Interview with Jeffrey Gundlach & Felix Zulauf 2 17 21

[Music] hi welcome to our very special event uh with two living legends uh former drummers and athletes the bond king himself jeffrey gunlack along with felix zuloff uh both legends who don't need a lot of introduction so let's kind of just jump right into it first uh gentlemen thank you both very much for your time right now uh this is a critically important moment in the history of global economics and markets we are we're going down a path that we have never been down before i know you've seen a lot maybe you feel like you've seen it all but certainly unprecedented amounts of central bank money printing government interventions uh and still uh you know grappling with issues of debt income inequality and so this feels like it's the beginning of a grand experiment and we're going to lean on both these gentlemen very much to find out perhaps where we go from here so let's begin there let's begin with the these rising bond yields uh felix i'll start with you bond yields are really beginning to spike here the market the stock market's noticing a little bit obviously people are getting a little antsy ppi in the united states coming in a lot hotter than anticipated this feels like it's the beginning of a major spike were we headed with respect to these rates and and inflation and everything else well uh my subscribers know that i wrote the piece about mid-year in 2020 that this is the sale of a generation for bonds and i was calling for a upcycle in bond yields and i think the upcycle is driven by unprecedented stimulation on monetary and fiscal side in the u.s and elsewhere it's global in nature and i think this will probably lead to a pop in the economy for maybe up to three four quarters into next year and this creates a rising inflation because we have an important change in the inflation picture which is the pricing of asian exports the chinese corporations have been reducing export prices every year over the last 20 years every year on average by about one percent or so and now they are raising export prices and on top of that you have rising asian currencies against the us dollar and also against the european um currencies and this creates a swing factor that will probably lead us to let's say at at some point this year three percent cpi inflation and and i think the bond market has not been prepared for that and we have a rising bond yields probably into next year we are now coming towards the 140 150 area which is some resistance and the rise may pause for a while but the cyclical direction is definitely up and i expect bond yields the 10-year treasury to reach the 2 percent zone whether it's 190 or 220 i don't care at the present time because what's important is the direction jeffrey the notion of three or four quarters of of prosperity or you know growth in exchange for what can last into some sort of inflationary spiral seems like a small price uh maybe it's politically driven your thoughts on on obviously yields are going higher but your thoughts on where this is going and ultimately what it does cost us uh for many years we've developed indicators at double line to try to give us a skype post as to where maybe the 10-year treasury yield should be based upon historical relationships one of the best indicators is the ratio of the price of copper to the price of gold uh there's a reason why that is a sensible thing for bond yields because copper is economically sensitive and gold can often be kind of a risk off sort of an asset so more recently for the last several uh months if not quarters now copper has been rallying patrol since the summer of 2020 a lot and gold is actually flat to down so the ratio of copper to gold right now suggests that in a free market sort of situation you should expect the 10-year treasury right now to be at two and a quarter percent uh and of course for about 100 basis points lower than that having come up somewhat from the very depressed levels of late last spring another indicator that is very helpful for the very long term is simply the seven year moving average of nominal gdp which has been a remarkably good long-term indicator for yields that suggests the 10-year treasury today should be at about 350. so we have tremendously suppressed bond yields thanks to the federal reserve foreigners aren't buying our bonds anymore treasuries have been for sale by foreigners for years and it accelerated fairly dramatically selling in 2020 the public is not really interested in bond yields at these levels which are below the inflation rate and pension plans it's almost not even worth putting them on the efficient frontier because their actuarial assumptions are so significant meanwhile the fed seems to be preparing us for the reality that we're going to be seeing our model shows that the number that's printed in june just a few months from now should have a three handle on it for the headline cpi and we've had fed governors like charlie evans number two man at the fed say that he doesn't care if inflation goes above two and a half percent in fact they're starting to welcome inflation being higher than any part of the treasury yield curve and you know they say they don't ring a bell at a change but i get the new york times i didn't get mostly for the puzzle i do the saturday and friday crossroad puzzle but i do look at the headline and yesterday's headline literally yesterday the headline on the front page is inflation fears fall by wayside in the biden era and it just goes on to talk about the massive stimulus that we're going to do and just i find that very interesting that the the mainstream media is now uh in cahoots with the fed governors really almost cheerleading for higher inflation telling you don't worry about it but inflation is obviously heading higher and the stimulus is likely to keep as felix said the economy running pretty well in the next few quarters we just got to 600 that helped retail sales a lot that was reported today and we got maybe another fourteen hundred dollars coming to a lot of americans we know that that goes into a propensity to consume so it does seem quite likely that this massive deficit oriented economic growth is going to continue i like looking at the website debtclock.org and it shows all these numbers spinning like a tokyo taxi meter and it talks about that it's going up but it raises a really good point the government doesn't tell you the truth about a lot of things one of the things they don't tell you about is how much they spend the government says they're spending you know 6.6 trillion or something like this but it's