Joe Weisenthal (2:27)

Yeah, you can't. Well, I think, look, there is nothing that's more different in 2025 versus 2015 than what's going on in fixed income. Right.

Tracy Alloway (2:36)

So you say that and it is true.

Joe Weisenthal (2:38)

Okay.

Tracy Alloway (2:39)

You know, if you look at, if you look at the benchmark 10 year yield, okay, sure, we're at 4% now, above 4%. And in 2015 we were at like 2%.

FedEx Advertiser (2:47)

Right.

Tracy Alloway (2:48)

That's changed. And we went through inflation, which is something we hadn't experienced for a pretty long time in, you know, previous years. But I also feel like it's changed, but a lot of it hasn't. A lot of the discussions haven't changed. If I think about what we were discussing back in 2015, it was stuff like who's going to buy US treasuries, who's going to fund the US deficit? Bond vigilantes. I mean, how many years have we been talking about bond vigilantes? Now the credit market, it was whether or not investors are being adequately compensated for the risk they're taking on. And the funny thing is now, you know, if you look at spreads on junk rate bonds, if you didn't think they were being adequately compensated at like 7.2% in 2015, I wonder what you think when you look at spreads of 6.4% in 2025.

Joe Weisenthal (3:37)

This is a really good point actually, because especially lately, obviously we've had all of these, you know, we've had a number of credit events, these little blow ups. Jamie Dimon used the term cockroaches, et cetera. But by and large spreads, which were sort of infamously narrow last decade, remain quite narrow by historical terms.

Tracy Alloway (3:56)

I feel like we should just mention here we are recording on November 10th. Oh yeah, things are changing fast in the credit market. There's a little bit of nervousness creeping in. But you're, you're absolutely right. By and large spreads are at, you know, pretty, pretty, very pretty low levels and people have been complaining about it for a long time now. Well, speaking of credit, you also have the rise of private credit, which is something we were talking about even back in 2015, but back I wasn't.

Joe Weisenthal (4:20)

You were?

Tracy Alloway (4:20)

Well, no, we both were. But we called it something different. We called it, you know, shadow banks and BTC and all of that.

Joe Weisenthal (4:28)

But that is a space that's much bigger, much more interest, much more scrutiny. I mean, just a whole, you know, orders of magnitude bigger since 2015. I don't think people have any real handle on like what risk scenarios look like, the quality of the underwriting, etc. So this is definitely something. And it's, you know, we've been talking about it for years, but it continues to grow. And with some of these called cockroaches, etcetera More interest in what's really going on.

Tracy Alloway (4:54)

Right. So things have changed, but things have also kind of stayed the same in some respects. But I'm very happy to say we do in fact have the perfect guest to talk about all of this. Someone who has, you know, been writing and conversing and going on TV and talking about a lot of these themes.

Joe Weisenthal (5:10)

For and making a great career. Direct investing in all of these.

Tracy Alloway (5:13)

Actually investing based off some of these ideas. We're going to be speaking with Jeff Gundlach. He is of course, the founder and CEO of Double Line Capital, someone we've wanted to get on the show for a long time. So, Jeff, thank you so much for coming on. All thoughts.

Jeff Gundlach (5:27)

Well, thanks for having me. I'm looking forward to our discussion today.

Tracy Alloway (5:31)

So let's start big picture because I actually we can take this in, you know, a bunch of different directions. But when you look at the treasury market and when you look at the credit market, which are you more concerned about at the moment? Because I know you've voiced some worries about both of these things.

Jeff Gundlach (5:48)

