"New Bond King" Gundlach: US Stocks Not Yet a Buy, This Year's Rate Cut Expectations Dashed; Now is a Good Time to Buy the Dip in Gold

"New Bond King" Jeffrey Gundlach recently warned that the U.S. stock market has not yet bottomed, hopes for a Federal Reserve rate cut this year have been dashed, but now is a good time to buy the dip in gold. In an interview with CNBC on March 24, Gundlach stated 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 index spikes to around 40 will it signify a complete capitulation of market sentiment, marking the opportune moment for investors to enter. Meanwhile, Gundlach poured cold water on the prospects of Fed rate cuts this year. He pointed out that with inflation remaining stubbornly high, the rationale for the Fed to cut rates is crumbling. He specifically cited Federal Reserve Chairman Powell's statement at a recent press conference: "If we don't see progress [on inflation], we won't be cutting rates." VIX Not Breaking 30, US Stocks "Clearing" Not Yet Arrived Gundlach emphasized in the interview that the decline in risk assets over the past few weeks has not been accompanied by a full-blown panic. He noted, "The VIX index has never really broken 30, which is very strange." In Gundlach's view, true market bottoms are often accompanied by extreme panic. He stated that many market participants believe a VIX index breaking 40 is the signal for a complete market capitulation, presenting a buying opportunity. However, despite market volatility, the VIX index has not reached this level. This implies that U.S. stocks may still have further downside, and investors should remain cautious at this stage, avoiding a blind buy-the-dip strategy. Rate Cut Expectations Collapse, Inflation Remains the Biggest Obstacle Regarding the widely watched Federal Reserve monetary policy, Gundlach offered a pessimistic forecast. He believes the rationale for Fed rate cuts this year is disintegrating, and investors should no longer use rate cuts as a reason to be bullish on risk assets. Gundlach pointed out that the Fed's inflation forecasts are overly optimistic. He stated that if commodities, especially energy prices, remain at current levels, inflation is very likely to stay above 3%, far from the Fed's 2% target. He specifically referenced Powell's impromptu remarks at the press conference: "If we don't see progress [on inflation], we won't be cutting rates." Gundlach believes this straightforward statement indicates that the Fed will not cut rates easily until inflation is effectively controlled. He even noted that the current two-year Treasury yield is higher than the federal funds rate, with market pricing suggesting a slightly higher probability of a rate hike than a cut. Gold Welcomes Buy-the-Dip Opportunity, Commodities in a Bull Market Despite a cautious stance on stocks and bonds, Gundlach expressed strong interest in gold and commodities, believing the current moment is an excellent opportunity to increase holdings in both. Gundlach mentioned that although he had reduced his gold position in January, he remains bullish on gold in the long term. He pointed out that gold's surge from $2,000 to nearly $2,500 necessitated a pullback. However, at current levels, he sees it as a very good buying opportunity. "I like it [gold] more today than I did two weeks ago," Gundlach said. "I think it's in a bull market." He also noted that after the commodity index broke below its 50-day and 100-day moving averages, the 200-day moving average should provide strong support. The Biggest Minefield: Private Credit is Reliving the "Wild West" During the interview, Gundlach devoted significant time to warning the market about an overlooked major risk: the private credit market. Due to the excessive valuations in public markets (stocks and bonds) in 2020 and 2021, a large amount of capital flowed into the opaque private credit market. Gundlach used a vivid analogy to describe the industry's current state: "It's like the American Wild West in the 1830s. At first, everyone was a respectable gold prospector. But as gold was discovered, speculators and ruffians flooded in, crime rates skyrocketed, and the market descended into chaos." Data is already sounding alarms. Gundlach revealed a shocking industry fact: "Recently, an extremely reputable institution downgraded the valuation of its private credit fund by 19% in a single day. This kind of straight-line drop, like an 'elevator shaft,' indicates severe problems with asset quality." More grimly, he highlighted the current state of CCC-rated (junk) bank loans. The credit spreads on CCC-rated bank loans have now surged to nearly 1900 basis points. Gundlach calculated: If the default rate in private credit portfolios reaches 8% this year, with a recovery rate of a dismal 50%, investors could face a direct principal loss of 4%. This loss magnitude far exceeds the additional spread compensation that private credit offers compared to public credit. The full interview is as follows: Let's dive deeper into today's big rally and what one of