actually 8.1 trillion when you have the numbers that are off balance sheet and 8.1 trillion think about that that's that's something like 40 percent of gdp is government spending and we have 4.6 trillion of that is actually borrowed so more than half of all of this massive government spending is now a deficit based and i think everybody knows we're not going to pay that back and so the game plan seems to me not that clandestinely is let's have negative real yields everywhere the corporate bond market mortgage rates are negative treasury rates are all negative that helps to slow down the cost as you put it charles of all of the stimulus which will ultimately reveal itself in in my view over the longer term a very substantial decline in the value of the dollar felix is the three-point uh the 3.0 or plus cpi uh that you and jeffrey both agree on uh he mentions that the new york times it does seem that there is a new unofficial mandate that i think during the biden administration will become an official mandate of the federal reserve in america and that's to seek uh unemployment levels for for non-white americans black and hispanics uh and the three maybe four percent range so we're in historically unemployment might have been six percent and the fed would make a u-turn uh instead they're looking to be more uh to be more involved in terms of social justice janet yellen with the very similar program uh i would think maybe christine lagarde certainly mario draghi now he's in charge in italy all of these central bankers are wearing a different cap now felix they all want to be part of the solution to the social ills of the world but could their prescriptions actually make the the problems worse you know the the world's biggest problem over the last 10 15 years has been not enough growth because our system is built on growth and if we do not have enough growth we cannot serve all the liabilities that they are out there in the system and therefore whenever the growth declines to two low levels authorities get concerns and central bankers as well we try now for 10 years to create growth by printing money like crazy qe and it didn't really work very well for main street it worked very well for wall street and i think they have realized that creating money is one thing but you have to spend it and what jeffrey just alluded to is really they are going wild in the fiscal stimulus that they are applying to the current situation so i think the next couple of years of the new era is really huge fiscal stimulus government expenditures combined with huge monetary stimulus and this is a prescription for higher nominal growth and higher inflation rates and probably lower productivity and lower prosperity for a lot of people because what it all does i mean the u.s is more excessive than others in this respect and what it all does is it weakens the u.s currency dramatically we are now we have now started the fourth of the major uh declines of the u.s currency since bretton books broke apart since the end of the gold standard and on average those bear market declines lasted about seven years you can make the point that it started in 2017 or in 2020 whatever that means the next three to four years you will have a lower dollar and the dollar could easily decline by 25 or 30 percent from current levels over that time span which creates inflation because foreign products you import and the us is a huge net importer the foreign products get more expensive so so felix let me just follow up on that then during this period of decline for the dollar could it actually find itself vulnerable to being replaced as the world's currency reserve currency i'm not sure if the yuan is ready to take its place or if you know maybe uh cryptocurrency which i know may sound far-fetched but certainly uh every single day it seems the grain gain more credibility with the established wall street uh would would the dollar be vulnerable enough that it would lose its status as the world's reserve currency that is a slow process and i think we have probably another 30 to 50 years to go until the dollar as a reserve currency is totally gone and replaced by another currency which could be the yuan the yan is not the convertible free market currency and therefore as long as you have uh capital controls on in china it cannot replace the us dollar as a reserve currency so this is a long-term trend but keep in mind that all the authorities central banks and fiscal authorities are doing the same thing as the us just not quite as excessively right so the currencies the currencies are all losing value you know the swiss franc has been the strongest currency in the last 100 years and he'd lost he had lost probably 86 or 87 percent of its purchasing power you see right so they are all going down the drain and and what it does is you really weaken the denominator of all the assets we are trading and talking about and therefore they may make them appear going up in price but it's because to a large extent it's because you weaken the denominator jeffrey on that note then the united states once this 1.9 trillion dollars goes through that will be uh all combined about 25 of gdp uh you can you can say it's the most generous of all all the countries in the world but it also established a precedence that could be taken even further a lot of talk about universal basic income and things like that uh where do you stand i mean as a something of a purist i would imagine when it comes to economies and the way business cycles work all of these things seem to conspire against just being able to use any sort of traditional modeling from where we go from here well i think that's right you know we've talked about all of these extraordinary policies and i've been amazed over my career which is now almost 40 years and how creative these policy makers are you think that they're completely out of tricks and then they come up with more tricks and now even janet yellen who's secretary of the treasury but obviously very tied into the fed is cheerleading for you know as big as stimulus as you can possibly imagine so clearly we're looking to uh you know go to a direct money spending program through consumers which is the universal basic income we've already embarked on i mean once the 19 once the 1400 comes through with 1.9 trillion dollar package that'll be four thousand dollars per person uh over the last 12 months andrew yang ran a semi-successful democratic nomination campaign on twelve thousand dollars a year and people thought that it was novel and a little bit a little bit weird and yet we're already one-third of the way to that program