Jeffrey Gundlach: Private Credit Is An Unmitigated Disaster, And It’s Only Going To Get Worse

because our uh debt burden and the way we're financing the the the government with $2 trillion of deficits here, since it's completely untenable, something has

to give. If something is untenable, it

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 this is an environment

imposed. And so this is an environment where risk is clearly building. and uh

I'm very interested in taking a low-risk approach for the months and quarters ahead.

>> Jeffrey Gunlock, founder and CEO of Double Line Capital, it is an absolute honor to welcome you to the show today.

Thank you so much for taking the time to join me.

>> Well, thanks for having me, Julia. It's

been too long since we've had a conversation.

>> It's been such a long time. It's been 5 years since our last conversation. and

you are one of my absolute favorite folks in the investing world to speak to. And so again, it's an honor.

to. And so again, it's an honor.

Jeffrey, a lot has happened this year so far. I can't believe we're almost

far. I can't believe we're almost through with the finished with the first quarter. And I keep saying with my

quarter. And I keep saying with my guests like so much has happened, so much has transpired. Well, a lot has.

And since it's been a while since I had you on, let's start big picture, macro view, the framework in which you're looking at the world today, your

assessment of the economy and markets, what's on your radar. And one of the things about this show, Jeffrey, is you can take all the time you need to set the table when it comes to that big

picture macro view.

>> All right. Well, it seems that uh 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 kind of

slowing down. And one of the kind of cornerstone ideas that I've had and I've been 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. And I was get got a lot of

years ago. And I was get got a lot of push back from people. They thought that you know rates were going to stay low for generational reasons. But I I think

that uh we have seen long cycles of interest rates that typically go on for about 40 years. And we had a low in interest rates in the around 1945

or so. and they started rising in the

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

2000. And I've been of the opinion that the uh secular decline in interest rates would definitely be uh 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. You know, the

the Fed raising interest rates from zero at the short end to five and a five and 38% created a very large increase in

interest expense. And so annually the

interest expense. And so annually the 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

year. And the treasuries that are rolling off uh 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 uh 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

on them. And I was interested to see when we had the taper, the tariff tantrum about a year ago almost exactly.

And it was interesting that during the the tariff tantrum, the stock market dropped 18% on the S&P 500. And if you go back uh for the 13 corrections or

bare markets in the S&P 500 going back a couple of decades, the first 12 of those 13 corrections or bare 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 is corroborating my idea that we when you get weak markets or weak economy, you won't have interest rates dropping.

And what's really interesting now is uh it's hard for people to decipher what's really the cause of rising interest rates. Every everyone's going to say

rates. Every everyone's going to say it's the price of oil. And of course there's there's something to that. But

as it a pattern a lot of patterns have been breaking. We used to have, you

been breaking. We used to have, you know, when uh 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 uh we've seen in a long time. I mean, the 2-year Treasury rate

time. I mean, the 2-year Treasury rate up 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 uh that's happening. So, I've been of the opinion

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 uh I I sometimes listen to the

replay of your of your Saturday morning show the rap I think it is with with Chris Whan.

>> Yeah. And uh I I kind of really I I think I've started listening to it.

Perhaps it's just confirmation bias because I agree with a lot of stuff he's saying. But the idea that last year was

saying. But the idea that last year was last year I was saying to people I feel like I'm in 2006 with all of this froth and all this uh

you know this new miracle technology of AI and the the narrowness of the market and it was so easy to make money last year. I mean even bonds investment grade

year. I mean even bonds investment grade bonds were up 8%. and S&P 500 was up was up something like 17 or 18 and European equities were even stronger and emerging

market equities were the strongest of all. But this year it's a year of

all. But this year it's a year of caution and a year of reflection. I

noticed last year that while gold went up 70% roughly for the year, Bitcoin actually fell. And I I my takeaway from

actually fell. And I I my takeaway from that was we've we've left the aspirational world. We've we've left the

aspirational world. We've we've left the world of hype and of uh everybody thinking that you know you only live once and all this sort of stuff and

we've got into a world of reality because Bitcoin is so like it's so 34 years ago now. I think one of the most

uh uh greatest insults for uh that that a millennial would say to a baby boomer is the only one only people who care about Bitcoin anymore are baby boomers because it's it's not cool. It's not

cool anymore. So we we've entered a world of things that are concrete and real and we've left the world of hype and I think that's going to be a theme.

I was watching financial news today and we're almost at the end of March and they say this is the worst quarter for the stock market since 2022.

>> So that's a long time. I mean it's not like the stock market is down that much.

I mean I I think some of the indices are down two or 3% some might be down 3 or 4%. But what that what that means is

4%. But what that 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

happening. And entering 2026 we were at a valuation uh in the stock market that reminded me a lot of where we were at

the end of 2021 which led to a a bad year uh in in uh 2022. So I I think that we're in a capital preservation world.

