“New Bond King” Gundlach: It's not yet time to buy U.S. stocks, this year's rate cut expectations have been shattered, now is a good time to bottom-fish in gold.

``` "New Bond King" Jeffrey Gundlach recently warned that the U.S. stock market has not yet bottomed out and hopes for a Fed rate cut this year have been dashed, but now is a good time to buy the dip in gold. On March 24, Gundlach told CNBC that despite recent declines in risk assets, the VIX—an index measuring market fear—has not shown a true "clearing signal." He believes only when the VIX surges to around 40 can it be said that the market’s sentiment has been fully released, which would then be a buy signal for investors. At the same time, Gundlach poured cold water on the outlook for Fed rate cuts this year. He pointed out that as inflation remains high, reasons for the Fed to cut rates are collapsing. Gundlach specifically quoted Fed Chair Powell’s recent statement: "If we don't see (inflation) progress, we won’t see rate cuts." VIX Still Below 30, "Clearing" in U.S. Stocks Not Here Yet In the interview, Gundlach emphasized that the decline in risk assets in recent weeks has not been accompanied by a full outbreak of panic. “The VIX has never really broken through 30, which is very strange,” he said. In Gundlach’s view, true market bottoms are often accompanied by extreme fear. He said, many market participants believe only a VIX above 40 signals that the market is fully cleared out and it’s time to buy. However, despite market volatility, the VIX hasn’t reached these levels. This means U.S. stocks may still have room to fall, and investors should stay cautious and avoid blindly bottom-fishing at this stage. Rate Cut Expectations Collapse, Inflation the Biggest Obstacle On the widely watched Fed policy, Gundlach gave a pessimistic outlook. He believes the justification for Fed rate cuts this year is coming apart, and investors should no longer use rate cuts as a reason to be bullish on risky assets. Gundlach argues that the Fed’s inflation forecast is too optimistic. He stated that if commodities, especially energy prices, remain at current levels, the inflation rate is likely to stay above 3%, which is far from the Fed’s 2% target. He singled out Powell’s impromptu remark during a press conference: “If we don’t see (inflation) progress, we won’t see rate cuts.” Gundlach believes this blunt remark means the Fed will not cut rates easily until inflation is firmly controlled. He even pointed out that the current 2-year Treasury yield is higher than the Fed funds rate, and market pricing hints that the probability of a rate hike is slightly higher than that of a rate cut. Gold Presents a Buying Opportunity; Commodities in a Bull Market Though cautious on stocks and bonds, Gundlach is very interested in gold and commodities. He believes now is a great time to increase allocations to these two types of assets. Gundlach said though he trimmed his gold positions in January, he remains optimistic in the long term. He pointed out that after gold’s surge from $2,000 to nearly $2,500, a correction was needed. At current levels, he sees it as a very good buying opportunity. “I like it (gold) better today than two weeks ago," Gundlach said. “I think it's in a bull market.” He also said that after falling below their 50- and 100-day moving averages, the 200-day moving average should provide strong support for commodities. Biggest Danger Zone: Private Credit Is Replaying the “Wild West” In the interview, Gundlach spent considerable time warning of a massive hidden risk being overlooked: the private credit market. Because public market (stocks and bonds) valuations were too high in 2020 and 2021, a large amount of capital flowed into the less transparent private credit market. Gundlach drew a vivid analogy: “It’s like the American Wild West in the 1830s. At first everyone was a law-abiding gold prospector, but once gold was discovered, speculators and ruffians poured in, crime soared, and the market fell into chaos.” The data has already started sounding alarms. Gundlach revealed a shocking industry fact: “Recently, a highly respected institution marked down its private credit fund’s value by 19% in a single day. This kind of ‘elevator shaft’ style plunge means there are serious problems with asset quality.” Even more severe is the state of CCC-rated (junk) bank loans: currently their credit spreads have soared to nearly 1,900 basis points. Gundlach did some math: if this year’s default rate for private credit portfolios reaches 8%, but the recovery rate is only 50%, investors face a direct principal loss of 4%. This loss is far greater than the excess spread private credit is supposed to provide over public credit. The full interview follows: Let’s explore today’s sharp rebound in more detail, and discuss how one of the world’s top investors sees the market outlook. Jeffrey Gundlach is DoubleLine Capital’s founder, CEO, and CIO. He’s joining us for an exclusive