being implemented without even you know really a plan underneath it just on on an ad hoc basis felix says as much as 50 years for the dollar to lose its reserve currency um status completely um i i'm going to take the under on that by a lot i i think that the estimates of how long things are going to take keep getting shortened remember uh a couple decades ago social security was supposed to be solvent until like 2060 and then it became 2040 and 2030 and now i think it's 2025 and also china was supposed to have uh surpassed the united states in terms of gdp uh a few decades from now and now that's being rolled back to i think 2028 it just seems to me that felix is right they have a problem with the non-convertible of the currency which makes it really good you know that that has to that has to be changed you're going to be a reserve currency but i think that's their goal and they can definitely make changes it seems to me if you have the highest gdp and you have a building military which china clearly is in the process of ramping up well maybe you will become the reserve currency so i think i think we've been very blessed united states thanks to um maybe not the nicest factors like the military industrial complex has created the biggest military in the history of mankind uh but we were frittering it away i mean policies in terms of deficit spending and now trade deficit increasing one thing that's gone unnoticed is over the past year the u.s trade deficit has reversed course from a gradual narrowing and it's increased tremendously by about one and a half percent of gdp and that is also weighing heavily on the dollar when when what if you just look at a 50 000 foot overview when we throw you know a few trillion dollars at the united states consumer it's not surprising that our trade deficit explodes because we've got a lot of people that aren't producing anything they're just spending and not surprisingly we've had a big explosion our trade deficit with china because you give people money and they go out and buy stuff that says made in china on it with their stimulus money well you get retail sales but you're not really getting economic domestic growth and these are all factors that i think are incredibly important in asset allocation and uh i've been recommending since the summer of 2020 very very vociferously that investors should be owning emerging market equities as opposed to developed and certainly u.s equities and as the currency trend continues that's just going to be reinforced with rockets of relative movement so i still think it's early in that game um the the united states stock market outperformed by so much over the last 10 years by a factor of three times the rest of the world 300 percent out performance and the amount of catch-up that is likely to occur it has just begun so i i think that we could easily see a 100 out performance of uh of emerging market basket particularly asian versus the united states let's just call it the s p 500 and it's been working quite well in fact even year to date there's a noticeable return differential in favor of emerging asia felix uh i'll i saw you nodding a lot so i think you may uh have some thoughts and comments on that and maybe also just add in with your thinking here as well the populist movement on both sides of the atlantic and the role the data is played in sort of pushing policy let's not forget one wave of socialism brought us uh you know the social security which bismarck saw as a way of maybe uh fending off the the socialism movement knowing uh and of course america adopted it at the time both both sides of the atlantic knowing not many people were living the 65 but ultimately that became an issue as well so you can piggyback off of what jeffrey said but if you can also add some comments on that as well well if uh if we are right in that the dollar declines in coming years uh on a on a on a major trend basis then i do believe that we have powerful bull marketing commodities not necessarily because we see huge infrastructure i think infrastructure will be pushed by government expenditures clearly and not just in the in the us i think it's in all of the western world and all in the emerging world wherever they have the money and and this is positive for commodities certainly for base metals i also believe that the climate change will probably work in the other direction then what is generally assumed as being the right topic so i think the climate wheel at the march and turn a little bit cooler and this leads to less good harvests and harvesting problems etc and this is very powerful bullish factor for the agricultural commodities so i think you have a bull market in commodities and the major producers of commodities are emerging economies and therefore it makes a lot of sense to overweight emerging emerging economies i do not believe that these trends will be a straight line i think there will be interruptions and you know the markets character has changed a lot in the old days and i'm in the market for 50 years now in the old days the market cycle was a smooth occurrence it started out slowly and then accelerated and then it slowed down and then it declined in today's world it is straight up and straight down you have nothing in between and and it's because our system is so leveraged up that the authorities know that it's so fragile they cannot let it slip away and therefore whenever the market goes down a lot and the algorithms drive it down and everybody's on the same side you have a big sell-off but the authorities come in quickly to save the day and and you saw it usually at the bottom like in march 2020 uh usually you have a climax a selling climax you have a low you bounce and you come back and re-test and then you go you don't have those restarting uh procedures anymore this is gone and it's gone because they bring on the heavy cannons the heavy guns to really push markets up and i think the downturn comes when everybody is positioned in the same way we have a lot of excesses and then something unexpected happens and then you have a huge sell-off it happens very quickly and then it's over with so i think the character of the markets has changed a lot and the algorithms machines do a lot do a lot do that well on that note i know like when it comes to to the human body they say if if you get in a cycle of losing a lot of weight and then putting it back on and then losing a lot of weight and then putting it back on that this structural damage to the body that's why i don't like to lose a lot of weight so so if that is the case uh with these what you're describing the is there