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- [00:06]
Alex Shahidi
Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co CIO of Evoke Advisors and a leading investment advisory firm. Learn more about our show@insightfulinvestor.org today I'm joined by Jeffrey Gundlach, founder, CIO and CEO of DoubleLine Capital. I'm in their beautiful studio in lovely downtown Los Angeles. And if you're listening to the audio version of this podcast, make sure to check out the video on Spotify and YouTube as well. Jeffrey, thank you for joining me.
- [01:01]
Jeffrey Gundlach
Welcome. Thanks for coming.
- [01:02]
Alex Shahidi
Thank you. Well, let's go back to the very, very beginning. Do you feel that you were born an investor, meaning that it is core to who you are?
- [01:11]
Jeffrey Gundlach
My father bought me stock in a company, the parent company of a chemical company he worked for. It was a very small amount, but I would follow. And this was when I was maybe 10 years old, and I would follow it in the daily paper. And one day we were over at my grandfather's house and the paper came and I went to the stock listings and it was on the American Exchange. And my grandfather had been a stockbroker and he had missed the crash at 29, and he had gotten his clients out of it. He was always very proud of that. But I was looking up the American Stock Exchange and he says, what are you doing? You don't care about that. You have to look at the New York Stock Exchange. Now. I kind of remembered that. So I liked following the stock market. And then when I was in eighth grade in a social studies class, we did a thing for about a month on stocks, and he had to pick one and chart it and follow it. And my uncle had been the head of development for Xerox. He had developed the Xerox copy machine. And we owned Xerox. And I picked Xerox for the stock. As it turned out, that was right in the teeth of the Nifty50, right at the day that we started it in social studies class was pretty close to, if not literally, the high I was charting Xerox, and it was going down half a point, two points, three points a day, every day. And we owned it. We owned Xerox because my father believed in the company. And that was the only time in my time growing up where we was right at that top when we thought that we actually had a little bit of money, my mother was begging my father to sell the Xerox, and she was getting increasingly angry that it was going down, down, down, because it ended up dropping by about 2/3. So I don't know, I always followed that sort of thing. But I really have came to develop the idea that I'm kind of a natural at looking at financial markets and figuring out what the state of society is by following all the things that go into price movements. But I never really thought there was. I didn't know there was such a thing as an investment business. I really found out about the existence of an investment business primarily from this show on tv. Lifestyles of the Rich and Famous had a show where they were counting down the top 10 professions paywise, on average, I suppose I said, this is great. I can figure out career opportunities in terms of what segments might be interesting. And number one was investment banker. And I didn't know what that was. So I figured I would look into investment bankers in the LA Yellow Pages. And I found out that nobody advertises investment banking in the LA Yellow Pages, but they do put in investment management. And so I figured, I don't know, this sounds like the same thing to me. And so I sent letters to about 23 different investment management companies in Southern California. And I got three letters back. And one of them ended up being where I got my first job in the investment business. And they interviewed me and they said, you've got a very interesting, unusual background because it was all mathematics. And I also studied philosophy. And they said, do you think you'd be interested in equities or fixed income? And I said, I don't know what those things are. And the guy seemed pretty exasperated. And he said, equities, stocks, fixed income, bonds. And I didn't know what bonds were, but I knew what stocks were. And so I said, stocks. And he says, well, I don't know, we probably need more quantitative firepower in the bond group. So, long story short, I ended up getting introduced to that. And I had been out of the Yale PhD program in mathematics. And I got this book to learn about what bonds were. It was called Inside the Yield Book. And it was kind of seminal in the literature. And it was broken into two sections. The first was prose explanations of how bond returns are developed and how important reinvestment is. And the back part of the thing was the formulas, bond math formulas. And so I figured I'll derive them all from scratch. And I learned a lot about how that worked. And I was so unfamiliar with the investment business. I thought everybody did that. Like that was like everybody would have done that. And it turned out that nobody did that. Nobody really understood that stuff. And so the quantitative aspect of bonds ended up being a really good match for me. And so, I don't know, I often wonder, what if I had started a steel company or something, what would have happened? But it didn't work out that way. I just fell in haphazardly into the investment management business. And I got past the chicken and egg problem, which is you can't get a track record unless you have money, and you can't get money unless you have a track record. But I was lucky that I was given an account at really an experience level that was unwarranted. I was in the business like six months and suddenly I was managing a portfolio for the Chrysler pension system. And they had a horse race. They had five or six managers. And this was common in those days. In the 80s, asset allocation decisions were being made by pension plans in very foolish ways. If you had the highest return for a calendar year, they would take money from the other manager and give it to you. So they're buying, selling low and buying high constantly. But as it turned out, I was typically first or second. And so my career got going and I don't know, I still think of investing is not working. I just think of it as. It's just something that I would follow all the time. I mean, even when I was at my first job, when I just got out of undergraduate, I would listen to the radio and I was following CD rates. And it was really interesting because that was Volcker. And so the CD rates were. I remember they were over 20%. I couldn't believe it. I'd been working for about four months and I got a cost of living increase of 20% because the inflation was that high and interest rates and all that stuff were going on. I've never once thought about doing anything else once I fell into the investment business. So I think to a certain extent it's sort of in my blood and I kind of interpret society through how the markets work. And so I don't think I can really distance myself from that because it's kind of part of how I view the world.
- [08:21]
Alex Shahidi
Well, in your career you've had the opportunity to meet a lot of great investors, including yourself. What would you say are the key qualities and characteristics of a great investor?
