Gundlach Warns Overvalued Markets and Shaky Loans Spell Financial Crisis

Jeffrey Gundlach, the "bond king" and CEO of DoubleLine Capital, has issued a stark warning about the current state of global financial markets, calling the U.S. equity market "among the least healthy" of his career and predicting a looming crisis in the private credit sector. In a series of interviews with Bloomberg's Odd Lots podcast and other outlets, Gundlach emphasized the need for investors to adopt a defensive stance, recommending a 20% cash allocation and cautioning against speculative fervor in artificial intelligence and data-center investments.

Gundlach's critique extends beyond equities. He likened the rapid growth of the $1.7 trillion private credit market to the subprime mortgage crisis of 2006, warning that "the next big crisis in financial markets is private credit" due to what he described as "garbage loans" and deteriorating underwriting standards. Recent failures of firms like auto lender Tricolor and car parts supplier First Brands Group have reinforced his concerns, which align with warnings from JPMorgan CEO Jamie Dimon about systemic risks in the sector.

Despite his bearish outlook, Gundlach has not abandoned all asset classes. He still views gold as a "real asset class" but has scaled back his recommended allocation to 15% from 25%, citing diminishing returns on the trade. The precious metal has surged 54% this year, but Gundlach notes its recent consolidation suggests investors should treat it as a hedge rather than a speculative play. His stance contrasts with his earlier predictions of a $10,000-per-ounce target, though he acknowledges gold's role in diversifying portfolios amid dollar weakness and inflationary pressures.

Gundlach also dismantled the traditional 60/40 portfolio model, advocating for a radical rebalancing. He advised capping equity exposure at 40%, with a focus on non-U.S. stocks, and reducing bond allocations to 25%, favoring non-dollar fixed-income investments. "The health of the equity market in the United States is among the least healthy in my entire career," he stated, pointing to inflated valuation metrics and speculative momentum in AI-driven sectors.

His warnings about AI echo historical patterns of market mania, such as the dot-com bubble. "Markets price in big transformations quickly and excessively," Gundlach said, cautioning that the current enthusiasm for AI could lead to a painful correction. This view is supported by NYU's Aswath Damodaran, who recently suggested even unconventional assets like baseball cards might offer better risk-adjusted returns in today's environment.

The bond king's comments come as broader market uncertainties mount. The S&P 500 has seen a 1.45% decline over the past month, and Bank of America's latest fund manager survey indicates growing concerns about overinvestment in AI and other high-flying sectors. Gundlach's recommendations-increased cash holdings, reduced exposure to speculative assets, and a shift toward real assets-reflect his belief that investors must prepare for a potential "catastrophic" market downturn.