interview with CNBC. Great to have you, thanks for being here today. Great to see you, Judge. I missed you last Wednesday. Missed you too. But you know what? Now you have a chance to let everything settle a bit. So I think it’s a good time to catch up; we’ll talk about all the Fed issues later, but first, I want to hear your overall view of the current market, because there’s just so much happening. Even today’s headlines are enough to rattle markets. Just tell me where you think we are right now, from your vantage point. I think it’s really interesting that during the decline in risk assets over the past few weeks, the VIX never really broke above 30, which is odd. I’ve heard guests on CNBC say if the VIX breaks 40, that might be a sign of market clearing, a time to buy. But despite wild swings, VIX really hasn’t spiked. At the same time, fixed income spreads have definitely widened. This hasn’t gotten much attention because it’s been drowned out by war headlines and the “blow-ups” in private credit, but junk bond spreads have widened by about 60 basis points from their previous levels—at the widest, about 70 points. All corporate credit spreads are definitely widening. EM spreads too. And the only safe havens, as expected, are ABS, CMBS—those have been some of the most stable asset classes. So I think today’s market action is pretty good. Markets closed very weak on Friday, nearly at lows. I heard Tom Lee say some institutional clients had planned to aggressively short at today’s open. Looks like they didn’t do it. If they did, I bet they regret it now. But I think the market’s in a recalibration phase. I think it’s hard to make money this year. Earlier you could make money in overseas markets and commodities, but although commodities—especially gold—are still up, the gains aren’t huge. We discussed this in strategy meetings; long term, I still want to invest in commodities and gold, but my enthusiasm for gold was definitely surpassed by last year’s actual market performance. You might recall, Scott, I said last year gold would rise above $4,000, when it was well below that. Well, I guess I wasn’t bullish enough, because it got to nearly $5,500, and now we’re back near where I think the gold target will peak this year. But at these levels, it’s a great opportunity to add to gold and commodities. I’m not especially bullish on credit or stocks right now. I don’t think they’re cheap enough. I want to see the VIX move higher as a sign of true capitulation in stocks. So, you cut your gold exposure sharply in January, but overall you’re still bullish and would buy at these levels, seeing the recent gold performance as temporary. Yes, I think so. Gold was due for a pullback. I mean, it went straight up from $2,000 to $5,500. At those highs, I thought it was overbought. But now’s a very good time to buy commodities and gold. I like this sector better than I did two weeks ago. Because I believe we’re in a bull market, and we’ve had a real retracement. The Bloomberg Commodity Index is now below its 50-day average, now below its 100-day. I do believe the 200-day (which isn’t too far away now) should provide support. Fixed income did pretty well early in the year, but as rates rose and spreads widened, most bond funds are now slightly or even, if you have more credit exposure, moderately negative year-to-date. So I think it’s really time to consider adding fixed income we’ve discussed for a year. This isn’t really about the long end of the market, though since last Wednesday’s Fed meeting the long end has actually done slightly better, thanks to the war issue, which pushed the dollar up along with rates. I mean, after every Fed meeting, we talk about the “word of the day” or “phrase of the day.” Last Wednesday, what stood out for me was Jay Powell really emphasizing: “We don’t know.” He said “we just don’t know” a lot. Interestingly, the Fed continues to make unrealistic inflation forecasts. They talk about inflation at 2.7% this year. That almost certainly, on a PCE basis, if commodities—especially oil and energy—stay here, inflation will almost certainly be above 3%. And then they say next year it’ll be 2.1%. Eh, maybe. By 2028 it dips to 2.0%, which is kind of absurd. This has gone on for years, inflation running above the Fed’s target, yet they say two years from now it will be 2.0%, which just doesn’t seem to be the case. Well, you could say the same about their forward guidance, and even Powell himself, if not mocking, at least implied not to pay too much attention to those forecasts, since they predicted cuts this year and next, but as you say, we face all these unknowns and the Fed’s own inflation expectations are rising. So it’s hard to take it all too seriously, isn’t it? Yes, it really is. Of course, you know, whenever we meet, I talk about the two-year Treasury relative to the Fed funds rate. Now the two-year yield is above the Fed funds rate. The median Fed funds rate is 3.58. So, the market is in some sense saying