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DoubleLine Capital Co-Founder & CEO Jeffrey Gundlach Talks Private Credit Risks
00:26:31
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Jeffrey Gundlach
Indiana University strengthens tomorrow's workforce with practical real world experience. IU grads make a difference in your community, serving as teachers, nurses and engineers who rise to tomorrow's challenges and meet them. Learn more at iu Edu Impact,
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Bloomberg Host
Bloomberg
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Jeffrey Gundlach
Audio Studios Podcasts Radio News.
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Bloomberg Interviewer
We're joined by the firm's CEO and cio, Jeffrey Gundlach. Jeffrey, thank you so much for having us here.
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Jeffrey Gundlach
Yeah, it's good to be I glad you made a house call.
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Bloomberg Interviewer
Excuse me.
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Jeffrey Gundlach
To do.
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Bloomberg Interviewer
Absolutely. I mean we've got this nice rug, these nice chairs, so we couldn't be happier. But let's get right to the good stuff here. I want to talk about this moment in private credit. There's been a ton of different analogies and metaphors used. One of the ones that you've used, you said on early in early April on X that Basically we're in 2007 for private credit. I want to talk about the potential dominoes effects here because you think about any potential crisis in private credit, what is the actual read through into markets more broadly, the economy more broadly, and what does that mechanism actually look like?
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Jeffrey Gundlach
I think the mechanism is already underway and the mechanism is a decline or elimination of trust because there's been so much reporting that is questionable in terms of the underlying activity. When, when I point out the one that really grabbed my attention last fall was there was a fund that was marked at 100 and overnight it was marked at 80. Now that is a hard to understand markdown by a not insignificant sponsor, one with a good reputation and a very large staff supposedly doing underwriting and due diligence and tracking and all that sort of stuff, and yet it goes down 19% overnight. Now, many people don't quite fully understand the ramifications of that. They think about a stock, you know, that reports and it goes from 100 to 81 and that's a big move, but there was a big earnings miss or something. These are portfolios of hundreds of loans, maybe thousands of loans in some cases. And 100 to 81 means either all the loans were marked down 19 points, all of them, or say since I keep being told that everything's largely fine, let's say 50% of the loans are absolutely rock solid. That means that the other 50% were marked down 38 points. What if 75% of the portfolio is absolutely rock solid, which is kind of what the the messaging has been, that it's mostly all good? No, I think one said no red flags, no orange, no yellow flags and mostly green flags. Wait A minute, where's the other slice of the pie? No red, no yellow and mostly green. What about the not mostly.
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Bloomberg Interviewer
Yeah.
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Jeffrey Gundlach
Type of thing. But if 75% of the loans are absolutely rock solid, it means the other 25% were marked down to 20 to 24. Right. So but what if it's 10% of the loans? Oops, it have to be marked down to below zero. Right, Right. So it's clear. And when, when we get these markdowns, it would be awfully helpful if they would say this is how many loans we have, this is the dollar amount of loans we have and this is how many were marked down.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
Because we know the dollar amount of the markdown is the percentage. So how many are there? That was really, really big issue. But I've been saying this is not just about private credit. This is something that is endemic to market cycles. This happened in the IPO of dot coms back in the late 90s. They had no, they had no revenue, no business plan and they were selling for large, large prices. And then of course in the lead up to the global financial crisis you had the mortgage market, the non guaranteed mortgage market exploded in size to about where the private credit market is today. A little less actually those securitized mortgage about 2 trillion, you know, and it boomed. And of course that, that ended up blowing up. It's all because the growth is so fast. That's what really drives it. And it can happen when there's a huge liquidity events, that money is pumped in from the government, some such thing as it wasn't during COVID and suddenly that money has to get deployed and it can be indiscriminate. So it's. I use the analogy of the wild west. This one I think really explains it in simple terms. You've got a nice town in it's 1840 and out on the frontier you got a little town, mostly farmers living off the land. And they're all God fearing people. And they got a sheriff there, he's got a heart of gold. He's like Gary Cooper and High Noon. And there's very little crime. You know, every now and then there'll be a murder of passion or something, but no one even locks their doors. They don't have to worry about it. And then something happens and maybe it's. There's a discovery of gold three miles away and all of a sudden all the fast buck artists and con men and rapscallions, they come flooding in. Not everybody's a rapscallion, but a sufficient Fraction of them are rapscallions. And they're coming in there to hit it big and then get out and suddenly there's murders. You have to lock your door, you have to barricade your door. The sheriff is completely overwhelmed.