the world's top investors thinks about where the markets are headed. Jeffrey Gundlach is the founder, CEO, and CIO of DoubleLine Capital. He joins us now for an exclusive interview with CNBC. Great to have you on the program. Good to see you, Judge. I missed you last Wednesday. I miss you too. But you know what? You got a chance to let things settle down a bit. So I think it's still a good time to talk to you, and we'll obviously talk about all things Fed, but I want to get your big picture on the markets right now, because there's just so much going on. The headlines alone this morning would rock the markets. Just tell me from your perspective, where do you think we are? I think it's interesting that in the past few weeks of risk assets going down, the VIX index has never really broken 30, and that's really strange. I hear a lot of guests on CNBC saying, If the VIX index breaks 40, that might be the signal for market capitulation, and it's time to buy. But we haven't seen the VIX really rally despite the volatility. At the same time, spreads in fixed income have certainly widened. It's not gotten a lot of attention because it's been drowned out by war headlines and private credit "blow-ups," but high-yield bond spreads have widened about 60 basis points from where they were, maybe 70 basis points at the widest. All corporate credit spreads are definitely widening. Emerging market spreads are widening. And safe havens, as we would expect, are things like asset-backed securities, commercial mortgage-backed securities. They've actually been some of the most stable asset classes. So I think the market's doing quite well today. I mean, the market closed very weakly on Friday, almost at the lows, and I heard that Tom Lee mentioned that some institutional clients were planning to short the market this morning. It doesn't look like that happened. If they did, they're certainly regretting it now. But I think the market is in a process of repricing. I think it's been difficult to make money this year. People made money overseas and in commodities early on, but even though commodities, especially gold, have gone up, they haven't gone up that much. We talked about this on our strategy call a few weeks ago, and I said that I still wanted to own commodities and still wanted to own gold positions for the long term, but my enthusiasm for gold was definitely surpassed by the actual performance of the market last year. You may recall, Scott, I said gold would go to over $4,000 last year when it was far below $4,000. Well, I guess I wasn't enthusiastic enough, because it went to almost $5,500, but now we're back near my target for the year for gold. But at current levels, I think it's a very good opportunity to add to commodities and add to gold. I'm not particularly enthusiastic about credit or stocks right now. I don't think they're cheap enough. I'd like to see the VIX index rally to signal a real capitulation in stocks. So, you cut back your gold exposure significantly in January, but overall you're still bullish and you'd be buying at current levels, viewing gold's recent dip as temporary. Yes, I do. Gold was due for a pullback. I mean, it went basically straight up from $2,000 to $5,500, and at that high, I thought it was a bit overextended. But I think now is a very good time to add to commodities and gold. I like that sector more today than I did two weeks ago. Because I think it's in a bull market, and we've had a real pullback. The Bloomberg Commodity Index has broken its 50-day moving average, and it's now the 100-day. I do believe the 200-day moving average, which is not too far from where we are, should provide support. Fixed income had a good start to the year, but due to rising rates and widening spreads, most bond portfolios are now down slightly or (if you had more credit exposure) moderately year-to-date. So I think now is really a time to consider adding to those types of fixed income investments that we've been talking about for a year. It's not really the long end of the market, although the long end has actually done a bit better since the Fed meeting last Wednesday, thanks to the war, which has driven the dollar up and accompanied with rates going higher. I mean, after every Fed meeting, we discuss the "word of the day" or the "phrase of the day" from that meeting. The one that struck me last Wednesday was that Jay Powell really emphasized "We don't know." He said "We just don't know" many, many times in his press conference. What's interesting is that the Fed continues to make unrealistic forecasts for inflation. They talk about 2.7% inflation for this year. That's almost certainly not going to happen in terms of PCE; if commodities, particularly oil and energy, stay where they are, inflation is almost certainly going to be north of 3%. Then they say it's going to be 2.1% next year. Well, maybe. And then 2.0% by 2028, which is really quite laughable. That's been going on for many, many years, where inflation has been above the Fed's target rate, and yet they say inflation