"New Bond King" Gundlach: The $1.7 trillion market is flooded with "junk lending" and could become the next "financial danger zone."

DoubleLine Capital founder Jeffrey Gundlach, known as the new "Bond King," has warned that the US stock market is in one of the "least healthy" states of his career and has compared the "junk lending" in the private credit market to the speculative behavior seen before the subprime crisis in 2006. He suggests investors maintain a 20% cash position to hedge against an impending market crash.

Gundlach stated in a recent media podcast that the $1.7 trillion private credit market is engaging in "junk lending," which could trigger the next global market collapse. He believes the current stock market is "extremely speculative" and advises investors to avoid making "extremely speculative" bets in the fields of artificial intelligence (AI) and data centers.

As a veteran bond investor, Gundlach is particularly concerned about the expansion of private credit funds to retail investors, saying it has created a "perfect mismatch" between liquidity promises and illiquid assets. He predicted: "The next major financial crisis will come from private credit, which has the same characteristics as the repackaged subprime mortgages in 2006."

BlackRock’s recent decision to write down its loan to the distressed home improvement company Renovo Home Partners from face value to zero in just one month serves as a new example of Gundlach's recent warnings.

Risks Accumulate in Private Credit Market

In his blog, Gundlach likened current problems in the private credit market to the "inflated" AAA ratings of subprime mortgages before the 2008 financial crisis. He warns that private management firms may have unrealistic assessments of their loan values.

The bankruptcies of auto lender Tricolor Holdings and auto parts supplier First Brands Group have added new urgency to Gundlach's long-held concerns. JPMorgan CEO Jamie Dimon told analysts last month that there is never just "one cockroach," and that when the economy turns, the pain could be worse than usual.

Gundlach said: "Private credit only has two prices—100 or zero. It looks safe because you can sell at any time, but it's actually not safe, because the selling price can gap down day after day."

The debt industry itself has been trying to reallocate responsibility for financing Tricolor and First Brands. Banks that provided loans are blaming privately managed firms that supplied supply chain and inventory funding.

Stock Market Speculative Bubble Appearing

Gundlach believes that the current state of the US stock market "is one of the least healthy I’ve seen in my entire career." He sees the most obvious signs of speculation in bets on AI and data centers.

Wall Street is increasingly cautious about companies’ massive spending on infrastructure and the high valuations of core enterprises in the AI boom. Chipmaker Nvidia’s stock price fell 8% this month, while the tech-heavy Nasdaq 100 Index dropped more than 3%.

"You have to be very careful with momentum investing during frenzy periods—I feel that's where we are now," Gundlach said. "Speculative markets always reach crazy highs—every time."

Suggestions for Adjusting Investment Strategy

Despite his warnings, Gundlach admits it's difficult to profit directly from his views on the private credit market. For example, he will not short high-yield bonds, saying such trades "have been losing money."

Even for his top trade earlier this year, gold, Gundlach now recommends lowering the allocation from the previously suggested 25% down to 15%. He recommends gold as a diversified investment that should be part of a standard portfolio allocation.

"Allocation to financial assets should be lower than usual," Gundlach said. "Whenever people buy what they think is safe, financial markets always encounter problems. These products are packaged as safe, but they really aren't."

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