"New Bond King" Gundlach: U.S. stocks are not yet a good time to buy; this year's interest rate cut expectations have been shattered. Now is a good time to buy gold.

“The New Debt King” Jeffrey Gundlach recently warned that the U.S. stock market has not yet bottomed out, and hopes for the Federal Reserve to cut interest rates this year have been dashed. However, now is a good time to buy gold.

On March 24, Gundlach told CNBC that despite recent declines in risk assets, the VIX index, which measures market fear, has not shown a true “clearing signal.” He believes that only when the VIX surges to around 40 does it indicate that market sentiment has fully released, signaling a buying opportunity for investors.

At the same time, Gundlach poured cold water on the prospects of a rate cut by the Fed this year. He pointed out that with inflation remaining high, the rationale for rate cuts is collapsing. He specifically cited Fed Chair Powell’s recent comments: “If we don’t see progress on inflation, we won’t see rate cuts.”

VIX not breaking 30, market “clearing” not yet

Gundlach emphasized that the recent dip in risk assets over the past few weeks has not been accompanied by a widespread panic. He noted, “The VIX has never truly broken above 30, which is very strange.”

In Gundlach’s view, a true market bottom is often accompanied by extreme panic. He said many market participants believe that a VIX breakout above 40 is a sign of a complete market clearing, and the right time to buy. However, despite volatility, the VIX has not reached that level.

This suggests that the U.S. stock market may still have room to fall, and investors should remain cautious and avoid blindly buying the dip.

Rate cut expectations collapse, inflation remains the biggest obstacle

Regarding the Fed’s monetary policy, which is a focus of market attention, Gundlach gave a pessimistic outlook. He believes the rationale for rate cuts this year is falling apart, and investors should no longer see rate cuts as a reason to be bullish on risk assets.

Gundlach pointed out that the Fed’s inflation forecasts are overly optimistic. He said if commodities, especially energy prices, stay at current levels, inflation could remain above 3%, far from the Fed’s 2% target.

He highlighted Powell’s spontaneous remarks at the recent press conference: “If we don’t see progress on inflation, we won’t see rate cuts.” Gundlach thinks this straightforward statement indicates that the Fed will not cut rates easily until inflation is effectively controlled. He also noted that currently, the two-year Treasury yield is higher than the federal funds rate, implying market pricing suggests a slightly higher probability of rate hikes than cuts.

Gold presents a bottoming opportunity, commodities in a bull market

Despite being cautious on stocks and bonds, Gundlach shows strong interest in gold and commodities. He believes now is an excellent time to increase holdings in these assets.

Gundlach said that although he reduced his gold position in January, he remains bullish on gold long-term. He noted that gold previously surged from $2,000 to nearly $2,500, which required a correction. But at current levels, he sees a very good buying opportunity.

“I like it (gold) more today than two weeks ago,” Gundlach said. “I believe it’s in a bull market.” He also mentioned that the commodity index, after breaking below the 50-day and 100-day moving averages, should find strong support at the 200-day moving average.

The biggest danger zone: Private credit re-enacting the “Wild West”

In the interview, Gundlach spent considerable time warning about a major hidden risk: the private credit market.

Due to overvaluation in public markets (stocks and bonds) in 2020 and 2021, a large influx of capital flooded into the opaque private credit sector. Gundlach used a vivid analogy to describe the current state of the industry: “It’s like the American Wild West in the 1830s. Initially, everyone was a law-abiding prospector, but once gold was discovered, speculators and outlaws flooded in, crime rates soared, and the market descended into chaos.”

Data has already begun to signal alarm. Gundlach revealed a shocking industry fact: “Recently, a highly respected institution marked down its private credit fund’s valuation by 19% in a single day. This ‘elevator shaft’ style plunge indicates serious asset quality issues.”

More severe is the current state of CCC-rated (junk) bank loans. The credit spread on CCC loans has soared to nearly 1,900 basis points.

Gundlach did some quick math: if this year’s private credit default rate hits 8%, with a recovery rate of only 50%, investors would face a 4% principal loss. This loss exceeds the extra spread premium private credit offers over public credit.

The full interview transcript is as follows:

Let’s delve deeper into today’s sharp rebound and how one of the top global investors views the future market direction.

Jeffrey Gundlach is the founder, CEO, and CIO of DoubleLine Capital. He is now speaking exclusively to CNBC. Glad to have you, and thank you for joining us today.

Glad to see you, Judge. I missed you last Wednesday. I’ve missed you too. But you know what? Now you have the chance to let things settle a bit. So I think it’s still a good time to talk with you. We’ll obviously discuss all the Fed issues later, but I want to hear your overall view on the current market because so much is happening. Today’s headlines alone could shake the markets. From your perspective, where do you think we are right now?