will be down to 2.0% in two years, and that just doesn't seem to be the case at all. Well, it's also sort of, I think you could say the same thing about their forward guidance, even the Fed Chair himself, if not scoffing, then implying not to put too much stock in those recent forecasts, because they forecast rate cuts this year, they forecast rate cuts next year, and as you say, we have all these unknowns, inflation—their own inflation forecasts have gone up. So, the whole thing is hard to take seriously, isn't it? Yes, it really is. And of course, you know, every time we meet, I talk about the two-year Treasury relative to the federal funds rate. And the two-year Treasury rate is now higher than the federal funds rate. The median of the federal funds rate range is 3.58. So, the market is, in some sense, pricing in a greater probability of a rate hike than a rate cut. What I keyed on in Jay Powell's press conference was when he went off-script and seemed to get a little emotional and improvise, those improvisations really hurt the market. When I heard him say it live, I thought, oh no, risk assets are going to start going down. The line was: "If we don't see progress"—and I'm going to add "on inflation"—he didn't say "on inflation," but he was in the context of inflation. He said: "If we don't see progress, then we won't be cutting rates." That's pretty straightforward, right? So, if we don't see progress on inflation, we're not going to see rate cuts. So now, our inflation models are showing that by the second half of 2026, inflation is basically going to be at 3.5%. That cannot possibly be classified as progress on inflation. That's actually reverse progress on inflation, inflation is going up. So it's really interesting. I actually tweeted on Thursday. Regarding Treasuries, in the bid-ask pricing on Bloomberg, there seems to be more hope, I guess, for stability in the federal funds rate, but I don't think investors should count on rate cuts. What really struck me when I was watching CNBC's pre-game show before the Fed came out, the guests who were trying to be bullish on risk assets were saying, "We're going to get two rate cuts this year. We can count on two rate cuts this year." And I'm thinking, what makes you think that? I mean, inflation is going up. Oil is almost $100 a barrel at that time, and the two-year Treasury rate is higher than the Fed funds rate. I just think if your only hope is that the Fed is going to cut rates, you're betting on the wrong horse. You're just going to be disappointed. Do you think we could actually see a rate hike? I mean, the probability of a rate hike in June is actually higher than the probability of a rate cut. Do you think we could see a rate hike? I think—well, not at the current price structure, I don't think we'll see a rate hike. You would need to see—I mean, if we saw commodity prices, particularly oil prices, spike, then you might see a rate hike. But what's the point of hiking rates based on oil, based on international conflict? I don't see how it would help that much. And given that credit spreads are widening, and despite the headlines about the war and oil markets, the private credit market is still very opaque. We have a lot of investors who want to get out and cannot get out. The most common story is that there are problems in the software industry and in certain corners of the market, but some of the price action and mark-to-market doesn't fully support that. There was a very important private credit fund managed by a very reputable sponsor that marked down its fund—a private credit fund—by 19% in one day. In one day. Does that mean all the positions were overvalued by 19%? Or does it mean that half of the fund is rock solid, but the other half went down 38%? Or does it mean that 75% of the fund is rock solid, but 25% of the fund went down 76%? I mean, none of that is comforting. It means something—you know, we saw "elevator shaft" type declines confirmed. I think that was underestimated in the past, but it's at least partially disclosed now. I think hiking rates in the face of that kind of event doesn't seem wise to me. And, while the two-year Treasury rate is 10 basis points higher than it was last Wednesday, and is now above the Fed funds rate, it's not at any kind of "signal" level. It could change tomorrow and be actually below the Fed funds rate. So, I don't think the Fed is going to hike. I certainly don't think they're going to cut at this point. So, when you say you certainly don't think they're going to cut, do you mean for the rest of the year? No, no, I'm not saying for the rest of the year. I'm saying for the next meeting. Okay. I really think they're not going to cut—I think the new chairman, we'll see what happens with the new chairman, is unlikely to take action at his first meeting. I don't think so. It's interesting that more and more people are recognizing that at the last Fed meeting, not last week, but the one before, there were participants within the Fed—many more than were reported at the time—who were