Yeah, I'm concerned about the financing of long term Treasuries primarily because we are issuing a lot of them and there's inflationary policies that are being run and probably likely to be further doubled down upon when Jerome Powell leaves as Fed chairman. I mean, we've got Scott Besant as the Treasury Secretary and he's talking about, well, he's basically mimicking what the President says. He basically says rates should be a point lower, two points lower. I've heard different numbers out of President Trump. He wants rates at 2%, 3%, but inflation is running above 3% on the headline CPI and it's not likely to come down to the Fed's 2% target. And so there's a lot of interest in artificially lowering interest rates and perhaps taking the maturities of Treasuries ever increasingly to under one year in maturity. A lot of investors aren't aware of the fact that something like 80% of all treasuries issued in the last 12 months, and this has been the case for the last few years, are less than one year. The treasuries that are issued longer than 20 years, so 20 years out to 30 years is only 1.7% of the treasury issuance of the last 12 months. And what's interesting about that is, is the Fed has been cutting interest rates over the last 13 months. And historically when the Fed cuts interest rates, of course short term interest rates decline definitionally at the Fed Funds level, but also two year treasury rates decline. Five year treasury rates decline. In fact, long term treasury rates have always declined subsequent to the first cut by the Federal Reserve and particularly when you're in a sequence of Federal Reserve cuts. And that's certainly been the case with now 150 basis points. But this time all interest rates outside of the two year are higher than they were before the Fed's first rate cut. That's just never happens historically. Another interesting thing that has never happened historically is earlier this year during the tariff tantrum of late March and early April, stock market had a pretty significant correction. And it was going back to around 2000. It was the 13th correction in the S&P 500 defined by a drop of 10% at least 10%. In the 12 corrections before the one here in 2025 the dollar went up when the stock market went down as a flight to quality asset. That didn't happen this time. When we went into that correction earlier this year, the dollar went down, it usually goes up by around 8%. And in the first quarter, early second quarter of this year it went down by around 10%. What is happening here seems to be that the pattern of interest rate movements and currency movements and what's a flight to quality asset and what isn't seems to have changed because interest rates have bottomed at the long end of the yield curve. And I've been saying this for five years now that the secular decline in interest rates at the long term maturities is over. And in fact in the next recession, long term interest rates are likely to go higher, not lower. And what's happened since the Fed started cutting corroborates this somewhat radical idea of mine. When it comes to credit spreads are tight. Although you correctly noted that they're not on the tights of the year anymore, they're starting to widen. I think junk bond spreads are up by about 30 or 40 basis points. And yes, spreads have remained tight for a long time. But one thing that you also referenced a little bit is the quality of the public corporate credit market is better than it's been historically. It's way better than it was prior to the global financial crisis where you had all kinds of garbage lending going on. But in recent years the garbage lending has not gone to the public markets. The garbage lending has gone to these private markets. And private credit has been very popular and is now increasingly been over allocated to by large asset pools. I remember Harvard University for example, they've got like a 50 odd billion dollar endowment and their donors pulled Back when they had uprisings on campus and the donors didn't like what was going on. So they stopped donating for a while. And Harvard had no money. A 50 odd billion dollar endowment and they couldn't pay salaries, they couldn't pay the light bills, they couldn't pay basic maintenance. They had to go to the bond market to borrow. They tried to borrow about $4 billion, I think. I think they got away with about $2.5 billion. But it's fascinating that you have a huge asset pool that doesn't have liquidity to pay the bills. And I've also heard that another large endowment, I think it's Yale University. I might be wrong there, but I think it's Yale. They're talking about selling some of their private equity stakes because they don't have any liquidity either. And this has bled over into the private credit market. I was at a Bloomberg broadcasted event in Hollywood, Paramount Studios I think it was. And I got there early and there was a panel before my fireside chat where the members of the panel were all significant executives at some of the largest private credit firms. And it was really interesting to hear them talk because the tone of the message they were giving was far from bullish. It's kind of like when you talk to a junk bond manager, say, what's the outlook for 2026? The most bearish thing they're going to say is we don't think spreads can get any tighter. But we think they're. That's the most bearish thing they're going to say. You're going to earn the coupon. Well, these private credit people were using words like tension and lack of Runway. These are all euphemisms for bad things happening. And I think that we've started to see defaults. There's something on the Bloomberg newswire today it's on top go that speaks of a home renovation business that was private credit, like $150 million issuance of private credit. And it went to zero.

Joe Weisenthal (12:10)

It's called Renovo.

Jeff Gundlach (12:11)