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Bloomberg Host
Well, who's going to clean it up this time? I mean, who's going to be the Gary Cooper? And if I remember, at the end of the Gary Cooper gave up his badge and left.
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Jeffrey Gundlach
The market will be the Gary Cooper.
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Bloomberg Host
Okay.
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Jeffrey Gundlach
Market inflicts the pain. Yeah. And so you'll end up having, you know, sales at lower prices and so forth. But the trust problem is pretty significant. I mean, it appears that many of the investors in the interval funds didn't quite understand what was going on with the gating possibilities. I'm sure it's in the documents. I'm absolutely positive it's in the documents. But the investors are being sold to through intermediaries. In many, many cases, those intermediaries get paid a very large commission. I read reporting that there were billions of dollars paid to intermediaries selling private credit by the private credit firms. Billions of dollars. So they have a lot of incentive to not focus exclusively on the negatives. Let me put it that way.
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Bloomberg Host
Yeah.
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Jeffrey Gundlach
And so I have a feeling that some people who are in interval funds think and maybe they just didn't read the documents. Did you read your mortgage documents? When you initial every page I'm actually
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Bloomberg Host
going through, I skimmed through them. Let's just say, who knows what's in there?
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Jeffrey Gundlach
You didn't read the fine print.
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Bloomberg Interviewer
Yeah, we do. We live in a disclosure based society. But you make a good point. I mean, you think about the fine print. Did people read it and how do you make sure that they read it? But I want to talk about how this develops because we got through the first quarter of redemptions and certainly we saw some big headlines and some big numbers there. You warned about the ides of June on CNBC last week. I want to talk on Bloomberg about what that means. Are you expecting even bigger redemptions when you get those second quarter numbers?
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Jeffrey Gundlach
I think if I went in front of a crowd of 2,000 people who are somewhat familiar with private credit and said show of hands, who in this room thinks the redemption requests are going to be higher than in June than redemption requests in March, I believe virtually every hand would go up because it's just human nature. When, when you can't get out, it makes you want to get out even more. And there on the panel that I did at the Milken conference Yesterday there was this, the statement made by one of the private credit people that it's really public credit that's at risk, not private credit, because since they can't get out of the private credit, we don't have to sell. See, that's one of the beauties of private credit. So obfuscation is now a synonym for beauty. But you know, they say that because they can't get out of their private credit, they're going to sell their public credit, they're going to sell stocks, it's going to be bad for the stock market. They're going to sell high yield, they're going to sell bank loans, so corporate bonds. And I said, you know, there's a certain intellectual attractiveness of that concept. The only problem I have with it is it's not happening at all. The stock market is not in trouble. It's at new highs. Not today, but it's, it's near the highs. The loan market's not in trouble. Yeah, they're up, they're up near par. The high yield market isn't in trouble. The spreads are tightened right back down where the, where they started from at their lows of the year. So it could happen that, that logic may apply to the future. Yeah, but it's not happening now. And with all of the noise and all of the redemptions that weren't met, you'd think if there were something to that concept, we'd see more evidence of it. And that's.
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Bloomberg Host
How does this play out though? Because I mean, hearing you talk, I'm having flashbacks to kind of like 20 years ago. I mean, the same thing people weren't reading and what was packaged into these, into these mortgage bond deals. And then once they found out what was in them, it was kind of this rush, but it was a slow moving rush.