- [08:31]
Jeffrey Gundlach
Accepting the fact there's many things, I'd probably give you a different answer on different Days. But you got to accept the fact that you can't come close to being right all the time. And failures. Just like a baseball player, they're great. If they hit.350, right, that means they're two thirds of the time, roughly, they're not getting a hit. So you have to accept the fact that you're going to be wrong. And part of that, when you understand that and accept it, you learn that you have to evaluate what your positions and what your results are going to be, assuming that your core assumptions are wrong. And you have to make sure that it doesn't become a fatal error. That's actually what the doubleline logo is about. Double line is in your real life on the street. You're not supposed to cross it. It's illegal to cross it, but it's also imprudent. So it's dangerous, and so no fatal flaws. The other thing is, I think most successful investors come to understand that you might be right in terms of your core assumptions and how you're viewing the course of the future. But it takes way longer than you think. Way longer. I remember things like the global financial crisis. I saw that coming in 2004, and it just 2005 came and went, 2006 came and went.
- [10:00]
Alex Shahidi
It sounds like you're wrong while you're waiting.
- [10:02]
Jeffrey Gundlach
Oh, you are wrong. When people say I'm early, that's just a synonym for wrong. And so, yeah, it takes a long, long time. In fact, I used to write quarterly white papers to send them out to clients. This was in the days when people sent letters and I would write on a topic. And one of them was that it came to me. It occurred to me that in the holiday season, people buy poinsettia plants, and a lot of times they end up killing them because the leaves start to fall off and they think, oh, I need to water it. No, no, no, no, no, no, no. It's the opposite. The leaves, it's going dormant. The leaves just fall off. And if you water it, you're going to kill it. And so they end up killing it. And what you have to do is just take it, if it's in a pot and just cut it down. So there's this much above the dirt. Put it in a dark closet and don't even look at it. I mean, maybe once every two weeks, you probably don't have to look at it for the first eight weeks, but then every two weeks, you might want to look at it. And then one day, something magical will happen. This little green shoot starts to come up, and then you take it out of the closet and it's now growing again, and you water it. That's sort of like the investment business. Everybody thinks that you have a daily cycle, a weekly cycle, monthly, quarterly. The investment business cycle is way outside the context of that. It can take many, many years for something to develop. I mean, we've been talking about the budget deficit problem going back to Reagan. Ross Perot, I think it was, had his voodoo stick. And there was a book called Bankruptcy 1994 that was popular in the early 90s, and it predicted that this was unsustainable. Well, here we are. Ross Perot was right. He was just over 40 years early or 30 years early. And so it takes a very, very long time. But then it all inevitably has to happen, though. And that's the cycles of the market. I remember the dot com situation in 1988, 1998, 1999. It just went on forever. And it just seemed. And then at the very end of it, the fourth quarter of 1999, I think the NASDAQ was up 80% in the quarter, and it seemed invincible, unstoppable. That's kind of where we were entering 2025, I think it just seemed like there's a survey. They ask, what do you think stock returns in the next 12 months? Will they be? And it was like, it just skyrocketed at the end of 2024, and it was one of the highest readings of all time, kind of rivaling 1999. So you have to be patient. Things take longer, and you have to avoid fatal flaws. And I think that's what you see. I mean, I remember, like, Bill ackman was on the COVID of Bloomberg magazine. And that's always. You never want to be on the COVID of Bloomberg or most magazines because you're tempting the fates. And ackman then had his worst year ever, right after he was on the COVID And I spoke at some conferences with him repeatedly. And I would talk to. He's kind of a taciturn guy, but I was talking to him and. And he survived that. So it wasn't a fatal mistake. He had a really bad year, but it wasn't fatal. And so I think that that's really a common characteristic.
- [13:26]
Alex Shahidi
And I guess part of that is recognizing that you don't know a lot of what will impact the price of your investments and therefore diversifying, not making overly aggressive bets and just being in some ways humble to the fact that a lot is beyond your control and don't put yourself In a position where if you get one or two things wrong, it can wipe you out.
- [13:49]
Jeffrey Gundlach
Right. It also means balancing risks, which I think is easier to do in bonds than it is in stocks. Because stocks, I mean sure there's indices zig and zag differently but ultimately the beta is kind of a constant. Whereas in bonds you can put together and I think this is why I like doing the bond stuff is, is I feel less nervous about stuff if I have offsetting risks. So it's not fatal. So you can put together and sometimes it's not possible, but oftentimes it is that you can put together things that kind of move in opposite directions are not totally correlated like low quality junk bonds together with long term Treasuries. I mean that's not always a recipe for success, but they will tend to move differently. I mean like in our current moment we see that credit is now weakening for the first time in a long time. But interest rates on Treasuries are falling. So you have offsetting risks and that's a very comfortable place to be. For quite a few years that wasn't possible. We had interest rates at 0, 10 year treasury was at 1 1.5%. There was starvation of yield. So nothing yielded anything. It's hard to believe that a couple years ago that the junk bond index yielded 350, that's to no defaults. 350.
- [15:11]
Alex Shahidi
They said it changed the name from high yield to low yield.
- [15:13]
Jeffrey Gundlach
Yeah, I just call it junk. When Yield gets below 6, I call it junk. If it goes up to 10, I'll call it high yield.