Apparently there were firms that had it at 100 a few weeks ago, a month ago, and it went to zero. Pardon me, A month ago. Yeah. But anyway, it's called Renovo or something like this. And the funny thing is the argument for private credit has always been a Sharpe ratio argument. At the center of it is that you get the same return or maybe a little better return than the public markets, but you have much lower volatility. Well, that's like saying that you have no risk in a CD you don't have any interest rate risk in a CD. If you buy a 5 year CD, the price never changes. Well, that's just because you don't market to market. Of course, a CD that you bought five years ago at 1.5% is not worth. You couldn't sell it at a par value. You're going to have to take a discount on it. But that's the private credit argument, what really happens. And this was really borrowed from private equity, which they use the Sharpe ratio argument there too. They say, well, you'll get the same return or maybe a little better return out of private equity than you will out of the S&P 500, but it's much lower volatility. So what happens is when the S&P 500 goes from 100 to 50, the private equity firms mark their positions down from 100 to 80. Now they're not worth 80. You couldn't sell them at 80, but that's where they get marked. And then when the market recovers back to 100 on the S&P 500, they mark their private equity up to 100. So lo and behold, both the S&P 500 and the private equity have a return of zero. But the volatility of the S&P 500 is more than double that of the private equity. So it's basically a sharper issue argument based upon the volatility being underreported that goes on in all of these so called private markets. Now it's very fascinating that this renovo in the article today, it basically said that they had a Chapter 7 filing and bankruptcy filing. And their assets, their liabilities were listed as being between 100 and $500 million. You check a box, you don't give a specific number. So there's ranges. And the range that their liabilities were in was between 100 and $500 million. Their assets were listed as less than $50,000. Less than $50,000. Are you trying to tell me that these big private equity firms and private credit firms with all of their resources aren't aware of that type of debt to equity ratio? That's obviously far into a bankrupt situation. So what's going on here that private equity firms had this marked a few weeks ago at 100 when it was obvious that their liabilities were vastly, vastly higher than their equity. That should have been marked down to, I don't know, 50, 25 1, but it's at 100. What's going on? It's like there's only one price for private there's only two prices for private credit appears, yeah, 100, that's it. And I heard an announcement made from these private equity people at that Bloomberg event. They're sort of like, as long as we believe that we're going to get paid back, we leave it at 100. Well, okay, but once you have 150 million plus dollars of liabilities and less than $50,000 of assets, it's pretty unlikely they're going to get paid back. The price should not be at 100, but that's what's going on. And so you have that Sharpe ratio argument. Then you have another argument for private credit which had been somewhat valid was just recent history. I mean performance. The five year performance of private credit a couple of years ago was definitely better than the five year performance. @ least reported performance of public credit. Private credit did better than public credit. So you had a trailing performance argument, which of course trailing performance is no guarantee of future results, which is stated on every single prospectus. But recently private credit is not outperforming, obviously with bonds going from 100 to zero in a matter of weeks. The public market has been performing better than the private market. And the most ridiculous argument of all for private credit has been private credit belongs in every portfolio because it lets you sleep at night, because it helps you ride out the volatility of your public credit. Again, that's just a repackaging of the volatility. If you don't market to market, there's no volatility. But if the price goes from 100 to zero in a matter of a few weeks, there's something untoward is going on. I'm very, very negative on those types of non transparent markets. It reminds me, I've been saying this for probably two years now, that the next big crisis in the financial markets is going to be private credit. It has the same trappings as subprime mortgage repackaging had back in 2006. Now it took a couple of years for it to totally unravel. So this stuff doesn't happen in a week or a year even. But I'm very negative on that. And so where we stand on fixed income is we don't like long term treasury bonds at all because we don't think people are going to want them during the next recession. The deficit is going to go up because it always goes up during a recession. The official deficit is about 6% of GDP. That's a level that was associated historically with the depths of recessions because of course it goes up during recessions. Well, when you go to a recession, the deficit goes up on average by, well, depends what, how long a time series you use. But if you go back for about 50 years, it goes up by about 4 or 5% of GDP. In more recent recessions, it's been a lot worse than that. We could argue, you could make the case somewhat plausibly that the global financial crisis was weird and that the COVID lockdown recession was weird. But during those, the deficit went up by about 8% of GDP on average. What happens if the deficit goes from 6% of GDP to, to 10% of GDP or 12% of GDP or 14% of GDP? All of those are possible. What happens is that you have to blow up the entire system because all the tax receipts would go to interest expense. We're already at a Large percentage, about 1.4, $1.5 trillion of the $7 trillion budget is now interest expense. Of course we have a $2 trillion budget deficit, so there's only $5 trillion of taxes and 30% of that is going to interest expense. And that is going to go higher. And as interest rates are still elevated from levels of five to seven to 12 years ago, the bonds that are rolling off have an average coupon for the next few years of a little bit below 3%, let's just call it 3%. That means that with fed funds at three and seven eighths and treasuries at four out to four and a half, that means that on average you're going to have higher interest expense on just rolling over the existing debt. And of course you're ladling on a couple trillion dollars in a non recessionary period. And so I did a thing at Grant's conference, Jim Grant had his 40th anniversary conference a couple years ago and I did the simplest, most succinct presentation I've ever given in my career. I just went through the interest expense problem using plausible assumptions on where the deficit's going. But the conclusion is, and this is an art and not a science, so there's a lot of assumptions that can be challenged, but putting it in a rather pessimistic light. So I don't say this is the base case, but by the year 2030, so five years from now, it's quite plausible that under the current tax system and the current borrowing regiment that we have 60% of all tax receipts going to interest expense. You can make it really, really draconian and say, what if interest rates go up to 9% on treasuries and what if the Budget deficit goes to 12% of GDP. And you make these kinds of pessimistic assumptions. Well, by around 2030, you would have 120% of tax receipts going to interest expense, which of course is impossible. So that means that something has to happen. And we're not talking about early in my career, people were saying we can't keep borrowing this money. That was under Reaganomics, which people thought was a bad idea because it was deficit spending. And they said, the way we're going, we're going to be broke. We'll be out of money in Social Security and other entitlement programs by 2050. And then 10 years later they moved it forward to 2040. So it was initially supposed to be like a 60 year problem, and then 10 years later it was a 40 year problem and then it was a 20 year problem and now it's like a 5 year problem, which means it's a problem in real time and something has to be done about this. So long term Treasuries look vulnerable to me. I still like short term Treasuries because I think the Fed is likely to cut interest rates and that definitionally leads to lower interest rates on say, five years into maturities.

Tracy Alloway (21:32)

Jeff, first of all, I hesitate to ask a question here because, you know, we could just let you go on and hear you tear particularly private credit to shreds. That was great. And thank you also for the plug for both Bloomberg journalism and the Bloomberg Hollywood event. That's called Screen Time. That's our conference there. And then secondly, Joe, I was going to make a Drake joke about private credit. I was going to say going from 100 to zero real quick in private credit could be a really terrible, terrible Drake song like most of them are. But that was five minutes ago, so I don't think my joke is relevant anymore.

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Joe Weisenthal (24:35)

You know, in the 2010s when we started this podcast 10 years ago, an investor could have a really nice 60 40ish portfolio. And there are all sorts of beautiful things with that, particularly that sort of inverse correlation that exhibited between treasuries and stocks. So that as you mentioned, typically in a downturn you get a stock market swoon. Well, at least the slug of fixed income that you own, maybe it outperforms, then gets a little smoothing, but maybe you get some positive real rates. It all works out really well. I understand. Okay, maybe there's still some opportunities in the short end because rates are going to go lower, etc. Maybe private, maybe public credit has better standards than private credit. We'll get into that. But like do we have to go back and revisit just the case or the for even having fixed income in a diversified portfolio? And I know that look, you're you, you're a fixed income portfolio manager. So I understand this is an existential question for you. So I know there's. But you know, like you know, how should, how would you sell the case for even Having it, it would be.

