Author: Long Yue, Wall Street CN

Two veteran macro investors sat down together and reached a nearly unanimous judgment: this AI-driven upcycle is approaching its end, and the coming decline won't be in the single digits, but a major bear market of 30% to 50%.

On June 22, the blog of U.S. asset management firm DoubleLine Capital aired a new in-depth interview. In the conversation, "New Bond King" Jeffrey Gundlach and Swiss hedge fund manager and "stock market prophet" Felix Zulauf stated that the world is shifting from a unipolar to a multipolar order, and geopolitical conflicts and sanctions will bring structural inflation. Against the backdrop of the old order collapsing, both the tech frenzy in U.S. stocks and the bottomless U.S. fiscal black hole have reached an extremely dangerous tipping point.

From left to right: Felix Zulauf, host Grant Williams, Jeffrey Gundlach

AI Frenzy Nears Its End, U.S. Stocks Face a 30% to 50% Plunge

"This is absolutely not a 20% pullback, but a bear market based on economic recession and valuation contraction, with a decline between 30% and 50%." Zulauf came straight to the point with a blunt judgment that U.S. stocks will peak as early as the third quarter of this year, or by the first quarter of next year at the latest.

The logic chain he presented is very clear: The capital expenditure-to-revenue ratio of hyperscale cloud computing companies (super-scalers) has surged from 10% to 30%, semiconductor memory chip prices have risen 200%-300%, and free cash flow is starting to turn negative—Oracle is already negative, and the next one will follow. "When these companies start going to the market to raise funds, and when their free cash flow begins to shrink, the entire AI cycle starts to decelerate."

To precisely time the market top, one must closely watch the trend of semiconductor stocks, those "selling shovels to gold miners."

Gundlach fully agreed with this. Currently, the top ten AI concept stocks in the S&P 500 index have a weighting as high as 41%. This extremely concentrated figure alarmingly coincides with the historical major tops of past market cycles.

"I advise people not to hold any momentum-driven or market-cap-weighted U.S. stocks," Gundlach offered a direct hedging strategy.

He also mentioned his "famous misjudgment" on September 30, 1999—when he turned maximally bearish on the Nasdaq, only for the index to continue rising about 80% in the fourth quarter. "But 18 months later, from that point, the Nasdaq fell from 100 to around 20. So when fundamentals are deteriorating but stock prices are still rising, that's the most dangerous moment. We are right here now."

Recession Is Coming, But Treasury Yields Won't Fall; A U.S. Version of YCC and a "Great Treasury Restructuring" Are Unavoidable

This is one of Gundlach's core judgments and his biggest point of divergence from traditional economic logic.

The usual logic is: economic recession → Fed rate cuts → long-end yields fall → bond prices rise. But Gundlach believes this time is different. Even if the U.S. economy falls into a recession in 2027, long-term U.S. Treasury yields will not see a meaningful decline.

The reason is that the fiscal problem has reached a structurally out-of-control level: U.S. interest expenses have soared from about $300 billion seven years ago to nearly $1.4 trillion per year now. Meanwhile, the fiscal deficit is expanding at a rate of $2 trillion per year, accounting for about 6% of GDP.

"Once a recession hits, the deficit won't be 6% of GDP, but 10% or even higher. This will trigger a buyer's strike on bonds," he said. "We've already seen this in developed countries—even Japan's long-term interest rates are rising, something many once thought would never happen."

Gundlach believes the policy response at that time will have two directions:

Option A: Yield Curve Control (YCC). Treasury Secretary Bessent might choose to suppress long-end interest rates, just as the U.S. did after World War II—inflation rises, but long-end rates are artificially suppressed, resulting in persistent negative real interest rates and a subsequent 40-year bond bear market.

Option B: U.S. Treasury Restructuring. Gundlach revealed that two years ago, he had already reduced the coupon rate on bonds with maturities over 10 years from 4.75% to 1.5% in his managed fund to guard against restructuring risk. After he publicly discussed this idea in an interview last year, the media pressed White House National Economic Council Director Kevin Hassett on it, who stated it would "absolutely never happen."

Gundlach's reaction to this was: "In the investment world, the synonym for 'Never' is 'Imminent'."

Zulauf had a slight divergence on the long-end rate issue: he believes that during a recession, the 10-year Treasury yield could still fall from a high of around 5.25% to about 3.75%—but this window would only last about 6 months, not 12. He added that short-end rates would be pushed very low by central banks.

