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Bloomberg Audio Studios. Podcasts, radio, news. And I want to start there, considering the fact that you've talked about how the U.S. is going to go bankrupt and how it's on an unsustainable fiscal path. Are we seeing that priced in or is there still a reckoning to come? Well, it's certainly behaving differently than it was for the last four decades. I mean, what we've seen is...
In the last 15 years, there's been a number of corrections on the S&P 500. And in every single one of them, when the S&P goes down more than 10%, the dollar index, the trade weighted dollar index goes up. This time, the dollar went down when the S&P 500 went down almost 20%. That's strange. Things are behaving differently. Usually when the Fed starts cutting interest rates,
Rates across the yield curve go down. The 10-year Treasury almost always goes up immediately following the first Fed rate cut, and then it keeps rallying for a while. This time, the 10-year yield went up, and the yield curve is steepening. So I think what we have is a recognition
that the interest expense for the United States is untenable if we continue running a $2.1 trillion budget deficit and we continue to have sticky interest rates. One thing that people fail to appreciate is how much the average Treasury payment
has gone up. The average yield, the average coupon on Treasuries was below 2%. The entire Treasury market, all 30 odd billion of it, you average it all together. Some of them are old, you know, they're issued with higher interest rates, but it was below 2%. Now it's pushing 4%.
And as long as bonds are maturing, and there's trillions and trillions of dollars of them maturing, a lot of them were issued back in, you know, 2009, 2008, these other time periods. Even if you just issued them in 2019, some of these are starting to come due.
And they were issued with coupons of a quarter of a percent. And now it's four and a quarter percent. So it's 400 basis points higher. So this problem continues to build. And there's an awareness now that the long-term Treasury bond is not a legitimate flight to quality asset.
It's not responding to lower interest rates. It's not really responding to an inflation rate, which is now 2.5%. Probably going to go higher on the inflation rate because the ones that are rolling off from a year ago. I mean, the cumulative, I think, headline CPI that came out today was 0.18%.
But the one that was rolling off, I think, was 0.1. And if you do the next two months, those three months together, that quarter, the cumulative rise from a year ago was 0.1. So we're likely seeing the low point in near-term inflation. So yeah, I think the reckoning is coming is that we have to somehow figure out
how we're going to deal with $37 trillion. I mean, we're actually going to hit the $37 trillion number for real. It's still $36.95 trillion, but it's going up quickly. So yeah, there's going to have to be some pretty creative thinking, and the market's starting to believe that. So the previous group talked about capital flows, and one of the reasons that the U.S. is...
is underperforming at this point is so much money came into the United States since, say, 2015 or so, or 2005. And it's...
There was a net investment position. Foreigners were investing more in the U.S. than the U.S. was investing outside the country to the tune of $3 trillion. That was about 15, 17 years ago. It's now over $25 trillion is the net investment position. And the dollar is falling. So it's not inconceivable that some of that $25 trillion that came in over just a couple of, not even two decades, could go out.
And so this is a moment where finally you have the setup where non-US investment, even if you're a dollar-based investor, you should be thinking about increasing your allocations to non-dollar investments. And it's already working.
It's already working. So there's so much to unpack there. I want to talk about the idea that there could be this $25 trillion or some of it that moves away from you. Say $5 trillion. Right, exactly, whatever it is. $3 trillion. You're getting trillions of dollars moving out of U.S. assets. How high or what kind of behavior do you have to see in a 30-year bond to like it again, given the fact that you've been very vocal about shorting it? I've been thinking about this for a long time, and I've come to the idea that
As the Fed eases and when the economy really does weaken more, the Treasury rate will continue to go up at the long end. And so for now, we're very uninvolved in the long-term Treasury bond. But there will come a moment where you have to pivot because there's going to be a response. And I've got many ideas of what that response might be, but one of the leading candidates would be quantitative easing.
So you get to a point where the rate is so uncomfortably high, what is that number? I'm going to guess 6%, where they say, this is going to be something that we're going to be running a $5 trillion budget deficit with all this bond issuance when we go into a recession. And so they'll pivot.
I believe this is a sensible idea. There's other ideas too, but the leading candidate is they will announce quantitative easing on buying long-term treasuries. And when they do, you have to very quickly, and hopefully you do it the day before they announce it,
but we don't have access to the day before stuff. That's for the primary broker dealers. But you would need to buy long-term treasuries as much as you possibly could because when that gets denounced, it'll be just like when they announced buying corporate bonds
in COVID, where all of a sudden the corporate bond market went from down 20 points to right back to where it started in just a matter of a few days. You could get a 20-point rally on the long bond if they announced that they're buying the long bond, because that would be a 100 basis point drop. You said that if the Fed were to cut rates, that might cause a sell-off.
in 30-year treasuries. It's already happening. They started cutting rates September of 2023, and the long bond has gone up in yield significantly since then, 100 basis points. And you think that will happen again? Why not? I mean, it's a paradigm shift. We have a tremendous paradigm shift that's going on where money is not coming into the United States.
where the long bond is not a flight to quality asset. Gold suddenly is the flight to quality asset. People, I think Costco is selling gold retail and they can't keep it in stock.