We've we've been uh at Double Line.

We've been for now over two years constantly cutting risk when it comes to credit risk, constantly upgrading. And

we actually have in funds that we can do things like tripleB corporate bonds. We

have the lowest holdings we've had in the history of Double Line, which is now almost 17 years. And we're uh not really very optimistic about the the prospect

for financial assets because I think even if we go into a recession, I think uh long-term interest rates on Treasury bonds will go higher, not lower, and

that will break the pattern of the f 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 the the expenses that people have on the

tremendous amount of debt that exists.

I've I've heard a lot of people saying that if the price of uh of gasoline nationally goes above $4 a barrel, 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 about the highest gas prices and it's $6.70 now uh for me to fill up at my station, which >> And that's just regular gas.

>> Yeah, it's just 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

psychological levels. Most people aren't aware that the national debt has uh surpassed $39 trillion. Mhm.

>> And I have a feeling that when it gets to $40 trillion, that could be a psychological level that people start to think, you know, it might be $50

trillion >> by the time we get to maybe 2030, 2031.

And this is this is a really big issue.

And I I'm I think that many of the things that investors think they know have been informed by falling interest rates and always a cycle of of of of uh

being able to refinance things. And

that's not there anymore. So what's

going to happen when and if the 30-year Treasury bond yield actually starts to go up in a weak economy? Just think

about that. If the economy is weak and the bond yield rises, think of what that means. It means that interest expense is

means. It means that interest expense is going up even faster. And of course, when you get a weak economy, the budget deficit expands by some significant percentage of GDP. It used to be 4% of

GDP was the expansion of the budget deficit during recessions. Of course,

the last two recessions were real doozies. You know, there was the global

doozies. You know, there was the global financial crisis and then you had the lockdown and there the budget deficits expanded by 8 and 12% of GDP. So if if

that actually happens, I think one of the messages that I've been telling thoughtful investors is we might see some fairly radical things that need to

take place to deal with this interest expense problem. And one of them uh was

expense problem. And one of them uh was kind of floated in the latter part of 2024 in a white paper. And then Scott Bessant uh who was not yet secretary of

the treasury pointed made a comment that maybe we should restructure the treasury bonds owned by foreign investors. And

what he meant by that was extend the maturity and reduce the coupon. And it

was funny when he said that because that's an idea that I've been noodling around with thinking that it's probably a higher probability than most people wish to believe. that perhaps one way of

dealing with this issue might be not just to do it on foreigners, but maybe you do it on everything. So you go you go and say, I know we're going to just

cut the coupon on on the treasuries so that we can reduce our interest expense.

Just think about it. The average coupon is about 3.8% on treasuries. So if you cut it down to say 1%, you'd be cutting

the interest expense by almost 75%. So,

we'll be able to reset back to the the expense levels we had 5 years ago and therefore have more of a runway to kick the can down. Uh because you can't if we

go to $2 trillion of interest expense uh which is where we're headed, that's that's really going to be uh untenable.

>> Yeah. And so I I think investors need to think about uh the idea that something could 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. You know that the the federal income tax was illegal. So

they put an amendment through to make it legal. You know, the Federal Reserve is

legal. You know, the Federal Reserve is not allowed to buy corporate bonds by its charter. But they bought corporate

its charter. But they bought corporate bonds in a small way in the aftermath of the of the lockdowns. So that was illegal. You know, back in 2006, there

illegal. You know, back in 2006, there were prospectuses on $2 trillion of mortgage back securities that were not guaranteed that said these mortgages cannot be modified under any

circumstances. In plain English, it said

circumstances. In plain English, it said this in the perspectuses, but yet they modified millions of mortgages uh in the United States. So things rules can be

United States. So things rules can be changed and so I'm very nervous about uh 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 uh over a

year ago now, I went to my uh 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 expo our coupon on 10 year and longer treasuries from

four and 3/4% to 1 and a.5%.

So that just in case they decide that they're going to modify these treasuries to lower coupons, well uh if you own a 6% coupon Treasury that was issued a 30-year Treasury bond that was issued 10

years ago with the six coupon, if they reduce that to a coupon of 1 and a half%, you're going to have over a 50 point loss. And so there's no reason to

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

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 dimminimous cost, you should eliminate that risk.

Mhm.

>> And so that's how I'm thinking about things that because our uh debt burden and the way we're financing the the 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

to stop. And the politicians of course are showing no desire to reign in spending whatsoever. And so it's going

spending whatsoever. And so it's going to have to be market imposed. And so I that that that's why I think that uh long-term Treasury yields the the path

of least resistance is higher. And uh I and it's it is 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 in here in the month of March 2026. Spreads on high yield have widened

2026. Spreads on high yield have widened by about 75 basis points. And so this is an environment where risk is clearly

building and uh I'm very interested in taking a low-risk approach for the months and quarters ahead.