It’s very interesting that over the past few weeks, risk assets have declined without a full-blown panic. I’ve heard many CNBC guests say, if the VIX breaks above 40, that could be a sign of market clearing and a good buy. But despite the volatility, we haven’t seen the VIX truly spike. Meanwhile, spreads in fixed income have widened. This hasn’t gotten much attention because it’s overshadowed by war headlines and private credit ‘blowups,’ but high-yield bond spreads have widened about 60 basis points from previous levels, possibly up to 70 basis points at the widest. All corporate credit spreads are definitely expanding. Emerging market spreads are also widening. And safe havens, as we expected, are assets like asset-backed securities and commercial mortgage-backed securities, which have been among the most stable asset classes.

So I think today’s market action is very healthy. I mean, Friday’s close was very weak, almost at the lows. I heard Tom Lee mention that some institutional clients planned to short the market at open today. It seems that didn’t happen. If they did, they’re probably regretting it now. But I think the market is in a revaluation phase. I believe making money this year will be difficult. Initially, there was profit in overseas markets and commodities, but despite the rally in commodities, especially gold, gains have been modest. We discussed this in our recent strategy meetings. I said that long-term, I still want to hold commodities and gold positions, but my enthusiasm for gold has definitely been surpassed by last year’s market performance. You might remember, Scott, I said last year that gold could rise above $4,000, back when it was well below that. Well, I guess I wasn’t bullish enough then, since it reached nearly $5,500. But now we’re back near my target for this year’s high. At current levels, I see a very good buying opportunity for gold and commodities. I’m not particularly excited about current credit or stocks—they’re not cheap enough. I want to see the VIX rise to signal a true market clearing.

So, you cut your gold exposure significantly in January but remain overall bullish and would buy at current prices, viewing recent gold moves as short-term.

Yes, I think so. Gold was overdue for a correction. It nearly went straight from $2,000 to $5,500, and at that high, I thought it was a bit overhyped. But I believe now is a very good time to buy commodities and gold. I like this sector more today than two weeks ago. Because I think it’s in a bull market, and we’ve had a real correction. The Bloomberg commodity index has broken below the 50-day moving average, now at the 100-day. I do believe the 200-day moving average, which isn’t far from here, should provide support.

Fixed income performed well early in the year, but due to rising rates and widening spreads, most bond portfolios are now at slight or moderate losses since the start of the year—more so if you have larger credit exposure. So I think now is a good opportunity to consider increasing holdings in the fixed income assets we’ve discussed all year. It’s not really the long end of the market, although since last Wednesday’s Fed meeting, the long end has performed somewhat better, thanks to the war, which boosted the dollar and pushed yields higher.

After each Fed meeting, we discuss the “words” or “phrases” used. Last Wednesday, I kept thinking that Jay Powell’s main emphasis was “we don’t know.” He kept saying “we just don’t know” during the press conference. Interestingly, the Fed continues to make unrealistic inflation forecasts. They project this year’s inflation at 2.7%. That’s almost certain, if commodities—especially oil and energy—stay at current levels, inflation will be above 3%. Then they say it will fall to 2.1% next year. Well, maybe. And then down to 2.0% by 2028, which is a bit laughable. This has been ongoing for years—inflation has been above the Fed’s target for a long time, yet they say it will drop to 2% in two years, which seems unlikely.

It’s a bit like, I think you could say the same about their forward-looking forecasts, even the Fed chair’s own comments—if not outright mockery—advising not to pay too much attention to recent forecasts, since they predict rate cuts this year and next. But as you said, we face all these unknowns, and their own inflation expectations have risen. So, it’s hard to take these forecasts seriously, isn’t it?

Yes, exactly. Of course, every time we meet, I talk about the two-year Treasury yield versus the federal funds rate. Now, the two-year yield is above the Fed funds rate. The median of the Fed’s target range is 3.58%. So, the market is somewhat indicating that rate hikes are more likely than cuts. During Powell’s last press conference, I paid attention to when he deviated from the script, seeming a bit emotional and improvising, which really hurt the market. When I heard him say, “If we don’t see progress”—and I’m about to say “on inflation”—he didn’t specify “on inflation,” but in the context, he was talking about inflation. He said, “If we don’t see progress, we won’t see rate cuts.”

That’s pretty straightforward, right? So, if we don’t see progress on inflation, we won’t see rate cuts. Our inflation model shows that by late 2026, inflation will be around 3.5%. That’s definitely not progress on inflation. Instead, it’s inflation moving higher. So, that’s very interesting. I actually tweeted last Thursday about Treasury bonds. Based on Bloomberg’s put/call function pricing, there’s still more hope—probably for the Fed to hold rates steady—but I don’t think investors should expect rate cuts.

