All right, folks. Jeffrey Gundlach, one of the most revered, admired voices on Wall Street, and let's just say very lately has been very, very vocal. I want to bring out DoubleLine Capital. Their founder, CEO, and CIO, Jeffrey Gundlach. Jeff, thanks so much for joining. You know, this year I've seen your name, I've seen articles, I've seen headlines, even your social media feed. There's a greater sense of urgency, a greater sense of care. What's happening here that really has you really trying to press a message to the general public?
Well, I noticed that there's a family resemblance between what the financial alchemy that's been going on in some of the private markets and the financial alchemy that went on in the mortgage market 20 years ago. What I mean by that is we took triple-B rated securities 20 years ago and somehow we made AAA rated securities out of them, and Wall Street found a way to pocket the difference by basically selling lower quality assets in disguise as high quality assets. And it was based upon ratings. It was based upon the rating agencies. Moody's and S&P were dominant in those days. And they were giving away investment grade ratings on securities that were ultimately worth zero in a fairly short order. And they gave AAA ratings to securities that dropped down below 40 in the depths of the problems. And so now we've got something that's sort of similar. We have ratings that are going on in the private credit market which are kind of dubious. And we have price discovery which is almost non-existent. And we have portfolios that are being held...
evaluations that are now we have historical data going back about a year, at least maybe 18 months, that are now being observed by the Department of Justice as being a little bit sketchy, with one prominent player in the private credit space earlier this year had a portfolio that was marked at 100. Lots of loans in this portfolio. We're not talking about Nvidia stock which can be very, very volatile. We're talking about a large portfolio of loans, and they were marked at 100, and then one night they changed their mind and marked the entire portfolio on average down from 100 to 81. That means either every loan was marked down 19 points, or half the loans were marked down 38 points, or a quarter of the loans — since I keep hearing that mostly everything's fine — maybe 75% of the loans are rock solid and 25% had to be marked down, so they were marked down to 24. So which is better: that everything was great but we had every loan go down 19 points, or everything is mostly great, we have 25% of loans going down 76 points? And this is being looked into because of course there's incentives.
Whenever you have incentives, you can predict what type of behavior will follow. And the incentive of course is to be slow in realizing problems because you're going to be able to bill your clients, people in your fund, at 100 instead of at 81, which makes your fee almost 25% higher. And so this is sort of an issue that there's no transparency. And I always say that when these financial alchemies come around, it always starts out with good intentions and maybe some very good results and even risk-adjusted returns. But it's like the Old West is the analogy that I've become fond of. The Old West, you've got a town, agrarian town out on the frontier, and there's maybe a thousand people there, and they're all living off the land and they're all god-fearing, and there's not a lot of crime. I mean, there might be a murder of passion now and then, but people don't even lock their door. And you got a sheriff. He's like Gary Cooper in High Noon with a heart of gold, and he doesn't have that much to do because it's a society of trust and morality. And then all of a sudden something happens and a lot of money is perceived to be capable of being made because they discovered gold two miles away from this town. And all of a sudden a lot of people come pouring in trying to make a fast buck. The fast money people, and a lot of them are decent people, but some of them are scoundrels and rapscallions, and they're coming in to make a quick hit and get out. And that is almost inevitable when you get to these financial alchemy periods. So, we've got illiquid securities that used to be sold to what was called perpetual capital and endowments and long-dated pension plans, and slowly, slowly they've started to morph into funds that were offering liquidity. They call it semi-liquidity.
Well, semi-liquidity was a — just jump in for one second because you're making a lot of amazing points and I just want to build on it because I've been on this too, you know, and I've been talking about it and I've been extremely frustrated. I've had some brilliant folks on Wall Street come on and every single one of them says it's much to do about nothing. Every single one of them are saying, 'Hey, you know, it's a small drop.' And you just talked about an issue there. The good people of this town allowing the scoundrels to run amok, but no one's saying anything except you. How do you explain that?
Well, it's just there's a lot of people making a lot of money and that leads to a slippage in standards. But everybody that was there say 10 years ago, they still want to keep playing the game because they've done very, very well with it. But other people can come in and start doing things that should be called out, but nobody wants the party to end. So even the ones that were there during the morality days, they want to defend kind of the reputation of the entire class. But there's things that are just so obvious. I mean, you got these long-dated assets and they're giving quarterly liquidity to a certain limited amount, but the fact they're giving it at all is troubling. And I think that the inner workings of all this don't really get well described. It was sold to the retail market through intermediaries that were paid very hefty commissions. Yeah. And those intermediaries, when you have somebody trying to sell you on a new allocation, they don't start out with the negatives. They start out with the attractive aspect of it. They might say that it's lower volatility, which is a myth. It's lower volatility if you're not marking it to market, just like a CD has fake laundered lower volatility. They had good results. They had much better results than private markets during the 2020 to 2022 period, particularly 2022, where you had the worst public bond market results of all time because interest...
And so the 30-year Treasury bond got marked down over 50% in the year 2022 alone. And it's still at that level. Amazingly, the drawdown on the long bond starting from 2020 is still 50% because the long bond is still over 5%, which is near its highs. It's actually within 10 basis points of the high of this cycle.
So Jeff, let me jump in again for a second because we're going to go to break and come back. But before we do, there was a piece in Bloomberg, 'Wall Street Alchemist Tap Insurers to Unfreeze Private Markets.' You talked about the retail investor, and all of a sudden we're all cheering because retail has access to these amazing things that only rich folks had access to, and now they're talking about some sort of — it feels like sleight of hand because everyone knows the jig is up, but how do you get out of it without blowing the whole thing to smithereens?
Well, what we're living on right now is hope, and hope is a very poor investment strategy. But sometimes when you're in a pickle, you have to go to hope. So when you march your portfolio down from 100 to 81, and I bet you everybody believes the next markdown will be — not up, the next remark won't be up but down. So you're just hoping that this software issue ends up not being as bad as people think, or maybe people change their attitudes about it. You're just trying to buy time. Yeah. It's kind of like Kevin Warsh is just trying to buy time with the Fed. And I don't blame him for this. He's brand new, but he's got these task forces he's setting up, and I think that's intentional. I think he knows that inflation is coming down. We just had a real weak inflation CPI report recently, down 4/10 on the headline for the month. And so we know that inflation is going down on a general basis, although still probably hovering around three and a half percent. But as long as we're getting sequential better looking numbers on some of these inflation indices, Kevin Warsh can hold off. And these task forces — I think I'm not a fan of the — I think the problem with the way many organizations are managed is it's run by committee, just like the FOMC is run by committee. And it used to be that everybody kind of fell in line behind the chairman, but now we're getting all these dissenters, and we're getting close to the point where they might even vote against the chairperson depending on how it's managed. So he's trying to buy time. Inflation is going his way, but now we're going away from one committee that's probably too large to now five more committees that are subsets of that one. So now we're going to have five more committees, and we all know that committees are just a way of slowing down decision.
