Title: Jeffrey Gundlach: We've Crossed to the Hard Side of the Street
Show: The Julia La Roche Show
Guest: Jeffrey Gundlach (DoubleLine Capital founder & CEO)
Date: 2026-09-16
URL: https://youtu.be/Li4qjXRQ6So
Length: 1:01:40
Note: YouTube auto-transcript; fillers (um/uh/you know) and stutters removed; obvious ASR name fixes (Gunlock=Gundlach, Worsh/Wars/Vor=Warsh, Bessant=Bessent, Schiller=Shiller, warp=WIRP, tips=TIPS, pieta tear=pied-a-terre, Double Line=DoubleLine, tenure=10-year); wording otherwise verbatim. Sponsor reads (Augusta Precious Metals, Monetary Metals) are the host's and are not Gundlach's views.

(00:00) You're going to have fallout and losers in the AI race for the holy grail. And that's going to be what leads to the next very significant drawdown in the risk assets. I think we're close enough to there that I want to be out of the epicenter, but I would be surprised if there wasn't some sort of a shock.
(00:21) Maybe it's an inflation shock, maybe a supply shock sometime in the next year. Hey everyone, welcome to another special in-studio episode of the Julia La Roche Show where I am thrilled to bring to you this conversation with Jeffrey Gundlach, founder and CEO of DoubleLine Capital. Jeffrey, great to see you in person.
(00:42) Really appreciate you taking the time. >> Yeah, I'm glad it worked out. Thanks for having me. >> I am too. It's always a treat having you on the show. It really meant a lot when we had your debut 6 months ago and it's great to be back together. >> Was that just 6 months ago? >> Yeah, March. >> Wow. 6 months.
(00:57) Time is flying, I'm telling you. All right, Jeffrey, since it's been a while, let's start with the big picture. Your assessment today. When you look at the financial conditions, the markets, and the economy, what does the big picture macro view look like for you? Where do you see things headed in the back half of the year here? >> Well, the valuations of the markets are pretty high.
(01:23) In fact, the Shiller CAPE ratio for the S&P 500 is at 42 point something. And any time that it has been 35 or higher, every single time, the forward 10-year return in real terms, so inflation adjusted, has been negative. And the most common one has been about -5 real per annum. So if inflation is going to be 2%, if Kevin Warsh is going to guide us to two and stay there, that would mean you should expect negative returns on a nominal basis for the next 10 years and there are no exceptions to it.
(02:01) >> Mhm. So this is obviously a lot about the concentration of the market and this new new thing which has already run into, in the last week or so, some strange developments with AI is going to kill everybody by the end of the decade and this sort of a thing.
(02:22) This is sort of strange behavior where something's rolling along and there's great belief in it and a lot of money being made in it and then the narrative changes in a fairly radical way that this is going to kill us all. And it's always interesting when something goes from being very widely supported and the cracks start to show.
(02:49) It's kind of like how it was when a year ago everything kind of changed regarding the perceived success of private credit. >> Mhm. >> When the numbers have been reported and looking back now it's fairly clear that the numbers that were reported a year ago were not accurate which means that the performance reported for the last few years is not correct.
(03:19) And so it shows that sort of the negative side of things is starting to appear in the news. Kind of reminds me of the Buffalo industry. I grew up in Buffalo, New York. >> That's right. >> And there was this steel mill that was moved from Scranton, Pennsylvania, and it was moved to South Buffalo by a guy who was from Scranton.
(03:42) And it got tremendous publicity as being this wonderful thing. It created thousands of jobs and it had a building that was the biggest steel mill in the world. It was over a mile long and everything's great until about 6 years later when the depression of 1907 showed up and nothing had changed at the steel plant except the press went from isn't this wonderful to reports on injuries, deaths, limbs lost, people crushed, burned to death at the steel mill.
(04:16) It's kind of a social mood thing. It went from let's all look at the bright side of things to wait a minute, it isn't all perfect. And that's sort of where we are, but we're doing it at a very high valuation and a valuation that continues to go up even though the competing interest rates in the Treasury bond market have been rising.
(04:36) They've risen a fair amount since we first met 6 months ago. >> I can't remember exactly where they were, but I'll bet >> that they're up about 75 basis points or so since then. And yet the stock market is probably a little higher than it was then. And so you're getting more and more stretched valuations.
(04:56) Also what I'm focusing on more recently is looking at the various tiers of credit ratings. So a few months ago everything was tight, even the lowest rated triple C's, and now you're starting to see erosion in triple C's. For example, the weakest bond market sector, and we're slicing them very thin, is triple C bank loans, which are down several percent in price and down about five or 6% in total return, while higher rated bank loans are still doing fine. They're up about 4%.
(05:38) So when you decompose the triple C sector you start to see things like, just take the high yield sector broadly, forget just the triple C's. If you split into two pieces, AI related borrowing in the bond market and everything in the junk bond market and the bank loan market other than the AI sector, you're starting to see the non-AI sector is still strong.
(06:06) Spreads have barely widened on the junk bonds and their prices are near their peak on the bank loans. But when you look at the AI component, they've visibly noticeably widened. The junk bonds are out about 50 basis points from their tights on the AI and the bank loans are out more like 130 basis points from their tights.
(06:30) And that hasn't bled to the single B category so far. So that's what we're kind of waiting to see. We're starting to see that the market doesn't believe the ratings of some of these companies. It's like when SpaceX borrowed a bunch of money, the bonds widened out to levels about three notches lower in credit quality. Interestingly, they got rated triple B minus, the lowest rating of investment grade.