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Jeffrey Gundlach
I mean, first, but this will be slower I think, because the, the, the stresses in the subprime market were being tracked by the, the ABX indices. We could buy an ABX tranche of double B, double A, single A, triple A. And the triple B's started to fall pretty noticeably in early 2007 and they got down to about 80. And a lot of people thought it was over, that was the end. And it was actually a buying opportunity, but obviously it wasn't a buying opportunity and, but you could see it on the screen every day. And you could also see on a monthly basis the delinquencies starting to pile up. This is more of a quarterly cycle with these, with these interval funds. And so they get A respite, you know, once they go through the painful process of gating them, they now have, I don't know, 10 weeks where they have to revisit that topic again. So we know Beware the Ides of March is from Shakespeare's Julius Caesar. And that was about, it was talking about, you shouldn't go to the Capitol. You know, the ides of March was March 15th. Turns out the Ides of March is not always the 15th. It has to do with how many days it has to do with when the full moon is.
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Bloomberg Interviewer
Hmm.
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Jeffrey Gundlach
So the ides of June this year, I believe is June 13th. I looked it up one time, I thought I saw June 23, but I think it's June 13. Doesn't matter which one it is. Beware of the Ides of March because that's when. Around when the redemption requests are going to come in.
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Bloomberg Host
Are we going to see true defaults? I don't mean like these, these kind of shadow defaults or whatever the heck we're calling it these days. Are we going to see true defaults in any sort of meaningful way in private credit?
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Jeffrey Gundlach
Yeah, you already are. You already are. We've seen markdowns from 100 to 81 on a very large private credit fund.
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Bloomberg Host
Yeah. They're not just.
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Jeffrey Gundlach
They believe them at par if they believe they're not on the way to default. I've seen statements not by every private credit card, by a lot of them. They said that's how they justify the 100 to 0. Remember the 100 to zeros that we saw last summer?
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
You know, they didn't, they one, one day had to make a binary decision that yesterday we thought there was a chance of this paying off. Today we don't think there's a chance of paying off 100 to 0. It's not going back up. It's. It's written off. And so there's, there's, there's plenty of write offs happening. I saw today there was another fund that marked its Navy down 5%.
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Bloomberg Interviewer
Yes.
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Jeffrey Gundlach
Now that I think is something to start seeing more of because it's a lot more defensible to mark a fund down 5% three times.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
Than a mark a fund down 15% overnight. You can spread it out over three weeks. You know, it's a little easier to wave your hands about it rather than 100 to zero overnight. And so it's pretty clear to me that the trust is starting to dissipate because everything's always one off and it's always at somebody Else it's like woebegone on, on steroids. Every firm is top decile.
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Bloomberg Interviewer
Well Jeffrey, I'd love to get your thoughts on some of the recent efforts we've seen to make private credit basically more transparent. Parent. Here's two different headlines from Bloomberg yesterday. One of them is Apollo to start reporting daily prices for private markets. And then you had JP Morgan creating a new index tracking 6400 private companies. So there is that effort out there. I mean, do you think that initiatives like this are helpful?
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Jeffrey Gundlach
It's very confusing because they started out in the early days saying this was a positive feature that we're not marking to market which is a strange thing because it's certainly my, my institutional clients don't feel that way. Yesterday I came up with this idea. Maybe what I should do is go to my institutional, you know, regular investment grade bond clients and say why don't we not value your portfolio every month, end with the last close of the day for your performance report. Why don't we use a one year moving average?
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Bloomberg Interviewer
You should try it.