Jeff Gundlach (25:37)

An existential question for somebody that's been five to eight years in the business and it's just getting going. Yeah, because you know, I've been, I've been at this for well over 40 years and I really don't, don't need to make money by managing other people's money at all. So I'm very honest. What people like about me is they say I get, I get stopped on the street and people say I see you on tv. I really love, I'm really a fan of yours because you're a straight shooter. I don't talk any kind of look whatsoever. But I think that right now I think financial assets broadly should be lower allocated, have a lower allocation than typical. You talk about 60, 40, that means you have 100% in financial assets. I think in equities today investors should have maximum 40% and most of that in non US equities. Particularly if you're a dollar based investor like any American would normally typically be. I think you want the dollar is going to fall and so you're not going to be making money on the currency. Translation, you're going to be losing money. And that's certainly been the case so far this year. Again, things are acting differently now that we're in a rising rate regime and not a falling rate regime. You're doing much better as a dollar based investor in local currency emerging market stocks. I mean they're up something like 25% year to date for a dollar based investor. You're even better off in European stocks because the dollar's down versus the euro. So I think the amount that people should have in fixed income should probably be about 25%, not 40%, maybe 25%. And I think that it should be some of it in non dollar fixed income. Again, emerging market fixed income, which is by far the highest performing sector for dollar based investors in the fixed income market this year. And so that leads to 40% that you're not. If you're at 40% in stocks and 20% or 25% in bonds, you've got another 35, 40% to allocate. And I've been very, very bullish on gold. We do a podcast that gets up on our website in early January every year. It's called Roundtable Prime. Double N Roundtable Prime. And we have a bunch of thought leaders there. It's the same group every year. And we go through one of the segments is what are your best ideas? And my number one best idea for this year was Gold, because I think gold is now a real asset class. I think people are allocating to gold, not just the survivalists and the crazy speculators, people who are allocating real money because it's real value. And of course, gold's been the top performing asset for the year and certainly for the last 12 months. And so I think investors, I was at one point advocating 25% of a portfolio in gold, like things, real assets, high quality land gold, high value assets. I think that's too high right now because I think that trade has played out so very well and gold seems to have stalled out in the last month or so at a very high level. So it's consolidating its gains. I think it goes higher, but for the time being I'd probably be more at 15% or something like that. And the rest, I think I would be in cash because I think valuations are just incredibly high. And the health of the equity market in the United States, it's among the least healthy in my entire career in terms of the PE ratio, the CAPE ratio, all the classic valuation metrics are off the charts. And of course the market is incredibly speculative and speculative markets always go to insanely high levels. It happens every time. This is not, obviously it happened in the dot com, it happened in the financials part of the gfc, it's happening now in the AI and the data centers and all that stuff. And it's interesting, probably the biggest thing that changed the economy and the world in the last, I don't know, 150 years was electricity. Electricity being put into people's homes was probably one of the biggest changes of all time. And of course around 1900 people realized that electricity to homes was coming. And so electricity stocks were in a huge mania and they did incredibly well. But the relative performance of electricity relative to the entire stock market in the US excluding electricity. So everything else but electricity. The electricity outperformance peaked in 1911. Houses weren't even broadly electrified by 1911. You had to be a very rich person to have electricity in 1911. But yet that was the outperformance. And so it all gets priced in very quickly and excessively because people love to look at the benefits of these transformative technologies. And they are transformative. I mean, look at what happened to some of the Internet stocks. They dropped 80, 90% in the early 00s, but there are many, many multiples of what their peak was at that time. But it gets priced in very, very early. So I think that one has to be Very careful about momentum investing during mania periods. And I feel like that's where we are right now. I just don't think there's any argument against the fact that we're in a mania.

Tracy Alloway (31:08)

I want to go back to something you said just then about how investors should be reducing their dollar exposure. So this is, you know, the sell America thesis that was very popular at the beginning of the year and per your comments, is still very popular with some people. But we have seen in general, you know, a little bit of a strengthening in the $10 year treasury yields have been going down compared to where they were earlier. What accounts for, I guess the stickiness of US assets in, in the global financial system and in investors portfolios. Even when I think we can all agree that there are challenges ahead for U.S. government debt and assets in the form of high deficits and spending and maybe political stasis and things like that.

Jeff Gundlach (31:54)

Habit. People, people are reluctant to make changes to long standing paradigms. One of the hardest things to do in the investment business is to significantly change your allocations after you've been right. That's counterintuitive to a lot of people, but trust me, someone that's done this for a very long time, that's the hardest thing to do. Because when you do something and it works really well, it gives you satisfaction on every level. An economic level, an emotional level, psychological level. It helps you to have happy meetings with your clients. Just imagine if you bought Apple at, I don't know, $5 a share and it went up to, I don't know, 700. And so you get to go to your review with your client and you say, let's take a look at your portfolio. Look at this cost 5 last price 700. I am working for you. I've done a good job for you. Well, when you sell Apple at 700, you no longer have that line item. And so you can't point to this great thing that you did for that client. And so people like to project the past successes of the past. They like to hang on to them or even project them into the future. And that's a dangerous thing to do. But when you check I was 100% $, I owned no foreign currencies for decades. And Then starting about 18 months ago, I had to pull the trigger. I had to say, you know what, I don't think this paradigm is intact any longer. And I think you're going to lose money by betting on the dollar as a dominant asset. And it's a scary thing to do because you Wake up in the morning and you look in the mirror and say, I'm looking at a strong dollar guy. And then all of a sudden the next day you're saying, I'm looking at a guy that's no longer confident in a strong dollar, pointing at the mirror.

Tracy Alloway (33:53)

Going, who am I?

Jeff Gundlach (33:56)

You know, I wonder why I should have to pay taxes. Quite frankly, when I look in the mirror, I don't identify as a billionaire. I identify as a homeless 80 year old guy. Why should I have to pay taxes when I identify as a, as a destitute elderly man? I don't understand.