any lingering structural damage to the economies and markets because we no longer have that smooth uh you know the business cycle well i i think what it does to the economy is it forces the authorities hands very early and they do not let the system clear and they didn't let the system clear for a long time and the end effect is that you carry with you more and more structural burdens and indebtedness and things like that and therefore you weaken our system structurally tremendously and be usually in such a situation the logical outcome would be a deflationary collapse at some point of time but that is a no-go for any politician because you won't get reelected with a deflationary problem and therefore i think they try to push it further up and up and up and the end effect will probably be not a deflationary collapse of the markets and the economy but i think you change our system you get the government more involved the the share of the government of our gdp continues to rise and we are slipping much more into a command economy a planning economy that is managed and the the bare side to this is that we have a structural bear market in individual freedom and we have a structural bear market in broad-based prosperity for the average person and therefore you have a structural increase of ever more people falling on the burden of the government right and that's that is what you call a trend into socialism and i think president biden is adopting the european model and leads us more and more into socialism and and that is not necessarily a bad thing for the markets as a whole but it's a bad thing for the efficiency of an economic system and that means lower productivity and lower prosperity in the long run and also jeffrey it would be something of a shock to americans you know listen in college everyone kind of says oh you know the socialism thing seems like it's working nicely it seems fair which is a popular word in america these days we look at some of these european countries particularly some of the scandinavian countries saying golly they've got it all they live like we live uh with less stress they live longer uh and so what they pay higher taxes but but is america truly prepared do you think uh you know the america that kind of rose through grows up from pulling itself up by the bootstraps to to give up those freedoms uh because i think a lot of younger americans think they're going to have it both ways and i don't think that's going to be possible yeah i agree with you that that's not going to be the outcome um i i think that what the what the planning type of authorities uh are hoping for is you know that they would be able to uh tamp down some of the populism and some of the unhappiness unrest but the opposite has been happening as we've been giving money away we see riots all over the place and uh all kinds of trouble uh so it's really these types of experiments have been attempted quite a few times even in the 20th century with yugoslavia and hungary and the weimar republic and they and more recently venezuela and you see just astronomical inflation rates that can develop in one or two years very short time window when these things really go full bore and so i really agree with with felix about a very positive commodity cycle one of the charts that i've been using now for a few years and i dusted off at least once a year for my webcast audiences is the relative performance of the dow jones industrial average so you can go back a long time and a commodity index like the goldman sachs commodity index just the total return performance and the cycles are very repetitious and they're extremely of broad swings you go from about an eight times out performance of commodities versus stocks and then it gets reversed over a multi-year or decade time frame to an 800 or 900 under performance and we're right down we were last summer right down at the kind of historical extreme so the amount of performance that's occurred so far just like my comment on emerging markets is just the beginning if we're in that type of a cycle we talked about fields also talked about how the market isn't working smoothly and it goes straight down and straight up i believe that that uh event started to happen around 2018. you might remember in 2017 there was a lot of appropriate commentary about how the fix index for the volatility on stocks was the most most subdued in market record history there were many many days in 2017 the vix closed below 10 which was a very rare phenomenon to ever happen even a couple of days during a year and it happened i think dozens of times in 2017 then all of a sudden it it spiked up and we've been elevated now above 20 on the fix for a long time i mean it's basically a year now and we just can't get below that even though the stock market has been relatively calm in terms of its actual volatility for the past i don't know i'll call it like five months now uh we still can't get that down and i believe that this is this is a long-term trend that we'll go go to go to uh wider swings you know big melt-ups big meltdowns on a recurring basis i'm so old is to predict that we'll see the vix index sometime in the next year or 18 months go over a hundred because that kind of volatility in the market um and there will be if one thing is helpful in the investment business that i've maybe maybe it's unique to me but it's a characteristic that i've fortunately have is i have sort of an emotional memory of how it feels when things really get dicey in markets how you know all confidence just dissipates and you get into these wild swings of volatility and if you can remember how it felt uh the end of march uh 2020 a little less than a year ago um people people thought the world was coming to an end and i i think the next bout of volatility on the downside it'll be yet another uh order of magnitude higher in terms of how people feel because uh there really there really isn't a fundamental underneath our economic growth right now the united states is not out of recession the big economic downturn that occurred last spring has not been filled i don't believe this arbitrary definition if you get a couple quarters of positive growth you're out of a recession for me and this is just my way of looking at economics i don't think you're out of a recession until you go to a new high in real and nominal gdp growth and we're not even close to that so we don't really have growth right now it's possible that at the end of 2021 thanks to another couple trillion dollars of stimulus it's possible that we get nominal gdp back to uh you know first quarter of 2020 levels but it's