>> Hey everyone, I hope you are enjoying this interview. If you can take a quick

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you so much and enjoy the rest of the interview.

Wow, Jeffrey, what a great frame up to the discussion here. And as you point out, like the first time you and I met in for an interview was seven years ago.

The the debt was 22 22 trillion at the time. And as you point out, 39 trillion

time. And as you point out, 39 trillion and that 40 could be that real psychological number. And um your thesis

psychological number. And um your thesis here in the next recession rates go up, the dollar goes down. Um gosh, you really got my attention though because

it sounds like it's going to be a really painful awakening. I wonder do do you

painful awakening. I wonder do do you think investors intellectually understand this, accept this? Are they

positioned properly? Because I'm also hearing from you is >> no, they're not positioned properly.

Most American investors in particular are very poorly positioned. I recommen

for the last uh 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, not emerging market equities in the local

currencies. And that's the one thing

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 uh 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 uh and uh you you've you've got that versus, you know, this US stock market that's down. I think it's time for

that's down. I think it's time for investors and it's it's it's not one of these things. So let me say a lot of

these things. So let me say a lot of people have been recommending uh foreign investments for United States investors but it's been 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 the all

States. The United States versus the all the rest of the world stock market excluding United States used to be at the same price to book. uh 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 extraordinarily overvaluation and everybody seems to think there's this phrase that gets thrown around US exceptionalism that doesn't mean anything to me what

what what they're what they're saying is the US has outperformed when people say US exceptionalist it means the US markets market, particularly equity markets have outperformed foreign markets. I think that we are in a

markets. I think that we are in a multi-year period. We're not we're

multi-year period. We're not we're probably in the in the second inning at at uh is probably the latest that we are in the game of this nine inning, you

know, baseball game analogy of foreign markets outperforming the United States.

So, I have an unusual asset allocation recommendation. And I basically

recommendation. And I basically recommended 40% in stocks, all of them non- US stocks. Um, some of them like Braz like Brazil, Chili, Chile, some

Southeast Asian stocks and the like. Um,

I recommend only about 25% in fixed income. All of it being inside of 10

income. All of it being inside of 10 years and all of it being uh in the higher part of the quality spectrum. And

then I recommend about 15% in commodities. I would probably have 10%

commodities. I would probably have 10% in a Bloomberg commodities index and 5% in gold because I believe that gold uh

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

uh uh earlier this week. And so I think I think gold will continue to be a strong performer. And then I think

strong performer. And then I think investors should have the balance of their portfolio in cash because things are going to get cheaper uh 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.

>> Yes.

>> Which is shockingly similar in size to what subprime and non-G guaranteed mortgages were in 2026. People say it's not very big. It's only two or three

trillion. Well, that's what that market

trillion. Well, that's what that market was during uh 2006 during going into the global financial crisis. And I just

think that this is going to be uh a very long drawn out story. It it won't it won't uh proceed with the rapidity that

the subprime problem did because the subprime problem was priced every minute of every day. You could 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.

>> Yeah. Jeffrey, um, when you say that you talk about that, it reminds you, you see parallels in today's private credit market to subprime in 2006 because in

the summer of 2007, you were at that conference and you said subprime was going to be an unmititigated disaster and it was only going to get worse. Um,

>> that's right. That was at the Morning Star conference in uh June of 2007.

>> Yes. And I I was I was uh invited to speak at the Morning Star conference this year. It ended up I had a

this year. It ended up I had a scheduling conflict and couldn't did it couldn't do it. But when I was noodling around with the concept of doing the Morning Star keynote, I said thought to myself, maybe I should start with

private credit is a total unmitigated disaster and it's going to get worse because that's what I ad lived back about subcrime. I didn't plan on saying

about subcrime. I didn't plan on saying that in 2007. It just I I just it just came to me and I blurted it out at that conference, but I was happy happy I said it.

>> But yeah, I mean the problem obviously everybody is 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 the marks are not real. And so

everybody knows at best you've got a moving average situation. I mean, I had my eyes got open to private credit just about a year ago for 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

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. And

which is typical. Uh it's kind of a club, the private credit world, at least it used to be. There's kind of 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 eight."

>> What? Wait, what? Different different

mark tomarkets. Oh my gosh.

>> One same exact holding. One had it marked at 95 and one had it marked at eight. And I that really opened my eyes

eight. And I that really opened my eyes because I hadn't had that kind of visibility into what was kind of going on there. But then all of a sudden you

on there. But then all of a sudden you notice last summer uh later or early last fall you started get these weird things where one you know bonds got

marked from 100 to zero like in in a matter of a couple of weeks. And then

the one that really got to me was there was a a a a fund by a very respected sponsor and that very respected sponsor a few months back announced one day that

they were re 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 threearters 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 uh opacity for sure on on these marks. And I I've I've I I

always I I I highlighted private credit as being the candidate for some problems coming up because it's such a rapidly growing market. I I've made an analogy

growing market. I I've made an analogy about anything that's goes from a small market to a booming market and it becomes extremely popular. I I say it's

like a town in the Wild West. Okay.