And gold has gone from... It was living at $1,800 an ounce not very long ago. And once it broke above $2,000, it was just straight up. And now it's basically a third of $10,000. $3,333.33. It was actually what I looked at yesterday. So I think gold is...
is a real asset class. It's no longer for lunatic survivalists and wild speculators. It's viewed as an asset class. And central banks have been accumulating gold. Gold was stuck in the mud because for a decade or more, central banks were selling it down. They've bought it all back.
So you buy gold? I've owned gold since it was $300. And I also own some gold miners personally. But they bought it all back. It's amazing. They sold it at like $300, $400, and they're buying it back at $3,000. See, central banks are not very good long-term investors.
Well, maybe they could use advice from you. One thing that we've been hearing about in a number of the panels this morning has been about the corporate debt market. And one thing that I've gathered from talking with people at DoubleLine and reading your outlooks is that you've reduced your allocation to below investment grade credit. Systematically over a two-year period. To the lowest level, I believe, since the inception of DoubleLine. That's right. We have higher quality portfolios today relative to strategy style.
That at any time we run closed-end funds that are leveraged. We have the lowest leverage of all time We had we had 45 percent leverage versus versus net assets and in one of our funds were at seven and we're just we're there because We we want to be a liquidity provider when you get paid to be a liquidity provider and you're not now the spreads are
very uninteresting in the credit market. Just as the valuation of the S&P 500 is incredibly uninteresting. You know, when we had the big sell-off in April, people were like, "Yeah, we were kind of asleep at the switch. "The market was really overvalued. "We really should have been thinking more cautiously." Well, it's more overvalued today.
because the s p 500 is down one or two percent and earnings estimates have been cut significantly so if you look at the forward pe it's higher now than it was
at the all-time high back in February or early March. - So what are you sort of anticipating? What kind of-- - I anticipate a great buying opportunity. I don't know when it's going to happen, but it's getting close. I feel that the environment feels a lot like
1999 relative to, you know, AI is just map over dot com for AI. I also think it feels a lot like 2006, 2007. You know, it's funny. One of the hardest things to do in the investment business is to learn and fully appreciate how long everything takes to happen.
It takes forever for the problems to actually show up. It takes forever for the defaults to finally arrive. But people anticipate changes with great enthusiasm. So AI, of course, was embraced with great enthusiasm. Electricity was all the rage back in 1900.
because people realized that electricity could change the world. And I think we can all agree electricity changed the world in ways that are bigger than AI will change the world, in my opinion. Electricity is like amazing. But there was a huge boom in electricity stocks in the first decade of the 20th century. But electricity stocks boomed so much that their relative performance
peaked versus the stock market excluding electricity stocks in 1911. If you own electricity stocks, you've been underperforming the non-electricity stocks since 1911. That's a long time.
And that's what happens. That happened with the dot-coms too. That was the 1999 thing. Sure, it turned out that some of those stocks were great investments. But that enthusiasm becomes very excessive. They see the possibilities, but it takes a long time for the possibilities to arrive. It's taking a long time for the tariffs to arrive.
So do you think that the tech stocks that have been outperforming are going to lag behind in terms of the 99 performance and sort of the corollary of all of the credit investments tied to the AI build-out also? Yeah, it's a momentum trade. And momentum trades always overshoot on the upside. And then once the momentum's broken,
the latecomers decide that their first loss is their best loss, and it turns into a seller's market. You talk about 2006, 2007. That's a credit event. And when we took that poll that my colleague Danny was pointing to, private credit seemed to be the spot where people expect defaults to really pick up. Yeah. Do you agree? Do you think that that's sort of the epicenter of some of the risk? Sure. Private credit is analogous to...
Private credit today is analogous to the CDO market in the mid part of the OOs where there's just tremendous issuance, there's tremendous acceptance, there's
I was listening briefly to the private credit panel here and there's a lot of phraseology that I heard that reminded me of CDO panels in 2006, 2007. Just complexity, illiquidity, I don't know, very large tensions between investor classes.