(06:55) And I have a feeling that that rating was encouraged by some persuasion of the rating agencies >> because the bond market isn't buying it at all. And the same thing happened with, there was another IPO, Oracle, where it got a junk bond rating but the bonds widened out tremendously right after it was issued. What the bond market is saying is these ratings don't make sense to us.
(07:21) And we've seen that in particular in growing strains in the private credit market where people are becoming aware that there are seven or eight rating agencies and the private credit firms and the insurance companies that they own, they're able to arbitrage these ratings. So you can get a rating from a few companies and pick the highest one for example.
(07:48) Or if you're more cynical about it, and I think at this point given the shenanigans that have been going on, it's worthwhile to be cynical about it. It might be that you just get a price list. You want a single C rating, it's a dollar. >> You want a double C rating, it's $5. You want a triple C rating, it's $10.
(08:06) You want a double B rating, it's $1,000. You want a triple B minus, it's a million dollars. And because that way you're able to get better capital treatment and therefore have more leverage at the insurance companies, which is then amplified by what I perceive to be extraordinary leverage at the reinsurance companies, which isn't even funded.
(08:29) So, as these developments start to develop, not just in paper losses, but in actual losses, >> I think we're going to start to see the end of all of the enthusiasm for all of these things. And it has a lot to do with AI and it has a lot to do with AI adjacent types of situations.
(08:52) Personally, I recommend, I do a thing now where every quarter I do a webcast called Gundlach Unlocked. Great. I do it because I had so much demand from investors in DoubleLine products who say why don't you tell us what funds of DoubleLine to buy and I couldn't do that in conjunction with my typical podcast webcast because you're not allowed to talk about your funds. It's kind of ironic, if you're doing a presentation about your fund you can't talk about your fund, at least you can't make any kind of forward-looking statements or anything
(09:23) like that >> so I just called it Gundlach Unlocked and said all I'm going to do is put down portfolio recommendations using sectors or DoubleLine funds or ETFs. And sometimes we'll use things that aren't DoubleLine, but it's primarily to give people the answer to that question that was being asked all the time.
(09:41) And so I break the recommendations into four pieces. The first one is equities. And I was at 40% equities for the first two times I did this. And now I'm at 30. And I was in exposures that were more, I would say, typical. But what I'm recommending now is 30% in one thing, an equal weighted index.
(10:09) It's a Fortune 500 index and it's equal weighted. There's about 400, they call it 500 but I think there's less than 500 companies in it. They just take the ones with the highest revenue. It's not based on earnings. It's revenue and they equal weight it. So if it's 440 that are in this you get one 440th of each one.
(10:32) So you don't have 40% of your portfolio in AI. You have almost nothing. You're being as far away from that as you can. So everything that I'm recommending is completely separate from AI exposure. So that's the equities. In fixed income, I have 30% as well, but I say put half in my total return fund, which is very low risk.
(10:54) There's no corporate bonds in it, let alone AI bonds. There aren't any corporate bonds in it. So, you're getting exposure that's extremely high credit quality and it's got a decent yield on it and it's been around a long time and people are familiar with it. And then for a barbell, for the other 15% of the fixed income I go way the other way to basically the riskiest thing, which is local currency emerging market debt.
(11:18) So you're buying emerging market debt which yields over 7% if you buy it non-dollar. So buying in local currency, and since I believe the dollar is heading lower, you're going to make money on the currency too. So you make money on the bonds hopefully. And they've done well. It's the best performing fixed income sector.
(11:37) Where you're not parsing it down to single letter ratings, but I'm talking about just a traditional set. So you would compare high yield to bank loans, to Treasuries, to corporates. The highest one is local currency emerging market. And I think that that will continue to do well. It was the best performer last year. And I've only allocated to local currency emerging markets once in my career.
(11:57) That's this time >> when I did a year ago June >> and sometimes you get lucky. This time it was exactly the right timing. So I have that and then I have 20% in real assets, which I'm now up to 10% gold again. >> 10% gold. >> Yeah. I had been 25% gold about a year ago, but I pared that back to five when it was up over $5,000, but now it's down to 4,300 and so back to 10.
(12:26) And then the other 10 I'm just using our commodity strategy. It's an ETF, DCMT. DCMT for commodity. And that's rules-based. At the end of every month, it rebalances. That's up 38% year-to-date. So that's doing awfully well. And what's left I'm calling dry powder. It's 20% of a portfolio.
(12:48) But I don't just buy cash. I don't like cash. I think you can get a spread above cash. So we have two funds that we're splitting that between, 10% each. DCRE, which is a commercial real estate ETF, before everybody says he breaks out into hives when he recommends something like that. It's very carefully managed. It's also very high quality, top of the capital structure, duration of two >> but it yields basically 6%.
(13:17) So it's a lot better than buying a T-bill. And then the last one is DLEX, my flexible fund, which has an interesting dual mandate that we've actually succeeded at 1, 3, 5, 10, and since inception: we're trying to beat cash and the Bloomberg bond index. And when you have volatile markets, which we've had over the past 14 years, it's no small trick to be able to do that.
(13:43) But it's my favorite fund to manage because you have so many moving parts to it trying to outperform cash and a six-year duration benchmark. And that continues to do well. And so you put that together and you get about a six and a quarter yield and a duration of two, which is what we like to think of as the Sherman ratio >> where you take the yield and divide it by the duration.
