Actionable insights — We've Crossed to the Hard Side of the Street

1:23 1. CAPE ≥ 35 → assume negative 10-year real returns

1. Check the Shiller CAPE on the S&P 500 (price ÷ 10-year average inflation-adjusted earnings).
2. If it is 35 or higher, plan for a negative forward 10-year real return (historically every instance; most commonly about −5% a year).
3. Subtract that from expected inflation to get the nominal expectation, and compare it with what bonds now pay — rising Treasury yields plus rising CAPE means stocks are getting dearer on both axes.
4. Cut cap-weighted equity exposure; keep what remains in a vehicle that avoids the concentration driving the multiple.

• CAPE dropping back below 35; the gap between the 10-year yield and the CAPE earnings yield (1/CAPE) widening further.

13:43 2. The Sherman ratio — yield ÷ duration as a rate-shock budget

1. Compute the portfolio's (or a fund's) yield and duration.
2. Divide yield by duration: that's roughly how many percentage points rates can rise in a year before the price loss eats the income. A ratio of 1 means a 100bp rise nets ~zero.
3. Stress it: 12-month return ≈ yield − duration × rate rise. Run +100 and +200bp and compare to the benchmark (the Agg) and to cash.
4. Build the mix so the ratio is well above 1 when you think rates can rise — short duration plus high-yielding, high-quality carry.

• Fund factsheets' yield-to-worst and effective duration each quarter; a ratio drifting toward 1 as yields fall or duration creeps up.

9:41 3. Build the allocation around one excluded risk — and a barbell

1. Name the risk you want zero exposure to (here AI) and screen every sleeve for it — including the bond funds (no corporates = no AI bonds).
2. Replace cap-weight equity with an equal-weight or revenue-weighted index that structurally under-owns the crowded sector.
3. Barbell fixed income: half ultra-high quality, half in the highest-yielding sector that benefits from your macro view (a falling dollar → local-currency EM debt).
4. Replace cash with short-duration, top-of-capital-structure carry ("dry powder" that still earns a spread).
5. Size gold against price: trim when extended, add back after a correction.

• The next quarterly Gundlach Unlocked for re-weights; gold moving back toward $5,000 (trim zone); the dollar trend that justifies the EM sleeve.

5:38 4. Decompose credit spreads by theme and rating before trusting the index

1. Split high yield and bank loans into the suspect theme (AI-related issuers) vs everything else.
2. Measure each bucket's spread (or price) against its own tights.
3. Separately slice by rating: CCC vs B vs BB, loans vs bonds.
4. Stress is real when the theme bucket and the lowest tier widen while the rest holds; the contagion signal is widening spreading into the next tier up (single-B).

• Single-B spreads starting to widen; new hyperscaler deals trading wide of issue within days.

6:30 5. Market-vs-rating notching test

1. For a new or large issuer, note the agency rating.
2. Compare where the bonds actually trade with the spread of the typical issuer at that rating and at each notch below.
3. Count the notches of disagreement. Two or three notches wide = the market rejects the rating; treat the credit at the market's implied grade.
4. Extra skepticism when the rating comes from a small agency, or the holder (e.g. a captive insurer) benefits from the higher rating's capital treatment.

• Downgrades catching up to prices (confirms); regulator/DOJ action on rating shopping; 2009-style AAA paper pricing below 60.

34:36 6. WIRP above 70 → the Fed follows the market

1. Before each FOMC, read Bloomberg's WIRP implied probability for the meeting.
2. If it's above 70% in either direction, the base case is the Fed delivers — it has always gone with the market since WIRP existed.
3. Adjust only for a chair-specific tell (speech framing, anecdotes) and pre-map the surprise: a skipped hike → the long end sells off (he guesses the 30-year +20bp on the day).

• The decision vs the WIRP reading; the 30-year's same-day move as a gauge of credibility.

40:15 7. The 2-year minus fed funds tells you what the Fed will do

1. Subtract the fed funds rate from the 2-year Treasury yield.
2. A large positive gap = the market says hike; compare the gap with extremes (2022's ~200bp) to judge urgency.
3. Expect the Fed to move toward the 2-year but in smaller steps than the gap implies (every chair since Greenspan has followed it).

• The gap narrowing after a hike (Fed catching up) or widening (behind the curve → more hikes, steeper long end).

28:34 8. 10-year fair value = 7-yr avg US nominal GDP + German 10-year

1. Compute the 7-year moving average of US nominal GDP growth (a trend signal: when it rises, yields tend to rise).
2. Regress the US 10-year on that average and the German 10-year (captures global rates; R² ~0.93 over decades, higher over the last 15 years).
3. Read the residual: US 10-year above fitted = too high (cheap bonds), below = too low. Check monthly — the inputs move slowly.
4. Use it as a starting point, not an override of inflation-based buy rules.

• The residual growing past ~50bp; a turn in the 7-year NGDP average; Bund yields breaking out.

31:40 9. Buy long bonds only at a 2% real yield

1. Take your realistic inflation estimate (his CPI model, not the Fed's target).
2. Add 2 points: that's the nominal yield at which extending duration is worth it.
3. Until then, stay in the belly (7 years or shorter). Raise the bar if inflation indicators (commodity highs, consumer strain) say inflation won't stop at the estimate.

• Long yields approaching 6%; CPI prints (his model: starts with a 4 through March); the size of Treasury buybacks/Twist (so far $6B — "one day of the deficit").

42:06 10. TIPS maturity test — does the hedge actually hedge?

1. Chart the nominal and TIPS yields at the same maturity together.
2. If the gap (breakeven) is roughly constant through a rate rise, the TIPS lost as much as the nominal — it hedged inflation, not rates.
3. For inflation protection without rate risk, use 5-years-and-in TIPS.

• Long breakevens widening sharply (would change the math); 5-year breakevens vs his CPI model.

47:04 11. Insurance counterparty check — mutual, or PE-owned?

1. Before buying an annuity or life policy (or reviewing one you own), find who owns the insurer.
2. Prefer mutual companies (owned by policyholders). Red flags: private-equity or private-credit ownership, a high share of affiliated/private-credit assets, offshore (Bermuda/Cayman/Barbados) reinsurance, domicile in a light-oversight state.
3. Check the ratings behind its assets — how many come from small agencies.

• State regulator or DOJ actions; insurer downgrades; redemption gates at "semi-liquid" private-credit vehicles.