Jeffrey Gundlach on Global Macro, Rethinking Recession and Saving Social Security

if you don't mind to get us started before we get into the nitty-gritty of macro could you share the story of how you got started an investment business yeah I I uh studied math and philosophy in college without any idea what I was going to do with those degrees I just took it because I I liked it and I ended up getting when I got a degree the philosophy not worth much of anything in the real world but math has some applications and the applications tend to be an actuary for an insurance company a math professor or C code breaker for the NSA and I refused to do anything with the defense department and uh I thought that I would just have to make some money I took this job at an insurance company and I absolutely hated it I was I was living in Hartford which was a big part of the discontent which is a at in those days was a terrible place and I just hated the company I was working for and so I figured oh well go back to school and so I got into a PhD program at Yale and I learned very quickly that that was a dead end as well because you would be a professor I thought that a professor would be a very of uh idealistic good place to be without a lot of politics and all the stuff that go goes on in business I was so wrong it was the most political thing ever so I left that and went back and and decided I was going to play rock and roll so we came to California and I and uh I was in a rock and roll band to some minor success we did open for gun and roses um but before they were famous so it's not it's not as impressive as it sounds so um I didn't really I I got a job finally cuz I needed and it was an insurance company at Trans America and weirdly I actually sort of liked it it was it just wasn't that bad but I knew I was going to have a career there just just I didn't hate it I was actually okay with the business world and so I was living in Hollywood I was still playing rock and roll at night and I had this crummy one-bedroom apartment in Hollywood and all my stuff that I had was was given to me by friends so I had like a beaten up chair had a cardboard box for a table for the TV and the TV was a black and white TV which was completely Antiquated a black and white TV the the knob for changing the channel had fallen off you had you had to change it with players and I used a wire hanger as the antenna and in those days there were really only three stations the ABC MBC CBS and I turned it on one night randomly and there was Lifestyles of the Rich and Famous came out which is that show by Robin leech champagne wishes and caviar dreams and they said we a a special show tonight we're going to count down the 10 top pinging professions in like America and so great I'll watch this thing about top ping professions and I'll figure out what to do and so actually actuary was number seven on the list which was kind of a it's kind of frightening but then when they got to number one they said number one is investment banker they said you have to work really hard and you have to have a very analytic mind and I said I got both of those things so I decided I was going to be an investment banker that that at the end of the show and so I went to the closet where I had the LA Yellow Pages and I decided I was going to look up investment banker and apply for a job uh spoiler alert investment bankers do not advertise in the Yellow Pages but I didn't know what investment banker was so I looked up investment and there was invested management and I figured that sounds like the same thing so it's close enough so I uh looked at every firm that had a boldface ad in the Yellow Pages and there were about 25 of them and I just sent every one of them a resume with an aggressive sort of cover letter and I got three responses one was you've got to be kidding you have no background in this whatsoever the second was we could use a good a mathematical person like you but we're a Twan shop and we can't pay you so that was that was off the list and the third one looked like the college uh admissions rejection letter you got a little tiny thin envelope that you you you kind of know what it's going to say and I was I threw it away but that evening the Curiosity got the best of me and I went to the trash fished it out and opened it and it was very short and it said we have had a large response to our job posting but we we we we we're we we're willing to talk to you call his number I'm like job posting so at pure luck they had posted a job opening at UCLA unbeknownst to me and so I got this interview and I go in there and I I meet uh this guy that was doing the hiring he was a pretty senior guy at the company and he said well your background is really interesting I mean you certainly have excellent academic history and all that stuff so I have a question for you do you think you'd rather do uh fixed income or equities and I kind of froze and I looked at him and I said I don't know what those things are and he kind of rolled his eyes and he said equities stocks fixed income bonds and I'm thinking to myself I don't know what bonds are so I said stocks and he goes well I actually think that we could use more help with your know quantitative Firepower in bonds and so I got hired on a 90-day probationary basis for $30,000 a year and I spent the week in between quitting but the insurance company job and starting there by reading this thing called inside the yield book which was kind of the Bible of fixed income it spoke to about reinvestment and how that worked and it started out with pros at the beginning like essays talking about bonds and then the second half of the book was formulas math Bond math formulas and I figured that I would learn a lot and get a deep understanding by deriving the formulas from scratch myself because I was just out the Y PhD program math so so I I go and I start working and I was so naive I thought everybody could do that I thought everybody knew how to derive Bond math