bonds, investment-grade bonds were up 8%, and the S&P 500 was up about 17% or 18%. European stocks performed even stronger, and emerging market stocks performed the strongest.

Jeffrey Gundlach
But this year is a year of caution and reflection. I noticed last year that while gold rose about 70% for the year, Bitcoin actually fell. My conclusion is that we have left the ambitious world. We have left the world of hype and the “you only live once” mentality. We have entered a world of reality, because of Bitcoin. It’s like something from three or four years ago, and I think one of the biggest insults to it is that the millennials will tell the baby boomers that now only the baby boomers still care about Bitcoin because it’s no longer cool. So we are entering a world composed of concrete and real things, leaving the world of hype behind. I think this will become a theme. Today as I was watching financial news, we are approaching the end of March, and they said this is the worst quarter for the stock market since 2022. That’s a long time. I mean, the stock market has dropped that much. I mean, I think some indices fell by 2% or 3%, and some might have dropped 3% or 4%. But this means that we haven’t experienced a single quarter of the stock market dropping 5% in the past four years, which seems like it was long overdue. As we approach 2026, the valuation of the stock market reminds me of the situation at the end of 2021, which led to the subsequent bad year.

Jeffrey Gundlach
In 2022, so I believe we are in a world where capital preservation is paramount. At DoubleLine Capital, we have been continuously reducing risk for more than two years, especially in credit risk, continuously upgrading quality. In fact, our holdings in funds that can invest in BBB-rated corporate bonds are at the lowest level in DoubleLine Capital’s nearly 17-year history. We are not very optimistic about the prospects for financial assets because I believe that even if we fall into recession, long-term Treasury rates will rise rather than fall, which will break the pattern of the last 40 years of my career. I think that is what is about to happen. Therefore, we will face an environment where people are increasingly concerned about interest expenses and, basically, the cost of interest on massive debt.

Jeffrey Gundlach
I hear a lot of people say that if national gasoline prices rise above $4 per gallon, it will have a psychological impact on the economy. I think there may be some truth to that. This morning here in California, our gas prices are about the highest. Hawaii may be higher, but our gas prices are high, and it now costs me six dollars and seventy cents to fill up my tank. That’s really…

Julia
Regular gas?

Jeffrey Gundlach
Yes, regular gas. So prices are already high. But I also think these psychological thresholds are significant. Most people do not realize that national debt has exceeded $39 trillion. I have a feeling that when it reaches $40 trillion, it may become a psychological threshold, and people will start to think, you know, by 2030 or 2031, it may reach $50 trillion.

Jeffrey Gundlach
This is a very big issue. I think investors believe that many of the things they know are shaped by the experience of falling rates and always being able to refinance through cycles, but that era is over. So when the yield on 30-year Treasuries actually begins to rise in a weak economy, what happens? Think about it. If the economy is weak and bond yields rise, consider what that means. It means interest expenses are growing faster. Of course, when the economy is weak, the budget deficit will widen, representing a significant proportion of GDP. In the past, during economic recessions, budget deficits typically expanded by about 4% of GDP. Of course, the last two recessions were very severe. You know, there was the global financial crisis, and then there was the pandemic lockdown, during which the budget deficit expanded by 8% and 12% of GDP, respectively. So, if this happens, I believe one message I have been telling visionary investors is that we may see some rather aggressive actions needed to address this interest expense issue. One concept was proposed in a white paper from late 2024. Then Scott Bessen, who was not yet Treasury Secretary at the time, commented that perhaps we should restructure U.S. Treasuries held by foreign investors. He meant extending maturities and lowering coupon rates. It was interesting when he said that because it was also an idea I had been mulling over, and I think its likelihood is higher than most people are willing to believe, and perhaps a way to address this issue is not only to do it for foreign investors but possibly for all Treasuries. So you walk over and say, I know we will directly lower the coupon on U.S. Treasuries so we can reduce interest expenses. Think about it; the average coupon on Treasuries is about 3.8%. If you lower it to, say, 1%, you could cut nearly 75% of interest expenses. This way, we can return to the spending levels of five years ago, creating more room to push problems down the line. Because you cannot afford, if we head toward $2 trillion in interest expenses, which is exactly where we’re heading, that would truly be unsustainable.