- [15:20]
Alex Shahidi
Again, let's talk about the macro environment and I'd like to start out really zoomed out, looking at the very big picture. So if you go to 20, 22 and you look backwards 40 years, you basically were living in a world of secularly falling interest rates. And you could argue now that has shifted and it's world of secularly rising interest rates.
- [15:41]
Jeffrey Gundlach
That's my belief that we bottomed on interest rates and that we're in a longer term cycle of rising interest rates, which is going to be very interesting because we had a Treasury debt that was like 3% on average and now it's moving towards 4% and depending upon where rates go it could go higher. And if you think about that you get to some very uncomfortable arithmetic regarding interest expense. And this is something that I talked about, oh 2, 3 years ago when people were saying rates will never go up, rates will never rise. And I use that famous photograph of then Cassius Clay, Muhammad Ali, with Sonny Liston, I think it was. Looks like Liston's never getting up. He looks like he's out cold. And I used that graphic and I just said, you know, we've got to start thinking about where this interest expense problem may go. And of course, now that it's higher than the defense budget, and not even the official defense budget, the true defense budget includes Ukraine and the Israel situation, all that stuff, the interest expense is already higher than that. So over a trillion. I think it's running at about a trillion 3 right now, up from 300 billion just a few years ago. And I think that is very strongly reason why interest rates are in secular rising position. Because the deficit is a percentage of GDP keeps going up and the interest rates that are rolling off, we still have some 25 basis point stuff that's rolling off and there still will be for some years to come. We have a strong possibility that people won't want to lend us money at low interest rates, especially for a long term period of time, especially if the dollar starts falling. So typically in a recession or weaker economy you get lower interest rates and you get a higher dollar. I think it's going to be the opposite because I think we're living in a mirror image of the 40 years that are informed by falling interest rates. And a lot of people have never experienced high interest rates, rising rates. And no junk bond investor has ever really experienced a rising rate default cycle because when defaults would show up, treasury rates would fall and you would have some capability of refinancing. So instead of going bankrupt, you could refinance. That can't happen in rising interest rates. So I think the corporate CFOs have been very smart and they've definitely managed their, their debt burdens pretty well. They've pushed the maturities out. It isn't a problem in the next few years, but ultimately the maturities will come. And will they be able to refinance? Will they have to default? I think defaults will be higher in a rising rate environment than they were in a falling rate environment yet. The junk bond market has only existed from the early 80s, so it's been nothing but falling rates until recently. And there hasn't been enough economic stress with these rising rates for the past three years or so to cause significant increase. Defaults are going up, especially on bank loans, but it hasn't been a deluge that you typically see during a significant recession. So yeah, I think interest rates are rising and I think, I think there's going to be some pretty radical changes that have to be made. We have $220 trillion of unfunded liabilities. That's like seven times the economy. We can't pay that off in today's purchasing power. It can't be done. You need to either inflate it away or restructure it. I came to the idea that there's a non zero chance of the treasury debt being restructured earlier this year back in the spring. And I was thinking about it and it occurred to me that it's a higher probability than most people think. Most people think it's zero. But then I noticed that there was a research paper that got a lot of play about 6 weeks ago talking about restructuring the treasury debt. And then I think somebody said, I think it was Scott Besant may have said something about, or it may have not been him, but it was somebody significant who said maybe we should extend the maturities for our foreign bondholders and significantly chop down the coupon, the interest rate that's paid. And I think Jim Bianco did a webcast on that a few weeks after that. And I was kind of blown away because I said, my gosh, that's the idea that I had like seven, eight months ago. And I rolled it out at a couple of conferences where I was speaking. And people sort of gasp. They can't wrap their head around that concept. But we have $36.5 trillion of debt. Some of it's owned by the Fed, but most of it isn't. And it's rolling over at higher and higher interest rates. And we're all. I think it was Stan Drunkenmiller who sort of put some awareness on this issue. And he was using the CBO's numbers. And the CBO's numbers are highly optimistic. They assume low interest rates. They assume never a recession. I can understand how you're going to fit that into a 30 year forecast. And they assume a deficit that's lower than the deficit is now. And we have a 7.2% deficit of the economy, 7.2% of GDP deficit. And we haven't had an official recession. So it's going to go to 12% under a weak economy. And I think the interest rates in the next recession on the long end will go up and not down because of fears of this interest expense problem. And I think ultimately we will have some form of restructuring. Either it's the debt or it's the liabilities. One of those has to give. There's going to be a very rapid growing awareness of this, I think it's just starting. I think it's really just starting that we're talking about restructuring foreigners and we're talking about the Doge thing, trying to work towards this. And it's really interesting how people are realizing that cutting means cutting. It doesn't mean, you know, some guy behind the tree that nobody sees. That's real people. And the reality of that is starting to become a pretty constant headline. People saying, well, wait a minute, I didn't expect my job was going to go away. So I guess they're having problems with town halls even in red states now, with people saying, you know, why don't we not shut the government down? Why don't we fund it for another nine months and then we'll deal with it. It's always the next time we're going to deal with it. But there aren't that many next times left. But per. Always. It takes longer than everybody thinks.
- [23:14]
Alex Shahidi
But at some point you hit the tipping point where it becomes too obvious to kick the can down the road further, that it's an unsustainable situation.