also quite possible we don't get there so we're still in a recession there's still all kinds of trouble why are all these fed officials and janet yellen and even president biden basically yelling from the rooftops that we need to go super big on stimulants they must not think the economy is in very good shape and you know that that's that's that's where we're gonna go ahead and and yes they have a social justice aspect to it which i i think makes it easier to pass these programs and so it might be for sinister reasons that they they go to um you know certain full certain levels on rationalizing their policies which as i said earlier i mean we're we're we're borrowing at 25 percent of gdp numbers that we we used to think five percent was was uncomfortably high and we're we're headed to infinity and beyond and the federal reserve jay powell has said there's no limit to the enabling that the federal reserve is willing to contemplate in terms of lending money to to to fund the treasury's deficits and so that's that's that's the business model if you want to call it that and it's it's not working so you know let's let's let's do twice as much and we'll it'll it'll not work twice twice as badly i'm afraid so it's not a very optimistic outlook but you you have to you have to deal with you have to play the cards you're dealt in this business yeah i mean it definitely feels like whatever to your point uh 10 years ago everyone was sounding the alarm but we didn't go off the cliff and now no one's sounding the alarm and it feels like wherever that cliff is wherever that felix wherever that edge is we will find it because there won't be any sort of discipline by any of these entities uh to start trying to reverse their actions i mean to your point they become actually hostage to these actions and have to go bigger and bigger every single time around so but but something jeff said and i want to get your thoughts on this about the last year did you find it curious though about not not necessarily the actions that were taken and by the way they were pretty swift from the federal government side in america to the federal reserve and also global uh even around the world but by investors themselves particularly this new wave of individual investors who who bought when all the experts were saying to sell well actually the individual investor has been absent in the market for many many years from 2009 to 2000 beginning of 2020 the individual investor was actually not present and he was a net seller of equities throughout all these years and he changed in 2020 he probably has something to do with the home office when people uh are at home and they have time to go to investment forums and chats etc etc and then all of a sudden it started and it then feeds into what happened for the first time in history i mean i mean i'm working in the markets for almost 50 years and i have never seen and this was one of the deepest declines and slumps in the economy i have never seen a recession and at the same time personal income go to new highs you know and obviously the money was out there and checks were sent out etc and and the individuals the retailers they all of a sudden had extra money they did not expect and and and they were spending time on the investment forums and got attracted and started to play like casinos they started to play and i think this is a phenomenon that you usually see very late in the cycle so we had a bull market from o 9 up to now and after 10 years the individual finally looks at the situation and then he looks back and he says okay this is what i should have done why not doing it now and and so he's now in the game and the individuals are roaringly bullish and actually the professionals are also excessively bullish they are they're long positioned according to the recent global managers fund fund manager survey by bank of america they have the largest long exposure and the highest risk exposure in 20 years right so so you have everybody positioned for a smooth sailing to the upside and uh jeffrey was talking about the weeks being sticking at around 20 i would think that even next month we could see a doubling of the weeks for for a shakeout before it continues you know when you use the word casino i think that's that's really appropriate because i think that's actually um there's something that i'm very anti-gambling i don't understand why people do it in casinos because it's just bizarre to me that people you know to take a proposition where they're almost guaranteed to lose but it has a lot to do with the psychology of it and one of the things that makes gambling so insidious is when people go up when they make when they win a couple of hands or whatever they start getting more reckless because they feel like they're playing with the house's money it's not it's not even their money they're losing and so they're inclined to get more reckless and increase the odds that i think that's what's happening uh an unintended consequences basis with this government stimulus is that people are getting six got six hundred dollars in december and that's just found money i think they feel like i've i've heard many many uh stories about people saying so what if i uh lose a lot of money on my five shares of gamestop i only have five shares and it's the government bought it for me so you know what's the big deal it's almost it's almost like a superior to a lottery ticket in terms of its risk reward profile uh and so it leads to a gambling mentality and as the stimulus checks come rolling in i have feeling that we're going to get more of that mentality happening again so it's really an interesting situation because by many valuation metrics the u.s stock market is as about as highly valued as it's ever been if you look at many metrics it's in the top percentile of the last multiple decade time period but what's fascinating about it is until very recently and it's still largely the case but it was extreme uh back three months ago as overvalued as equities look by these metrics they're actually cheap to bonds by a historical kind of yield comparison they're not even averagely priced bonds are so rich because of the government's action and they were when the tenure was below one percent in particular they were so rich that even the pe of equities being at 1929 types of levels on a cape ratio basis and you know second highest in history it actually screens uh below average valuation versus treasury bonds so the distortion that has happened with these policies of the fed uh you know uh suppressing interest rates has found its way through this casino mentality of government