Joe Weisenthal (34:14)

So, yeah, I think other people, other people might identify you differently. I want to go back to the rates question. As you mentioned, it's sort of historically unusual that we've seen this period of the Fed cutting rates for the last 13 months and very little downward action in the long end of the curve. We know everyone can sort of look at the same math that you look at in terms of interest expense. We know that the long end of curve is very sensitive for housing and that's something that's very important to the US Economy. We know that President Trump would like to see the long end of the curve go down, perhaps because he has deep familiarity with it from his real estate days. Do you think at some point in the sort of medium term future we're going to see the return of proper yield curve control, that we're going to see the Fed cut rates and not get the response desired at the long end and then more drastic action is going to come such that actual steps are taken to suppress that long end?

Jeff Gundlach (35:17)

That's my base case, and I've been talking about this now for nearly two years, that we cannot afford the market to set interest rates. If the deficit spending continues, it won't be tenable. So what has to happen is going to be some sort of drastic measures. And I'm not exactly sure what those drastic measures are going to be. There's a number of candidates for them. We could do what we did from after World War II until the mid-50s when inflation was rising and we had significantly negative real yields. And we had inflation go up to around 8%. And the yield curve was kept, the long bonds were kept at 2.5%. You can absolutely manipulate the yield curve. Japan did that for decades. For decades they kept rates at zero even though there was no demand. I actually had a meeting with the guy that ran the biggest pension plan in the world. It was one of the Japanese public pension plans. And I was really anxious to sit down with him. And I said, I really want to ask you this question. Do you actually own these negative yielding JGBs? And he actually laughed out loud when I asked him that question. He said, of course not. Nobody owns them except the bank of Japan and the institutions that are forced to buy them by the bank of Japan. So it's a real thing we did in the United States for a decade, they did in Japan for decades. And Secretary Besant has alluded to the fact that maybe that's on the table, some sort of interest rate manipulation. So what this leads to is a really interesting dilemma because what I think is my roadmap for the future. And of course there's many variations one could use. But the starting point for me is that interest rates will rise until such time as they're uncomfortably high for the Treasury Department. Where is that? 5%, 6%? My guess is 6 is the highest. It would be full on uncomfortable full on at 6% on the long end. So what happens is you want to avoid long bonds while the market forces are in play. And Joel, you said that long rates aren't down very much since the Fed started cutting. No, no, they're up a lot. Long rates are up a lot since the Fed started cutting. This is the first time it's ever happened. They're up by almost 100 basis points. With the Fed cutting, that's never happened before. But with interest rates rising as the Fed is cutting at the long end, what's going to happen is they'll get to a point where all of a sudden it's too uncomfortable and then something dramatic will happen. Something dramatic could simply be the government. The Treasury Department buys the Treasuries and if they announce that they're going to buy Treasuries and control long term interest rates, you would have a 30 point rally in the long bond in a week. There's a very sensitive strategy here where you have to be very negative over the normal course of things. And then once the intervention comes in, there's going to be a significant step. Function lower in yields. And so you have to try to figure out how you're going to do that pivot. That's what I spend most of my time thinking about when it comes to the treasury market these days. Although for now it's way too early for them to panic and start manipulating the rates. What they might manipulate are mortgage rates. They could absolutely buy Ginnie Mae's, Fannie Mae's, Freddie Mac's, the government guaranteed mortgages and drive those Yields down much closer to where treasury yields are. And there's no rule that says they can't go through treasury yields. I mean, there are instances where non treasury yields are lower than treasury yields of the same maturity. Just earlier this year there was a corporate bond that was lower yielding than the same maturity treasury bond. That also happened in the early 80s when IBM bonds traded a lower yield than treasury bonds of the same maturity because investors had greater confidence in the payback of IBM than they did in what they thought was a bad strategy under Reaganomics. And that has begun to enter the picture here in 2025 with corporate bonds periodically, not only the very best ones, of course, but like Microsoft or something like that, trading through Treasuries. And so that's a tell that something is up here. The other thing that they might do, and there was a white paper written about this just about a year ago now that said maybe we should restructure the Treasuries held by foreigners. Which is a very strange thing to say.

Tracy Alloway (39:56)

This is the Mar A Lago Accord, right?

Jeff Gundlach (39:59)

Yeah. Yes, it is. I don't know how you define what a foreigner is. Foreigners can hide behind entities and so it looks like they're not owned by foreigners. So I'm not exactly sure what foreigners mean. But why put the word foreigners in there? Why not just say we're going to restructure the treasury debt full stop? What does that mean? Well, one way to save on interest expense, to get it back down from 1.5 trillion to the 300 billion it was a couple of years ago. Why don't you just say all the Treasuries that exist today, we're changing their coupons. The ones that have a coupon above one, the coupon is now one. The ones that have a coupon less than one, the coupon stays the same. That would save a tremendous amount of interest expense. Of course, it would cause a disastrous tumultuous time in the government bond market. But people say to me, you're always talking about this debt problem. What's the solution? The solution is get to a point where people won't lend the government money anymore, that the government can't borrow any money. So that if you restructure Treasuries that way, there'll be a couple of generations, the government won't be able to borrow any money anymore. And that would actually put us in a better place than where we are today.

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Tracy Alloway (43:28)

I want to ask another question about private credit, but just before I do, I'm curious. Do you ever talk to Besant about your ideas for how to fix the US treasury market basically, or voice your concerns?