discussing the potential possibility of a rate hike. I think that really set off some downward momentum in bond prices and it spilled over into downward momentum in stock prices. So, the market is kind of treading water right now, not really trending. Almost nothing is going up. And nothing is really going down significantly. But I've been cautious, probably more cautious than I should have been for the past nine months. But really, nothing has made any money over the past nine months, because the big tech stocks, the "Magnificent Seven," which performed so well, have also stalled. They've quieted down, and we've seen most of the market become quiet for about nine months now, right? So, for now, in fixed income, we want to play defense, because there seems to be momentum pushing rates higher. Not necessarily in the Treasury market, although rates are higher there now too, but in the credit market, there's a definite trend of widening spreads. High-yield bond spreads at one point narrowed to about (and I'm using approximate numbers) 250 basis points over Treasuries. Now, again, approximate numbers, about 325 basis points over Treasuries. So the yield on junk bonds, if you don't consider defaults (which may not be a prudent assumption), but if you assume no defaults, you're talking about yields north of 7%, 7.25% to 7.5%, without having to sink dramatically in credit ratings. So that's starting to get interesting. Same thing with bank loans. One thing, perhaps a canary in the coal mine, or something to watch closely, is that CCC-rated bank loans are really bad. They've been gapping down, and I think most investors don't realize that CCC-rated bank loans, as an industry, have spreads at the index level of close to 1900 basis points. That's a real problem. Of course, that's because default rates are currently on the rise for CCC-rated bank loans. They're not at recession or financial crisis levels yet, but they're not negligible either. I hear private credit sponsors talking about that U.S. private credit portfolios could experience default rates of 8% this year or in the next 12 months. Well, if you consider typical recovery rates (which are certainly not a dollar for dollar), you'd be lucky to get 50 cents on the dollar. If you have an 8% default rate, that implies a 4% loss. That's far more than the spread that private credit offers relative to public credit. So, I think, I think some seeds planted in 2020 and 2021 have sprouted. My real-time thinking was, especially at the end of 2021, when the public markets were clearly unattractive—the bond market certainly was, bond yields at the end of 2021 were 1% or less, and everyone knew that $7 trillion had been injected into the economy, inflation was going to go up. So bonds looked bad, and stocks were extremely expensive relative to their multi-decade internal history. If you add to that the assumption (which turned out to be correct) that bond yields were going to rise, and possibly rise significantly, then you didn't want to own stocks at record valuations. So people woke up at the end of 2021 and said, "I don't want bonds, I don't want stocks. So give me something else, and I'm not really sure what's inside it." Because if I can map public market activity of stocks and bonds onto some new asset class, if I do the mapping, I'm not going to like it, because I'm mapping something that I've analyzed and concluded is unattractive. So people turned to things like SPACs, remember those "blind pools"? And private credit, where you give them money and you just hope that you get your principal back eventually. Well, that's not really working out. I do worry. I've been saying for a year now, it feels like 2006, where everything is overvalued, cracks are starting to show, but everyone says, "Everything is under control. No problem. It's just a software problem." But it's not just a software problem. We know that the private credit industry has received a tremendous number of redemption requests, far exceeding the contractual 5% (that they're allowed to redeem), and the funds have received redemption requests far in excess of that. Anyone who's been around this market as long as I have, or even half as long, should know that when the next liquidity window comes, these investors, especially retail investors, are going to demand a lot more than they did in March. Everyone knows that. They got rejected on their March 31st redemptions, they're just going to make bigger requests. It's a bit like bond trading, when things are good, there's a very attractive bond offering, it does well, and everyone wants in. Let's say they offer $500 million in bonds. People who want to buy might want to buy $50 million, but they'll place orders for $150 million, because they know they'll be allocated. Everyone will be scaled back. So you ask for far more than you think you'll get, because that's the game in this case. Now the opposite is true. We're on the other side, and people will be asking for requests that might be many times what they actually want, because they