- [23:25]
Jeffrey Gundlach
Yeah. And I think the awareness of that is starting to really grow and people don't know what to do about it. But people don't know what to do about a lot of things. I mean, look at NATO, look at just geopolitical broadly. I read a headline today that if France and the UK back Ukraine that Italy's not going to join in, which that's interesting. When the trouble comes, you get to sort of an everyone for themselves type of mentality. And that seems to be a path that we've been on for quite some time and it's just going to keep accelerating. So I think I'm quite fond of Neil Howe's work. He's a demographer. He wrote the book called the Fourth Turning in 1996 or 1995, when he used demography to predict the global financial crisis. And he said it would come somewhere around 2006. So it was pretty accurate. But his work is based upon this concept of turnings. We used to talk about the Kondratiev cycle years ago. No one really talks about that anymore. It was basically a 75 year thing. And it turns out that there's a logic behind why it's every, you know, 75 years or so. And it has to do with the fact that societies get a framework and it starts out in a context of crisis, typically. But the framework is agreed upon and it's designed to be in harmony with the production to put it in democracy and philosophic terms, the means of production and the means of production get addressed through how you split up the rewards of the economy. There's the production economy and then there's the property relations, which is how you divvy it up. And it starts out where they're in sync, but there's a natural tension which is unavoidable where the property relations don't want to change, they get set in place and the people that benefit from them work hard to not let them change. The powerful, the wealthy, they don't want that to change. But the means of production change in revolutionary form many times over a 75 year period. Think of television, think of the Internet, think of AI, think of the steam engine, the telegraph, you name it. And so they radically change the means of production and the populations get further and further out of sync with the means of production and this tremendous tension. And ultimately it's kind of like having one foot on the dock and one foot on the canoe and it keeps drifting and eventually you're going to get wet, you're going to fall in, and so everything has to get ripped up and you have to start over again. And that's where we are. And I think people use different frameworks to talk about this, but they're all sort of cousins of each other and it has to do. And usually, not always, but usually it leads to some sort of significant conflict like the Civil war, World War II, and it happens about every 80 years or so. And Civil War was 1865, World War II is 1945, add 80 to that, it's 20, 25. So it's kind of, you are here on the map and it's just going to keep coming faster. So this is really interesting. I, I thought the financial crisis was a really interesting investment period. It was challenging. It took longer to come than most people thought, including me. But when it came, it was brutally difficult but exhilarating to navigate. I think this is going to be harder, so I'm looking forward to it. I want to get people through it and I want to see how the movie ends.
- [27:27]
Alex Shahidi
And do you think it's harder because we threw the kitchen sink at the problem before and now we don't have that anymore any longer.
- [27:33]
Jeffrey Gundlach
We've done it over and over again. I mean, what we did during the global financial crisis looks pretty tame compared to what we did in response to the pandemic. And it just keeps notching higher and higher. Just like the participation rate, employment participation rate keeps dropping, I mean, irregularly. But it's lower highs and it keeps dropping. So we threw way too much at the global financial crisis. We broke laws, we subordinated senior investors to technically less secured investors. We modified mortgages illegally. In the pandemic, we bought corporate bonds from the Fed, which is illegal, prescribed by the Federal Reserve act of 1913. So the responses just keep getting bigger. But it gets to the point where the response is so big that it kind of can't work. So we've had a corporate Bond crisis in 2003, we had the scam lending crisis, the global financial crisis, then we threw $7 trillion of cash at the pandemic. And it's just going to keep being more. And we've already crossed that tipping point. I've been talking about this for decades where you gave enough money to people that you caused the inflation. And I was like, oh, because can we really do it again? And we keep having to bail out somebody else. And the last one that needs to be bailed out is going to be the government and the Federal Reserve System, because the Federal Reserve is bankrupt thanks to the Bear Market of 20, 23, 20, 22, 23. They have a negative net worth. There's nothing there. So I think we're going to end up in a different sort of property relations situation. And the interesting thing is it will be very, very good. People actually agree to it. They'll actually get along. The fourth turning is about people not getting along. The first turning is about everybody getting along. It's kind of like how great the US economy was in the 50s. And so it'll be great when we get there. And the baby boomers are going to have to give up their entitlements on some percentage. And they will. They're a pretty docile group, actually. And means tested, age tested. I mean, we can solve these problems very easily. But just like cutting means cutting, restructuring means restructuring. And there's a lot of vested interests that don't want to do it. So it'd be the easiest thing. All you do is you say if you're above X, I don't know, 50, whatever it is, you're good. But you can get it at age 65 or whatever it is. But every year less than that, we're going to start extending and you pretty quickly get to a place where it wouldn't be such a problem. But people are going to have to give things up. And they always say that the entitlements are the third rail of politics. But just a little bit, the volume's coming up a little bit on talking about those things. And it's going to be obviously necessary in the next recession. We're going to have to do it. So we can't just do a 30% of GDP deficit. We can't do that.
- [31:20]
Alex Shahidi
Well, we started with the qualities of a great investor and don't get wiped out is priority number one. And if you just think about where we are, the stretching rubber band and kicking the can down the road and just responding with greater and greater stimulus, at some point that ends.
- [31:37]
Jeffrey Gundlach
And also I think we're the last one.
- [31:39]
Alex Shahidi
Right. And then the interest rate cycle, we talked about that. So one thing that I've learned by talking to investors is they build a playbook and the longer they've been in the business they feel like they've got it figured out. And somebody who's been in the business for 40 years might feel like, you know, I've got this thing figured out. But a lot of those assumptions may be flipped on their head because the world has really changed. Would you talk about that?