Jeffrey Gundlach
So I think investors need to consider the idea that the creditworthiness of U.S. Treasuries may come into question. People don’t like to hear this. They think it’s too radical an idea.

Jeffrey Gundlach
But I want to tell you. You know, federal income tax used to be illegal. So they passed an amendment to legalize it. You know, under its charter, the Federal Reserve is not allowed to purchase corporate bonds, but after the pandemic lockdown, they bought corporate bonds on a small scale.

Jeffrey Gundlach
So that was illegal. You know, in 2006, there were $2 trillion worth of unsecured mortgage-backed securities prospectuses. On them, it was written in plain English that these mortgages could not be modified under any circumstances. That’s what the prospectus said, but they modified millions of mortgages in the U.S. So the rules can be changed.

Jeffrey Gundlach
Therefore, I feel very nervous about the risks of holding long-term Treasuries. In our portfolio, our exposure in this area is practically zero. And for those we do hold, over a year ago, I went to my government bond team and said I wanted to keep the duration structure of our Treasury holdings unchanged. But at every maturity bucket, I wanted you to replace the bonds we hold with the lowest coupon bonds in that bucket. By doing so, we reduced the coupons on 10-year and longer Treasuries from 4.75% to 1.5%. This way, in case they decide to modify these Treasuries to lower the coupons. Well, if you hold a Treasury with a 6% coupon, that’s a 30-year Treasury issued ten years ago, with a 6% coupon. If they lower it to 1.5%, you will suffer over a 50-point loss.

Jeffrey Gundlach
So even if you think the probabilities of these risks are low, there’s no reason to take them on. I think we all in the investment world agree that if you take risks without any return, you shouldn’t take them. The other side of the same coin is that if you can eliminate a risk at no cost, even if the cost is minimal, you should eliminate that risk.

Jeffrey Gundlach
That’s my view on things. Because of our debt burden and the way we are currently financing the government through a $2 trillion deficit, this is completely unsustainable, so change must occur. If something is unsustainable, it must stop, and this situation must stop. And the politicians, of course, show no willingness to control spending. Therefore, it will ultimately have to be enforced by the market. So that is why I think long-term Treasury yields, the path of least resistance is upward. And this is somewhat concerning, because now we’re seeing some credit pressures emerging as rates experienced one of the largest monthly increases on record in March 2026. High-yield spreads have widened by about 75 basis points. So, the current environment risks are clearly accumulating, and I am very interested in taking low-risk strategies in the coming months and quarters.

Julia
Hey, everyone, I hope you enjoyed this interview. If you could take a moment to click the subscribe button, we are working toward our next goal of 100,000 subscribers, and your support really helps us achieve that goal.

Julia
Thank you very much, and please continue to enjoy the rest of the interview. Wow, Jeffrey, you have built such a great framework for our discussion. As you pointed out, the first time you and I met for an interview was seven years ago. Back then, the debt was $22 trillion, and you pointed out it is now $39 trillion. That $40 trillion might indeed become a real psychological threshold. And your argument is that in the next economic recession, interest rates will rise while the dollar will fall. My gosh, you really caught my attention because that sounds like it will be a very painful awakening. I wonder, do you think investors rationally understand this? Are their positions appropriately set? Because I also hear from you…

Jeffrey Gundlach
No. Yes, positions are appropriate. Most American investors, particularly, their positions are very poor. Over the past year and a half, I’ve been advising American investors that the stocks they should hold should be 100% non-U.S. stocks and that they should hold them in foreign currencies. This worked very well last year and is working decently this year. My top advice is that American investors should buy emerging markets, not emerging market stocks, but emerging market stocks denominated in local currencies.