Jeff Gundlach (43:40)

I think he watches my CNBC segment after all.

Tracy Alloway (43:45)

Right, all right, let's go back to private credit for a second because that's obviously the topic du jour. And as Joe pointed out, one of the things that has really grown exponentially over the past 10 years. You've said, you said on the podcast just now, and you've said it before, that you think private credit is the candidate for Another financial crisis. And I understand the marking issue, I understand that liquidity mismatch. But when I look at private credit, maybe what's missing in terms of some of our more recent financial crises is that leverage built on top of leverage aspect. Can you give.

Jeff Gundlach (44:23)

Well, that's private credit. Well, that is credit. This is leverage upon leverage.

Tracy Alloway (44:28)

Yeah, okay, explain that, explain that. Because as far as I know, we're not seeing the scale of stuff getting rebundled as we saw for instance in the financial crisis.

Jeff Gundlach (44:38)

Well, that's true, you're not getting the rebundling, but you are having, there's a lot of leverage. And the firms, they leverage, they're raising money and then they're borrowing money to buy more private credit. It's absolutely leverage upon leverage. And the other thing, while they're not bundling like putting the thing about the gold financial crisis is you took BBB rated and it's questionable whether they even deserved a triple B rated thing. And creating AAA rated securities out of them, I mean just that alone should make you just stop even thinking about investing in it. Suddenly a A has turned into a triple B has turned into A aaa. But one thing they are doing is issuing public traded vehicles, daily nav vehicles to allow Main Street America, mom and pop investors to avail themselves of this wonderful, fantastic opportunity of private credit, which is totally a liquidity mismatch. You've got daily nav funds investing in things that don't trade at all. And so once there's a run on those vehicles and I don't know how popular they've been, but they're certainly been touted. But if they become popular in any way, you're going to have the catalyst for a tremendous selling deluge because there is no people want to redeem and they won't be able to get their money out. And once you get that, the trouble always comes in financial markets is when people buy something that they think is safe, it's sold to them as safe, but it's not safe. You buy a AAA rated subprime mortgage pool, you think it's safe because it's AAA rated, but it's not safe. It's extremely dangerous. You buy CDO equity, you buy CDO squared equity back before the global financial crisis and there isn't any real equity. It's I buy your equity, you buy my equity. It's just a game that's being played to make an illusion of liquidity. That's where private credit is right now. It's an illusion. They don't even Claim it's liquidity. But if you package it into a publicly traded vehicle that trades on a daily basis, you have the perfect mismatch of no liquidity. With a vehicle that promises liquidity, it looks like it's safe because you could sell it any day. But it's not safe because the price at which you sell it will be gapping lower, gapping lower island gapping lower day after day after day. And so that's where the risk rise. But these things go on forever. One of the things about the investment business, business is difficult enough to be so called right about the direction of things we're going. But it's impossible to be both right on the direction and correct on the timing. Even if you're right on the direction, it's going to take a lot longer than you think. I turned negative on the packaged non guaranteed mortgage market in 2004. It took three years for it to even start to decay. So these things take forever and it goes on much longer than you think. Remember, I turned negative on the Nasdaq maximum negative September 30th of 1999. I looked like a moron three months later because the Nasdaq went up 80% in the fourth quarter of 1999. But if you had gone short the Nasdaq September 30th of 1999, 18 months later you had a profit of 64%. Even though it went up 80% in the first three months, it dropped so much in the ensuing 15 months that the short would have made you a profit of a very handsome profit in a very difficult market. Of course you've been out of business. Sorry, but out of business you were making people's money.

Tracy Alloway (48:37)

Yes, slight problem there. But just very quickly, are you betting against private credit now?

Jeff Gundlach (48:44)

I have no way to do that. I don't really short bonds. Shorting high yielding bonds is a really difficult thing because the cost of carry is just brutal. Every day that it doesn't decline, you're paying out a very high rate and so you're losing money all the time. So I don't really do that. What I do is I just don't allocate to it. I allocate to things that will do better, that will be immune, relatively immune or fully immune from the knock on effects of deterioration in private credit. So that would mean higher credit things using foreign currencies more than typically. But no, I don't think you can really short private credit.

Joe Weisenthal (49:33)

What have you learned in your career about longevity and drawdowns or underperformance because as you mentioned, you can be right or you could be, you could correctly identify a medium or long term trend. But it sometimes takes a while to play out. Whether it's the case from September 99 to the peak that's not actually that long, that was closer to six months, or being bearish on some of the housing assets starting in 2005 that took a little bit longer. What, how do you survive as a portfolio manager and be willing to take time where you're just and accept that you're going to underperform for a while?