- [31:59]
Jeffrey Gundlach
I talked about sexually rising interest rates and that's a very big difference. And it will lead to different relationships I think. So I think we'll see much higher default rates. We're already seeing elevated default rates on bank loans because they reprice every 90 days typically. So they've already absorbed all those Fed hikes and they're actually benefiting from the Fed cuts a little bit. But I think that the endless outperformance of the United States equity market will reverse with this regime shift. If you just look at the foreign investment position in the United States, it's gotten so big it's $23.5 trillion. Fifteen years ago or so it was like three was the net investment position. The outperformance of us has attracted money into the US and that's led to a virtuous circle of US outperformance because the money keeps piling in because it's a one way trade, particularly versus em. I mean it's been going on for decades and versus Europe it went on pretty hard for over a decade. But that's suddenly reversing now, which I think is a tell on this one way outperformance. It's driven in large extent by flows and flows reverse or can reverse. And when they do, particularly if we're getting bellicose with other economies and other governments. Well, China people used to talk about China not reinvesting their treasuries, but quietly they've been doing that for a long time. I mean they're already down by 600 billion from their peak. And so that's already happened. But what if that accelerates? And what if the non cooperation, which obviously is the tariff rhetoric in just the past month has gotten people not getting along? I mean, we've got the Canadians booing the NHL, the Star Spangled Banner when they play it in Toronto or Montreal. So I mean that's all part of things disassociating. My strongest belief on how this regime will play out is the mirror image concept. I think the dollar will go down as the economy weakens. And I believe that's happening. I mean the dollar is already down by 10% from its highs and it's fallen quite a bit just in recent months. And most people say, I know this, I've been doing this 40 years, I know exactly how this works. When the economy goes down, the dollar goes up. I think it's going to be the opposite. And I think during recessions the US outperforms, emerging markets, don't do well, it's going to be the opposite. And so I really strongly suggest that investors that are US dollar based, and I'm sure this is true, the predominance of US citizens, they have almost all of their investments in the dollar, almost all. And I think it's been such a comfortable thing to do because it worked in a nonstop way. But that's starting to change too. So I think the investment consequences of this is you want to be much more diversified. People talk about 60 40. I think 6040 went out the window with zero interest rates. And then we had the bear markets and stocks and bonds when the interest rates were rising. And I think I've been advocating more diversification. Not just 6040 stocks, bonds, but, but just take a look at what's happening with gold. Gold actually if you take a very highly convenient start date, which is January 1, 2000, so it's been 25 years. Stocks have done quite well. Gold's done better. And if you just look at the S and P divided by gold, it hasn't rallied at all. So we're starting to see interest away from traditional dollar only 60, 40 types of investments. And that's why I believe gold has been so strong when other commodities have been weak. It's not so much for economic purposes. It's people are by degrees monotonically gaining mistrust in the way all of this is being run from all of these embedded elites. And it's amazing how many politicians we have that were born in the 1940s and they're still in office, they just don't want to leave. But I think the dropout due to age or just death, I mean, you're going to see all those people that are clinging to this belief that it's still 1960. I'm talking about all of the 80 year old politicians. They all seem to think the same thing. And their ability to hang on to that will decrease by circumstances, but just by simple demographics will go away. And the United States has been in a very strange position for a long, long time. And that is spending way more money on retired people than on young people. I read a magazine article back when there were magazines on airplanes and you had to read them because you didn't have anything else to do. I read an article, this is quite a few years ago, and it said that if you take a look at 65 plus and compare them to, I think it was 25 and younger. We spent seven times as much on 65 plus as we do on 25 and under and spending money, a lot of money on 65 plus. You're just giving them, you're just giving them sustenance. You're not investing in the future. There's no such thing as investing in an 80 year old. But the future is the younger generation. And if you're not developing them, you're not educating them, you're really missing out. You see this everywhere. The leaders of all this. California seems to lead everything in advance of everything. And California spends so much money per student on education and yet they have very mediocre results. So it's like we're in this place where we're not logically managing. And I think it has a lot to do with the political cycle. It's always yield to next election for politicians. And it's one of the downfalls of democracy is if you regular elections. And the US is really extreme in this regard. I mean, it's set in stone two years, four years, six years. Well, it's hard to do long term planning. So one of the ways that China managed to keep it together for a long time is autocracy. But we have benefits of democracy or the republic or democratic voting. But there's also the idea that the regime can change awfully quickly, as we saw in the first four weeks of Trump's second term. I mean, things are changing very, very quickly and they can be changed back. We have one executive order that says, well, the next guy comes in and changes back and then comes back and changes again. So it's not a system that has Like a spirit or a belief system. It's just, it's devolved into very short termism. And I think what with the USAID thing, I mean, I know that some of that stuff is probably legitimate, but I mean, the list that they were reading off the first few days of looking into that was pretty horrifying. I mean, it's not a lot of money, but the fact that it's anything like that reveals. You can only imagine how much rot there must be in the Defense Department, which fails every audit. I mean, they don't know where the money went. You know, you can only imagine what they're going to find in Medicaid, Medicare and the Department of Defense. I mean, there's a lot there. And I think it'll accelerate the dissatisfaction with the way we keep kicking the can down the road and allowing for blatant corruption. I mean, just blatant corruption. And I guess everybody always knew that politicians were corrupt, but I don't suppose they suspected the extent to which it could go. Decades ago people were getting angry because the government was paying $100 for a hammer in the Defense Department. I mean, that sounded bad at the time, but what we got going on now really was unimaginable and unthinkable. Just 20 years ago you brought up.
