It feels just like 2008 now! The new bond king warns of a $1.7 trillion bubble brewing the next financial crisis.

Jeffrey Gundlach, a veteran Wall Street investor and CEO of DoubleLine Capital, who is hailed as the “new bond king”, recently issued a rare and strong warning, stating that there is a serious speculative bubble in the current market, particularly in the private sale credit sector which has reached a scale of $1.7 trillion and is brewing “the next financial crisis”. He advised investors to increase their cash allocation to 20% to guard against potential systemic risks.

New Bond King Warns: The Most Unhealthy Market of His Career

(Source: Bloomberg)

Jeffrey Gundlach, in an interview with Bloomberg's “Odd Lots” podcast, stated that many asset prices are “extremely overvalued” at present, urging investors to keep about 20% of their portfolio in cash to guard against potential significant declines. The CEO of DoubleLine Capital warned that the current stock market appears dangerously speculative and is “one of the most unhealthy markets” of his career.

A Dartmouth alumnus who began his Wall Street career at TCW Group in the mid-1980s pointed out that there is a clear speculative bubble in artificial intelligence-related stocks and data center investments, emphasizing that momentum investing during prosperous times often ends in tragedy. Gundlach has over 40 years of investment experience, having lived through the 1987 stock market crash, the 2000 dot-com bubble, and the 2008 financial crisis, making his warnings highly valuable for reference.

The current market's bubble characteristics are strikingly similar to the eve of historical crises. The valuations of AI stocks have reached unreasonable levels, with many companies' P/E ratios exceeding 100 times, and some companies that are not yet profitable have market values reaching billions of dollars. The investment frenzy in data centers has also raised concerns, with investors betting that AI demand will grow infinitely, but the fragility of this assumption has been proven multiple times in history. During the internet bubble of the late 1990s, investors also believed “this time is different,” resulting in the Nasdaq index plummeting 78% from its peak.

Gundlach's suggested 20% cash allocation is significantly higher than the traditional portfolio standard of 5% to 10%. This defensive allocation means that even if the market drops by 50%, investors still have ample cash to buy quality assets at the lows. This strategy proved to be extremely effective during the 2008 financial crisis, when those who maintained a high cash ratio not only avoided massive losses but were also able to acquire quality assets at very low prices during market panic.

1.7 Trillion Private Sale Credit Bubble: The Epicenter of the Next Financial Crisis

Gundlach is especially concerned about the rapid expansion of the private sale credit market. This market, which amounts to $1.7 trillion and lends directly to businesses, is showing an increasing number of risks. He stated that many of the loans are considered “junk loans,” similar to the situation before the 2008 subprime mortgage crisis, and specifically mentioned the recent failures of the auto loan agency Tricolor and the auto parts supplier First Brands Group as early warning signs.

He added that the bankruptcy of the home improvement loan company Renovo Home Partners may not be an isolated incident, but rather exposes the underlying vulnerability bubble behind seemingly safe private sale credit assets. Gundlach wrote, “In the private sale credit space, a loan that can be valued at 100 today can be 'revalued' to zero weeks later after the borrower declares bankruptcy.” He cautioned, “Remember, there is never just one cockroach.”

Three Major Structural Defects in the Private Sale Credit Market

Valuation Opacity: Loans are not traded in the public market, and the valuation heavily relies on internal models, making true losses hidden and not apparent.

Liquidity mismatch: Promising retail investors easy redemption, but the assets are essentially not quickly sellable.

PIK Loan Proliferation: Allows borrowers to pay interest with new debt instead of cash, causing the debt snowball to grow larger.

His remarks echoed the warning from JPMorgan CEO Jamie Dimon. Recently, Dimon used the same “cockroach” metaphor when discussing the failures of auto financing company Tricolor Holdings and auto parts manufacturer First Brands, implying that these bankruptcies may not be isolated incidents. The rare alignment of the two Wall Street giants indicates that the seriousness of the private sale credit bubble has raised significant alarm within the industry.

BlackRock hits a snag, 150 million, valuation drops to zero overnight

After the news of Renovo Home Partners declaring bankruptcy broke, a larger victim emerged: BlackRock, the world's largest asset management company, holds most of Renovo's approximately $150 million in private sale debt. Even more shocking, according to Bloomberg reports, just a month ago, BlackRock still valued the debt at face value of 100 cents - and within weeks of Renovo's collapse, it was rapidly downgraded to zero.

This sharp decline in valuation reveals the core issue of the private sale credit bubble: the significant disconnection between valuation and reality. Because these loans are mostly not traded in the public market, their valuation heavily relies on internal models and management assumptions rather than transparent market prices. This means that real losses often remain hidden until the borrower defaults or the fund is forced to revalue its assets, at which point they become exposed all at once.

Apollo Global Management (Apollo) and other large institutions such as MidCap Financial and Oaktree Capital Management also hold risk assets related to Renovo, highlighting the potential for broader ripple effects in the private sale credit space. Independent journalist Kristen Shaughnessy and others question the reasonableness of viewing these losses as “isolated incidents”, suggesting instead that they may reveal deeper issues brewing in the private sale credit market.

According to InvestorsObserver, Gundlach recently warned about the rise of PIK (Payment-in-Kind) loans, which allow borrowers to pay interest with additional debt instead of cash. This structure is very similar to the negative amortization loans before the 2008 subprime mortgage crisis, when borrowers' monthly payments were not even enough to cover the interest, leading to a continuous increase in the principal debt and ultimately triggering a massive wave of defaults.

Reviewing the Subprime Mortgage Crisis of 2006 and 2008

Gundlach said: “The next big crisis in the financial markets will be private sale credit. This is reminiscent of the situation when subprime mortgages were repackaged in 2006.” He also criticized the trend of selling private sale credit funds to retail investors, calling it a “perfect mismatch” – promising easy redemption, but these assets are essentially not quickly sellable. Once investors start redeeming, the fund may have to sell assets at a significant discount.

This warning is astonishingly similar to the situation before the 2008 financial crisis. At that time, Wall Street packaged high-risk subprime mortgages into complex financial products and sold them to investors who did not understand the risks. When the real estate market collapsed, the value of these products evaporated instantly, triggering a global financial crisis. Today, the private sale credit market is repeating the same pattern, only the underlying assets have shifted from home loans to corporate loans.

Despite continuously issuing warnings, Gundlach also admitted that it is difficult to profit directly from this perspective. For example, he would not short junk bonds because this trade “constantly loses money.” He stated that he remains bullish on gold but has lowered his recommended allocation from the previous 25% to 15%. In mid-September, he suggested a 25% allocation to gold, reasoning that tariffs on imported goods would keep inflation stubbornly high.