Jeffrey Gundlach on U.S. Debt, Private Credit and Gold | The Julia La Roche Show

Because our debt burden and the way we're financing the government with $2 trillion of deficits, since it's completely untenable, something has to give. If something is untenable, it has to stop, and this has to stop. The politicians, of course, are showing no desire to reign in spending whatsoever. And so it's going to have to be market imposed. This is an environment where risk is clearly building, and I'm very interested in taking a low-risk approach for the months and quarters ahead.

Well, thanks for having me, Julia. It's been too long since we've had a conversation.

All right. Well, it seems that the economy seems to be slowing down. And what's interesting about that is that bond yields are going up, Treasury yields are going up while the economy is slowing down. And one of the cornerstone ideas that I've had, and I've been developing this really for about the last five years or so, is that we are no longer in a secular declining interest rate environment, particularly for long-term interest rates. And I came to that conclusion about four or five years ago when I got a lot of pushback from people. They thought rates were going to stay low for generational reasons. But I think that we have seen long cycles of interest rates that typically go on for about 40 years. We had a low in interest rates around 1945 or so, and they started rising in the 50s and they rose all the way until I guess you could almost say 1984. And then we had the falling interest rates that went all the way into really 2000. And I've been of the opinion that the secular decline in interest rates would definitely be over for long-term interest rates because of the interest expense on the Treasury debt, which has absolutely exploded thanks to the ongoing $2 trillion a year of incremental budget deficits, but also the higher interest rates. The Fed raising interest rates from zero at the short end to 5.38% created a very large increase in interest expense. And so annually the Treasury Department was paying about $300 billion in interest and now it's about $1.4 trillion in interest. And there seems to be no end in sight for this deficit spending. And so we continue to ladle on about $2 trillion a year. And the Treasuries that are rolling off have an average interest rate now of about 3.8%. So as we have interest rates now at 4% roughly on the 2-year Treasury and almost 5% on the 30-year Treasury, we have bonds that are rolling off will be refinanced with bonds, if we stay where we are, that have a higher coupon on them. And I was interested to see when we had the tariff tantrum about a year ago almost exactly. And it was interesting that during the tariff tantrum, the stock market dropped 18% on the S&P 500. And if you go back for the 13 corrections or bear markets in the S&P 500 going back a couple of decades, the first 12 of those 13 corrections or bear markets, the dollar went up every single time and the dollar went up by about 8 to 10%. And I thought it was fascinating that a year ago when the stock market dropped 18%, the dollar actually went down. And that is corroborating my idea that when you get weak markets or weak economy, you won't have interest rates dropping. And what's really interesting now is it's hard for people to decipher what's really the cause of rising interest rates. Everyone's going to say it's the price of oil. And of course there's something to that. But it's a pattern, a lot of patterns have been breaking. We used to have, when Treasury rates would rise, it was fairly typical for spreads on credit products to narrow. But here in the month of March, this is one of the worst months we've seen in a long time. I mean, the 2-year Treasury rate is up 60 basis points this month. And yet spreads on credit products have been widening and not shrinking. And so, we're starting to see real tightening of financial conditions that's happening. So, I've been of the opinion that we're going to see a very difficult environment for financial assets. And I know that I sometimes listen to the replay of your Saturday morning show, the rap I think it is with Chris Whalen.

So that's a long time. I mean it's not like the stock market is down that much. I mean I think some of the indices are down two or 3%, some might be down 3 or 4%. But what that means is that we haven't had a quarter of even negative 5% from the stock market going back four years which seems like it would be really overdue for that to be happening. And entering 2026 we were at a valuation in the stock market that reminded me a lot of where we were at the end of 2021 which led to a bad year in 2022. So I think that we're in a capital preservation world. We've been at DoubleLine, we've been for now over two years constantly cutting risk when it comes to credit risk, constantly upgrading, and we're not really very optimistic about the prospect for financial assets because I think even if we go into a recession, I think long-term interest rates on Treasury bonds will go higher, not lower. And that will break the pattern of the first 40 years of my career. And I think that's what's going to happen. And so we're going to be running into an environment where there's going to be growing concern about the interest expense and about basically the expenses that people have on the tremendous amount of debt that exists. I've heard a lot of people saying that if the price of gasoline nationally goes above $4 a gallon, that's going to cause a psychological effect to the economy. I think there might be some truth to that. I just noticed this morning here in California, we've got about the highest gas prices. I think Hawaii might be higher, but we have about the highest gas prices and it's $6.70 now for me to fill up at my station, which...

