Overview of Odd Lots — Episode: Jeffrey Gundlach Says Almost All Financial Assets Are Now Overvalued
This Odd Lots / Odd Thoughts interview (hosts Traci Alloway and Joe Weisenthal) features Jeffrey Gundlach, founder & CEO of DoubleLine Capital. Gundlach lays out a broad, contrarian case that many financial assets are richly valued, identifies private credit as the most likely source of the next market crisis, and warns the U.S. Treasury and interest-rate regimes face structural stress that could force extraordinary policy responses (yield-curve control, debt restructuring). He also gives concrete portfolio guidance: favor short-duration cash-like instruments, non‑U.S. equities, emerging‑market fixed income, gold/real assets, and avoid long Treasuries and opaque private-credit allocations.
Key themes & main takeaways
- Long-duration U.S. Treasuries are vulnerable. Gundlach expects long-term yields to rise in the next recession rather than fall, breaking the past secular pattern.
- Private credit is the biggest systemic risk candidate: valuation opacity, liquidity mismatches, weak marking practices, and leverage-on-leverage create the conditions for a crisis.
- Fiscal stress is real and accelerating: interest expense is already large and could consume an outsized share of tax receipts within a few years under pessimistic but plausible scenarios.
- Monetary/fiscal policy can — and likely will — be changed dramatically if markets force the issue (yield-curve control, Treasury purchases, coupon restructurings).
- Portfolio prescriptions: reduce U.S. equity/dollar concentration, prefer short-duration fixed income, add gold/real assets, use cash, shift meaningful equity exposure offshore.
Gundlach’s views on Treasuries and rates
- Issuance profile: ~80% of Treasuries issued in the past 12 months have maturities <1 year; only ~1.7% were 20–30 year.
- Historical oddity: despite 13 months of Fed cuts, long-end yields have increased (rare/unprecedented pattern).
- Fiscal math: official deficit ≈ 6% of GDP today; interest expense ≈ $1.4–$1.5T of a ~$7T budget. Gundlach models scenarios where interest expense could consume a very large share of tax receipts by 2030 (he cites a pessimistic ~60% figure).
- Policy risk: if long yields rise to a politically intolerable level (Gundlach suggests ~6% could be the tipping point), the government may enact aggressive measures: direct Treasury buys, yield-curve control, mortgage market interventions, or even debt "restructuring" (coupon resets).
- Tactical stance: avoid long Treasuries; favor short-term Treasuries and cash while watching for an intervention-driven step change lower in long yields.
Private credit: why Gundlach is worried
- Scale and growth: private credit has grown dramatically since 2015 (previously discussed as “shadow banks” and BDCs).
- Opacity and marking: many private positions are still marked at par (100) despite clear balance-sheet deterioration in examples (he cites a Renovo Chapter 7 case where liabilities dwarfed assets).
- Liquidity mismatch: issuance of daily‑NAV or publicly traded vehicles backed by illiquid private loans creates a run risk — promised liquidity vs. asset illiquidity.
- Leverage layering: funds that buy private credit often use borrowed capital (leverage-on-leverage), amplifying losses when things go wrong.
- Crisis potential: Gundlach calls private credit the frontrunner for the “next big crisis,” in structural similarity to subprime/CMO problems (though the mechanism differs).
- Practical implication: don’t allocate to opaque private-credit strategies you can’t stress-test or quickly liquidate; it’s hard to short private credit directly.
Portfolio recommendations (Gundlach’s suggested allocations and rationale)
- Equities: maximum ~40% overall equity exposure; favor non‑U.S. equities for dollar-based investors (to reduce currency risk and capture regions that have performed better this year).
- Fixed income: reduce traditional allocation — Gundlach suggests around 20–25% in fixed income (not the classic 40% in a 60/40), favouring short-duration instruments and emerging-market fixed income (EM local currency has been strong for dollar investors).
- Gold & real assets: add meaningful real-asset exposure — Gundlach historically advocated up to 25% but now suggests around 15% in gold/real assets (still views gold as a core real asset class).
- Cash/liquidity: hold a meaningful cash position to weather policy shocks and valuation drawdowns.
- Avoid: long-dated U.S. Treasuries, opaque private-credit funds (especially daily-NAV vehicles backed by illiquid loans), and speculative, momentum-driven equity pockets (AI, data center mania).
Fed, fiscal, and policy scenarios to watch
- Yield-curve control (YCC): likely candidate if long yields rise to a politically unacceptable level; precedent exists (post-WWII, Japan).
- Direct Treasury/Treasury-MBS purchases: the Treasury or Fed might buy Treasuries or agency MBS to suppress mortgage rates and reduce fiscal pain.
- Debt/coupon restructuring: Gundlach raises the possibility of changing coupon terms on existing Treasuries as a blunt fiscal maneuver (controversial and market‑disruptive).
- Market signals to monitor: widening credit spreads, increases in long Treasury yields toward high-single-digit territory, runs on daily-NAV private-credit vehicles, and any public talk/papers about “restructuring foreign-held Treasuries.”
Market behavior, history, and timing
- Secular rate regime shift: Gundlach believes the long-term secular decline in rates is over — long rates may rise during the next recession.
- Mania dynamics: transformative technologies (AI, internet, electricity historically) are often priced extremely early and create speculative manias; Gundlach sees current markets as exhibiting mania characteristics.
- Timing caveat: being right on direction and wrong on timing is costly; Gundlach advises a multi‑year (he targets 18–24 months) investment horizon for decisions and acknowledges markets can stay irrational much longer than expected.
Notable quotes
- “The next big crisis in the financial markets is going to be private credit.”
- “There is only one price for private: 100.” (on persistent par-marking)
- “By 2030 it’s quite plausible that 60% of all tax receipts go to interest expense.” (pessimistic scenario he presents to show fiscal constraints)
Practical action items for investors (summary)
- Trim U.S.-centric equity/dollar exposure; consider increasing non‑U.S. equities.
- Limit long-dated Treasury exposure; prefer short-duration Treasuries if you want government credit.
- Avoid or be highly selective with private-credit products, especially daily-NAV/public vehicles backed by illiquid loans.
- Maintain higher cash allocation to navigate policy shocks and possible forced reallocations.
- Allocate to real assets (gold, high-quality land) — Gundlach favours ~15% in current environment.
- Monitor market signals that could presage policy intervention: large moves in long yields, runs in liquidity-mismatched funds, and accelerating fiscal stress metrics.
- Set and communicate an investment horizon of ~18–24 months to clients; manage expectations on short-term underperformance when taking a contrarian stance.
Who should pay attention
- Portfolio managers and allocators considering private credit or long-duration Treasury positions.
- Investors relying on traditional 60/40 portfolios for diversification and downside protection.
- Anyone using daily-NAV vehicles for exposure to illiquid credit.
- Policy watchers tracking yield-curve control, Treasury-market interventions, or nontraditional fiscal solutions.
This episode is a broad, prescriptive warning: valuations are elevated, private credit is the riskiest corner of today’s market structure, and fiscal/monetary policy may be forced into extraordinary actions that will reprice many “safe” assumptions.