money through a chain of events that's led to these high valuations that although i don't really want to own the thing i've got to believe that if money gets sent out in the next six weeks fourteen hundred dollars per person i have a hard time believing that it's not going to find its way into further inflating this bullish this bullish fervor that's going on but what watch out if something happens unexpected you know we have all seen the charts of uh call option volume it has gone parabolic so a lot of a lot of players have been playing the market by buying call options if the market for whatever reason at some point this year probably later this year begins to decline you know the market maker in the options who sells the calls to somebody has to hedge by going along the stocks and at some point of time in the decline he has to sell out completely and that gives you that sews straight lines down you know as we have straight lines up all of a sudden we have straight lines down so uh i think it's as jeffrey said i think it's going to become much more volatile in the next few quarters uh felix and you both agree that the vix is going to make a dramatic parabolic move relatively soon but you also reference the the bank of america survey with the global money managers they were relatively bearish very conservative throughout almost all of 2020 and now all of a sudden they're 63 percent long the lowest cash amount that they've had in eight years and it kind of reminds me the story of sir isaac newton uh one of the greatest uh bubbles in history i think it was that mississippi stock scam uh all of his friends were making a lot of money on it they would go to the parties and he told every one of them you're gonna lose it all you're making a mistake finally he said you know what i'll give it a shot and he lost it all so the smartest man to ever grace the face of the earth was seduced eventually by the excitement is some of that going on in the professional circles right now i believe so because you have to keep up with performance yeah and and you have to be in the performance stocks the pros have to be in the market and they have to perform if you do not perform for a certain period of time you lose the mandate and that's your business risk and therefore they have to catch up and stay with what's in the game and what's winning and what's hot if they don't they run the risk of losing businesses and therefore everybody eventually ends up in the same stocks and on the same side and that's when something unexpected happens because there is no marginal new buyer left and then you go down one of the most incredible reversals that we've seen maybe in years happened just in the last few months we had the mega cap stocks you know which of course be the super six but primarily the fangs and microsoft were outperforming by a huge amount mega cabs are outperforming small caps massively and that out performance is completely reversed totally is completely reversed and now make mega caps have underperformed uh the smaller cap stocks for the past four to five years that entire uh out performance was reversed in just a few months and i think that there's a lot of reversals that are going on we've seen weak balance sheets start to outperform strong balance sheets we've seen the emerging markets start to outperform the us and i always think that whatever is the big leader into a very strong market you got to watch out for when that leader starts to flag um it's kind of like they're they're they're leading on the upside and i call them on the battlefield of of the performance war if you want to call it that felix i call it they're the generals so you had these generals leading the charge and that the troops were kind of falling behind but now the the the the generals have left the field and so one thing that i think is is responsible for that again is all of this little guy trading through government money because they love they love these little micro cap names that's become incredibly popular penny stocks are now very popular and as felix alluded to that type of behavior is very uncharacteristic of a buying opportunity and highly characteristic of very light late cycle heading into mania charles you mentioned the mississippi scheme there's a great book i've read a couple of times it's an easy read it's by john kenneth galbraith it's called the great crash of 1929 and it just goes through the florida land speculation of the early 1920s and how that set the stage for the ultimate speculation in stock market and how everything went haywire in 1929 it's a very interesting read i recommend it to everybody um it's a perspective that it's very interesting to think about where we are today when you read a book like that uh i i've noted it and i can't wait to pick it up so then let's go back let's talk about this relationship with the small investor the fdm i think that's the goldman sachs micro cap index is up in the last eight months something like 70 percent followed by the russell small cap the small russell 2000 there's going to be a hearing in washington d.c about the whole gamestop saga can i think king griffin will be there some of the uh some of the role players on reddit and there's some speculation that maybe just maybe felix there could be something out of there that changes the rules of the game with the stock market whether it curtails the ability to have more than 100 percent of the stocks short the role of options to take positions particularly when there's sort of these complicated options maneuvers that allow extreme leverage should anything come out of this what do you think's gonna happen well usually they protect the big guys always they protect the banks the bankers and the very big guys uh uh always that's uh the has been the rule of the regulators over time and and i expect something something like that along those lines the interesting thing was that in some stocks there were shorts outstanding more than 100 percent of the outstanding shares and and i think that should not happen you know when that happens you have a squeeze going on you can't really resolve and and i think that should be prevented by regulation other than that i think there's nothing wrong with short selling short selling is fine the problem is when you have a rigged market when you have a stock sold short of a company that is making losses and is really doing bad cyclically and structurally and the stock goes down and the pros shorted and short more than they are outstanding stocks and then an investment forum picks it up and creates a short squeeze you know i'm not sure whether