(14:06) So if the yield and the duration are the same, you're going to get basically zero. If rates go up 100 basis points in a year, you'll get the income, but it'll be offset by a price loss of the same magnitude on a mark-to-market basis. But if you have a yield of six and a quarter and a duration of two, rates could go up 200 basis points and you'd still be positive. Mhm.
(14:24) >> And so that way you can think if rates go up 200 basis points, I'll outperform cash or be in line with cash perhaps, but I'll tremendously outperform the Agg index because that will have a loss of six and a yield going in of five. So it'd be negative 1 and we would, under this scenario, have a return of about four.
(14:49) So you have to think in these terms of how the price and the yield and how the credit pieces fit together. I use the analogy of loading the dishwasher after a big dinner party. You have to make it all fit together. And I enjoy doing that. So that's one of my favorite funds to run. So you'll notice that nothing in this mix >> has any AI. There's nothing here.
(15:08) And I was perfectly fine owning some AI by using other types of equity vehicles. But starting last week, I want out. If you're in there, have fun. I hope you enjoy yourself. I hope it works out well for you. >> But we're past that point where everything's viewed as beautiful. >> Yeah. >> And now they're finding, they might even be finding problems that aren't there.
(15:33) >> They might be going to that. Plus, there seems to be perhaps some ulterior motive of why does a guy go from one company to another and then quit right before that other company was trying to IPO, and who knows what's really going on here. >> We've had a lot of conversations on this show about gold and after the move we've seen lately, there's a natural question.
(15:58) Is it too late? It's understandable because when an asset moves this significantly already, price tends to become the focus. But one of the things that I've learned from the many investor conversations I've had is that price isn't the first question they ask. They want to know why they should own something, the role it should play in their portfolio, and what they are trying to accomplish by owning it.
(16:22) And if you're exploring these questions yourself, Augusta Precious Metals is an educational resource for exactly that. Their experienced education team offers personalized one-on-one web conferences where you can ask questions, learn how owning physical gold and silver works, and understand how a gold IRA differs from purchasing precious metals directly.
(16:44) It's really about getting educated before deciding whether any of it makes sense for you. To learn more, visit juliabuysgold.com or text Julia to 35052 for Augusta's free guide. Because ultimately the question isn't whether or not the price of gold has changed. It has. The question is whether or not the reasons for owning gold have changed.
(17:07) And based on everything I've learned through these conversations, I don't think they have. You're very good at putting together the kind of puzzle of what's going on in the investment world. I love the dishwasher analogy. Let's talk about rates because you called the secular bottom in rates.
(17:30) Was that in 2020? >> Yeah, 2020. >> Yeah. Let's talk about how investors should think about rising rates. We had the 10-year above 5%. >> Yeah. I felt like, I think when we last spoke, you were talking about $4 gasoline was a psychological level and I said I think the $40 trillion deficit >> yes >> will be a psychological >> and we crossed that.
(17:55) Well, it was really interesting because I was monitoring it and I noticed a few months ago where the pace of the growth of the debt was going and I said we'll be over 40 trillion by Halloween. And then I recalculated about a month later and I said it's going to be above 40 trillion by Labor Day. And amazingly the next day they announced it had gone over 40 trillion.
(18:19) And interestingly the day after they announced it went over 40 trillion, Bessent announced Operation Twist. He didn't buy anything. He didn't do it. He says he may have started by now, but he signaled that there was a concept being considered of issuing tons of T-bills, which you can manipulate through the Fed.
(18:40) I don't know if the Fed will cooperate, but at least it's possible to do that and buy long-term Treasuries. Now he says that it's about improving liquidity for off-the-run Treasuries. It doesn't make any sense because the bid-ask spread on an off-the-run Treasury is probably about 3/8 of a point worse at most than the bid-ask spread of the on-the-run.
(19:06) So it's like a couple of basis points. What difference does it make if an off-the-run Treasury trades at 5.33 or 5.35? How does that change anything? So, I think there's something else going on there. And I think it might be just a full-on Operation Twist is what they really want to do to control long-term rates.
(19:27) I've said in the past that rates will naturally go up if they're left to market forces, and that certainly has happened. And at some point, they will reach a level where it's decided that some extraordinary measure has to be taken. And when you're dealing with a deficit that's headed towards 50 trillion, and maybe headed to 10 or 12% of GDP in the next recession, what are you going to do? Are you going to inflate the deficit away by printing money or devaluing the deficit, or are you going to restructure the Treasury debt by
(20:04) extending maturities and or reducing coupons? Those are really the only two methods that you can do it. Even cutting entitlements isn't going to do it because you've already got all that debt. It would slow it down obviously, which would be a good thing, but it's not really going to change the trajectory.
(20:24) And during recessions, the deficit typically goes up by 4 to 6%. So, we might have a deficit that's 12% of GDP, and we can't finance that. And meanwhile, the hyperscalers and the AI guys, they have an insatiable demand now for borrowing money at today's rates. The spreads went wider and they didn't care. And they won't care.
(20:44) They won't care if the rates go up 200 basis points. They're not thinking about making seven or 9% IRR if they're successful at these enterprises. They're hoping to get, what did SpaceX say, that their addressable market is one quarter of global GDP. I mean, how many companies can have one quarter of global GDP as their market? Four.
(21:10) So, it just doesn't work. You're going to have fallout and losers in the AI race for the holy grail. >> It's going to happen and that's going to be what leads to the next very significant drawdown in the risk assets. Are we there yet? Well, I think we're close enough to there that I want to be out of the epicenter of that.