These things, private credit is extremely heavily invested in. Harvard University, who has a $53 billion endowment supposedly, they had to come to the bond market twice
because they couldn't have they could have enough money they have 53 billion dollars and they can't pay they can't pay for repairs they can't pay for operating expenses they came to the bond market looking for a couple two and a half billion dollars i think they got one and a half billion dollars and then they came back again and well i think it was last week it was announced that harvard is thinking about selling some of their private equity interests at a discount obviously because when you're when you're when you're a forced seller you're not going to get your cost
And so there's a lot of over-impressions. When I speak to RIAs, you know, people that manage kind of higher net worth retail money, for the past three, four years, one of the very first questions, without exception, what about private credit? And I say, are you heavily invested in private credit? Yes. And everybody is. And I say, so...
You know, what's the argument? And I was giving a speech down in Texas and the woman before me was from a fund that's very heavily involved in private credit. And she basically gave a sales pitch for private credit and basically a three-pointed sales pitch, none of which of the points really sell me. The first is that it's less volatile. It's a sharp ratio argument.
We all know it's only because they don't mark them to market. I mean, everybody knows that. So it's just like private equity. If S&P 500 goes from 100 to 50, they mark their private equity down 20 points. And then they both recover over time. They both go up to 100. So look at that. They have the same return, but S&P had double the volatility and then some. That argument is not valid. They aren't marked to market. So
You know, the next argument is somewhat valid. Historical performance. Private credit had some very good years. It was quite cheap, you know, five or seven years ago. And you use a historical argument that the performance is good, and it's true. But as we all know, as they say in the disclaimers of the commercials, you know, past performance is no guarantee of future results.
Public credit, I think, has outperformed private credit for a few quarters at least now. It's already changing. I think that there's a lot of overinvestment in private credit and the liquidity is not very good. I just don't think the excess reward is anything close to what it used to be. I would view that as a place where there would be forced selling. Harvard could turn into a forced seller.
Harvard, you know, they at least used to have the best reputation. Yale had this great reputation for investing in private markets. And that lured in a lot of me too behavior because they were emulating the results of Yale. But there's once once one university is publicly acknowledging that they have liquidity problems. I've got news for you. If you have a cockroach in the kitchen, there's never one cockroach.
So there's more, it's always, it becomes systemic. It doesn't mean everybody's over-invested and overly locked up. But in 2008, I was raising lots of money for distressed mortgages, you know, the stuff that was defaulting like crazy. It got to such a price that it was just,
Truly unbelievable. I mean there were securities that were trading that started life at a hundred had never really had much volatility and they were being liquidated at prices of 30 cents on the dollar and you could use assumptions that were just nobody believed would happen. You could say 70% of these mortgages default and we recover 30 cents on the dollar and it's a 24 IRR.
And I said this to the Stanford University endowment, the head guy. And I said, I can prove to you that your worst case is going to be a 24 IRR because I'm going to use, you tell me what assumptions you think are absurdly punishing and I'll use them. And he got a 24 IRR. Let me finish. And he says, I can't argue with you. You make a very compelling point, but I can't invest with you.
And I said, "Why?" He said, "I have no money. We're all locked up. We're getting called because everything's so cheap. Everyone's calling their money now. You know, these are draw funds. Now we're calling your capital." And he said, "I can't even make those capital calls." And I said, "Come on. I really love Stanford Endowment. What a great name for the client list. Give me $10 million."
I don't have $10 million. I have no money. These are large endowments. And if they need money, they have to sell. You see, markets, everyone knows markets have fear and greed that drive them. Everyone knows that fear is stronger than greed when it really comes to shove. But the actual strongest driver of investment behavior is need.
Sometimes people need. Back in 1993, interest rates were perceived to be low and I went to one of my university endowment, it was the treasurer, it was their operating money, and he said, "I just met with the president of the university and he says I have to make 6% for the operating money." And he said, "I told him it's impossible to get 6% without tremendous risk because treasury interest rates are at 3." And he said, "Wrong answer."
You're going to get 6%. Just find out how you're gonna do it. And of course, in 1994, interest rates went way up and everybody that had done that sort of thing, like Orange County, California,
There was a very famous default of Orange County, California. And, you know, so there's need is very powerful, but it's bad enough when you make the determination. You say, I have this goal, the 6% goal. I need to make it. I'll give it a shot. But the other side of that is even more powerful when you're forced to sell.
It doesn't matter what the price is. You don't have an option. If you have to sell to pay the bills, what are you going to do? If you're preparing for that kind of moment, are you sitting mostly in cash, a little gold? No. We manage a lot of other people's money, and a lot of it is in the fixed income market. We're just protecting and waiting for much better opportunities. Think about it. Markets take the stairs up and the elevator down.
which means they go down faster than they go up. And so when it really breaks, it's not down a couple of points. Even what we saw in April, that's not a real break of the credit market. A real break of the credit market is bonds drop 30 points. And everyone thinks they're cheap, but they have to sell.