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 and 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 rap scallions, 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 uh unethical people and so you end up with a lot of crime and everything starts to deteriorate. That's what happens. That's

deteriorate. That's what happens. That's

what happened in the co market in the middle of the OOS. That's what's hap that's what happens in any market.

There's nothing special about private credit. It's just a booming market. And

credit. It's just a booming market. And

so suddenly you've got a a few firms that are doing well and they're 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 then the government was pumping 7 trillion dollars into the economy. So anybody that had even a

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

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 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 spaxs became popular all of a sudden? Just blind pools. It's like I

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

stocks. I don't want public bonds because I know they're going to be bad.

So, give me something that I cannot map uh the 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 it will it'll have this mapping of the risks that I don't want. So, give me something where I

want. So, give me something where I don't know what it is. And better yet, don't market 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-marktomarket, completely opaque, just I'll I'll feel better because I don't know what it is. And so,

you know, the the the argument for private credit became, hey, it's a it's low volatility, which it isn't, or or else, hey, it's got it's got good

performance starting in uh over the last four or five years. Well, that's because private mark 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 up outperformed. It's like it's like saying

outperformed. It's like it's like saying a CD outperformed the 30-year Treasury bond. It's because you don't market to

bond. It's because you don't market to market.

>> So, this is this is just a a fundamental uh flaw in in that asset class. And

there's uh a lot of, you know, uh it ultimately get gets to the point where there's even an ad on uh on a financial program now that says back in the good

old days, regular lunch pale type of Americans were able to buy little pieces of these great American companies like, you know, General Motors and Boeing. But

now companies are staying private a lot longer. And so the po poor mom and pop

longer. And so the po poor mom and pop America don't have the opportunity to to invest in these phenomenally great private opportunities. So now we're

private opportunities. So now we're doing an ETF that invests in private credit. Now the problem with that is

credit. Now the problem with that is it's fine for for an endowment to get locked up in something like that, but these funds are now letting people

withdraw money uh 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 um maybe ailarate 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

every quarter. This is starting to blur very 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 uh violated the concept of private. Private means that you don't

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, you know, something that was supposed to be an alternative to liquid investments with their marktomarket uh foibless,

the alternative should not suddenly morph into a a public market because now you have a fundamental mismatch between what's essentially private placements

and liquidity. And it it just c they

and liquidity. And it it just c they cannot exist with each other. they they

they they cannot exist. They they're two different boxes. And so when you have

different boxes. And so when you have something that is being contorted uh in order to expand the buyer base or

to plate those owners that have already been disappointed with the lack of liquidity, you you have you have something that cannot work. It it it 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.

>> Do you think is it they talk about the cockroaches like is it a full-blown infestation? Are we headed toward a

infestation? Are we headed toward a crisis? Like how do you see this one

crisis? Like how do you see this one playing out?

>> I I think it's very heavily overinvested in. I I've give I give speeches and uh

in. I I've give I give speeches and uh 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 because you own a lot of it right and they all say yep and everybody body, they all own

private credit. Everybody's in it. And

private credit. Everybody's in it. And

so there there is no incremental buyer.

There's only incremental sellers. And we

s we saw a glimpse of the illquidity 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

are. And the other thing that doesn't get talked about enough, but uh if you really want to get down into the weeds, there are podcasts by uh 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 insurance company that's in

like Bermuda or Barbados or the Cayman's where US regulators have no visibility and there are instances where some of

these uh private credit uh companies with their insuranceances are are putting reinsurance risk into these islands but they're not funding it

fully. So they offload, say, $50 billion

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

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

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,

we've they struck gold with this with this reinsurance model. And like you know Apollo owns the theme and so they they 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

it. But then they end up claiming to offload risk that that isn't really offloaded. So some of these insurance

offloaded. So some of these insurance companies or reinsurance companies do not have 10% surpluses as a percentage of of their liabilities. They have more

like 1% surpluses. And there could be a very big problem uh should there should should the marktomarket issues that they have today turn into actual defaults

which would happen if the economy slipped into uh something of a less than mild more than mild a not mild recession

something that was worse than that. So

I'm very I've been I've been reducing risk for two years. We're at our lowest risk position in 17 years of double line and I'm not even close to starting to

increase the risk. I think we need we we need uh we need spreads on credit products to go substantially wider for us to really decide that it it would be

prudent to start going into say single B securities or or lower types of ratings.

So, we're just trying to we're just trying to preserve capital and uh wait for better opportunities which based upon the setup entering 2026 are 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 It's only once

constant information. It It's only once a quarter really.

>> Yeah.