that is legal or not or whether it is already illegal but if it would have been the other way around that the small guys would have been squeezed by the big guys there would no new regulation come up i'm quite sure yeah i'm sure i'm sure you're i'm sure you're right um i i just don't think these these congressional hearing types of things but they're just a reaction to make it look like we're talking about something or doing something i agree that there should be some uh regulation about shorting more than the outstanding supply of stock but uh i i would expect very little to be done uh in response to an event now that is fading into the rear view mirror i think it would take a much stronger event than that to actually to get something get something to happen but certainly i wouldn't expect any sort of meaningful uh regulation to come out of these hearings at all i remember when they called mark zuckerberg in front of congress it had me like three or four years ago and the congressman didn't even know what questions to ask i just had no idea i mean they were shocked to hear facebook was selling ads they they couldn't believe it so for these for these people to suddenly get get um insight and intelligence about some of the you know the leverage and the option buying and the like it's it would take it would take an awful lot of uh of tutorials i think and i i don't expect that's going to happen i admit i'm really nervous about hearing maxine waters try to try to get into the nuances of all of this um i think a lot of those folks are going to embarrass themselves but it will be a problem consumption i remember when she was giving jamie dimon of uh of uh jp morgan a really hard time and about student loans about how they were punishing people with their student loans and they're ruining people's futures and jamie dimon said to maxine waters maxine we haven't made a student loan in 10 years you the government have been making all the student loans you don't even know who's making the loans you're berating jamie dimon for his evil behavior on student loans he's not making any student loans that's how that's how ignorant these people who are on you know finance committees in congress are it's it's it's pretty horrifying maybe term limits would be the answer maybe felix uh when when does the system get cleaned out in other words uh uh you know we go from five percent uh borrowing the 25 percent to 50 to 100 whatever the number is it it's it's it can't go on in forever there's got to be you know you talked about this new business cycle these sharp moves to the up and down side but at some point do we need a um a sort of magnificent cleansing process that we need someone who's fearless at the federal reserve uh you know sort of the combination we had when ronald reagan was in office a politician and a central banker not afraid to be on poplar for a couple of years uh to clean out the system if you will so that we can get a real true fresh start well i i think i think the backlash will be political uh and i think what we have seen with trump who tried to put himself in front of a certain revolution against the political establishment that was just a warm-up i i think it will get much much worse in in years to come and at some point of time i cannot predict when that will be but at some point of time the people out there a majority will get so angry with the political establishment that they are revolting and then they go for change and then it gets very nasty and and then we might have change and uh and and it will not be it will not be nice going through that change and the chaotic situation that we'll be creating but that's usually what happens whether it's a country a or country b doesn't matter we will see something like that in europe we will see something like that in north america in all the countries where prosperity for the average john and jane goes down you reach at some point that point where you get that backlash and i think the trump era was just a warm up for that i agree jeffrey you talked about you know your emotional attachments or how you feel and feel emotionally felt emotionally during these massive pullback periods you know the pain is something that's it's just a big industry we don't want to endure and i say we i mean citizens of the west any kind of pain whether it's physical pain whether it's emotional pain whether it's economic pain we've got a pill for this a pill for that a doctor a psychiatrist something we just have forgotten the notion of going through any kind of pain at all uh and and and you know there are times when it is inevitable and so uh you know to to felix's point what what happens in that kind of a scenario well i just think that there's a lot of ways of of addressing that question i'll start from almost an effect in an investment perspective you know i've i believe there's a certain amount of risk in the world there's certain amount of risk inherent in markets and in life and in society and where things go wrong is what you're alluding to is when you try to rid the world of its inherent risk so i use the example of hedge funds every now and then you get a hedge fund that has some some idea some sort of a gimmick and they think that they can generate something like a percent per month every single month with no volatility so they've created a system they think that has eliminated all the investment volatility from the system and they're going to go on with this perfect you know infinite sharp ratio and it actually can work for a while uh sometimes it's a fraud like bernie madoff sometimes it's just a low volatility period and you can actually get some of these ideas that work for i don't know maybe even 30 months in a row and then all of a sudden something happens there's a shock to the system and they report a negative two month and then invariably this happened to bear stearns it happened david asking in the 90s about two weeks later they have to put out a revised performance report that they weren't down two they were actually down 20. and the reason was that they didn't believe the marks they were getting their models didn't agree with them but now they realize that the the marks were on negative 20. and then the investors all go ballistic because they can't believe that this one percent a month has turned into a negative 20 month but they don't even know what's coming next because three weeks after that they get the bankruptcy letter that they're completely out of business and i think that's an investment uh analogy for how society works so you're right we got a pill for everything nobody wants to take any