Watching CNBC’s pre-market show before the Fed’s last meeting, I was really surprised that some guests trying to be bullish on risk assets kept saying, “We’ll get two rate cuts this year. Expect two cuts.” I was thinking, what makes you believe that? I mean, inflation is rising. Oil prices were nearly $100 a barrel, and the two-year yield was above the Fed funds rate. I just felt that if your only hope is for the Fed to cut rates, you’re betting on the wrong horse. You’ll just be disappointed.

Do you think we might actually get rate hikes? I mean, the probability of a rate hike in June is actually higher than a cut. Do you think we could see a rate hike?

I think—well, based on the current pricing structure, I don’t see a rate hike happening. You need to see—my point is, if commodity prices, especially oil, surge, then maybe you’d see a hike. But what’s the point of hiking based on oil or international conflicts? I don’t see how raising rates would help much. And considering credit spreads are widening, and despite war and oil market headlines, the private credit market remains very opaque. Many investors want to exit but can’t. The most common comment I hear is that some parts of the software industry and certain market segments are indeed problematic, but some price actions and mark-to-market adjustments don’t fully support that view. There’s a very important private credit fund managed by a highly respected sponsor that marked down its fund’s valuation by 19% in one day. One day. Does that mean all positions are overvalued by 19%? Or that half the fund is rock solid, but the other half dropped 38%? Or that 75% of the fund is solid, but 25% fell 76%? None of that is reassuring. It indicates something—like an “elevator shaft” style collapse—has been confirmed. I think this was underestimated in the past, but now at least partly disclosed. In such cases, raising rates doesn’t seem wise. And although the two-year yield is 10 basis points above last Wednesday’s, now above the Fed funds rate, it doesn’t signal anything meaningful. It could change tomorrow and fall below the Fed funds rate. So, I think the Fed won’t hike. Of course, I believe they won’t cut either under current conditions.

So, when you say you definitely think they won’t cut, are you referring to the rest of this year?

No, I’m not saying for the rest of the year. I mean the next meeting. Got it. I really don’t think they’ll cut— I think, given the new Chair, we’ll see what happens when he takes over, but it’s unlikely they’ll act at the first meeting. I don’t think so. Interestingly, more and more people are realizing that at the last Fed meeting (not the one last week, but the previous one), there were many more participants—more than reported at the time—discussing the potential for rate hikes. I find that very interesting, and I think it caused some downward pressure on bond prices, which also affected stocks. So, the market is kind of “stuck,” with no clear trend. Almost nothing is rising. Nothing is really falling sharply. But I’ve been cautious, probably more cautious than I should have been over the past nine months. But in those nine months, I haven’t really made much money because the previously strong “Big Seven” stocks have also stagnated. They’ve quieted down, and most markets have been calm for about nine months now, right?

So, right now, we’re only playing defense in fixed income because there’s momentum pushing yields higher. Not just in the Treasury market, although yields there are higher now, but in the credit markets, where spreads are clearly widening. High-yield bond spreads once narrowed to about (roughly) 250 basis points over Treasuries. Now, they’re back up to about 325 basis points. So, junk bond yields, ignoring defaults (which may not be prudent), are now over 7%, around 7.25% to 7.5%, without much downgrade in credit ratings. That’s starting to look interesting. The same applies to bank loans. One thing to watch—like a canary in a coal mine—is that CCC-rated bank loans are really bad. Their prices have been plunging sharply. I believe most investors don’t realize that the industry-wide spread on CCC bank loans is approaching 1,900 basis points. That’s a real problem. Of course, it’s because the default rate on CCC loans is rising. They haven’t reached recession or financial crisis levels yet, but it’s not negligible. I’ve heard private credit sponsors say that the default rate on U.S. private credit portfolios could reach 8% within the next 12 months. Okay, if you consider typical recoveries (which are far from 100 cents on the dollar), recovering 50 cents would be lucky. An 8% default rate means a 4% loss. That’s much higher than the spread premium private credit offers over public credit. So, I think some of the seeds sown in 2020 and 2021 have already sprouted. I was thinking at the time, especially late 2021, when the public bond market was obviously unattractive—the bond yields were around 1% or less, and everyone knew $7 trillion had been injected into the economy, so inflation would rise. Bonds looked terrible, and stocks were valued at very high levels relative to their long-term history. If you add the assumption (which was correct) that bond yields would rise significantly, you wouldn’t want to hold stocks at record-high valuations. So, people woke up at the end of 2021 and said, “I don’t want bonds, I don’t want stocks. Give me something else.” They didn’t understand what was happening inside. Because if I map the activity in stocks and bonds to a new asset class, I wouldn’t like it—since I’ve analyzed and concluded that those assets aren’t attractive.