(21:35) I'm not selling everything. I'm not short anything, but I want to be further and further away from the areas that are going to suffer the most. And we've been at this process of moving shorter maturity on the yield curve, moving up in credit, getting out of a lot of things for a couple of years now.
(21:59) And so you never can time it precisely but I would be surprised if there wasn't some sort of a shock, maybe it's an inflation shock, maybe a supply shock sometime in the next year. These oil prices have gone back above $100 >> 106 today >> and now on WTI and Brent's even higher and >> and the strategic reserve is almost completely depleted.
(22:29) You can't deplete it all the way. Once you get down to a certain level, you have to stop depleting it because the ratio of the oil to the salt or whatever is in the caves, it gets to the point where it compromises the oil. So, you can't go to zero. >> So, you have to stop at some point. And I'm told by my energy team that we're pretty close to that point.
(22:51) Meanwhile, it's not just the United States. The global oil reserves are at basically the all-time low. And yet, of course, the population is bigger, yet we're at an all-time low. So, they're not going to have much of a cushion on oil. And in California, they have an interesting thing going on.
(23:10) Diesel nationwide is eight a gallon now. And in California, there's some parts where it's $9.99 and 9/10. Do you know why that's >> because they don't want to hit $10? There aren't enough numbers. >> They don't have enough digits on the pump. >> Oh my gosh. And I drive a diesel engine. >> They don't have enough digits on the pump.
(23:29) And so one person suggested, and I think it would be viable, but I don't know how much work you have to do, you could just sell gas by the half gallon. >> Oh. >> Sell diesel by the half gallon. You'd have to change the machine so it spun at a different speed. Oh, that's >> But you can probably just change a gear in the thing.
(23:49) I would think you could make it work. But that's up there. And I don't see this energy price shock going away at all. >> No. >> And it's all starting to filter into other things. I just heard today on my way over here that Costco is rationing its Kirkland motor oil >> because they had to raise the price a lot and they were either witnessing or fearful of people hoarding it because the price went up a lot.
(24:23) It like doubled or something and so they doubled it and then rationed it. Well, if you double the price, a lot of people are going to say, "I'm going to buy it before you double it again." So, you get that kind of, this is what causes inflation problems, when people start buying in advance because they think the price will go further up.
(24:43) And I feel that we're on the precipice of that potentially in the energy market. And of course, this spills over into a lot of other things. >> It's not just diesel, it's also the motor oil. I know high-end lubrication products are like that. Helium, there's sulfur. >> There's just all kinds of stuff that are bypassed, fertilizer, and all of these things, the prices are going to not go down.
(25:10) >> And those are critical for the economy. >> Yeah. And our inflation model, with the oil price where it was last week. So, it's going to be even more severe with the higher oil. We think that the next print that comes out on the CPI will start with a four >> based upon the oil movement and stay above four, unless something changes with the commodity complex, stays above four all the way through March.
(25:40) And here's Kevin Warsh talking about we will get to two. And two doesn't mean 2 anything. He says two, not 2.5, two. And now he announces on the PCE. >> Now that might not go to four. We don't really have a model for the PCE that's as robust, but the CPI will probably stay above four.
(26:07) And the Fed chair says, well, he has defined success as the Fed requiring 2.00 to be maintained and to stay there for a while. He says we're going to do it. We're not going to fail. So if he doesn't get there, he failed by his own parlance. So the inflation problem seems to be getting back on people's minds, simultaneous with, it's interesting now it's $8 diesel and even 10 in California, and today I had a meeting, somebody quoted the national debt at
(26:46) 41 trillion. We're not even talking 40 anymore, it's 41 trillion. Maybe that's just on a round, I don't know, but it's going to get up there >> it's ticking higher yeah >> so that's kind of a problem, so we want to stay at the shorter end of the curve. We think the long end continues to move higher if it's allowed to move of its own accord.
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(28:34) Now, back to the rest of the episode. You've talked about how you favor Treasury investors stay in the belly of the curve, 7 years or shorter. Yeah. >> I thought this was interesting. I would love for you to explain this. Can you walk us through how you use the German bund and the US GDP to figure out where the 10-year should be? >> Well, I'll tell you, it used to be that nominal GDP was a benchmark for where the 10-year should be.
(29:01) >> And then we did some work on it and we noticed, and this is kind of data mining, I mean just admitted up front, that the 7-year average of nominal GDP turned out to be a very interesting trend signal for where it would go. When the 7-year moving average was going up,
(29:23) rates would typically go up, on the 7-year moving, and for good reason. It means the economy is getting better on an average 7-year basis. And that became the benchmark for the 10-year. And then we had the negative interest rate regime particularly in Europe. We didn't go there in the United States, but they had it in Europe.
(29:41) And the US nominal GDP was no longer a good benchmark for the 10-year for that, because you had foreign interest rates that were so much lower that it was influencing US interest rates a little bit lower. So what we did is we noticed that if we use the 7-year average of US GDP and use the German 10-year, we were capturing more of the global interest rate aspect.
(30:07) And so in that way the influence on the 10-year of the global economy was a little bit more insightful than just the outlier US economy. And it turns out it's an amazing correlation. If we run it back for a few decades, the correlation of the 7-year moving average of US nominal GDP and the German 10-year, the R squared is
(30:34) .93. That's very very high, it's almost the same line, and that line is moving up now, and it says though, interestingly, that the US 10-year is presently about 20 basis points too high >> too high okay >> too high, although that's not that much, but usually they're almost on top of each other. It's uncanny.