Jeffrey Gundlach
This is the only thing that is actually rising this year. If you look at the year-to-date, almost nothing is rising. I just checked. This year, gold is up a few percent, the dollar index is up 1.7%, the commodity index, the Bloomberg Commodity Index is up 21%. The only other thing that has risen is emerging market stocks, which are up 1.4%. And in contrast, you know, the U.S. stock market is down. I think it’s time. It’s not common for investors to see this. So many people have been suggesting that American investors invest overseas, but that hasn’t worked for years, and now it’s starting to work. What excites me most in the investment market is when something fundamentally makes a lot of sense but starts to happen in reality, and that’s what’s happening now. These overseas investments are outperforming the U.S. and have a long way to go. If you look at the MSCI World Stock Index, you can divide it into two parts, the MSCI U.S. Index and the MSCI Non-U.S. World Index. About 15 to 20 years ago, the price-to-book ratios of U.S. stocks and those of the rest of the world (excluding the U.S.) were the same. And now, the S&P 500 Index’s price-to-book ratio is more than twice that of the rest of the world (excluding the U.S.). This is an extreme overvaluation. Everyone seems to be saying one phrase, “American exceptionalism.” That makes no sense to me. What they mean is simply that the U.S. has performed better than other regions. When people say “American exceptionalism,” they mean the U.S. markets, particularly the stock market, have performed better than foreign markets. I think we are in a multi-year phase. We may be in the second inning of this nine-inning baseball game metaphor, at most, where foreign markets will outperform the U.S. So I have an unusual asset allocation suggestion. I basically suggest 40% investment in stocks, all non-U.S. stocks. Some of these are in Brazil, Chile, and some Southeast Asian stocks, etc. I only recommend about 25% investment in fixed income, all under ten-year maturities, and all in higher credit quality. Then I recommend about 15% investment in commodities. I might put 10% in the Bloomberg Commodity Index and 5% in gold because I think gold is very attractive right now, having risen significantly to a highly inflated level of $5,500 last year, but earlier this week, it fell to $4,100. So I think gold will continue to be a strong-performing asset. Then I think investors should hold the remaining portion of their portfolios in cash because as we advance into 2026, asset prices will become cheaper. Of course, one thing everyone is talking about, and I have also been very bluntly discussing, is the situation with private credit. Yes. Its scale is strikingly similar to subprime and unsecured mortgages in 2006. People say it’s not large, only $2 to $3 trillion. Well, that was exactly the scale of that market as we entered the global financial crisis in 2006. I think this will be a very long and drawn-out story, not spreading as quickly as the subprime issue because the subprime issue was priced every day, every minute, because there was something called the ABX index used to rate AAA-rated subprime products. You could see it start to plummet like a rock in early 2007. So you could see it fall from 100 to 93, and then to 80. But this private credit thing is evaluated about once a quarter. So the data points will be very limited.

Julia
Yes, Jeffrey, when you talk about that, you… When talking about that, it reminds me, do you see similarities between today’s private credit market and the subprime market of 2006? Because in the summer of 2007, you said at a conference that subprime would be a complete disaster and only get worse.

Jeffrey Gundlach
That’s right. That was at the Morningstar conference in June 2007. Yes. This year I was invited to speak at the Morningstar conference, but I couldn’t go due to scheduling conflicts. But when I was thinking about giving a keynote speech at the Morningstar conference, I said to myself, maybe I should start with “private credit is a complete disaster and will only get worse,” because that’s exactly what I spontaneously said about the subprime issue in 2007. I hadn’t planned to say that. It just came out of my mouth, and I said it. But I’m glad I said it. But, I mean, the issue, obviously, is that everyone is becoming increasingly aware of the private credit market and that those valuations are not real valuations. I think the head of Apollo has also said that. The valuations are not real. So everyone knows that at best, you’re facing a moving average situation. I mean, about a year ago, I really started paying attention to private credit when a client from an insurance company came to visit, a very large insurance company client that was very deeply involved in private credit. They said they had several managers, and eight of them held exactly the same position, exactly the same one. This is typical; it’s somewhat like a club-style private credit, at least it used to be that way, and now there is a bit of family infighting, but not long ago, it was a harmonious big family. He said, I have eight managers holding exactly the same position. One is priced at 95 and the other at 8. What? Wait a minute, what?