So, they turned to things like SPACs—remember those “blind pools”? And private credit, where you give them money and hope to get your principal back someday. Well, that didn’t work very well. I’ve been worried. I said about a year ago that it felt a lot like 2006—everything was overvalued, cracks were starting to appear, but everyone said, “It’s under control. No problem. Just software issues.” But it’s not just software issues. We all know the private credit industry has received a huge number of redemption requests, far exceeding the 5% contractual redemption limit (meaning they can redeem only 5%), and the funds are getting redemption requests well above that. Anyone who’s been in markets for years, even if only half of that experience, should know that when the next liquidity window opens, investors—especially retail investors—will ask for much more than in March. Everyone knows this. Their redemption requests on March 31 were rejected, and they’ll just ask for even more. It’s a bit like bond trading: when the market is good, a very attractive bond issue performs well, and everyone wants a piece. Suppose they issue $500 million in bonds. Buyers might want to buy $50 million but end up placing orders for $150 million because they know they’ll be allocated less. Everyone bids for more than they expect to get, and the game is rigged that way. Now, it’s the opposite. We’re in a different situation—people are submitting requests many times their actual desired amount, knowing they’ll be scaled back. Seeing this happen is very interesting. Back in 2007, I’m not saying it’s exactly the same, but the ABX index, which tracks subprime BBB-rated mortgage-backed securities, was visible daily. It suddenly dropped from 100 to 93, then to 80. It happened pretty fast. Everyone could see it. It was quick because it was marked-to-market hourly or daily. Even if it didn’t need to be that bad, it would take longer to play out, and it would become a problem. And it wouldn’t be a short-term issue. The data points are limited, but that’s what’s happening under the surface of the market.

So, as I’ve said before, it’s always the same story: a problem emerges, it shuts down parts of the market, halts certain behaviors, and then something new rises to take its place. The new thing might be very good initially because it’s an opportunity, but it’s not fully analyzed, and the risk-reward may be too high. I’ll use a metaphor—like the Wild West. Around 1830, there was a small town on the American frontier where everyone was God-fearing. They went to church, had community dinners, the sheriff was honest, like Gary Cooper in “High Noon,” and crime was low. But then what happened? Gold was discovered just three miles from that peaceful town. Suddenly, speculators and outlaws flooded in, hoping to get rich. Some hardworking, ambitious people arrived, but so did a large number of thugs and rascals, who cut corners and caused crime to spike, chaos ensued. That’s what happens in markets. That’s what’s happening with new asset classes. It starts offline, then suddenly fills with speculators—and maybe some outlaws. Not everyone, but some. And then you see some funds, without warning, marking bonds from $100 to zero overnight. I believe this has already begun and is likely to continue, because these things tend to have life cycles. That’s the risk I see. I’ve been talking about this for almost a year. So, don’t say, “Oh, Gundlach is just a broken clock, always warning the same thing.” No, I only started worrying about this nine months ago. I think it’s starting to happen.

Let me ask you about the Fed chair. How do you see his statement that he won’t leave until the investigation into him, the Fed, and that overhaul is complete? And from your perspective, how do you see all this developing?

Well, I think what’s happening isn’t very favorable. We definitely have some friction between Donald Trump and Jay Powell, to put it mildly. I mean, Trump blames everything on Powell. He calls him “Jay the Delay,” and maybe there’s some record to prove that. But Powell’s approach is very confrontational. At last Wednesday’s press conference, he seemed to be pushing back. He’s not a shrinking violet. I mean, he basically said that high inflation is due to tariffs, and now, because of the war, inflation might be higher than we want. Both are blaming each other, pointing fingers. Then Powell said, you know, as long as the investigation is ongoing, he’s not going anywhere. He’s a bit like that—he said he hasn’t decided what will happen after May. But if you read between the lines, it seems that unless things normalize, that’s the basic scenario. I think he plans to stay, not as chair necessarily, but to continue involved in the Fed’s work, possibly staying until the end of 2028. I believe he’s very eager to be a thorn in Trump’s side. That suggests to me that Powell, if things stay as they are, will oppose any rate cut proposals from the new Fed chair. So, that’s another variable—maybe not the main one, but a reason why rate cuts might not happen. And before last Wednesday’s Fed meeting, many market commentators (as I mentioned earlier) were talking about a favorable scenario where the Fed would cut rates a few times. That’s no longer a realistic baseline. With the two-year Treasury yield above the Fed funds rate, it’s impossible. As you correctly pointed out, Judge, the betting markets show a higher chance of rate hikes in June than cuts. That’s a notable change from a month ago.

We’ll see. We’ll meet again when they make any decision in June. I always look forward to our conversations, including this one. Jeffrey, thank you very much.

Thank you, Scott. Best of luck to everyone. The markets are becoming increasingly challenging.

Risk warning and disclaimer

Market risks are inherent; investments should be cautious. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest accordingly at your own risk.