(30:58) I use the chart, the US nominal GDP 7-year moving average and the German 10-year. So, if people want to go and look at Gundlach Unlocked on the replay, you can just go skip to that slide if you want and it'll blow your mind. >> Wow. >> How identical those lines are. >> We'll definitely link it in the show notes for folks.
(31:20) I love the podcast too. And >> and by the way, that 0.93 correlation, >> it would be stronger if we didn't use the first three years of like 20 years ago. So for the past 15 years, the R squared rather is higher than 0.93. There's almost nothing that you can find that has that high of an R squared, >> but it's a great starting point.
(31:40) I think people should follow it and you don't have to look at it every day because the 7-year moving average doesn't change very quickly. Is there a point where you think it would be attractive for investors to move further out on the curve? >> Yeah. I want a real interest rate of 2%. >> Mhm.
(31:59) >> So if inflation is at two, I could maybe buy it at four, but inflation is more like at four. So I'd want to buy it at six in the present moment. And I'm not convinced inflation is going to stop at four >> at all because we're at a new high on the commodity prices again. Mhm. >> And I don't know, I just feel like there's been scrimping and saving going on.
(32:23) Consumers have moved down from higher-end retailers to middle-end retailers to lower-end retailers. And there's an indicator somebody brought out that was pretty funny. The gas station indicator. When people go in and only buy gas, they don't get a Twinkie, they don't get a can of Coca-Cola because they don't want to spend the money on it. The gas is already too expensive.
(32:51) And that indicator apparently, I'm sure it's not the most scientific thing, but that indicator apparently is showing a great movement of gas-only buying. And so that kind of shows you that people are running out of money. The savings rate is very very low as well. That's another bad indicator for the economy.
(33:16) So maybe 6% will be a good buy point. Maybe that's coincidentally the moment at which the Operation Twist really kicks into gear. It's obvious that $6 billion didn't do anything. They were doing $2 billion, then they said they were going to do at least four, and then Bessent announced that it was six. I think the market rallied for about 30 seconds and then sold back off.
(33:39) So six billion isn't going to do anything. That's basically one day of the deficit. >> You're not going to do anything with that. So they would have to get serious and do, people would say that's QE. They'd say no it's not. We're just doing Operation Twist.
(33:55) We're not net buying back any Treasuries. We're just buying them, issuing at the short end, not the long end. That makes it difficult when they raise rates though. So there's a lot of interesting things with the interest rate level. >> Yeah. >> Because it's high enough now to cause, I think, bank loan borrowers, I talked about triple C bank loans.
(34:14) They're not doing well. That's because if they hike that just puts more pressure on these bank loan floating rate borrowers and they're not good quality to begin with >> and most of them are playing beat the clock. Can they survive long enough to see the next rate cutting cycle? Because that's what they need to bail them out.
(34:36) And right now it's a zero probability that they're going to enter into a rate cut cycle at tomorrow's meeting. >> Yeah, >> I'd say it's a zero probability. >> Zero probability. It's so wild to think how much that has even shifted that expectation over the past year or >> I think that if the Fed doesn't raise rates tomorrow, and I know the market fully expects them to, and historically, ever since we had the WIRP function developed on Bloomberg that uses the shape of the short end,
(35:03) the Fed has always gone with the bond market if the WIRP was above 70, either direction, doesn't matter. And I think it's at like 88 or something. It was yesterday, which is pretty high. He'd have to really have a lot of courage to go against that. If they didn't hike rates tomorrow, I think the 30-year Treasury would go up at least 20 basis points by the close of the day.
(35:27) >> What's your expectation? I know we're recording this before the Fed meeting, so some folks are going to watch it before, some will catch it after. It's still very relevant regardless of when you watch the episode, but yeah. What's your expectation? Do you think he holds or do you think he hikes? >> I think there's zero chance of a cut.
(35:46) I think the chance of a hike is not a lot greater than 50/50. I don't believe the WIRP function so much this time because Warsh, we don't know who he is yet. I have this analogy to the old Gore / George W. Bush debates back in, I guess it was 2000, and I think one of the reasons that Al Gore lost the election is three different Al Gores showed up at the three debates.
(36:18) The first was the sighing Al Gore. Every time Bush said something he didn't like, he would sigh very audibly into the microphone and that's all people talked about. That's all people remember. That's all I remember. >> Yeah, >> that and need some wood. I remember that one from Dubya when he was accused of owning a timber ranch.
(36:35) He said, "I own a timber ranch? News to me." And he leans into Al Gore and he goes, "Need some wood?" Which, I had to vote for him after that. And I own a timber ranch actually. So you need some wood. >> So yeah. So, he showed up as the sighing Al Gore and then he was the pumpkin.
(36:54) He showed up with this weird orange makeup and then the third one he was trying to be like Mr. Nice Guy and no one could figure out what he is about. But that's what Warsh has done. His first press conference was almost 180 degrees different. The second one was almost 180 degrees different than the first.
(37:09) And then he's talking about he doesn't like forward guidance. He's not going to do forward guidance. And he gets up at the podium at Jackson Hole and he talks about hiking. The first thing he does, he tells stories about hiking >> and the first was a vigorous hike and the second one was a more relaxed pace and it's like, are you not aware of the word hiking? Yeah, it has a meaning to your audience, and it just seemed like it couldn't be a coincidence.