the probability of a hike is higher than a cut. What I noticed during Powell’s presser was, when he went off script, seemed to get emotional and ad libbed, those comments really hurt markets. When he said, “If we don’t see progress”—the next thing was “on inflation.” He didn’t say “on inflation” but the context was clear. “If we don’t see progress, we won’t see rate cuts.” It’s pretty direct, right? So, if we don’t see progress on inflation, we won’t see rate cuts. Now, our inflation model suggests by the second half of 2026, inflation will essentially be 3.5%. That can’t be described as progress on inflation. It would actually be going the other way. So it’s very interesting. I actually tweeted about this on Thursday. Looking at Treasuries, Bloomberg’s put/call option pricing, there’s a bit of hope, I guess, for the Fed funds rate staying steady, but I don’t think investors should bank on rate cuts. Watching CNBC’s “pregame” before the Fed, what really surprised me was the guests who want to be bullish on risk assets all saying, “We’ll get two cuts this year. We can count on two cuts.” And I thought: Why do you think that? I mean inflation is rising. At the time, oil was nearly $100 a barrel, the two-year Treasury yield was above the Fed funds rate. I just felt, if your main hope is for rate cuts, you’re betting wrong. You’re going to be disappointed. Do you really think we could see rate hikes? I mean, the probability of a hike in June is higher than a cut. Do you think we might hike? I think—not with the current market structure, no. You’d need to see—if we see a surge in commodity prices, especially oil, you might see a hike. But what’s the point of hiking due to oil and geopolitics? I don’t see how that helps. And with spreads widening, despite war and oil news grabbing headlines, private credit is still very opaque. Many investors want out but can’t. Common feedback is, problems are isolated to software and certain corners, but not all price action and markings support that view. A very high profile private credit fund, managed by a respected sponsor, marked their fund down 19% in one day. One day. Does that mean all positions were overvalued 19%? Or half was solid and half down 38%? Or maybe 75% solid and 25% down 76%? None of this is reassuring. It means something—those “elevator shaft” markdowns have shown up. I think this was underestimated, but it’s now partially disclosed. When this is happening, hiking doesn’t make much sense to me. And while the two-year yield is up 10 basis points from last Wednesday, above Fed funds now, it’s not at any “signal” level; it could change tomorrow, back below funds. So I don’t think the Fed hikes. I certainly don’t think, in this context, they cut. So when you say you certainly don’t think they cut, you mean for the rest of this year? No, I didn’t mean the rest of the year. I’m talking about the next meeting. I really don’t think they cut then—we’ll see what happens with a new Chair, but it’s unlikely there’s action in their first meeting. Interestingly, more people have realized that, in the last (not last week’s, but prior) Fed meeting, internally more participants than reported were discussing the possibility of rate hikes. I think that added downward pressure to bonds and spread to stocks. So the market’s treading water, no trend. Nothing’s really going up. Nothing’s really plunging. I’ve been cautious, probably more than I should be for nine months. But very little’s made real money because even the formerly hot “Magnificent Seven” stocks have gone quiet. Most markets have been flat since about nine months ago, right? So, in fixed income, we’re just playing defense since there’s an apparent upward pressure on rates. Not just Treasuries, but especially in credit, there’s a tide of widening spreads. High-yield spreads got as tight as 250 basis points above Treasuries. Now, more like 325 basis points. So, junk yields—assuming zero defaults (which isn’t prudent), but assuming that, you can get 7.25%–7.5%+ without a huge credit downgrade. That’s almost interesting. Same for bank loans. One thing, like the canary in the coal mine, to watch: CCC-rated bank loans are ugly. Most investors don’t realize that CCCs, as an asset class, have spreads of almost 1,900 basis points. That’s a real problem. Of course, that’s because default rates on CCCs keep rising. Not at recession or crisis levels, but certainly not trivial. I hear private credit sponsors say, this year, or next twelve months, default rates in US private credit portfolios could reach 8%. Well, if you consider a typical recovery rate (clearly not 100 cents on the dollar), if you’re lucky to get 50, and if 8% default, that’s a 4% loss. That dwarfs the extra yield private over public credit provides. So, I think, seeds planted in 2020 and 2021 are starting to sprout. At the time, especially in late 2021, public markets were deeply unattractive—bond yields under 1%, $7 trillion injected, inflation coming. Bonds looked bad, stocks were at record valuations. If you further assumed, correctly, that yields would rise, stocks are not where you want to be at peak valuations. So people turned to things like SPACs—remember “blank check” companies?