Yeah, it's just gas. Yeah. And so it's way up there. But I also think there's something about these psychological levels. Most people aren't aware that the national debt has surpassed $39 trillion.

Yeah. And so I think investors need to think about the idea that something bad could happen in terms of the creditworthiness of the US Treasury. And people don't like hearing this. They think it's too radical of an idea. But I've got news for you. The federal income tax was illegal. So they put an amendment through to make it legal. The Federal Reserve is not allowed to buy corporate bonds by its charter. But they bought corporate bonds in a small way in the aftermath of the lockdowns. So that was illegal. Back in 2006, there were prospectuses on $2 trillion of mortgage-backed securities that were not guaranteed that said these mortgages cannot be modified under any circumstances. In plain English, it said this in the prospectuses, but yet they modified millions of mortgages in the United States. So rules can be changed and so I'm very nervous about exposures to long-term Treasury bonds. We've actually have almost zero in our portfolios in that regard. And the ones that we do own, I actually over a year ago now, I went to my government bond team and I said, I want to keep our Treasury holdings, all the same maturities that we have, but in every maturity bucket, I want you to swap the ones that we own for the lowest coupon in that maturity bucket. And in so doing, we lowered our coupon on 10-year and longer Treasuries from 4.75% to 1.5%. So that just in case they decide that they're going to modify these Treasuries to lower coupons, well, if you own a 6% coupon Treasury that was issued, a 30-year Treasury bond that was issued 10 years ago with the 6% coupon, if they reduce that to a coupon of 1.5%, you're going to have over a 50-point loss. And so there's no reason to take risks even if you don't think they're a high probability. I think we can all agree in the investment world, don't take any risks if you're not getting paid anything for taking that risk. And on the flip side of that same coin, if you can eliminate a risk at zero cost and even if it's a de minimis cost, you should eliminate that risk.

And so that's how I'm thinking about things because our debt burden and the way we're financing the government with $2 trillion of deficits, since it's completely untenable, something has to give. If something is untenable, it has to stop. And this has to stop. And the politicians, of course, are showing no desire to reign in spending whatsoever. And so it's going to have to be market imposed. And so that's why I think that long-term Treasury yields, the path of least resistance is higher. And it is somewhat troubling that now that we have some credit stresses showing up as interest rates have had one of the biggest monthly rate rises here in the month of March 2026, spreads on high yield have widened by about 75 basis points. And so this is an environment where risk is clearly building and I'm very interested in taking a low-risk approach for the months and quarters ahead.

No, they're not positioned properly. Most American investors in particular are very poorly positioned. For the last year plus I've been recommending that American investors own the stocks that they own should be 100% non-US, 100% non-US stocks and to own them in the foreign currencies. So that worked extremely well last year and it's working well this year. My number one recommendation is American investors should buy emerging market equities in the local currencies. And that's the one thing that's actually up this year. If you look at what's happened this year, there's almost nothing that's up. I'm just looking at this a moment ago. What's up this year is you've got gold is up a percent. You've got the Dixie index, the dollar index is up 1.7%. The commodity index is up, the Bloomberg commodity index is up 21%. And the only other thing that's up is emerging market equities which are up 1.4%. And you've got that versus this US stock market that's down. I think it's time for investors and it's not one of these things. A lot of people have been recommending foreign investments for United States investors but it hasn't worked for years and years and years but now it has started to work. What I find is always the most exciting to me in the investment markets is when something fundamentally makes a lot of sense, but it finally starts to actually come into real time, which has happened now. These foreign investments are outperforming the United States. And there is a long way to go. If you just take a look at the Morgan Stanley indices, the Morgan Stanley World Index of Stocks, you can break it into two components. The Morgan Stanley Index for the United States and the Morgan Stanley Index for all the rest of the world except the United States. The United States versus all the rest of the world stock market excluding United States used to be at the same price to book back about 15, 20 years ago and now the price to book on the S&P 500 is more than double the price to book of the rest of the world excluding the United States. And this is an extraordinary overvaluation. And everybody seems to think there's this phrase that gets thrown around, US exceptionalism. That doesn't mean anything to me. What they're saying is the US has outperformed. When people say US exceptionalism, it means the US markets, particularly equity markets, have outperformed foreign markets. I think that we are in a multi-year period. We're probably in the second inning at the latest that we are in the game of this nine-inning baseball game analogy of foreign markets outperforming the United States. So I have an unusual asset allocation recommendation. I basically recommend 40% in stocks, all of them non-US stocks. Some of them like Brazil, Chile, some Southeast Asian stocks and the like. I recommend only about 25% in fixed income. All of it being inside of 10 years and all of it being in the higher part of the quality spectrum. And then I recommend about 15% in commodities. I would probably have 10% in a Bloomberg commodities index and 5% in gold because I believe that gold is very attractive right now having gone up tremendously last year to a very frothy level of $5,500 but it fell down to $4,100 earlier this week. And so I think gold will continue to be a strong performer. And then I think investors should have the balance of their portfolio in cash because things are going to get cheaper along the line of 2026. And of course one thing that everybody is talking about and I've been very vocal about this is the private credit situation.