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Jeffrey Gundlach
Why not? Because it appears that people find it attractive, isn't it? That's one of essentially the major selling points for private credit. It has what Sherman has, has termed laundered volatility. So everybody knows that the prices are moving. They say that private credit really earned its stripes during the lockdown, the COVID lockdown, because it held up. Well, corporate credit bonds would held up too if you didn't mark them down. Does anybody really believe they could have sold private credit loans the first week of April 2020, 2025, say during the taper tangent, they could have sold those loans at cost. That's absurd. Of course they could. Nobody thinks that. But instead of saying yes, we could have sold them, they say you're missing the point. We don't have to sell them. And that's what's so great about it. Well, okay, but if I use moving average marks on my portfolio, portfolio of publicly traded bonds, I'll probably have three times the Sharpe ratio. It'll be the same return ultimately over the fullness of time. It'll look different because it won't be as bumpy. And that's kind of the number one characteristic. It was always sold as being lower volatility.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
Everything's lower voltage. You don't market. Nobody thinks that private equity is really lower volatility than public equity. It's just, it's just the vehicle that it's in and then it was sold the second, the second sales point was the higher historical returns. That's almost all born of 2020, particularly through 2022 when the public market and corporate bonds went down 15 to 18 points in price thanks to rising interest rates. Yeah, you don't mark them. You've got 18 points better performance.
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Bloomberg Host
Well, I am curious about one thing. There's been a lot of talk about sort of this new sort of wave of vintages that might be coming down the pike and sort of what the, what the potential yield might be on that that's offered. But more importantly the demand. Demand. Will the demand be there in the same way that we saw, you know, seven, eight years ago in the last vintage?
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Jeffrey Gundlach
I doubt you'll see, you'll see a repeat of the glory days when the public markets had zero yield and the private markets had both of the yield and the hidden volatility. You know if I, if I just use moving averages, I'm actually surprised I might, I wonder if I can get, get the regulators to allow me to immediately mutual fund. This is one year moving average pricing. I kind of doubt it but if I could, I mean I think it would be a massive success. Right.
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Bloomberg Interviewer
Well I do want to talk a little bit about vehicles here because you know you mentioned interval funds. You think about these non traded BDCs and you think about the last year. I mean there has been a real push to put retail and open up access.
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Jeffrey Gundlach
Yeah. Because the machine has kind of reached its limits institutional and investors and I've seen it written which is a little bit concerning to me. I don't know exactly what they mean underneath this but they see we need to go to retail to keep making loans. It's almost like you have to always add your investor base. What does that sound like? Well, what does that sound like? You can't, you can't go forward unless you attract more and more and more investors. What does that sound like?
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Bloomberg Host
I don't know. I think they build sounds like Social Security system of.
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Bloomberg Interviewer
Well, I am curious whether or not you think that, you know we're going to see some of that push die down here. Whether we are going to see demand from retail heading forward here.
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Jeffrey Gundlach
I'm not sure it'll cool. I think there will be for sure heightened redemption requests. There may be some people that think that it's, it's a buy. I would recommend against that because my experience is long, long and I have a very strong memory and I know the way these things work. You have the first push down and it looks cheap by historical prices and then some intrepid people decide they're going to take a. Take a punt on it and they buy it and it pushes it up somewhat. That's what happened in subprime. Like I said, the Triple B ABX went down from 100 to 80 and then it rallied up to like 92 or something before it went to zero. Hmm. But. So I think there'll be some people that think that it's a buy, although there's an inconsistency between everything's fine and our Navy was marked down 1%. But this is the greatest opportunity you got to buy now because it's down a whole whopping percent. So I think there will be people that buy it and then sell it lower.
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Bloomberg Host
Yeah. I am curious, though. If we do end up in a crisis, there's been a lot of talk as to what capacity the government would have even bail things out the way they did, you know, 20 years ago.
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Jeffrey Gundlach
I have a really hard time thinking about a government bailout on this one.
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Bloomberg Host
Okay.
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Jeffrey Gundlach
The last one, they were able to wrap it up in the little guy on Main street losing his house.
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Bloomberg Host
Right.
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Jeffrey Gundlach
This is the richest guys in the world making money in the Wild West. And so they might do it. I mean, it might be possible. I modified the mortgages. That was against the law and violation of prospectuses. So a lot of weird things can happen. But I think. What do you. I think to get a government bailout, the problem would have to grow so large that it wouldn't be possible. It's weird. They could do a bailout.
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Bloomberg Host
Yeah.