know they'll be scaled back. So, it's interesting to see this happen, because in 2007, I'm not saying it's exactly the same, it's never exactly the same, but in 2007, you had the ABX index, which tracked the subprime BBB-rated market. You could see it every day. It suddenly went from 100 to 93, to 80. It happened pretty quickly. Everyone could see it. It happened fast because it was marked to market hourly, daily. And this is a quarterly mark-to-market process. So, even if it's not as bad as it needs to be, not as systemic, it's going to take longer to play out, and it's going to be a problem. And it won't be a short-term problem. The data points are few, and this is what's going on beneath the surface of the market. So, as I've said in the past, it's always the same thing: a problem emerges, it shuts down parts of the market, stops certain behaviors, and then something rises to take its place. What rises might be very good early on, because it's an opportunity, it's not well-analyzed, maybe the risk-reward is too high. I used an analogy, it's like the Wild West. You know, in the 1830s, there was a little town on the frontier in America, and everyone in that town was God-fearing. They went to church potlucks, the sheriff had a heart of gold, like Gary Cooper in High Noon, crime rates were low, everyone got along. But then what happened, what can happen in a frontier community, is that gold was discovered three miles from this peaceful, happy town, and suddenly, speculators flooded in, hoping to get rich, and they were joined by ambitious, hardworking people, but they were also joined by a lot of crooks and scoundrels, who cut corners, and suddenly crime rates skyrocketed, and the situation became chaotic. That's what happens in markets. That's what happens in new asset classes. It starts off the radar, and then suddenly it's filled with speculators, and maybe scoundrels. Not all of them, but some of them. And then before you know it, you see some funds marking down bonds from $100 to zero overnight with no warning. I think that has started to happen and will likely continue to happen, because these things tend to have their life cycles. So I think that's where the risk lies. I've been talking about this for close to a year. So people can't say, "Oh, Gundlach, he's just a broken clock, always saying the same thing, worried about this." No, I've only been worried about this for about nine months. I think it's starting to happen. They'll say Gundlach is worried about the "OK Corral gunfight," the private credit version. Let me ask you this. Back to the Fed Chair. What do you make of his comments that he's not going anywhere until an investigation into him, the Fed, and that renovation project is complete? And from your perspective, how does that play out? Well, I think what's happening here is not constructive. We definitely have some bickering between Donald Trump and Jay Powell, to put it mildly. I mean, Trump is blaming everything on Powell. He calls him "Jay the Slow," and maybe there's some historical record to support that. But his approach is very confrontational. And Jay Powell, in his press conference last Wednesday, seemed to be pushing back, and he's not a shrinking violet. I mean, he basically said, inflation is high because of tariffs, and now because of war, inflation might be higher than we want. So, they're both kind of blaming each other, casting blame on each other. And then Jay Powell says, you know, as long as this investigation is going on, I'm not going anywhere. He's sort of, he said he hasn't made up his mind about what happens after May. But if you read between the lines, in my opinion, unless things normalize, this is the base case. In my opinion, he plans to stay, obviously not as Chairman, but continue to work at the Fed, where he could stay until the end of 2028. I think he'd be very happy to be a "thorn in the side" of Trump's pronouncements. It seems to me that that indicates that Jay Powell plans, if this situation remains as it is, he's basically going to be against any rate cut suggestion that might be made by a new Fed chair. So that seems like another variable, perhaps not the primary one, but one more reason why you might not see rate cuts, which was, prior to the Fed meeting last Wednesday, what a lot of market commentators (as I've said before) were saying was a constructive factor for risk assets, that the Fed would cut rates a few times. That can no longer be described as the base case. It's absolutely not the base case with the two-year Treasury rate being higher than the Fed funds rate. As you correctly point out, Judge, the betting markets show that there's a greater probability of a Fed rate hike in June than a rate cut. It's not by much, but it's an interesting change from a month ago. We'll see. We'll get back together when they make any decisions in June. I always look forward to our conversations, including this one. Jeffrey, thank you so much. Thank you very much, Scott. Good luck to everybody. The market is getting tougher and tougher.