- [41:39]
Alex Shahidi
A topic that I think is worth digging into a little bit, which is obviously the macro environment is highly uncertain. There's a lot of risk and regime shifts and everything we talked about. And then you also talked about in consequence, and as a function of this, you want to be more diversified. Yet when you look at most investors, they're much less diversified today than they were 10 years ago.
- [42:01]
Jeffrey Gundlach
I think that's right. Particularly with, you know, the fads when the manias come and we had a mania in 2024, I mean the whole Magnificent Seven thing is obvious mania. I mean it's exactly a carbon copy of what happened in the latter part of the 20th century. And so you get to these manias and people buy the s and P500 index fund because they like ETFs are cheap and the whole thing, but they don't realize that seven stocks are this massive piece and they're all highly correlated. So an S and P index fund has such a massive AI or had, it's less now, but massive AI sort of awaiting. But I think people need to diversify out of financial assets as the only thing that they so called invest in. I mean people have a house, but you can't really sell your house. You got to live Somewhere. But I think the reason gold has gotten new life is because people are buying it as an asset class, not as a speculation, not as some commodity pool advisor or something. They're buying it because it's outside of what they see is a deteriorating financial management at the governmental level in much of the world. And so they're going to that. And I think real estate, just land, farmland. I mean I thought I was never a real estate guy, but over the past 10 years I bought three significant properties and I have a mix now. I'm different. Asset allocation is very personal, has a lot to do with where you are in life and what your resources are. But when I just talk about everything, that's non double line because I don't know what bucket to put double line in. It's such a unique thing. But when it comes to real assets versus financial assets, I'm basically 50 50. So I believe in tangibles, I believe in land, I believe in gold or other high concentration stores of value. And I think it'll be a long time before I go out back into financial assets of greater than a 50% sort of allocation. So I've gone. That's pretty significant when I talk about other for other people who aren't in a more common situation. I've been advocating 25% cash for the last six, eight months and only about 25% in stocks. And the stocks be equal weighted, not market weighted. So you actually have diversification in the US and then I like long term plays and my favorite long term play, and this has been, I've been saying this for over a decade, is India because of the demographics and the education and the global changes in global supply chains and escape from China. And they have the same demographic profile today that China did 35 years ago, which means hundreds of millions of people entering the labor force. China actually has a decreasing labor force now that we're suffering the back end of the consequences of the so called one child policy, which was never a one child policy, but they did have a low birth rate and that's challenging too. For the fourth turning if you will, you've got all these developed economies and they have horrible fertility rates under 2 and so their population is dwindling or they need immigration. The most common male name in 2024 in the UK was Muhammad, which tells you how the demographic shift has been evolving. And so we don't have quite the same problem here. Although we've certainly, we've certainly decided that our fall off in the labor force could partially be replaced. Ultimately with immigrants.
- [46:24]
Alex Shahidi
If you had to rank the performance of these four asset classes for the next 10 years, where would you rank them? US stocks, non US stocks, bonds and gold.
- [46:35]
Jeffrey Gundlach
I think number one would probably be non US stocks. Number two would be gold. Number three, I guess it would be US stocks.
- [46:50]
Alex Shahidi
That's a close call. Between that and bonds.
- [46:51]
Jeffrey Gundlach
Yeah, if you'd asked me that 18 months ago, I would have been much higher up on bonds. I mean the yields were much higher. You could easily, easily put together a low risk bond portfolio with 8 or 9% yield. Now 6 is the new 9. And yes, stocks might be able to do 6%. But from the starting point of where we were at the end of 2024, I would think stocks and bonds, I would think getting 9 or 8 out of stocks from where we started, it just seems impossible. The Cape ratio, Shiller's cyclically adjusted ratio was it 37? It just can't get higher. It was only higher once in history and I think that was 1999. So it's all earnings. You can't expect expansion from a 37 CAPE ratio of any significance. So what are the earnings going to be? Well, people are hoping for 12% this year. They were hoping for 14%. The ways they're shaping up, I think it's going to be single digitized. So yeah, I think bonds and stocks are sort of close. But where we are now on yields with some rates now below four again on the treasury bond market. And I see very significant problems for long term treasury bonds as well. So I would put long term treasury bonds as the least attractive. Even though rates have come up some, we have been de emphasizing long term treasury bonds. One of the things that I'm still grappling with is we entered this year with very little extra compensation versus historical norms from buying non treasury bonds by buying junk bonds or corporate bonds. And it stuck for a long time. And so on a valuation basis you should be saying I don't want to have heavy allocations to these things. But I think the reason that we've had such a prolonged period of that de minimis compensation for taking that risk is I think people are waking up to the fact that that risk might not even, it might not even be a risk. I mean if you're really willing to accept at least the notion as possible that they restructure the treasury debt, you might be better off in corporate bonds. When I started in this business there were corporate bonds that yielded less than treasury bonds. IBM for example, IBM's still around. So wasn't a lot of risk there. But it was perceived that IBM was a safer bond investment than the treasury.
- [49:49]
Alex Shahidi
Because you could trust the company more than you could trust the government.
- [49:52]
Jeffrey Gundlach
Well, yes, and people thought that the government was running a bad fiscal policy. And we still are.
- [50:05]
Alex Shahidi
It's worse.
- [50:06]
Jeffrey Gundlach
It's worse. So I think that investment grade corporate bonds really like single a corporate bonds, I think they're safer than long term Treasuries.