So you have an opportunity at some point to buy bonds down, I don't know, let's just say it's 25 points. High yield bonds yield about 2.5% more than treasury bonds. So if it takes 10 years for that 25 point opportunity, you're going to break even.
And it's not going to take 10 years. It's not going to take five years. I believe what the panel before me said I think is true. I think 27, 28 are likely to be a window of tremendous opportunity.
Because I think by then, the Treasury problem will be even more in focus than it is today. And I think that it'll weigh upon market behavior. We need to restructure a lot of things in our system. We need to restructure...
We need to restructure institutions, we need to restructure political parties, we need to restructure our finances. All these things have been in place. It's the waves of history. You know, Neil Howell calls it the fourth turning. He wrote a book called The Fourth Turning in the mid-90s, predicting the credit crisis around 2006 using demography. Pretty good.
And I know him pretty well, we talk about it, we have the same concepts, and that is that societies start with a pact. They have an economic system that produces things, and then they have, so that's the means of production, and then they have the property relations that split up the rewards. And when it starts out, and this would be say right after World War II or after the Civil War, it starts out that everybody kind of buys into how the system works.
But there's a fundamental problem with this kind of duality of property relations and the means of production. Means of production change in revolutionary ways. Steam engine, radio, television, telephone, internet, AI. They're just explosions of innovation. But the property relations, they don't change very quickly. In fact, they're...
barely evolutionary in the way they change because over time, there's this becomes a wealth inequality, which of course we're in an extreme, where the people that benefit from the property relations, they don't want them to change because they're winning. So when you have tremendous concentration of wealth and power, the property relations become calcified.
And meanwhile, the means of production are causing all kinds of disruption and intensifying the wealth inequality. And then suddenly the whole thing says, this doesn't work. We have to get the property relations to a right place where this isn't a feudal system, where there's the lords and the serfs.
But that's what we have. And so we need to rejigger all of this stuff. And the treasury debt problem, the interest expense unaffordability, is another offshoot of all this. It's all the same thing. It's that we need institutions that people believe in.
We're almost out of time, and I could speak with you for an hour, but I want to finish with the idea that is this a United States problem or is this a global problem? Can you hide by going to invest in places like, say, Europe or Japan? You can hide to a certain extent. I don't think you can become immune. I think the way to invest in periods like this, I think, are to go with long-term themes. And a long-term theme is...
that I think is one of the most bankable and it might take in 30 years, this will be a great success. And that is you should buy, you should invest in India.
Because India has a similar profile today to where China was 35 years ago, when they had tremendous population labor force, visibility of labor force growth, tremendous problems, a gummed up legal system, corruption all over the place. But those are things that can be fixed.
And you see what China went from 1/12 of the US GDP to 70, 80% of US GDP. And they certainly produce more goods than the United States. So in a certain sense, they're bigger. Well, India has the same demographic outlook as China did then.
has a benefit for supply chain being moved around, for manufacturing can come there, they're very technology. They have a long history of being a significant society. So I don't know how long it's going to take, but that's one that you buy and you just...
Do yourself a favor and don't open the statement. Because if you do, when there's trouble, you're going to sell it, right? Because it'll be down 30%. So just hold it for your grandchildren's college fund, and it'll work. So there are places to hide. But I think gold is...
It's proven to be a source of growth. If you were a Bitcoin person, I would recommend instead of being a Bitcoin person, you would take the same unit of volatility by buying gold and leveraging it probably twice.
See, it's interesting that gold has outperformed Bitcoin here today, even though Bitcoin's done very well. And for the last 12 months, Bitcoin has outperformed gold, but they're both up 40 plus percent. Those are the places to be. And then dollar-based investors should be investing in foreign currencies. The S&P 500 has stopped outperforming the MSCI Europe.
And it's underperforming in a major way on a year-to-date basis. And that took a while to happen.
But things always take longer than people think. But it's happening in real time. And the next one will be selected emerging market equities as opposed to the United States because the emerging markets will have the same benefit broadly as India does most specifically. But you also win on the currency translation if you're a dollar-based investor. So we're...
are for the first time in a long time starting to introduce foreign currencies into our funds, even ones that are owned by dollar-based investors. We're not all in. We want to see the dollar break through a certain trend line, resistance lines and stuff like that. But we're pretty close. Jeffrey Gundlach of Double Line Capital, thank you so much. It was a pleasure speaking with you.
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