>> And so, we'll see what happens. One

thing I think anybody that's been around the block even half as many times as I have been knows that the withdrawal requests from private credit are going

to be way higher in June than they were in March. Because when you ask for 14%

in March. Because when you ask for 14% and they give you five, the next thing you do is you ask for 40 because that way maybe you'll be able to get a little bit more. It's like a bond allocation.

bit more. It's like a bond allocation.

You know, I've been trading bonds for over 45 years. And when there's a a good market and there's a company that people really like the credit profile of, uh,

if they do a $500 million issue, if you want 50 million, you don't put in for 50 million because there's going to be more demand than the 500. So, you put in for

200 million and that way you get the 50.

That's what these redemptions are going to be. They want a certain percentage.

to be. They want a certain percentage.

They they didn't get it this time. They

know that there's going to be a lot more demands next time and so you're going to see some pretty wild redemption requests come June of 2026.

>> I know you're going to be right, Jeffrey. All right, I want to bring up

Jeffrey. All right, I want to bring up another area that you have been absolutely on top of and I think this is so interesting. You pointed this out.

so interesting. You pointed this out.

The Fed follows the 2-year yield more than leading it.

>> No doubt about it. No doubt about it.

>> All right. Ex Can you explain it for the audience? Well, I what I would tell

audience? Well, I what I would tell anyone the audience to do if they have access to a chart making 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 when

yield. And what you'll see is that when the what 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 two-year moves up, it means

cutting. If two-year moves up, it means they're sp about about to start raising rates. Um, when the Fed started cutting

rates. Um, when the Fed started cutting rates in September of 2024, we had a massive gap. The two-year Treasury was

massive gap. The two-year Treasury was like 175 basis points lower than the Fed funds rate. And and they finally started

funds rate. And and they finally started cutting. And then when they when they

cutting. And then when they when they were starting to raise rates back in uh in 2021 2022, the two-year Treasury was way above the Fed funds rate. And they

when the Fed finally raised the rate, I think it was 25 basis points at a February meeting. I was on a financial

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 you

two-year Treasury. And you really you really see that in market action just in the past uh six trading days because the Fed the Fed uh press conference and the

Fed funds uh unchanged was was just a week ago yesterday, a week ago Wednesday. And what was fascinating is I

Wednesday. And what was fascinating is I was watching the financial programs before the Fed announcement. All the the stock people were on there saying, "Yes,

you know, things are getting a little little uh less uh 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

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

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

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. I I I because we the 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

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

be. So that's what the Fed funds rate should be. I I think we should eliminate

should be. I I think we should eliminate the Fed and just use the two-year Treasury for the short-term interest rate.

>> Um Okay. So, do you Okay, the next move is a hike. Do you think Why do you think Okay. Most likely a hike, you think?

Okay. Most likely a hike, you think?

>> Sure looks like it. If if certainly if the price of oil sustains >> at $95 a barrel for West Texas Intermediate, if that if that lasts

through the summer, there's absolutely positively the Fed will hike rates.

>> Okay. And then also, as you point out in your thesis again and in the next recession, rates will also go up, dollar goes down. Um on the recession front, do

goes down. Um on the recession front, do you have a probability in mind um like how likely we are to enter one anytime soon or timeline?

>> I I don't that's not really a framework that I that I think about because there's there's there there's no science behind that sort of thing. But I I I I I

think that I I think that the rising interest rates that are being pressured higher because of supply and because of still elevated

inflation. I mean I I I think that

inflation. I mean I I I think that that's mortgage rates back to 6 and a half%. If this continues, we're going to

half%. If this continues, we're going to get mortgage rates at 7% again. The

housing market couldn't even survive it with mortgage rates in the high fives. I

mean the the housing market is more abundant even with rates below 6% on mortgages and now they're at six and a half%. And if if if we keep this

half%. And if if if we keep this elevated inflation framework they're going to keep going higher. So yeah I I would think that I would think that uh

certainly there's there's a good probability that the powers that be will declare that a recession started sometime in 2026. I

would give that a 50% probability at least.

>> Okay. Um I want to go back to um more of our fiscal picture >> because you also wrote a piece in the economist and I will link that for folks

too. I think I can link that um back in

too. I think I can link that um back in December of 2024 where you kind of laid out two outcomes here. Um what do you think? Are we headed for a debasement or

think? Are we headed for a debasement or you also mentioned earlier restructuring and I guess what would be the my question for you is what would be the

rep repercussions? Um yeah and maybe

rep repercussions? Um yeah and maybe potential triggers.

