In markets awash in “garbage lending” and unhealthy valuations, Jeffrey Gundlach is keeping his strategy simple: load up on cash and stay away from private credit.
One of Wall Street’s bond kings is spotting overpriced assets almost everywhere he looks. In an episode of the Odd Lots podcast recorded to mark the show’s 10-year anniversary, Gundlach called out nosebleed valuations in the equity market and warned investors against “incredibly speculative” bets.
The DoubleLine Capital founder recommends a 20% cash position to hedge against a market implosion — one he sees brewing in unsafe lending to private companies and overblown hopes for artificial intelligence.
“The health of the equity market in the United States, it’s among the least healthy in my entire career,” Gundlach said. “The market is incredibly speculative and speculative markets always go to insanely high levels. It happens every time.”
The veteran debt investor is concerned the $1.7 trillion private credit market is engaging in “garbage lending” that could tip global markets into their next meltdown. The collapse of auto lender Tricolor Holdings and car-parts supplier First Brands Group has lent new urgency to what’s an oft-repeated narrative for Gundlach.
“The next big crisis in the financial markets is going to be private credit,” he said. “It has the same trappings as subprime mortgage repackaging had back in 2006.”
That warning sets the stage for Gundlach’s broader critique of market excess, which stretches from risky loans to frothy tech stocks. He sees the clearest signs of speculative behavior in bets on AI and data centers.
Wall Street has been growing more cautious about the huge sums that companies are spending on infrastructure and the hefty prices those at the center of the AI boom command. Shares of chipmaker Nvidia Corp. are down 8% this month while the tech-heavy Nasdaq 100 index has lost more than 3%.
“One has to be very careful about momentum investing during mania periods — I feel like that’s where we are right now,” Gundlach said.
‘100 or Zero’
The debt industry itself has been looking to reassign blame for financing Tricolor and First Brands. Banks that extended loans are pointing the finger at private managers that put up the supply chain and inventory funding. What’s clear is it’s become harder to dismiss any one case as an isolated event: JPMorgan Chase & Co. chief Jamie Dimon caused a stir when he told analysts last month that there’s never just one “cockroach,” and there could be more pain than usual when the economy takes a turn for the worse.
Gundlach drew parallels to the “inflated” AAA ratings of subprime mortgages in the run-up to the financial crisis and warned that private managers may have an unrealistic assessment of the value of their loans.
“There’s only two prices for private credit — 100 or zero,” Gundlach said. “It looks like it’s safe because you could sell it any day, but it’s not safe because the price at which you sell will be gapping lower day after day after day.”
Take private loans to Renovo Home Partners. BlackRock Inc. just decided that the loans it made to the struggling home improvement company are worthless. About a month ago, it deemed the debt to be worth 100 cents on the dollar.
The industry’s push into retail investors has created the “perfect mismatch” between a promise of liquidity that is backed by illiquid assets, Gundlach said. The risk is that if those funds are hit by redemptions their inability to sell assets quickly may cause spiraling losses.
Gundlach, however, doesn’t see a straightforward way to invest based on his view that the private credit market is a powder keg waiting to blow. He won’t short high-yield bonds, for example, a trade he says is “losing money all the time.”
Even when it comes to gold, his No. 1 trade earlier this year, Gundlach is now advocating a 15% allocation after the metal’s earlier torrid rise (he previously recommended 25%). He touted it as a diversification that should be part of the standard portfolio asset mix. But overall, he warns that investors don’t have a lot of good options now.
“Financial assets broadly should have a lower allocation than typical,” Gundlach said. “The trouble always comes in financial markets when people buy something that they think is safe. It’s sold to them as safe, but it’s not.”
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Read more articles by Denitsa Tsekova, Tracy Alloway, Joe Weisenthal