—and private credit: you give them the money and hope you eventually get it back. That hasn’t worked out well. I have worries. A year ago, I said it felt like 2006: everything overvalued, cracks showing, everyone saying “it’s all under control, no problem, just a software issue.” But it’s more than software. We know private credit has gotten redemption requests way beyond the 5% contractually allowed, much more than they can take. Anyone with as much market experience as me, or even half, knows that when the next liquidity window opens, these investors, especially individuals, will request much more than in March. Everyone knows this. They were turned down March 31, so next time they’ll ask for even more. It’s like a bond deal: if there’s a hot deal for $500 million, people who want $50 million will put in for $150 million, knowing there will be cutbacks. That’s just how the game is played when demand is high. Now it’s the reverse. People ask for many multiples of what they want, knowing they'll be cut back. So it’s interesting. In 2007 (not to say it’s exactly the same), the ABX index tracked subprime BBBs; you’d see it fall from 100 to 93 to 80—pretty quickly, marked to market daily. Now, it's every quarter. So, even if it’s not as systemically bad, it can take longer to play out and become a problem. And it won’t be a short-term issue. The small number of data points just show what’s beneath the surface. So as I’ve said before, always the same pattern: a problem emerges, it closes some parts of the market, certain behavior stops, then something new rises to take its place. Early on, it's a great opportunity—under-analyzed, maybe overpaying for risk. My analogy is the Wild West. In 1830, a little frontier town was full of God-fearing, decent people. Potlucks, kindly sheriff, low crime, everyone got along. Then what happened? Gold was found three miles out; suddenly, prospectors rush in, lots of ambitious, hard-working folks—but also a bunch of crooks and troublemakers, crime surges, things get chaotic. That’s what happens to new asset classes. It's offline at first, then fills with speculators, maybe crooks. Not all, but some. Next thing, you see bonds marked unexpectedly from par to zero overnight in some funds. I think this is starting now and will probably continue—it’s the life cycle. So I think that’s the risk. I’ve been warning about this almost a year. So you can’t say, “Oh, Gundlach is just a broken clock, always worried.” No, I only got worried about this nine months ago. I think it’s starting to happen. They’ll say Gundlach is worried about a private-credit “OK Corral shootout.” Let me ask you: back to the Fed Chair. What did you make of his saying he won’t leave until the investigation of him, the Fed, and that renovation is over? What happens with him in your view? Well, what’s happening there isn’t helpful. There’s clearly tension between Donald Trump and Jay Powell, to be diplomatic. Trump blames everything on Powell—calls him “Late Jay,” which maybe history will back up a bit, but, he’s awfully confrontational. Powell’s presser last Wednesday, he pushed back—he’s no wallflower. He’s basically saying, tariff-caused inflation, now war, so inflation may stay higher than we want. They’re blaming each other. Powell said as long as the investigation continues, he’s not going anywhere. He said he hasn’t decided what will happen after May. Between the lines, unless things change, he plans to stay, obviously not as Chair but with the Fed until the end of 2028. I think he’s happy to remain Trump’s “thorn in the side.” That suggests that, if the situation stays the same, Powell will likely oppose any new Fed Chair’s push for rate cuts. That’s another variable—maybe not the main one, but one more reason you may not see cuts. Before last Wednesday’s Fed meeting, many commentators, as I noted before, were saying the case for risk assets was that the Fed would cut several times. That can’t be the baseline view anymore. With two-year yields above fed funds, it’s impossible. As you noted, Judge, betting markets say the odds for a hike in June are higher than a cut. Not by much, but it’s a big change from a month ago. We’ll see what happens. We’ll get together again in June after whatever decision they make. I always look forward to our conversations, including this one. Jeffrey, thank you very much. Thank you, Scott. Good luck to you all. The market is just getting tougher and tougher. Risk Warning and Disclaimer The market has risks; investment should be cautious. This article does not constitute personalized investment advice and does not take into account individual investors’ specific objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their circumstances. Invest at your own risk. ```