Well, I think my my base base case is that the uh long-term interest rates on treasuries will move higher until such

time as they get to a level that is uh difficult to ignore the ramifications of it. And I would say that would be around

it. And I would say that would be around 6%. I think if long-term interest rates

6%. I think if long-term interest rates went up to about 6% people would start to do the arithmetic and start realizing that we're headed towards two plus

trillion dollars of interest rate expense which is it just is it's untenable. And so that's when you might

untenable. And so that's when you might have this restructuring concept begin where we say we'll just we'll

we'll we'll just bite the bullet and do a soft default where we don't honor the coupon rate. And what would happen is

coupon rate. And what would happen is that we would not be able to borrow money for a couple of generations because the price of these long-term bonds would collapse and no one would

trust us anymore to issue uh long-term debt, which would actually be ironically part of the solution because if we couldn't float any debt, we'd actually have to balance our budget. And that's

what that's really what we should be doing. We shouldn't be running a

doing. We shouldn't be running a debt-based economy. you know, $2

debt-based economy. you know, $2 trillion $2 trillion of our economy is just is just borrowed money at the federal government levels. Just just the federal government level alone. So that

would be the the trigger would be that you can't ignore the looming explosion in interest expense and you have to do something about it. Your other

alternative would be debasement that you would you would simply pay it back in, you know, cheaper dollars. You pay it back in, you have inflation. Basically,

allow you would allow an inflationary situation, which is what which is what they did by the way, Julia, back in the aftermath of World War II.

>> The debt to GDP ratio then was about where it is today. And inflation was predicted to go much higher in the aftermath of World War II. And it did,

but they kept the interest rates extremely low at a 2 and a.5% Treasury

rate while inflation was going up into the high single digits. So basically,

you ended up inflating it away and having very very negative interest rates. And that led to a

interest rates. And that led to a 40-year bare market in the treasur in Treasury bonds. And that's what would

Treasury bonds. And that's what would happen here too if we debase. If we if we debase, you're going to be living with high interest rates for a long time period. But the other alternative is

period. But the other alternative is this soft default. I can't really think of any other uh tools that are available. That's kind of some

available. That's kind of some combination of debasement and you know soft default. Mhm. I guess what's also

soft default. Mhm. I guess what's also worrisome is like technically like we're still in like good times if you will and we haven't had like a major emergency and that's our fiscal picture.

>> Yeah.

>> Right. Well, that's that's that that's the whole problem. You know, we we we don't have a rainy day fund at all. You

know, it's not raining and yet we spent we're spending our rainy day fund.

>> Yeah. You know, one thing that gets my attention listening to you is um and you mentioned a couple times in this conversation, you're in a capital preservation world. you're cutting risk.

preservation world. you're cutting risk.

It's kind of just it just piques my my interest when I hear someone like yourself say that. What are you most concerned about? Like what is that risk

concerned about? Like what is that risk for you today? Yeah, I know you don't double line. do not cross the double

double line. do not cross the double line of risk. Like what is the risk for you now that worries you the most or keeps you up at night? I you know if you not you know not literally keep you up at night but I

>> I I really think that the incestuous relationship of private credit with private equity is not going to end well.

>> I I I think it's it's it's it's it's not healthy. And so I I I really I've been

healthy. And so I I I really I've been saying now since about last May May, so it's coming on 10 months that the next problem is going to be these private

markets. And

markets. And certainly the the the headlines that have come out about the private credit market are they're it's a pretty loud

alarm bell that's going off there. It's

pretty loud and and uh there's no it's it's not a natural situation. So I I think that the

situation. So I I think that the defaults that will come uh out out of some areas of the private

credit market will lead to significant repricing lower of the uh say credit risk that's say a single B level or

lower. So I the thing I am about

lower. So I the thing I am about investing not not I I take risk very rarely and I want to I want a big fat pitch when I'm going to take risk and I

don't think spreads on high yield widening by 50 to 70 basis points from the all-time tights comes close to being a fat pitch. I I think you know high

yields high yield spreads were at 350.

Now they got out to about 425.

You know call me when they're at 700.

that's that's when I'm going to want to start taking risk.

>> And uh most people aren't aware that the bank loan market, the triple C bank loan market is already a disaster. Prices

have gapped lower and the spread on triple C bank loans generically speaking on index level are almost 2,000 basis points.

That means that nobody thinks they're going to get paid. So the defaults are coming.

>> Yeah, I like that. Wait for the fat pitch. All right. Another thing you

pitch. All right. Another thing you mentioned too in the conversation, but you nailed this. This was actually called I think it was one of Business Insiders top trades uh top market calls of the year, but in March of 2025, and this this audience loves gold, that's

why I'm bringing it up in your webcast.

Um you said gold, which was trading around 2915 at the time perhaps, would go to 4,000, which it did in October, and of course, we saw it hit 5,500 earlier this year. Now it's back to like

I think I saw this today. I I own gold, so I look today 43 north of 4,300. But

you said like It's an opportunity now.

You are you buying gold right now or how are you playing the gold trick?

>> Uh I actually bought some I I bought some gold miners last June was the last thing I did relative to gold and I was super lucky. It was just pure luck on

super lucky. It was just pure luck on timing because that was exactly when they start started to take off, you know, but that there's a funny story about my gold call and that was I was on

a a TV program and gold was at 2970 at the time and I was asked by the interviewer, do you think it'll go above 3,000?