(37:41) So was he signaling that he was going to hike? >> Maybe. >> Interesting. Maybe. He's talked about hiking and if he hadn't said that I'd probably be in the camp of not hiking, but since he started with a hiking anecdote, I'm going to go that he's going to hike 25. >> Hey everyone, I hope you are enjoying this interview.
(38:02) If you can take a quick moment and hit that subscribe button, we are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. I had another viewer who asked, they knew you were coming on. Long time listener. They wanted to know if you had any advice for Scott Bessent >> or what would your advice be? >> Resign while the getting's good. That's what I'd say.
(38:36) There's no way I would take that. >> Do you think it's just an untenable situation for whoever is in that post? >> Yeah. But see if you're trying to do the impossible, >> you're trying to deal with a runaway deficit problem at a time when the Federal Reserve chair acknowledges that probably he's going to have to be hiking rates, at a time when the president wants interest rates to be zero >> or the lowest in the world.
(39:04) >> We should have the lowest interest rates in the world, he says. Why? I mean, we've got enormous debt. Why should we have the lowest interest rates? People aren't willing to lend us money at zero. You won't be able to do it. No one's going to lend money to us at zero. >> So, it's an impossible job because you're trying to do too many things at one time with just a couple of policies at your disposal.
(39:34) The problems are very complicated and interconnected and you got a hammer. So everything looks like a nail when you got a hammer. So I don't envy him, but I thought his kind of tough guy act didn't go over very well, Scott Bessent, when he said, >> "I am the house. >> I am the house. >> I am the house.
(39:55) >> Bet against the house if you want." And what did everybody do? They bet against the house. >> Yeah. That kind of backfired. >> Yeah. >> So we'll see what happens. >> Yeah. You've also taught us on this network that the Fed follows the two-year more than it leads. >> Yeah.
(40:15) Well, that's one of the reasons they're going to hike: the two-year is 100 basis points above the Fed funds rate right now, which is pretty far out there. This is not as bad as 2022, but it's about 2/3 as bad. The Fed follows the two-year, and the Fed has followed the two-year ever since basically Greenspan.
(40:40) Volcker and Greenspan not so much, but everybody since then has followed the two-year. And the two-year is saying you should hike 50. >> Mhm. >> But they're not going to do that. >> They're not going to do that. No. So, they'll do 25. >> You and I have talked about the next recession.
(41:01) You've talked about the endgame would be, I guess, dollar debasement. Ultimately would this be a dollar debasement, debt restructuring or both? >> Maybe one or the other or both. >> Do you think the conversation is becoming more mainstream? Because I think the last time we talked about it was >> I do. >> Yeah, >> I do.
(41:23) I think like I said, all these things run in parallel. It's all kind of a social mood parallelism. Suddenly AI is going to kill us. Not AI is going to let us all retire to Tahiti. No, it's going to kill us instead, and so you get these things all happening, and there is more awareness of, I mean dollar debasement has become the name of a trade.
(41:45) >> People are saying dollar debasement trade. So that is going to happen and it's going to happen at an accelerated rate in the next economic downturn. So that's what people don't understand. They don't understand that the dollar is not a safe haven. Another thing people don't understand, I keep hearing people on TV and I was just in a meeting where this guy was questioning me.
(42:06) They say that they want to protect themselves from the long-end nominals. They've seen that they've underperformed. So, they want to buy long-term TIPS. They want to buy 30-year TIPS. Most people don't understand that 30-year TIPS do not protect you from rising interest rates. If you do a chart of the yield on the nominal bond and the yield on the TIPS, you'll notice that they've moved exactly the same for the past six years.
(42:36) The difference between the two has been a constant. So, rates went up 500 basis points on nominals. They also went up 500 basis points on TIPS. So you did not have a zero price performance on the TIPS. They went down just as much as the nominals. The ones that protect you from inflation are 5 years and in >> 5 years and in. Okay.
(43:01) >> Okay. So you pointed out that a lot of investors might not understand this. Is there anything else out there that might be more consensus that folks are just getting absolutely wrong when it comes to investing? Anything else that's out there for you? >> You mean all the time or present moment? >> It could be.
(43:21) It could be both, but maybe even present moment if there's one. If people think 30-year TIPS are a safe haven. >> Well, the TIPS are not a safe haven and they won't be. They haven't been for years. Yeah, I think investors have to be extremely conscious and suspect, I said this earlier, of ratings.
(43:48) >> Ratings on corporate bonds, ratings on junk bonds, I think are going to come under increasing scrutiny. They're already under scrutiny. The DOJ is investigating a private credit firm for their strange ratings behavior. I mean, there's a troubled investor now who reported that his affiliated insurance companies had 3% of their investments affiliated and they raised it to like 42%.
(44:21) And then it was found out that 50% of all of their ratings were from one rating agency that has a 25-person staff and rated 3,200 deals in the past year. >> That's not possible. You have to go through research packages of 200 pages to come up with a foundation for making ratings.
(44:50) They don't have the personnel to do it. They're just not doing it. And so we're going to find out that the ratings of some of these smaller ratings agencies that are being arbitraged will show up to be something of an echo of 2006 >> where the ratings were relied upon in the mortgage business for the CDO programs that were going on.
(45:16) And the AAA ratings, the AAA prime mortgages issued by Wells Fargo Bank, prime credit score, Wells Fargo, which was the best underwriter in those days, the six coupon fixed rates on 80 LTV loans. Those mortgage-backed securities dropped, on the worst day, March of 2009, below 30. The AAA's went below 30 and they spent considerable length of time at prices below 60.