Julia
Different marks to market. Oh my gosh, one…

Jeffrey Gundlach
The same position, one valued at 95 and the other at 8. This really opened my eyes because I hadn’t previously understood what was happening there so clearly. But then suddenly, you notice that last summer or early last fall, you began to see these strange things, like, you know, bonds dropping from 100 to zero within weeks. Then what really impressed me was a fund managed by a very respected sponsor that just a few months ago announced it adjusted the fund’s valuation from 100 to 81 in a single day. That was a significant write-down for a fund, overnight. But what many people did not fully realize is that they were unlikely to adjust every single bond they held, every credit position from 100 to 81. That may not have happened. So you have to ask yourself, what is the delta of some of those valuation changes? If half of the fund is completely solid, and they only wrote down the other half of the fund, that means they wrote down that half of the fund by 38 points. If three-quarters of the fund is absolutely solid, and then I write down 25% of the fund, that means that 25% of the fund was written down from 100 to 24 overnight. So what exactly is happening here? It sounds like there must be a lot of opacity in those valuations.

Jeffrey Gundlach
I have always emphasized that private credit is the candidate area for potential problems in the future because it is such a rapidly growing market. I made an analogy: anything that transforms from a small market into a thriving market and becomes extremely popular. I said it’s like a small town in the western wilderness. Well, suppose you’re in the frontier in 1820, and you have an agricultural population that is all God-fearing, and you have a sheriff like Gary Cooper from “High Noon,” who is good-hearted, and everything is running smoothly. But then one day, somebody discovers gold three miles outside of this little town. Suddenly, all these opportunistic types, some of whom are shady characters, flood into the town because they want to get rich. So suddenly, the population swells due to enormous growth. Some of these are unethical people. So you will ultimately see a lot of crime, and everything will start to go downhill. That’s what happens. That’s what happened in the CLO market at the beginning of this century; it’s what happens in any market. Private credit is nothing special. It’s just a thriving market. So suddenly, you have a few companies doing quite well, they have good risk controls, and so on. They achieve decent returns.

Jeffrey Gundlach
Then for some reason, this industry becomes super hot, just like private credit in 2021. Why did private credit become super hot in 2021? Because rates were still zero. Then the government injected $7 trillion into the economy. So anyone with even a rudimentary understanding of basic economics should know that inflation would rise significantly. And zero rates would become a huge loss proposition. Therefore, of course, rates rose from about 1% to over 5% for 30-year Treasuries, meaning a 50-point loss. Of course, the stock market, when you enter 2022 at such high price-to-earnings ratios, experienced massive losses due to such a significant rise in rates.

Jeffrey Gundlach
So when you know subprime, public bonds will get worse, you know traditional stocks will get worse, you will look for something else. Remember how SPACs suddenly became popular? Yes, just like blind pools. It’s like, I don’t want stocks; I don’t want public stocks; I don’t want public bonds because I know they will get worse. So give me something where I can’t map the risks of public bonds and public stocks because if I can map the risks of public bonds and stocks to some other new asset class, then I wouldn’t like that new asset class because it would contain the risks I don’t want to take on.

Jeffrey Gundlach
So give me something that I don’t know what it is; better yet, don’t mark it to market because then I don’t have to worry about volatility. That’s the private credit market. It’s a market that isn’t marked to market and is completely opaque. I would feel better because I don’t know what it is. So the argument about private credit has turned into, hey, this is a low-volatility asset; it’s actually not, or, hey, it has performed well over the last four or five years. Well, that’s because the private market… the public markets were down 12% in fixed income in 2022, and the stock market suffered even larger losses.