And I said, what kind of a forecast is that? Can it go up 1%.

that? Can it go up 1%.

>> Yeah. And I so I I didn't plan on saying this, but because the way the the conversation the question was framed, I said I said, "You know what? It's going

to go above 4,000 this year. That's

forget about 3,000. It's going to go above 4,000." And it ended up making an

above 4,000." And it ended up making an honest man of me. I mean, it ended up going up to 4,500 around the fourth quarter of last year and then even went

to above 5,000. So, I I think I think that gold is real money. Uh, I think people are starting to get aware of that. Central banks are going to be a

that. Central banks are going to be a huge continued source of demand for gold. Back in the old days before we uh,

gold. Back in the old days before we uh, Nixon went off the gold standard, central banks had about 70% of their reserves in gold and it got down to 20%

of reserves in gold back when everybody was shifting to dollars as their reserve preference. Well, gold is now on the

preference. Well, gold is now on the rise again. It's up to about 30% of

rise again. It's up to about 30% of central bank reserves. I think it's completely reasonable to believe that that the the percent of the reserves

will go to to 50%. Which is a tremendous demand for gold. And so there's there gold isn't for, you know, survivalist

cooks and wild crazy speculators anymore. It's a real asset class and

anymore. It's a real asset class and it's being reintroduced to the world of central banking as a real uh asset class worthy of parking perhaps a third of

your reserves in it.

>> So I I don't I just don't see any reason why anybody be should be selling gold.

I'm not a silver person. I know a lot of people like silver because it's like you know it's got the big bang for the buck when the when the the beta of gold is working positively. silver goes up even

working positively. silver goes up even more, but silver is more of an industrial metal. I I think gold is is

industrial metal. I I think gold is is the real deal. So, I'll stick with I'll stick with the standard and not the not the derivative.

>> Mhm. You've been in the investing world for like 45 years now. Um, is this a is this a one of the harder environments from your perspective like to make

money?

>> No. No. The hardest environment was for was 2021 where there was no yield in the bond market. There there was a moment where

market. There there was a moment where the only way to get 5% from US fixed income was to buy the junk bond index and leverage at 50%. And hope for no

defaults because the junk bond index yielded three and a half to no defaults.

Believe it or not, if you had done that, if you had gone for that 5% by buying the three and a half index and leveraging it 50%, you'd have gone bankrupt.

>> Gosh.

>> Because your borrowing cost went up to five and 38 and your coupon is still three and a half. So you had a negative arbitrage of almost 2% that you you were

that was you were bleeding that you know every minute of every day. and the price of your junk bonds was significantly below cost. So you were margin called.

below cost. So you were margin called.

So if you in in the in world of fixed income, we all know in investments broadly that there's fear and there's greed and that greed motivates people

but fear becomes stronger than greed.

But the one thing that is the most dangerous is not fear or greed. It's

need. I need to make X percent because I was in 1993 I was at the uh in the office of a major university's treasurer

and the president dropped by and he has said president says to the treasurer how are we going to make 6% on our endowment 6% income on our endowment and the

treasur said it's not possible because treasury yields were at 3% at the time and there was nothing that yielded 6% % and the president said to the treasurer,

"Wrong answer.

Wrong answer. I want to know how are we going to make 6%." He said, he he he didn't want the answer. We can't. He

says, "No, no, no, no. You're making 6%.

How are you going to do it?" Well, what ended up happening is people ended up buying crazy things that like Orange County bought some wild Fanny May uh

debentures that had a a funky characteristic to it and they ended up going from a 100red down to like 40 during 1994's bare market in bonds which

was really wasn't even that bad. So in

an attempt to get six, they lost 60. So

it's investing on need is the most imprudent thing to do. You just have to be a say we're going to under earn. We

we we'll make this we'll make we'll make eight some future year. We'll make four this year. We'll average six. Never

this year. We'll average six. Never

invest based on need because it's always you're always going to take imprudent risks.

>> That's a really good lesson. And there's

a reason Jeffrey you're the bond king and you are you you are the bond king. I

know you might not say that but um you're the one who's standing still. Um,

can I ask you about I want to ask you about California. You had a tweet or an

about California. You had a tweet or an ex post recently. Um, because people ask you a lot about the munis and you said you usually don't have much to say, but now looking at the deficits caused by

absurd spending and tax policies and accelerating revenue erosion. I can say avoid all general obligation munis in California, Illinois, and New York. Um,

I never bought a a go a general obligation. Um,

obligation. Um, >> is can we as someone who lives in California um >> what's the situation? Are they screwed?