- [50:18]
Alex Shahidi
Even though the government can print money to pay its debt.
- [50:21]
Jeffrey Gundlach
Yeah, but they can print it, but won't be worth anything. That hurts your corporate bonds too because they're dollar denominated. But the government has been printing a lot of money and it's getting to the point where it's not your grandchildren's problem anymore. Remember years ago people used to say Social Security is going to run out of money by 2050. And then 10 years later it was oops, it's 2040. And then 10 years later, oops, it's 2032. I think they're out of money in five years. And so this is a real time problem. And this is why non financial assets, non dollar investments I think are more attractive now than any time in the past 10 to 20 years.
- [51:14]
Alex Shahidi
And that's part of being diversified. You talked about diversification. So being diversified across non financial assets and financial assets, different asset classes. And when you just look at where people are, it is extremely concentrated. It's heavy in stocks, heavy in US stocks, heavy in a handful of companies. It's almost the opposite extreme.
- [51:33]
Jeffrey Gundlach
Yeah, well like I said, it's highly reminiscent of the last few years of the 1990s. You ask something that investors that are successful have in common. I think one of the things is, and I don't know if you're born with this or there's some way of developing it, but it's sort of an emotional memory where you remember facts. Most people can remember facts pretty well, but they don't remember kind of how it felt. That's what I mean by emotional memory. I've been really sort of lucky with that. It's the thing that really, really defined my almost unique success during the global financial crisis. For someone that wasn't shorting things, I remembered 1994 in the Fed cycle and the bond market was poor in 1994. 2022 was way worse. But 1994 was not great and there was a lot of mal investment that was banking on interest rates not going up. And then the Fed had to raise rates during 1994 and there was no bid. Nobody had any money because everybody was a seller. So prices were just gapping lower. And certain securities that were in the news as being money losers for some public pension plans and stuff, nobody wanted to buy them. They either didn't have the money or it was viewed to be imprudent. And the securities got so cheap, it was unbelievable. It was truly unbelievable. There was absolutely no way to lose. People were just giving them away. I mean, there were securities that if you put on the worst possible assumptions, you would still have significant excess return versus Treasuries, the worst possible case assumptions. And I was just amazed at how low they went. And I learned the lesson. I said, it's not always about value. Somebody has to actually take out a wallet and buy. The global financial crisis was just getting started. Countrywide wasn't gone yet. But there started to be problems with the defaults going up one Friday afternoon, which is a really terrible time to do a margin call. But a mortgage reit, a very high quality mortgage reit, maybe the best one in terms of their underwriting, ran out of money and they got margin called and these floating rate mortgages had Never traded below 100. And the prices started to give and they were down about 98, so not much of a discount. And this list comes in from this reit. And there were big blocks, it was a big read. And there were several trades that were in the hundreds of millions. And they said, we're talking it at 97. And I said, I don't know, I bid 93, four point back bid. And I got hit on 300 million. And one of the younger guys, he now works at Doubleline, he's been worked for me his whole career. He's had a Russian accent. He's like, this is too cheap. This is the cheapest bond I have ever seen. And it was like a lightning bolt went off because I was like, you're writing that on the ticket. Cheapest bond I've ever seen. You're tacking it onto the blotter on the board because mark my words, they yielded at that price of 93, they yielded eight. And I said, mark my words, this isn't going to end until these things yield 15. Well, I was wrong. They actually went to a yield of 40. But the point was I said, we are not buying any more of these, period. None. We're not putting on a throw. We bid nothing. There was a small rally early on in the credit crisis. We were able to get out of them at a profit, but those bonds went down to 45 cents on the dollar. And today they're 103 again. But there was nobody to buy them. And that's what people don't understand. The popularity of index funds is dangerous because index does well, attracts money, index does better. The index outperforms 95% of active managers in stocks. A bull market has something to do with that because the index has no cash. But it's that thing that people are just reinforced to buy more. And then all of a sudden it starts going down and they start selling and there's nobody to buy it. And index funds are very susceptible to this because you're running an index fund, they give you money, you buy the stocks you're buying, puts them higher, people give you more money. And again, it's a virtuous circle. And the other side of that is the vicious cycle of selling. And I don't think investors quite understand the danger of having so much money in index funds that have such lack of diversification. So this theme runs through everything. It's just a question of degree. And I think that the worst is US index funds because of the foreign investment position. We could have $20 trillion come out of this market in the next however many years. Could even happen in a more compressed time frame. That would lead to tremendous underperformance because maybe that money goes home. Because Europe is now outperforming. In recent weeks, it's now outperforming, emerging markets have started to perform. Maybe that becomes a trend and everybody wants to switch to the new ballgame. And I think the odds of that, again, it might take longer, probably will take longer than people think, but it's going to be very severe. And the underperformance is going to be very acute and painful. And that's what will accelerate that turnover from sector to sector, from country to country. I believe it has started.
- [58:26]
Alex Shahidi
If I were to tease out the insight in what you just described, the way I would summarize it is, as an investor, you have to be very careful about the assumptions that you make. In some ways, the ones who have been in the market for a long time have deeper assumptions that they feel are investment truths. When you go through a big regime change and the backdrop changes radically, you got to be really careful because that's what can wipe you out.