Which is shockingly similar in size to what subprime and non-guaranteed mortgages were in 2006. People say it's not very big. They think it's only two or three trillion. Well, that's what that market was during 2006 going into the global financial crisis. And I just think that this is going to be a very long drawn out story. It won't proceed with the rapidity that the subprime problem did because the subprime problem was priced every minute of every day. There was an index called the ABX index for AAA-rated subprime and you could see it dropping like a stone starting in early 2007 and so you could see it go from 100 to 93 to 80. But this private credit thing is only like once a quarter. So the data points are going to be few and far between.

That's right. That was at the Morningstar conference in June of 2007.

But yeah, I mean the problem obviously everybody is increasingly aware that the private credit market, the marks are not real marks. I think the head of Apollo said so that the marks are not real. And so everybody knows at best you've got a moving average situation. I mean, my eyes got open to private credit just about a year ago for real when I had an insurance company client come in, very big insurance company client, and they were very involved in private credit. And they said that they had several managers and that eight of the managers that they had owned this exact same position, the exact same one. Which is typical. It's kind of a club, the private credit, or at least it used to be. There's kind of a little bit of a spat going on in the family now, but it was one happy family a while ago. And he said, I've got eight managers that own exactly the same position. One of them has it priced at 95 and another one has it priced at 80.

One same exact holding. One had it marked at 95 and one had it marked at 80. And that really opened my eyes because I hadn't had that kind of visibility into what's kind of going on there. But then all of a sudden you notice last summer or early last fall you started to get these weird things where bonds got marked from 100 to zero like in a matter of a couple of weeks. And then the one that really got to me was there was a fund by a very respected sponsor and that very respected sponsor a few months back announced one day that they were remarking their fund from 100 to 81. Now that's a pretty big markdown to take overnight on a fund. But what a lot of people probably don't fully appreciate with that is it's very unlikely that they marked every bond, every credit position they had from 100 to 81. That probably didn't happen. So you have to ask yourself what exactly is the delta on some of these mark changes? What if half the fund is completely rock solid and they only marked down half the fund? That means they marked half the fund down 38 points. What if three-quarters of the fund is absolutely rock solid and they only marked down 25% of the fund? That means that 25% of the fund overnight was marked from 100 down to 24. So what is going on here? It sounds like there's a lot of opacity for sure on these marks. And I've always highlighted private credit as being the candidate for some problems coming up because it's such a rapidly growing market. I've made an analogy about anything that goes from a small market to a booming market and it becomes extremely popular. I say it's like a town in the Wild West. Okay, so you're on the frontier in like 1820 and you've got an agrarian population and they're all god-fearing and you've got this sheriff who's like Gary Cooper in High Noon. He's got a heart of gold and everything's functioning pretty well. But then all of a sudden one day someone discovers gold three miles away from this town and suddenly all these opportunists, some of them being rapscallions, come flooding into the town because they want to strike it rich. And so suddenly the population is swamped with tremendous growth and some of them are unethical people and so you end up with a lot of crime and everything starts to deteriorate. That's what happens. That's what happened in the CDO market in the middle of the 2000s. That's what happens in any market. There's nothing special about private credit. It's just a booming market. And so suddenly you've got a few firms, they're doing well and they've got good risk control and all that. They have decent returns and then for some reason the sector gets super hot like private credit did in 2021. Why did private credit get super hot in 2021? It's because interest rates were still at zero and the government was pumping $7 trillion into the economy. So anybody that had even a rudimentary understanding of basic economics should have known that inflation was going to go substantially higher and interest rates at zero were going to be a huge losing proposition. So of course interest rates went from like 1% up to over 5% on 30-year Treasury bonds which is a loss of 50 points. And of course, the stock market when you have that type of a rate rise from a very high PE ratio going into 2022 also suffered tremendously. So when you know that public bonds are going to be bad and you know that traditional equities are going to be bad, you look for something else. Remember how SPACs became popular all of a sudden? Just 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're going to be bad. So, give me something that I cannot map the risk of public bonds and public stocks over to because if I can map the risks of public bonds and stocks over to some other new asset class, then I won't like that new asset class because it will have this mapping of the risks that I don't want. So, give me something where I don't know what it is. And better yet, don't mark to market because that way I don't have to worry about volatility. And so that's the private credit market. It's a non-mark-to-market, completely opaque, just I'll feel better because I don't know what it is. And so, the argument for private credit became, hey, it's low volatility, which it isn't, or else, hey, it's got good performance starting over the last four or five years. Well, that's because public markets dropped 12% on fixed income in 2022 and much more than that on equity. So, of course, something that's not marked to market outperformed. It's like saying a CD outperformed the 30-year Treasury bond. It's because you don't mark to market.