>> I own California munis, but I don't own general obligation munis. I own only own things that are attached to a revenue stream like a water project

>> where you know the revenue stream is going to be there. And I only buy things that have uh investment grade single or higher ratings. And that's not

because of an insurer. That's because

they legitimately have this revenue stream underneath them. The geos I I think I think if the thing I would avoid

the most I think would be Chicago munis.

I I just I just can't imagine why anyone would take the risk of being uh legislated. I mean anything can happen.

legislated. I mean anything can happen.

These rules can be changed. They they

can make it so that munis become taxable if your income is above X. They they can say that if your income's above this then we're cutting the coupon on your anything can happen. And there's such a

war uh there's such enormous wealth inequality that's manifesting itself increasingly in political activity where

you have to be extremely uh extremely concerned about things. Yeah. California

uh will probably try this billionaire tax. Um I I think it will be held up in

tax. Um I I think it will be held up in court for many years before it actually would ever be implemented because there there'll be tremendous interests that

want to tie it up in court. So, I'm not really that worried about the billionaire tax thing, but uh it is it is a troubling it is a troubling trend uh that may may I know Bernie Sanders

wants to wants to uh bring it up on a national level.

>> Do you do you think California is headed toward bankruptcy?

>> Um sort of bankrupt already. I mean, we've got so much we we're supposed to have a balanced budget, but we're not close to

a balanced budget. You know, we we we launched projects like the light the highspeed rail project that supposed to go between San Francisco and Los Angeles

was supposed to be finished by 2020.

They haven't laid an inch of track yet.

Last time I checked, it's 2026. So,

we're quite a quite a ways behind schedule. And the budget was $30

schedule. And the budget was $30 billion. And now they say if they were

billion. And now they say if they were to complete it, uh, Los Angeles to San Francisco, it would be over $130 billion. So got a hundred billion dollar

billion. So got a hundred billion dollar overrun. So instead of saying we're

overrun. So instead of saying we're going to spend 130 billion, they've decided they're going to make it still about 30 or 35 billion, but they're going to build it between Merced and Bakersfield.

Uh, that that's a route that absolutely nobody has any demand for. It's it's

it's it's like an absurdity. So yeah, I think California as they raise taxes and you talk about billionaire taxes, all they're doing is draining the tax base. We've already had

four of the five richest Californians leave California >> in the past 12 months. And that's just going to accelerate. And California

thinks that if you if you leave, they're going to be they're going to charge you a a wealth tax. Good luck with that.

Good luck trying to track people down who are living in Tennessee because you think you because you're going to send them a bill. Gosh,

>> what are you gonna do? Yeah. What are

you gonna do?

>> What are you gonna do? Not move back.

>> Yeah. You're going to you're going to chase so many folks out. Um they're

going to come they're going to come to North Carolina where I am and drive up our housing prices.

>> If they do the wealth if they do the wealth tax, it'll cost more to administer than it raises.

>> That's a good point, too. Jeffrey, um

can I ask you one final question before I let you go? Okay.

>> I don't know if you're rushing out. I

would take more time, but I I want to be mindful of your time, too. Um,

this would be, what is something right now that if you were to make a prediction might seem it it wouldn't be consensus, and it's definitely not obvious, but

maybe a year from now, if we're having this conversation, it would be more widely accepted.

I think the next presidential election will have three parties running a candidate.

>> And do you think that candidate would be like viable then? Because

>> uh it it'll be interesting. uh the state the the Democrat and Republican parties

have created tremendous uh blockages to third parties having a chance to succeed.

>> But the interest in the third party will be high enough to overcome those blockages.

>> H I wonder if that would be us getting out of the fourth turning then.

I'm I'm I I uh spoke with Neil How se 16 17 years ago and it was fascinating because I didn't know who he

was and I never heard of the fourth turning but as we were talking we had exactly the same point of view although framed a little bit different but I

completely understood what he meant by fourth turning and I said that I thought that the big change the big reset if you will the restructuring the re the restructuring of our institutions which

is deeply overdue at this point. I said

I thought it would be around 2030 and he agreed and I and I still think it's around 2030 and I think Neil still agrees with that being a plausible time frame.

>> Yeah.

>> So we're very much sympatico on on this concept.

>> Yeah. We love Neil how on this channel too and uh we'll probably see that crescendo soon. I have to say Jeffrey

crescendo soon. I have to say Jeffrey Gunlock it is been it has been an absolute honor having you back on. I I

always loved our conversations. Again,

you are one of my absolute favorite people to interview and it's a treat to have you on this program. It means so much to me. It's a huge milestone for me as a podcaster and um extremely grateful. I hope this isn't our last

grateful. I hope this isn't our last conversation. I would love to welcome

conversation. I would love to welcome you back on um whenever you would be willing to give us the time and can thank you so much. Jeffrey Gunlock,

founder and CEO of Double Line Capital, the bond king. I appreciate you so much.

Thanks again.

>> Thank you, Julia. I enjoyed our conversation.