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Jeffrey Gundlach
If it was not that large a problem. But then the public would go, what are you doing? You're just wiring. Wiring money to these billionaires.
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Bloomberg Host
Yeah.
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Jeffrey Gundlach
You've already given your tax breaks to, you know, though that's largely a myth. But that's the way. That's the way the public has been.
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Bloomberg Host
But when you look at. When you look at the fiscal situation, particularly with interest expense continuing to rise higher than defense, I am curious what you think the Treasury Department is actually doing right now with regard to its issuance. Primarily on the shorter end of the curve. And what, at least from what they've communicated, is probably going to be their strategy going forward. Do you trust in what they're doing?
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Jeffrey Gundlach
Well, trust is an interesting word, but they, they're already issuing the vast majority of treasury debt short term. Most people aren't aware of this over the last year, and it's been the case for the last few years. About 85% of all treasury issuance is inside of one year and you know what percentage is longer than 20 years? Under 2%. Actually under one and a half percent. So it's already, it's, it's funny the long and get so much attraction, attention but it's really not the area. They're already doing it all on the short end. The big mistake was that we didn't go much more heavily on the long end when the yield was 1, you know, because now the yields up at 5. So it's up 400 basis points. Those bonds, those 1% or 30 years, they're still down at $0.50 on the dollar.
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Bloomberg Interviewer
Right?
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Jeffrey Gundlach
Still, I mean they're still on their lows because the Yield is within 10, 10 basis points of its high.
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Bloomberg Host
But the market keeps absorbing this.
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Jeffrey Gundlach
Well, maybe, maybe it's being manipulated. I mean they talked about yield curve control but, but rates. Has the market really been been dealing with it? Because since the Fed started cutting interest rates back In September of 2024, the, the long rates are up 100 basis points.
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Bloomberg Interviewer
Right?
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Jeffrey Gundlach
They are up and I think they're going to continue to go up even if there's a recession. In fact, I think if there's a recession they'll go up even faster because people will be worried about the management of the interest expense and it will get to the point where something has to be done about it. And it could be that the government does yield curve control. Scott Bessant talked about yield curve control as a tool and, and we used yield curve control after World War II for about a decade that in Japan for decades. So it can be done. They've done quantitative easing so they can buy whatever bonds they want and they could just buy long bonds and bring the yield down to whatever they want it to be. As they, as they did it in Japan. Now that, that didn't work that well from 1945 to 1955 because once they stopped doing it, you went into a huge bear market and treasury yields went up to 15% even on long term Treasuries and T bill rates were Trend taken above 20%.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
So will they do that? Possibly. That's, that's a potential tool. I have an idea which I've already acted on in some of my portfolios where it's appropriate.
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Bloomberg Interviewer
Go on.
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Jeffrey Gundlach
Which is one of the greatest things ever because in investment business if you can eliminate a risk without paying anything, you should do it. We can agree on that. And if you take a risk, you should get paid something for it. Right?
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Bloomberg Interviewer
Fair.
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Jeffrey Gundlach
Okay. So if you can ever eliminate a risk at zero or no cost, you should do it. So I was thinking what if they go crazy and amplify and implement Scott Besant's suggestion of late 2024, which is we should lower the coupon on our foreign treasury holders and extend their maturity. Now how do you know who the foreign foreigners are? Foreign investors can hide behind any entities. So that's not really an implemental implementable idea but it shows a glimpse into the thought process.
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Bloomberg Host
Do you think they'll try that like an ultra long, ultra ultra long bond?