So, this is just a fundamental flaw in that asset class. And there's a lot of, you know, it ultimately gets to the point where there's even an ad on a financial program now that says back in the good old days, regular lunch pail type of Americans were able to buy little pieces of these great American companies like General Motors and Boeing. But now companies are staying private a lot longer. And so the poor mom and pop America don't have the opportunity to invest in these phenomenally great private opportunities. So now we're doing an ETF that invests in private credit. Now the problem with that is it's fine for an endowment to get locked up in something like that, but these funds are now letting people withdraw money every quarter. And of course, we saw the withdrawals here that have been requested for March in some cases are triple what the vehicle's prospectus allows for. So they allow for 5%, they're going to do 15%. I heard today that in a way to maybe alleviate the perception of this problem, there's now a sponsor that's talking about doing a fund that lets people take out 7.5% a quarter instead of 5% a quarter. And then they're saying, well, in fact, we might even see if we can get a clearance to do monthly liquidity, so people can get out 2% every month instead of 5% every quarter. This is starting to blur in a very troubling way the delineation between public and private. I mean, if this private stuff is going to give you monthly liquidity, why not make it weekly liquidity? Why not make it daily liquidity? Well, at some point you've really violated the concept of private. Private means that you don't have liquidity and for that you have a longer term horizon and perhaps you can have a higher rate of return. But once you start turning something that was supposed to be an alternative to liquid investments with their mark-to-market foibles, the alternative should not suddenly morph into a public market because now you have a fundamental mismatch between...

What's essentially private placements and liquidity, and they just cannot exist with each other. They cannot exist. They're two different boxes. And so when you have something that is being contorted in order to expand the buyer base or to placate those owners that have already been disappointed with the lack of liquidity, you have something that cannot work. It simply does not have the potential. It doesn't even hypothetically have the ability to function. And this is why private credit has to have a major shakeup.