(45:48) Those were the AAA's. It turns out that they never lost any money. They've recovered all the way to par, but clearly the market didn't perceive them as AAA. And when they no longer were confident of the par payback and were very skeptical of the par payback, they priced them like junk bonds. And that's likely to happen to parts of the insurance industry.
(46:12) And so the life insurance industry has become a very dangerous place because I don't think they have the money to pay all these long duration claims. I'm really talking about life insurance companies and annuity companies. >> They're long-dated money. So actually them buying private credit can make sense if you're at the right moment in the cycle because they don't care if they have no liquidity.
(46:41) They're anticipating paying almost nothing on an annuity that gets activated 30 years from now, and of course death benefits have to be paid all the time, but actuarial work on this is very convincing. You have a good idea that it's going to be many years before you run it. You have a percentage of death benefits that are above whatever x% is.
(47:04) Well, there's parts of private credit that are doing this, but they're offering liquidity. But these insurance companies may fail. So, I would tell people if you're in the market for, involved in, life insurance or annuities, you should get it only from mutual companies because they work for the policy holder.
(47:27) These insurance companies are owned by private equity and private credit and the private equity buys the private. It's all a circle. It's all incestuous. So the insurance company gets bought by private credit which is owned by private equity. That insurance company has to buy whatever the private equity company tells them to and they're going to buy the private credit and then they're going to reinsure it oftentimes offshore where you can't analyze what's going on in Barbados or the Caymans, and there's reporting that some of these
(48:00) things, for $100 of future liability you're supposed to reserve, it used to be $14, then it went down to $10 as being the buffer. Some of these companies probably don't have even the $100 in the funding and you can't see it because US regulators have no authority.
(48:22) So, they started out in the states on these things. And there's like Delaware, Iowa, South Carolina, I think it is, one of the Carolinas, and I think it's Georgia, where every state has their own insurance examiner. And some of the states have much looser rules. And of course, there's arbitrage of the rules, just like there's arbitrage of the rating agencies.
(48:46) And so these companies will arbitrage and have their insurance companies in these low oversight states. And those low oversight states are also much more unperturbed about them then pushing money to a reinsurer. They don't know what's going on at them. So this is a very dangerous situation where the private credit is sort of the fuse and the insurance companies are the bomb.
(49:13) And somewhere in the next down cycle that is going to be a very very commonly told story and people say how come I didn't see this? It's because a lot of the shenanigans were done in other jurisdictions offshore. >> I actually get a lot of email questions from viewers asking about their annuities.
(49:36) So they should make sure it's owned by a mutual >> a mutual because the policy holders own the company. It's not owned by a private equity firm. >> Okay. >> Or private credit firm. >> Mhm. >> But they make their own decisions. You see, it used to be that insurance investing was the most conservative investing.
(49:57) And once you started getting these layers of incestuous activity, they started taking more and more and more risk. And some of these insurance companies, not all of them of course, but some of them are taking enormous risk. And people don't really appreciate it >> because it's hidden. Like I said in the past, it's the wild west.
(50:19) >> What happens is you've got the town, everything's going fine. No crime except for an occasional murder out of passion or something. People don't even lock their door. The sheriff takes care of everything. God-fearing guy. And then they discover gold nearby. And suddenly the town is 10 times the size at least.
(50:41) And some meaningful fraction are opportunists. They're rogues and they're scoundrels, rapscallions, and they're just trying to make a quick buck and hopefully get out before the party stops. That's the wild west. That's what has gone on now really since about 2019 in these areas.
(51:05) And of course, a lot of money went into anything but traditional stocks and bonds in late 2021 because bond yields were zero and inflation was absolutely going to go higher and stocks were quite rich relative to traditional metrics, but they were actually cheap to bonds. But people just said, "If I know what you're doing and can relate it, map it somehow, like in a coefficient way, where what you're doing I can roughly replicate by using stocks and bonds,
(51:40) >> people won't want to do that because they'll say I don't like stocks and I don't like bonds. So I don't want to even know what you're doing." That's why SPACs came into existence. All these SPVs and everything. So, like, oh yes, you want me to lock up my money in this thing for a while? Well, I hate stocks. I hate bonds. Cash is at zero.
(52:01) I'll tell you what, I'll allocate to you under one condition. You don't tell me what you're doing because if I know, I'm not going to like it. And so, it just went into this black hole of private markets with all kinds of inflated claims. The past performance, as we learned one year ago, was a lie. The liquidity was called semi-liquid, which, after I criticized that name at the Milken conference in May of this year, that day the industry dropped it, because I said semi-liquid is kind of a diabolical
(52:37) term. >> Semi means half and liquid means you can get your money out. >> I said well it's true half the time >> you can get your money out. The time you don't want to get your money out >> and the time you want to get your money out, you can't get it out. >> Yeah. >> So, it's semi-liquid in kind of a diabolical way. So, that got dropped.
(52:56) And so, the arguments for it were kind of inflated and that will now, as Warren Buffett has so famously said, you'll find out where all the troubles are. You'll find out who's swimming naked when the tide goes out. >> Mhm. Or as you said, it will be a total unmitigated disaster and it's only going to get worse.
(53:18) >> That's right. And it's moved pretty meaningfully in that direction over the last 6 months, >> I'd say. So, >> and it really feels like the whole ethos of optimism peaked around June of this year. And I could feel it. I said, "This feels like 2006. This feels like 1999 where it's a can't-lose mentality." And it felt like it was really once those bonds came out from these hyperscalers and so forth, and within days the market was saying I reject the price these were sold at, I'm not buying
(53:58) these bonds at 75 over, my bid's 200 over. That happened in days and that was a noticeable shift in the blinkered way of looking at the true risk profile of some of these things, and at least one of the blinkers is off and maybe another one's going to be taken off soon.