Private Credit Crisis: "It Feels Just Like 2006 Now," "Everyone Is Lying"

Compared to public markets, the private credit market hidden beneath the surface sparked even stronger concerns. It is rife with rating fraud, liquidity illusions, and accounting games to conceal losses.

Gundlach stated:

"This gives me a strong feeling, exactly the same as I felt in 2005 and 2006: everyone is lying, lying about credit quality, lying about software exposure—they say it's 15%, but it's actually 28%—creating a completely illusory liquidity, an illusion that is now shattered."

Ratings are bought. "These private credit rating agencies have only 30 employees but are rating hundreds of loans, each with 200-250 page documents. I don't think they are actually analyzing; I think they are selling a price list. Want a CCC rating, that'll cost you $1; want a single B, that's $10. In the end, everyone gets a BBB-."

Credit quality is severely misrepresented. A large private credit fund claimed in its promotional materials that "investment-grade corporate bonds are the pillar of the portfolio," but in reality, in the private world, securities rated B+ and above account for only 2% of all securities. "Less than 2% is above single B+, what are you using as a pillar?"

Software asset risk is underreported. One fund claimed software exposure was 15%, when it was actually 28%.

The liquidity illusion has shattered. Many investors who bought interval funds through financial intermediaries thought they could redeem fully each quarter, but in reality, the redemption cap at the fund level is only 5%.

Valuation marks are chaotic. Gundlach gave an example: the same loan is held by 8 different private equity institutions, but the marked prices range from 95 to 8—the same asset, some mark it at 95, some at 8. Another case: a PIK bond with a principal of $100 million, where the underlying private equity has been written down by 98% to $800,000, yet the bond itself is still marked at a par value of 100.

Offshore reinsurance is the last black box. A closed loop has formed between private equity, private credit, and the insurance companies they control, with risk transferred to offshore reinsurers in places like Barbados, the Cayman Islands, and Bermuda, where there is neither regulation nor transparency. "I'm not sure those risks are really hedged. Once a recession hits, fixed annuities and life insurance need to be paid out, and those assets simply do not have adequate reserves."

Zulauf added: "All problems will surface when the market turns and the tide goes out."

The AI Funding Chain and Private Credit Are Actually the Same Line

AI and private credit seem like two markets, one on the equity side and one on the credit side. But within this framework, they are connected through the cost of capital.

If AI capital expenditure continues to rise, it will depress free cash flow. After free cash flow declines, companies must either issue equity or borrow. When borrowing, if long-term interest rates cannot fall, financing costs will not automatically ease as they did in past cycles.

Low-rated companies are in more trouble. In the past, when the economy weakened, spreads widened but risk-free rates fell, sometimes offsetting some of the pressure and allowing struggling companies to refinance and survive. Now, if risk-free rates do not fall but rise instead, the refinancing window will narrow.

This will directly transmit to bank loans, CCC-rated loans, and private credit. Gundlach mentioned that cracks are already starting to appear in these markets. The core reason is not that a particular industry suddenly turned bad, but that the past model of relying on low interest rates and refinancing is no longer smooth.

Therefore, the AI trade is not just about watching Nvidia, cloud vendors, or data center orders. Ultimately, it also depends on whether the financing market can continue to provide money, and whether the credit market can withstand higher interest rates.

Dollar Weakens, U.S. Stocks Underperform, "The Second Inning" Has Just Begun

Gundlach mentioned a historical pattern: in the past 13 major U.S. stock market declines, the dollar rose in the first 12 instances, by about 8%-10%. But during the 2025 tariff turmoil, the dollar fell by 8%-10% instead.

"This confirms my judgment—in this rate-hiking cycle, the market's reaction function has changed."

He believes that the long-term outperformance of U.S. stocks relative to other global stock markets has ended, and emerging markets are now outperforming the S&P 500. "We are now in the second inning, not the eighth, not the ninth."

Zulauf added a risk point to this: Asian sovereign wealth funds have bought a large amount of dollar-denominated assets over the past 12 months, but they are no longer buying U.S. Treasuries, but AI stocks. "Once the market turns, they will sell stocks and sell dollars at the same time. This is completely different from holding Treasuries and will accelerate the dollar's decline."

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