formulas and stuff and I learned within a few days that I knew more about bonds than the people that were doing it because they were come they were they were just a placeholder back in those days money management was largely what we call balanced funds so you had stocks and bonds and the same company did both and they would allocate you know 6040 to 4060 or whatever um and the bond guys were just kind of you know a side car it was all the equity guys that were driving the bus and so the bond guys were just just they were just a placeholder it was almost like almost being a clerk um and so turned out that I learned very very quickly and within six months I'll cut the course story short I went for about an hour but after six months I got the Chrysler pension plan that I was tasked with managing primarily because the guy who should have been doing it was afraid that he'd screw it up and he'd get fired because the head of the company was friends with leoka and that's why we got the account it's because of this you know almost nepotism sort of situation and so I started doing it thankfully it wasn't that hard it wasn't fullon active management it was more of a formulaic mandate that we had but it turned out that I was their best manager um and so I just started and I started doing mortgage back Securities because that was by far the most interesting Market it was rapidly changing it just come into existence really and there were so many things going on and it was a really a fertile place for excess return and as luck would have it I ended up having the highest returns in the industry and I remember people saying to me how could you do this with mortgages you know but it was because we're so incredibly inefficient there were really weird things in the market in those days there were quarter coupon mortgages there aren't anymore so they had jinny May 10s 10 and a quarters and 10 and a h and for some unknown reason the 10 and a quars traded below the average price of the tens and the 10 and a halfs which makes no sense it was just because there was something about it was an off theun coupon or something so there were weird things like that you could do it just shouldn't shouldn't exist and so uh I ended up uh doing more and more and more and you know what if you're if you're ever really good at anything it's almost a guarantee you're getting it fired and so I started doubling well that that's a good segue so thanks for that Jeffrey I especially like the life stales of the RIS of the famous uh component there um with that we'll jump into the bit of the macro discussion uh there's a lot to focus on here but um just sort of starting figure we'll talk for a second or a couple minutes about the economy inflation and sort of jump into Investments but I remember um I think the last time we did this was probably maybe February last year and there was a lot of discussion back then and all of last year about the potential for no Landing soft landing hard landing and the probability of recession was I think around 65% for much of last year today it's 30% um and we the market still believes the FED is going to keep F the FED funds rate pretty close to where it is now when you like why do you think that we didn't have the recession that everyone assumed the most expected infl uh recession ever why do you think that yeah I I I think we can all agree the answer to that is the the lockdown and the stimulus which created an economic pattern and new variables into the economy that made historical Cycles less of a template for maybe what was going to happen and so you know we have the inverted curve I think Bill showed it or it was slipped into his thing the those are our slides everyone saw them already so the curve the curve has been inverted longer than any time in my long career um and yet it's been very very stable for a while now they have change rates for quite some time was last July I think was the last hike so we're coming on coming on a while uh on on that and so uh the inverted curve would strongly suggest that we should be in recession but money supply I think was the biggest um head fake of the whole thing because the stimulus of the trillions of dollars took the money supply trajectory of M2 from an incredibly stable growth pattern for the years into the lock lockdown just up very steadily and then all of a sudden like this and then the heavily monetary monetary policy and monetary looking economists they always observe that when M2 goes negative year-over-year you get a recession kind of like immediately almost always and so what I think the mattus missed is that the M2 did decline year-over-year but it was still really high it was one of those things where PE people got fooled by year-over-year and didn't think enough of how about versus two years ago three years ago and fact frankly there's a lot of stories out now about excess savings have been used up and I'm not even sure what excess savings is is really defined as but the M2 is still really high it's still higher than if you had taken that trajectory preco and just kept going we're still substantially above that and I think that has a lot to do with it um plus the leading economic indicators which have been very reliable historically they're extremely focused on manufacturing you got this you've got uh you know you've got a fair fraction of them and Manufacturing was really strong in the lockdown uh we you know people were buying refrigerators and doing decks in their backyard and doing a home office and buying cars and all that stuff but Services were completely you know Mo major categories of services were just dead you know travel Leisure and Hospitality so when the manufacturing stuff rolled over people started thinking well the recession we're starting to check like every recession box but the problem was they didn't understand that the manufacturing oriented indicators the is manufacturing ISM the leading economic indicators that got handed off to services so suddenly when the