(54:20) >> Yeah, you definitely have a perception of that mood and even when we spoke six months ago, you said this was a year of caution. You're taking a low-risk approach for the months and quarters ahead. And you just said that ethos of optimism, you think it peaked this summer. >> I think so. Reminds you of 99, 2006.
(54:38) We know how those movies played out. You've been in this business for 40 plus years. Yeah. >> Are you more worried about what's ahead in the context of everything you've experienced over your career? I'm worried about all the same things, but what makes me more worried now is it's quite clear that the reshuffle, the reckoning day and the reaction that's going to be required is going to affect us a lot.
(55:12) We've already got wealth taxes being proposed. We've got the pied-a-terre tax here in New York where people that have lived in only their place in New York for decades, they're told to prove that they're residents of New York. They don't have another property. They're getting tax bills. This is kind of rogue behavior.
(55:33) And as people say, desperate times call for desperate measures. That's what we did in 2020 to 2022. We spewed out $7 trillion of giveaway money and we were too stupid to not think that inflation was going to go towards double digits. When I was 5 years old, this is a true story. I was 5 years old. We were poor.
(55:55) We couldn't afford a clothes dryer. My mother had to hang the stuff on the line, which was difficult because in the winter in Buffalo, you got to do it in the basement. >> And we were struggling for money. And I said, "Mom, I got this great idea. The government can just give everybody a million dollars and everybody will be fine."
(56:18) And my mother said, "Oh, well, the problem with that idea is an apple would cost $100." And I said, >> "You're right." I was 5 years old. >> I thought I'd come up with this wonderfully brilliant creative Eureka idea. And my mother shuts me down and I go, "Yeah, you're right. Obviously, it wouldn't change anything. It would just change how many zeros things cost."
(56:44) A 5-year-old, I understand this. And we had Jay Powell say inflation was transitory. >> Jay Powell, the chairman of the Federal Reserve, didn't think that inflation was going to be any problem after the 7 trillion. And it's sort of incredible. And now we've got the president wants to, I mean it's just talk, but $5,000 per adult, one and a quarter trillion dollars, why not? We only have a six or 7% deficit to GDP, why not just throw on another 3% for fun? But obviously that'll never happen, but
(57:20) there's a mentality of bailout and I worry about the bailout of the inevitable correction of the AI and all the private stuff that's going on. There'll be a lot of people looking for the government to take care of problems because that's become the template, and that could be a very very contentious thing because I think a lot of people would be livid if they bailed out these private credit people, if they bailed out reckless AI spending.
(58:06) I don't know if people would really tolerate it because they feel like you took a private credit risk. You're the most sophisticated people on Wall Street. They call themselves the most sophisticated people on Wall Street. They probably are among the most sophisticated people on Wall Street.
(58:26) They shouldn't be bailed out for sloppy protocols and risk management that's very poor. Back in the financial crisis, yeah, I know, unsuspecting people were going to get thrown out of their house. They had to modify the board. I mean, yeah, I think that's a hard sell because it was really bailing out the banks, >> but you could sell it on like the mom and pop level.
(58:52) >> You could sell the story. Yeah. >> A little bit better. This one I don't know how you sell it, >> Maybe if we don't bail it out. Maybe that's the motivation behind >> there. It's going to kill us all. Hey, if you don't bail us out, we're all going to get killed.
(59:07) AI is going to kill us. So, we've got to get the government to get wrapped into all this AI stuff. Because when you think about it, the thing where we really unleashed something that was extremely lethal was the nuclear weapon. We didn't let private industry do that. That was the government.
(59:28) It was the defense department that built the nuclear program, so that you could control it. But now if you create hyperbolic risks of AI, suddenly you have a good reason for the government to put in some sort of an oversight, which means of course picking winners and losers. And that is a very very unhealthy path. But it seems that that's where we're going.
(59:56) And I don't think people are going to like it as it comes more crisply into focus, because it really is something how that fellow who did the switcheroo and then resigned and said it's going to kill us all, his X page had been dormant and within hours it had 150 million views. 150 million within hours, and it was a dormant account. Mhm.
(1:00:23) >> So how did that happen? >> Musk says that in the history nothing like that ever happened. So that means it's either a unicorn or black swan or whatever you want to call it, a one-off, or else there's some weird coordinated thing going on. >> Maybe there are no coincidences. Yeah. >> Yeah.
(1:00:43) And the timing seems awfully strange relative to the midterms, relative to an IPO that was being organized for maybe October. So I don't know. I'm not a big conspiracy theory person, but it is a fact set that does seem a little bit out of the norm. >> You're staying out of that epicenter. >> Absolutely. >> Yep.
(1:01:08) Jeffrey Gundlach, founder and CEO of DoubleLine Capital, I really appreciate you being so generous with all of your time, your knowledge, helping us all learn and get better. I could talk to you for hours. You're absolutely brilliant. One of my favorite people to interview. It's truly an honor. Well, I'm happy to do it and I always enjoy the conversations.
(1:01:23) So, good luck everybody out there. It's, as I said six months ago, it's going to get harder during the year and I think we've crossed over to the hard side of the street for the next 6 months to nine months. >> Thank you so much. Nice.