Jeff Gundlach (50:12)

Well, you have to have think very carefully about your time horizon. When I started in this industry, one of the first things I was tasked to do was to do a study on what would happen if you had perfect foresight in financial markets. Perfect foresight. And of course you can do a study like that by using historical data. So you take stocks, bonds, real estate, commodities, every asset class and you just look at the historical returns and you can say, let's say at the beginning of every year I invest with a five year horizon and I pick the asset class that I know with metaphysical certitude is going to have the highest return for those five years. Because I'm looking at historical data. I came to the conclusion that if you had a five year horizon, you would go out of business. Even if you with metaphysical certitude would have the highest performing asset class. And that's because so often the first two years of the five years that best performing asset class was not a good performer at all. It was very frequently back end loaded. So I said we cannot invest other people's money with a five year horizon. I think that most people that invest other people's money use too short of a horizon. However, a lot of investment managers talk about they're constantly reallocating, they're constantly, they have a one week horizon weekly meeting and they change. That's not going to work. It's not going to work because the chance of you being right in a week is very low. Even if you're going to be right for over a two year period, your chance of being right in a week is very low. So I kept modulating time horizon and I came to the conclusion that the sweet spot was between 18 months and two years for a time horizon. And what I've learned is that having done that, I have a 70% hit rate. I've got a long enough career and enough strategies where it's statistically significant and I have a 70% hit rate, which means I'm right 70% of the time, which means I'm wrong 30% of the time. So I've been at this for over 40 years. So I've been wrong for more than 12 years. Right. But thank God they haven't been in a row because what you can't do is really three years is when everyone pulls the plug. If you're, if you're wrong, if you underperform year one, year two and year three, you're gone. If you're wrong five years in a row, they shut your Janus unconstrained bond fund. Because you can't have sequential years of outperformance like that.

Tracy Alloway (52:48)

It's a very specific example, Jeff. Wonder where that came from.

Jeff Gundlach (52:51)

Well, so really it comes down to about having the sweet spot on not being overly active and not being overly fixated on your long term idea. And I managed to do that. I've never really had three years in a row of underperformance. So that's been a good thing. And that's probably. I call myself, is it Uncas or Chenachgook, who's the last of the Mohicans and John Fenmore Cooper? I'm the last one. I'm the last man standing. When I started in this, every single person of significance that's been in the business since I started my career, they're all retired or gone. I'm the last one standing. Dana Emery was the only one left and she was at Dodge and Cox, but she retired at the end of June. So I'm Uncas, last of the Mohicans.

Tracy Alloway (53:46)

Jeff Gunkus, does that work? Jeff Gunkus, kind of very quickly, you know, again, we're sort of, we're very, we're being very introspective and retrospective on the show. But over the past 10 years, what's been the thing that surprised you most, either in terms of the markets or the financial industry itself?

Jeff Gundlach (54:11)

I think the thing that's surprising, and it's equally distressing as surprising, is the magnitude of money printing that occurred in 2020, 2021, 2022. The fact that the Federal Reserve broke the law and bought corporate bonds surprised me. It probably shouldn't have surprised me because they broke the law when they modified mortgages during the global financial crisis. That was not allowed for the prospectuses of trillions of dollars of securities, but they did it anyway. And so what I've learned is that the rules can be changed in spite of the fact that, that they seem to be set in stone. And that's why I Say, and when I say this, people really act very in a shocked type of reaction. They don't believe that they can restructure the treasury debt, but yes, they can. They can restructure the treasury debt. And I think that that sort of has to happen in some fashion, whether it's the coupon adjustment that I talked about, whether it's. Whether it's doing the yield curve control that Joel brought up earlier, I think something like that has got to happen. Because when something is impossible and paying our interest back in today's buying power dollar is impossible to pay off our debt, it's impossible, then you have to open up your mind to a radical change in the rule system. And of course, that is happening on every level. I mean, you look at surveys of people that are, say, 35 and younger, they don't believe in the institutions of this country at all. They don't believe in the Constitution. They don't believe in religion. They don't believe. They don't believe in anything. People need something to believe in. And that's what has to replace the system, a system that people can believe in. And what's being floated now just blows my mind. And that is that we're going to. Because we have tariffs that are raising a few hundred billion dollars a year. If they stay in place. Well, that means that we should give $2,000 to everybody as a tariff dividend. We don't have any money. We're borrowing $2 trillion. We don't have $2,000 to throw away at people. Again, didn't we learn that in 2020-2022 that giving money to people causes inflation? Remember people talking about modern monetary theory?

FedEx Advertiser (56:44)

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Joe Weisenthal (56:45)

I've heard of it.

Jeff Gundlach (56:45)

You know, you never hear anybody talking about that anymore because by modern monetary.

Tracy Alloway (56:49)

Theory, how come no one talks about that anymore?

Jeff Gundlach (56:53)

Because inflation went to 9.1%.

Joe Weisenthal (56:56)

Can I ask one last question? Are you, like, it seemed like, you know, you mentioned Trump floating the idea of a $2,000 tariff dividend to the public.

Jeff Gundlach (57:05)

It's a bribe.

Joe Weisenthal (57:06)

But do you, like, are you. Was there an opportunity, in your view, for Trump to have changed the status quo? Like, are you disappointed that someone with sort of Trump's Persona, energy, sort of perceived outsider status, did not do, has not done anything that actually changes some of, whether the fiscal or economic trajectory.

Jeff Gundlach (57:29)