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Jeffrey Gundlach
I don't think they'd get many buyers for it. I think what they'll do instead is a re restructuring of the existing debt holders possible. I'm not saying this is a 30% chance even, but what if they say, you know what our interest expense is now $3 trillion. We had a recession, rates have gone up. We're now issuing 30 year bonds at 6%. We can't afford it, you know, we're drowning here. So let's just say every maturity bond is outstanding, same maturity. Well, won't bother extending. They could extend them but you don't want to get people super mad. So you say we're not going to extend your maturity but we're going to drop the coupon to the following, the lower of the existing coupon and one. So you would take the entire stock of treasury debt which has an average coupon about four.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
Take it down to be one. So you would bring the interest expense down 75% overnight. And so you would go from $3 trillion to one quarter of that. Okay, so down to 750. And so you'd be half of where you are now. So that would be the ultimate way of kicking the can down the road. We always, we always keep saying we're running out of road. Well that would be a new, a new road that's being paved. We can kick it down. Now what would happen? Well of course bonds, the bondholders would be super mad. The ones that own the sixes that were issued 10 years ago was 30 years. They would go down like 70 points and all those bonds would be worth 30. And the government would not be allowed to borrow for generations. Which is the solution to our work, to our debt addiction. Right, we could do that. So what did I do when I thought of this idea some time ago, actually two years ago now, I said, I called up, I was on the road talking about the potential for this and I said, you know, you're talking too much and you're not acting enough. So I called up My treasury desk. And I said, in certain funds, including our flagship fund, I said, you know, I want you to go through our treasury book and analyze all the maturities. And I want to keep every maturity the same because we like our yield curve positioning, but I want you to take what we own and swap it for the lowest coupon existing in that cohort. Now, not only do you have to pay penalty for that, you pay a little liquidity penalty, but our fund is so liquid, it's. It's not an issue for us. You pay a little bit, but you actually pick up yield. You actually pick up yield because the onesies and the one and a half skis out there, they're off the run. The on the runs trade at the lowest yield. So you actually pick up yield. So you're being paid to eliminate a risk. And I took the coupon in our. In our long bucket of Treasuries from four and three quarters to one and a half.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
So if you. That blows up, I'll be a hero. I'll be a hero, just like I was in the global financial crisis. Yeah, because. Because when you sidestep something and you and people go, I could have done that. Because you're actually not paying a penalty for.
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Bloomberg Interviewer
Right.
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Jeffrey Gundlach
So we'll see if the ones, these and twosies start rallying tomorrow.
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Bloomberg Interviewer
Well, you're going to be the first person we call if we do see that sort of restructuring. But we only have a few minutes left with you. And I do want to talk a little bit more about positioning because you told our colleagues Joe Wiesenthal and Tracy Alley, I believe it was, back in November, that you would recommend a 20% cash position basically to hedge against some sort of market implosion. Is that still your recommendation? What is the ideal allocation? Right now?
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Jeffrey Gundlach
I kind of like 20% in cash. I've had allocations higher than that at times. I just think markets are very, very high. Yields, I think, are going to rise. I've said that earlier this year. People were betting on 2, 3 rate cuts this year. And I said on national media, I said, you know, if you're buying risk assets on the back of only two rate cuts is your high conviction idea, you're back in the wrong horse. We're not going to get rate cuts this year. And now I think that narrative has become not uncommon that we're not getting rate cuts and maybe we'll get a rate rate hike, but cash. I think you can deploy lower valuations on risk assets and higher yields on fixed income. I'VE liked commodities for a long time. Yeah, I like about a 20% position. I personally have a higher one. But for most people, 20% position in something that's real assets. And the Bloomberg commodity Index is perfectly fine.
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Bloomberg Host
Yeah.
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Jeffrey Gundlach
For that it's doing great. It's been super strong. It's new high. Yeah. It's above all moving averages. It's due for a pullback. But it's so broadly diversified and so many commodities are under upward pressure based on the oil prices, particularly food commodities, which haven't really even filtered through yet. So I like that I go on and off on gold. I was very big gold bull entering 2025 and I was asked when it was at 2970, I was asked on national TV, right. Do you think it's going to go above 3000? Yeah. And I said, what kind of a forecast is that? Is it going to go up a percent?
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Bloomberg Host
Yeah.
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Jeffrey Gundlach
I mean, come on. I said it's going to go above 4,000 by the end of this year, 2025, and it went to 5,500.
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Bloomberg Host
Jeffrey this has been a wonderful conversation.
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