- [58:51]
Jeffrey Gundlach
Yeah, I put it in very simple, practical way of operating every single time. That, and I Learned this probably 30 years ago through a painful experience or two. Every time you make change or you're reconsidering allocation, first question I ask myself is if and when this goes Wrong. How am I going to explain it to the client? What is the spectrum of my assumptions? And somewhere within that spectrum there has to be analysis done that assumes that this is going to be wrong and then say, yes, it was wrong, but I had legitimate thesis, it was very well thought through. But I'm wrong about 30% of the time, which is quite a low number. I mean, most people are wrong more than 50% of the time. And people that are reasonably successful in the investment business, they're right like 55% of the time. 70 is very high. But I've been doing this for over 40 years and I've got tons of data, so it's statistically pretty significant. So you know you're going to be wrong. So you just say, okay, this is one of the 30 percenters that I got wrong. But this is how it was risk mitigated. This is how the loss was contained and how it didn't become a fatal risk. And that's really important because there's nothing worse than. I've seen some real horror shows. I've been in meetings with pension committees years ago now where they would have all their managers come in and the managers would present with the other managers present going around the table. And I'll never forget one, it was during the emerging market, the long term capital management meltdown that rolled the markets. And this poor firm had really abysmal performance. And this is in bonds too, and it's many percentage points below an index fund. And they said, so can you explain this to us? And the guy from that company, wow. He said, we have no idea what happened. We're just as confused as you are. He was fired on the spot and he deserved to be fired on the spot. But it was just like. It almost sounds like, hey, we were throwing some darts one day and this is where they landed. There was nothing there. So I really think it's important to say when and if this goes wrong, how am I going to explain, I mean, when we had that tremendous interest rate suppression, that yield zero interest rates for so many years we had owned some securities and because of the yield starvation and the lack of volatility, they had gone down to very low yields. In fact, it got to a point where the yield under the most likely outcome was negative, actually negative because it was a premium dollar price. The money could be returned quickly enough that you would have bigger dollar loss on the price than the interest you received. And one of the guys that was helping to run that product, he was like, I don't know what to do, because these look so unattractive, but there's nothing to buy. And I said, we cannot own something whose base case is a negative return in a way that's not even conjectural. I mean, it's just very simple mathematics. I said, we just can't do it. I'd rather own cash. I can explain to the investors why we have 30% cash, a lot better than why I own this. So sometimes you just have to really think, no, I can't just sit here and do nothing. The problems that people have in the investment business, they're very emotional. Every update, they're bullish. Every down day, they're bearish. And the other problem is lack of action. There's a syndrome in a lot of people that says, ready, aim, aim, aim, aim. And they just can't pull the trigger. And your first question is about investing and makes people good investors. You got to act. And it's, you know, and there's an old bond phrase, it's probably true in all investment classes, your first loss is your best loss. What that means is don't hold onto something, praying for a recovery. Right. Small losses, more often than turning back into profits, turn into bigger losses. So you have to be able to accept that and move on. So that's important.
- [64:16]
Alex Shahidi
The last question I wanted to ask you, and thank you for your time, is on inflation. So one of the assumptions, and it may not be overt, is that inflation volatility has been relatively low for a long period of time. It was, yeah, yeah, until recently. But you basically had low and stable inflation for a long period of time. And then all of a sudden inflation spiked. It came down. But it seems that inflation volatility is a thing now, and that has a significant impact on the way you invest, because that is something that you could see people undervalue because it was not an issue for a long period of time.
- [64:50]
Jeffrey Gundlach
Right. I've been predicting for over two decades that the response to recessions or economic weakness would increasingly be money giveaways. And we did it under George W. Bush. It was a few hundred dollars in the global financial crisis, and that's not enough. And then there's different rounds of this stuff, but you get to a certain point where it's too much. And the monetary authorities and certainly the leadership in government, they have no idea where that is. But we obviously passed that by the inflation rate going from 1.4 to 9.1 on the year over year, CPI. And the next round, I'm afraid, is going to be bigger and so inflation went up to 9.1 pretty quickly. So few people in the Fed saw this coming. And yet it just seems to me that anybody. You don't need economics lessons. When I was like five years old, we didn't have any money. And I remember saying, mom, why doesn't the government just give everybody a million dollars? Everything would be great. She says, jeffrey, if the government gave everybody a million dollars, an Apple would cost $1,000. And I was like 5 years old. And I said, hey, she's right. Because it's just in speeches I used to say, I hear commonly the most ridiculous idea that you cannot bring inflation back because of demographics and all this stuff. I said, I can bring inflation back by 5:00 this afternoon. Have the Treasury Department declare I'm going to be hyperbolic for dramatic effect, that they're going to give every single American $1 billion. I said, if there isn't inflation by 5:00 tonight, the lines at the Ferrari dealers are going to be something to behold. Of course you can get that happening. It's always and forever a monetary phenomenon and that amount of money. So I think you're right. We had. Inflation was so stable. I mean, it was two plus or minus for so long. And it didn't matter what terrible policies we ran, it didn't matter that we started giving money away. But we've crossed the Rubicon. We did it. And I don't know if that will. They won't suddenly get a new dose of caution and fiscal rectitude, because when the trouble comes, it's always the same thing. We've got to do something. Desperate times call for desperate measures, and these crises keep getting worse. And so I think its base case is the next one will be worse than the last one, and that means a bigger response. And that's going to be the catalyst.
- [68:04]
Alex Shahidi
Well, Jeffrey, I appreciate you sharing your insights. I always enjoy our conversations and I hope our listeners did as well. Thank you.
- [68:11]
Jeffrey Gundlach
Thanks everybody for listening.
- [68:13]
Alex Shahidi
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