economy reopened we had a Baton Pass from manufacturing to services and we actually had a boom in travel a boom in Hospitality Leisure we had Taylor Swift and all this other stuff that actually she probably added tenth a tenth to GDP and um so it's just that those patterns aren't aren't really that uh that reliable because the context is completely different and I think that's what people missed um now some people I'm Daniel D Martino Booth is on our Round Table Prime i i i there's a video out where she says the recession has started now I mean I think she said that a year ago too but that's a lot of people uh are are Le are leaning on that so um I think probability of recession is higher than the consensus thinks but i' I've got sucked into the the mapping problem myself I I gave I thought we would be in a recession by now but it it you know maybe we are maybe on revisions but it just doesn't seem like it there's this narrative that I hear a lot I heard on the radio some guy said the economy is shrinking and inflation is going up well he says so that's the definition of stagflation so we're in stagflation I I just don't I can't call this environment stagflation yet first of all the economy has not I mean we had two negative cores of GDP that was probably a little added to the confusion as well right but the last one they say is 1.6 six GDP now is pretty unreliable at this this early time in the uh in the economic reporting cycle for the quarter but it's higher than 1.6 on on that that estimate now and certainly this is not a really high inflation rate we've had a very high cumulative inflation rate so this is going to be that same problem of looking at year over-ear instead of over three years I saw something interesting today that many food categories over the past four years are up 40 and 50% communally and um some of them are up you know 200 300% and so we we just like we have a lot of M2 we have a lot of high prices and people are still having problems with that and so that might ultimately lead to you know a real problem because people got used to this stimulus uh they ramped up their Lifestyles they treated themselves and they're out a lot of them are out of money and you can see it in credit card usage going way up the number of credit cards going up and I think Andrew showed the increasing delinquencies in very parts of of uh asct underlying loans so you know I I don't think we're in station yet but I I do think that when the recession comes it's going to be a very very ugly experience because and I talk about this all the time but the federal deficit is over 6% of GDP and the Biden Administration predict it's going to be 6.1% of GDP for 2025 well I'm going to take the over I'll always take the over on those things and that means that when next time we go into a recession historically recession adds to the deficit 4% in the old days 9% in the last three recessions if you average it out it might be about 6% and the trend has been to be increasing so it's plausible that we could have a deficit at least for a year or two of 12% of GDP and that's really scary because we already have all of this uh debt that we have that we have to roll over and one of the things that I think we'll be talking about in a couple of years is that people didn't really uh prepare themselves mentally and investment wise for all of these bonds that are rolling off that have coupons of 25 basis points 50 basis points 100 basis points there's a lot of them there's 17 trillion in the next three years that are rolling off and they're not going to be reissued at 25 basis points very likely and if they stay where they are higher for longer if we just say that that these bonds roll off with today's rate structure you're talking about some of them being reissued at 4500 basis points higher and that's a lot and and so if and now if you issue uh a greater amount with with a deficit during a recession you have a full-blown crisis on your hands because we're we're getting near that date that that we have to cut Social Security benefits or restructure they they say the CVO says it's 2034 but they assume 4% deficit of percent of GDP 3% interest rates and no recession we're already well above that interest rate level well above that deficit level and the chance of having no recession by 2032 seems remote at best so I'm going to say that Social Security runs out of money without a restructure by 2028 would be my guess so we're getting very close to that and one of the reasons I think the FED is trying to find excuses and reasons why to cut rates is they've got to know about this they've got to know that we cannot sustain rates at this level and enter a recession because the whole thing it well we're we have to do what we need to do which is restructure these unfunded liabilities that are not that you know sit are sitting out there as promises to pay the FED recently announced I guess I'll call it a taper a reduction of quantitative tightening that that is related to what you're talking about yeah I think J Powell went off script uh not this one but the the one before and he said something like we need to get the the bance sheet down so that we can inflate it again when we need to he basically tipped his hand that yes the Playbook is the same it's you slash interest rates and you do QE but he wants to do it from a lower starting position now he's he's backed off of that one because we're going from 60 to 25 on the treasury starting I think in June so that's a so he's not going to be decreasing it that much but I think you know he he's he's aware of the fact that these things are are issu this he better be if he's the chairman of the Federal Reserve I remember I think I was talking to one of my colleagues this morning maybe it was 2018 maybe 2019 you were talking about 6% treasury rates back when that was very unheard of we're pretty close now when you PR it it was a pretty it was pretty good I think it would have been exactly right if we hadn't had the lockdown