pain uh and we're gonna have you know free things for everybody and it's all good until such time as the negative 20 shows up and then the negative 20 turns into what what uh felix is talking about through social upheaval and i've been predicting that we will we will see a more than two-party system i think 2024 will actually see more than a two-party system in the united gavin st we have now in california surpassed the 1.5 million signature threshold and gavin newsom is going to be on the ballot for recall uh coming up it'll be very interesting to see if california will vote for a republican if they're that disgusted with what's been going on with with the democratic leadership because there's so many democrats in california that's almost mathematically impossible it would seem unless suddenly the scales fell from everybody's eyes simultaneously and they realized that these policies i mean i live in southern california and the the living conditions have deteriorated so rapidly over the past three or four years the homelessness the trash crime is off the charts the freeways are falling apart and people are sort of disgusted by this maybe a moment will come where suddenly everybody uh gets the idea that change is needed i was i've been looking because of all the censorship that's been going on on social media and all of the canceling and and everything that's going on i i took a moment uh earlier this week to review the mccarthy hearings back in the 1950s senator joe mccarthy and all the stuff that was going on with smearing people's reputations and essentially cancelling people and there was that one moment at the congressional hearing when joseph mccarthy broke he violated a pledge he had made to one of the interrogating congress people that he wouldn't mention this guy's name that worked at the interrogator i can't remember his name is a law firm but joe mccarthy got so irritated that this interrogator congressman was was pushing too hard on his his attorney roy cohn that he he broke the promise and started to smear this guy that worked at this congressman's uh law firm and in a beautifully eloquent and just historically powerful moment this congressman just said do you have no decency sir have you no decency and joseph mccarthy's career ended in that moment you could just see he was speechless literally and he just realized he had pushed everything one bridge too far and i'm hoping that we get a moment like that sometime in the next couple of years because maybe that would accelerate the process of the reset and make it less potentially violent or painful if we could compress it into a moment of of you know uh referring global awareness if you want to call it that i've got four minutes and uh if if we could felix i'll start with you just the the most important thing we have not covered right now and also why do you keep doing this you've mentioned you've been doing it for 50 years i want to understand your passion for this and and maybe if it's if it's contagious because i i i think it's laudable i i applaud the success that you both have enjoyed you don't have to do this you still are and you're still willing to teach others well you know once you get hooked you can't get off uh the world is so fascinating because what we are living through literally is new it has never happened in this way and and i want to see how the story continues i want to you know i i won't leave up to 150 but i want to see how it continues and how it ends etc etc i think what what referring to the current situation what's important maybe as a closing remark from my side is everybody believes this is an easy game because you have central banks that stay excessively easy and have set to stay and overstay overstayed excessively long you have fiscal authorities that stay excessively easy and have said they will continue to do it et cetera et cetera and therefore and the and the economy as jeffrey d described is only coming out of the lows and is beginning to recover and and maybe accelerating later in the year etc etc and everybody believes with no tightening uh by the monetary policy uh there is impossible to be a market decline and i just want to remind our listeners our audience that 87 was one of the biggest stock market declines and it happened in a short period of time 36 or 37 percent in a few weeks time and most of it in one day and there was no monetary tightening by the central bank and there was no recession all what happened was a declining dollar a weakening dollar the dollar went down every day and bond yields went up every day and up to a point where it triggered some models to begin selling and then portfolio insurance kicked in and i think this time we have all the algorithm acrobats out there the machines and they will kick in so sometimes when the top is here and i guess this is sometimes from mid-year on this year to media next year sometime in that time window we will have a nasty surprise on the downside and if you get out get out quickly because you have to probably get in quickly again as i said straight up and straight down right jeffrey i'm looking at what i've been looking at uh i've called the chart of the year for 2020 is parsing the economy and this and the markets into sectors and one of the most fascinating things that we revealed from this this study is technology uh however it's defined these are kind of blurry distinctions sometimes but the official definition of technology represents six percent of gdp and the employment in the technology sector is two percent of all employment yet the market capitalization of technology at your end was 38 of the market cap of the us of the us stock market the s p 500 this is so wildly out of sync and it is the the single best uh example of what uh wealth inequality looks like and we've got to get that trend to get more in sync target capitalization has to get more in sync with uh employment and gdp shares and until that happens i think we're headed into uh on a collision course with this type of social unrest we've been dealing with the bond king jeffrey gundlach and uh the legend himself phil and zuloff gentlemen thank you both very much i thoroughly enjoyed it and i'm sure the audience did as well and i hope we can do it again real soon thank you charles thank you very much charles thank you jeffrey thank you for joining you

Channel: DoubleLine Capital

Views: 42,625

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Keywords: DoubleLine, Zulauf Consulting, Felix Zulauf, Jeffrey Gundlach, Charles Payne, Fox Business

Id: XzQXfDVsqBI

Length: 60min 7sec (3607 seconds)

Published: Mon Mar 01 2021