He can't. The problem is, look at, look at this government shutdown. You know, what is going on here? Why, why do we have to pay taxes if the government is shut? Shouldn't taxes not be charged for 41 days. Shouldn't you have like an 11% tax rebate? Because what's going on? Well, it's just because there's this massive entrenched interest that is the kind of the uniparty government that will fight tooth and nail. Just look at all the lawfare. Look at, look at all of the indictments, all this stuff. I mean, they'll do anything they can to hold on to power until such time as the people that vote these people in say, no mas, no more of this. And that began with Trump. It's been furthered just this month with Mamdani. Mamdani won because people do not believe it's a little bit different. Trump was more like the lower middle class. They felt that nobody was listening to them. Now it's just young people, just broadly, people under, I don't know, 35 years old, people that lost three years of education with lockdowns and all these policies, they feel like they have no chance of ever having the life experience that the baby boomers had. Home prices are more affordable, less affordable than they've ever been. People have educations that aren't worth anything, jobs aren't available, nobody's hiring. They feel like there's no future for them that looks anything like what they look at Nancy Pelosi and Chuck schumer and Mitch McConnell and all these other people had. They don't have it. And so they are not going to go along with this. And so that's why Mount Damme won. It's just like, I don't have a shot here in New York City as a young person, and that's what's taking over. And so Trump can't do it himself. He caught onto something that was obviously kind of hibernating within the psyche of part of the population, but it's now become a generational thing. I wouldn't be surprised. Talk about another crazy gunlock idea. I wouldn't be surprised if they start putting in place an age tax, not a wealth tax, which they're doing to a certain extent through electricity bills and stuff like that these days already. But you could put it together, an age tax that if you're over age 55, you have a surtax based upon you had a better environment to accumulate wealth than the subsequent generations have. And so you should give some of that back. I think that might actually happen.

Tracy Alloway (60:14)

That would be a popular platform with certainly a specific demographic. Are you going to run, Jeff?

Jeff Gundlach (60:20)

Yeah, absolutely. Positively no. No chance.

Tracy Alloway (60:24)

All right.

Jeff Gundlach (60:25)

Absolutely no chance.

Tracy Alloway (60:26)

All right. We shall leave it there. Jeff, thank you so much for coming on Oplats. Really appreciate it.

Jeff Gundlach (60:31)

Well, thanks for having me on. I'm sure. Kind of all over the map today, but I hope your audience enjoys it.

Tracy Alloway (60:47)

Clearly a lot to unpack there, Joe. One of the things actually this was towards the end, so that's why it's in my mind. But you know, when he was talking about the Fed buying corporate bonds in 2020, I really think that was an underappreciated moment in financial markets because I remember again, we're being very introspective here. I remember writing pieces about the corporate bond market being problematic like circa 2015.

Joe Weisenthal (61:12)

Right.

Tracy Alloway (61:12)

And I used to have commenters who were like, okay, so what's the worst case scenario? And the most extreme scenario that we used to talk about was, well, what if the Fed has to come in and buy corporate bonds? That was the extreme scenario. And that's what happened in 2020. So I kind of. I take his point about how quickly these things can change and you can deviate from norms.

Joe Weisenthal (61:33)

Totally. Remember we interviewed Bill Gross on the beach a couple of years ago and he called out Jeff for like being the pretend bond king. Anyway, I liked Jeff returning the favor by pointing out the short lived Janice unconstrained fund that Bill ran after having left Pimco. So I see that the rivalry. The rivalry continues.

Tracy Alloway (61:56)

Yeah, we should have them both on and just let them duke it out.

Joe Weisenthal (61:59)

Just let them duke it out. Seriously, it's like, just do it. Yeah, just both. Come on, people would love them.

Tracy Alloway (62:05)

Oh, I'm sure, I'm sure that would.

Joe Weisenthal (62:06)

Raise some money for charity or something like that.

Tracy Alloway (62:09)

Okay, Jeff, if you are still listening and Bill, if you are listening, we should put pretend bond king in the headline and maybe lure him on. Yeah. Open invitation to come on all of them and debate. But on a serious note, more serious note, the other thing I was thinking about was when it comes to private credit.

Joe Weisenthal (62:28)

Yeah.

Tracy Alloway (62:29)

I thought the point about how everyone's been piling into private credit because it's outperformed public credit, that is changing now. You know, empirically that has changed this year. But then secondly, everyone's been piling into private credit because of that low volatility pitch, which is one that we've heard a number of times on the podcast now, this idea that, well, you don't have to market to market and that's actually a big strength, that sales pitch starts to lose a lot of power and conviction when you're going from 1000 in the space of a month.

Joe Weisenthal (62:59)

I don't like how there are new ones, like, every day.

Tracy Alloway (63:02)

Yeah.

Joe Weisenthal (63:02)

I'm saying it's like each one of these little credit cockroaches are pretty small in the grand scheme of things. But two things. A, they're small and yet they seem to be touching a wide number of firms, which I don't love. And I don't like how they keep popping.

Tracy Alloway (63:15)

Right.

Joe Weisenthal (63:15)

I'm a little. I'm a little anxious.

Tracy Alloway (63:17)

Right. Because you think the scale is small, but then it just keeps going. Well, this is also why. Why the cockroach analogy is so perfect. Right. Because if you see one, you know you have more than one.

Joe Weisenthal (63:27)

Yeah.

Tracy Alloway (63:28)

I once read an entire book about cockroaches just because I figured, like, know your enemy in New York. And it was actually really interesting. All right, shall we leave it there?

Joe Weisenthal (63:38)

Let's leave it there.

Tracy Alloway (63:38)

Okay. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

Joe Weisenthal (63:45)

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our guest Jeffrey Gundlock. He's at Truth Gundlock. Follow our producers Kerman Rodriguez at Carmen Ermine, Dashiell Bennett at dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to bloomberg.com oddlots where the daily number newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord, Discord GG oddlots.

Tracy Alloway (64:10)

And if you enjoy Odd Lots, if you want Jeff Gundlach and Bill Gross to duke it out on the podcast, then I should say proverbially, not literally. Then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes. Absolutely. Add free. All you need to do is find the Bloomberg channel on Apple podcasts and follow the instructions there. Thanks for listening.

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