I think it's very heavily overinvested in. I've given speeches and sometimes the audience is like 2,000 people and starting in about 2023 all the way up until the present moment, the very first question that gets asked in the Q&A session was what do you think about private credit. And it got asked so many times that I started answering it by saying I guess you're asking me because you own a lot of it, right? And they all say yep. Everybody owns private credit. Everybody's in it. And so there is no incremental buyer. There's only incremental sellers. And we saw a glimpse of the illiquidity when Harvard University's endowment had to tap the bond market to raise money to pay maintenance bills and salaries because their donors stopped donating when they had the protests on campus and the trouble there and they pulled back. Harvard with a 50 odd billion dollar endowment didn't have enough liquidity to pay a couple billion dollars of expenses which shows you how locked up people and institutions and plans really are. And the other thing that doesn't get talked about enough, but if you really want to get down into the weeds, there are podcasts by ex-insurance examiners that had 40-year careers that talk about what all is going on with private equity owning private credit, private equity buying insurance companies and then directing those insurance companies to buy private credit and then offloading some of that risk at the insurance company to a reinsurance company that's in like Bermuda or Barbados or the Caymans where US regulators have no visibility. And there are instances where some of these private credit companies with their insurance are putting reinsurance risk in these islands but they're not funding it fully. So they offload, say, $50 billion of risk at the insurance company level to the reinsurance company, but they don't fund it with $50 billion of assets. They're actually supposed to fund it with $55 billion of assets. So they have a 10% surplus to be prudent, but instead they're underfunding these reinsurance companies. And I'm sure it's not 100% of them that are doing it, but it's like the Wild West again. You know, they struck gold with this reinsurance model and like you know, Apollo owns the theme and so they have these captive insurance companies that kind of learned it from a Warren Buffett who started doing this a long long time ago and made a fortune on it. But then they end up claiming to offload risk that isn't really offloaded. So some of these insurance companies or reinsurance companies do not have 10% surpluses as a percentage of their liabilities. They have more like 1% surpluses. And there could be a very big problem should the mark-to-market issues that they have today turn into actual defaults which would happen if the economy slipped into something of a less than mild, more than mild, a not mild recession, something that was worse than that. So I've been reducing risk for two years. We're at our lowest risk position in 17 years of DoubleLine and I'm not even close to starting to increase the risk. I think we need spreads on credit products to go substantially wider for us to really decide that it would be prudent to start going into say single B securities or lower types of ratings. So, we're just trying to preserve capital and wait for better opportunities which based upon the setup entering 2026, they're almost sure to come. It just might not happen this year because like I said, the private credit stuff, you don't get constant information. It's only once a quarter really.

No doubt about it. No doubt about it.

Well, what I would tell anyone in the audience to do if they have access to a charting tool, just go back 30 years if you want and just map out the Fed funds rate, the official Fed funds rate and the two-year Treasury yield. And what you'll see is that after you've had a stability on the Fed funds rate, you'll start to see the two-year move. If it starts moving down, it means the Fed's about to start cutting. If the two-year moves up, it means they're about to start raising rates. When the Fed started cutting rates in September of 2024, we had a massive gap. The 2-year Treasury was like 175 basis points lower than the Fed funds rate and they finally started cutting. And then when they were starting to raise rates back in 2021, 2022, the two-year Treasury was way above the Fed funds rate. And when the Fed finally raised the rate, I think it was 25 basis points at a February meeting. I was on a financial program right after the Fed press conference and I said they should have raised it 200 basis points because they're that far behind the two-year. The Federal Reserve simply follows the two-year Treasury. And you really see that in market action just in the past six trading days because the Fed press conference and the Fed funds unchanged was just a week ago yesterday, a week ago Wednesday. And what was fascinating is I was watching the financial programs before the Fed announcement. All the stock people were on there saying, 'Yes, you know, things are getting a little less convincingly good, but we got one thing going for us. The Fed's going to cut rates twice this year. The Fed's going to cut rates twice this year.' And I said, 'No, they're not. The two-year Treasury is above the Fed funds rate.' Well, since then, we've had a spike in the two-year Treasury, and it's basically at 4% right now. So, there is no way you're going to get a Fed funds rate cut with the Fed funds rate sitting where it is now and the two-year Treasury more than 25 basis points higher than the top end of the Fed funds rate. So, what you're going to be hearing increasingly, and it's already started, is people going to be talking about maybe the next move by the Fed is a hike, which is such a radical change in rhetoric from just six trading days ago when the consensus was two cuts. Although I didn't believe it because the 2-year was already on top of the Fed funds rate then. But it's simply that the Fed doesn't have any super secret information. They're just looking at everything that we're all looking at. And the two-year is the combined wisdom of all these investors who are investing for safety, investing in relatively short-term money, and that's what they think the rate should be. So that's what the Fed funds rate should be. I think we should eliminate the Fed and just use the two-year Treasury for the short-term interest rate.