We welcome in our Bloomberg TV and radio audiences for special coverage of the close live from DoubleLine headquarters in Los Angeles. And let's get right to it. We're joined by the firm's CEO and CIO, Jeffrey Gundlach. Jeffrey, thank you so much for having us here.
Yeah, it's good to be here. I'm glad you made a house call. It's easy to do.
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 early in April on X that basically we're in 2007 for private credit. I want to talk about the potential domino 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?
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 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 81.
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 messaging has been, that it's mostly all good? No, I remember I think once 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? Yeah. You know, 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'd have to be marked down to below zero.
Right. To get right. So, it's clear. And 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, right? Because we know the dollar amount of the markdown. It's the percentage. So how many are there? That would really, really be an 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 dotcoms back in the late 90s. 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 for those securitized mortgages, about two trillion, you know, and it boomed. And of course 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 event. The money is pumped in from the government, some such thing as wasn't during COVID, and suddenly that money has to get deployed and it can be indiscriminate. So I use the analogy of the Wild West. This is what I think really explains it in simple terms. You've got a nice town. 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 who's got a heart of gold. He's like Gary Cooper in 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 a discovery of gold three miles away and all of a sudden all the fast-buck artists and conmen 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.
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 Cooper gave up his badge unless...
The market will be the Gary Cooper. Okay. The 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. Yeah. 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 delivery page?
I'm actually going through that. Skim through them. Let's just say who knows what's in there.
You didn't read the fine print.
Yeah. Well, we do 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 we get those second quarter numbers?
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 in June than redemption requests in March? I believe virtually every hand would go up. Because it's just human nature when you can't get out, it makes you want to get out even more. And on the panel that I did at the Milken conference yesterday, there was this 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, you know, 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 near the highs. The loan market's not in trouble. They're up near par. The high yield market isn't in trouble. The spreads have tightened right back down 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 was something to that concept, we'd see more evidence of it.
And that's 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 what was packaged 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. I mean at first, but this will be slower I think because the...
The stresses in the subprime market were being tracked by the ABX indices where you 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 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 it was about, it's talking about you shouldn't go to the capital, 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. So the Ides of June this year I believe is June 13th. I looked it up one time. I thought I saw June 23rd but I think it's June 13th. Doesn't matter which one it is. Beware of the Ides of March because that's around when the redemption requests are going to come in.
Are we going to see true defaults? I don't mean like these 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?
Yeah, you already are. You already are. We've seen markdowns from 100 to 81 on a very large private credit fund.
Yeah, they're not, does any, they will leave them at par if they believe they're not on the way to default. I've seen statements not by every private credit company, by a lot of them that they said that's how they justify the 100 to zero.
Remember the 100 to zeros that we saw last summer, right? You know, they didn't, one day they 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 zero. It's not going back up. It's written off. And so there's plenty of write-offs happening. I saw today there was another fund that marked its NAV down 5%. Yeah. Now, that I think is something you're going to start seeing more of because it's a lot more defensible to mark a fund down 5% three times, right, than to 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 Wrigley on steroids. Every firm is top decile.
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. 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 6,400 private companies. So there is that effort out there. I mean do you think that initiatives like this are helpful?
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 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 at every month end with the last close of the day for your performance report. Why don't we use a one-year moving average?
Why not? Because it appears that people find it attractive. Isn't that essentially one of the major selling points for private credit? It has what Sherman has termed laundered volatility. Basically, 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 have 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, say during the taper tantrum, they could have sold those loans at cost?
That's absurd. Of course, they couldn't. Nobody thinks that. And but instead of saying yes, we couldn't 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 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, but 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, right?
Everything's lower volatility if you don't mark it. Nobody thinks that private equity is really lower volatility than public equity. It's just the vehicle that it's in. And then it was sold, 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.
Well, I am curious about one thing. There's been a lot of talk about sort of this new wave of vintages that might be coming down the pike and sort of what the potential yield might be on that. But more importantly, the demand, will the demand be there in the same way that we saw, you know, seven, eight years ago in the last vintage?
I doubt you'll see a repeat of the glory days when the public markets had zero yield and the private markets had both the yield and the hidden volatility. You know, if I just use moving averages on my, I'm actually surprised. I wonder if I can get the regulators to allow me to do a mutual fund that uses 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. 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 to...
Yeah. Because the machine has kind of reached its limits with institutional 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 say 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 go forward unless you attract more and more and more investors. What does that sound like?