Jeffrey Gundlach
So, of course, some things that are not marked to market performed better than the market. That’s like saying a certificate of deposit performed better than a 30-year Treasury. That’s because you’re not marking it to market. So that’s a fundamental flaw of that asset class. And there are many, you know, it ultimately got to a point where now there are even ads on financial shows saying, in the good times, ordinary Americans like blue-collar workers were able to buy a small piece of shares in great American companies like General Motors and Boeing. But now companies are privatized for longer. So the unfortunate ordinary Americans don’t have the opportunity to invest in these extremely great private investment opportunities. So now we are doing an ETF that invests in private credit. The problem is, for endowment funds, being locked into such products is no problem, but these funds are now allowing people to withdraw money every quarter. Of course, we saw in March that in some cases, redemption requests were three times the amount allowed by the fund’s prospectus. So they allow 5%, and they have to deal with 15%.

Jeffrey Gundlach
I heard today that to alleviate people’s views on this issue, there is now a sponsor discussing establishing a fund that would allow people to withdraw 7.5% quarterly rather than 5% quarterly. Then they said, in fact, we might even see if we can get approval to provide monthly liquidity so that people can withdraw 2% monthly instead of 5% quarterly. This is beginning to blur the lines between public and private in a very unsettling way. I mean, if these private products are going to offer monthly liquidity, why not turn it into weekly liquidity? Why not turn it into daily liquidity?

Jeffrey Gundlach
Well, at some point, you really do violate the concept of “private” meaning you have no liquidity. For that, you have a longer investment horizon, perhaps to earn a higher rate of return. But once you start turning something that is supposed to be a liquidity investment (and its marked-to-market valuation flaws) into a… a public market product because you are now fundamentally mismatched between the private product and liquidity, it, it, it cannot coexist. They cannot coexist. It’s two different realms. So when you distort something to expand the buyer base or placate those who are already frustrated with a lack of liquidity, what you get is something that cannot work. It fundamentally lacks the potential to operate; that’s why private credit must undergo a significant shakeout.

Julia
Do you think, hmm, if they talk about “cockroaches,” does that mean a widespread outbreak? Are we heading toward a crisis? How do you see the evolution of this?

Jeffrey Gundlach
I think this area is oversaturated with investment. When I give speeches, sometimes there are 2,000 people in the audience, and from about 2023 to now, during the Q&A, the first question is always, “What do you think about private credit?” This question has been asked so many times that I have started answering, “I guess you’re asking me because you hold a lot of private credit, right?” They all say, “Yes,” everyone, they all hold private credit. Everyone is involved. So there are no new buyers left. Only new sellers. So we caught a glimpse of liquidity issues with the Harvard University endowment, which had to enter the bond market to raise capital to pay maintenance costs and salaries because when campus protests occurred and trouble ensued, their donors stopped donating. Harvard has over $50 billion in endowment but lacks sufficient liquidity to cover tens of billions in expenses, which shows how tightly locked individuals, institutions, and pension plans are. Another thing that hasn’t been fully discussed is, if you really want to get into the details, there are some podcasts made by former insurance underwriters with 40 years of experience who discuss private equity owning private credit and private equity acquiring insurance companies, and then guiding these insurance companies to purchase private credit and transferring part of the insurance company’s risks to reinsurers based in Bermuda, Barbados, or the Cayman Islands, which American regulators have no knowledge of. In some cases, some private credit companies that own insurance companies have transferred these reinsurance risks to those islands, but they have not fully funded them. So they are transferring, say, $50 billion of risk at the insurance company level to reinsurers, but they haven’t funded that with $50 billion of assets. They should actually fund it with $55 billion of assets to maintain a 10% surplus for prudence