cuz we were we were headed there like 2018 2019 there's a little bit of a rally in 2019 rates came down a lot but I feel like we're on that trajectory then all of a sudden we made up for that 2022 in a very sh order you know we got up to what five 540 or something like that on the thir year so it's pretty close to Six so I'll call that a win when I said they were going to six within within several years the general wisdom was that rates would never go positive again that was actually what the narrative was in 2016 I saw an article on the Bloomberg wire that really shocked me and it made me uh get a lightning a light light bulb above my head and that was a guy said rates will never rise for my entire career and I have an intention of having a very long career and I was like uhoh because whenever you know this business like sh Sherman and I like to say you know never means imminent right do you think we'll ever see negative yielding bombs again no no I I don't think so I I don't we'll see I I I don't know what do you think so you alluded to 6% yields uh back when it was very unfashionable sitting here today and thinking about bonds and the fiscal issues that you mentioned what is your outlook for bonds over the medium term that we can pull it in yeah I I continue to have the same template and I think it's been largely working and that is that once the once you start to get some ideas of slowdown or certainly a recession will have a pavlovian bond Grill bond yields will fall because everyone thinks that that's the way it works again I'm I'm I'm very sensitive now to being cautious and thoughtful when trying to apply past patterns to the Future because when you talk about interest rate movements when you talk about how the dollar acts during a recession it's all been during secularly declining interest rates which I think are over and so we we all think that the dollar gets strong during the recession I think is going to get be very very weak as because of the response to the recession so yeah I I think we could see rates fall in a pavlovian way but then everybody's going to wake up and go uhoh look at these policies that we're running in response to this recession they're going to be worried that the interest rates are are you know becoming stimulative and inflationary again right and they're going to be worried about these deficits and they're going to be worried about what the response is going to be those deficits which I mean I think I think it's some component of monetization it's it's part of it if not if not fall in monetization we saw that in the 1940s where um there was yield curve control coming out of World War II and inflation at one point I think it was double digits and it was down at zero and it was moving around but throughout a good portion of a decade there was explicit Yi control absolutely right and and inflation actually had a brief moment at 8% when the 10e treasury was at 2 and a half exactly I mean incredibly negative interest rates and those things happen at at turning points you know and I early in my career treasury rates were as high as 14% And the inflation rate using the CPI for the 12 months prior was four it had been falling there was a 10% real rate of return available and nobody wanted it and we just saw we sort of saw the opposite of that a couple of years ago where the inflation rate was you tell me some some people say was CPI got to 9.1 but import export prices were in the high double High Teens you know and yet the rate was at zero and so it's weird how those types of strange um Rel relationships tend to occur right at the at the uh turning points and so it happened in the 19 early part of the 80s I think it happened in 2021 2022 when you fold in your view on the fiscal issues and all that like as a fixed income investor how would you how do you structure a portfolio that sort of navigates through that maybe the answer isn't like by the 30y year cuz something's going to happen like we did that for 10 years but now what is it I like to the 30 year last October because I thought a rally was coming but I I I I don't like the third year because I think it's going to be very vulnerable to changing attitudes about us policy and so if you want risk offset uh which you're in a world where I think you do you might want to own say five and 10 year treasuries or something like that as a way of maybe going up in price if bond market starts rallying but as I think uh Cohen talked about and uh pretty effectively there's a real a lot of logic for sort of Double B Securities maybe top higher single B Securities in the threeyear 2year 5year area where you're starting with a high base rate and you get a spread on top of it so that's a really good way to go I I like double b bank loans still it's higher for longer you know I don't think they're going to default um we we've been uh adding a little bit to certain parts of the clo market for the same reason floating rate start with a high base rate you're ending up getting 7even 8% on some of these things and so it's pretty easy to put together portfolios that yield about a percent and a half to maybe for a little bit riskier 2% more than an index one and it's not that dangerous it's not that risky so the the FED is you know we we were in i i i term it the fixed income dungeon for seven years we were just absolutely being tortured you couldn't get any yield inflation was higher than the yield rates the Fed was at zero forever spreads I mean there was a moment in 2021 where the only way to get 5% from fixed income traditional stuff would be to buy the junk bond index and leverage at 50% and hope for no defaults because they yielded three and a half and if you had done that you would you you'd be out of business today because you lost a fortune on the bonds you were leveraged and your borrowing cost is above your coupon so you got a really big problem so that didn't work out but now it's more like it was when we started double line May or maybe 2011 where you can do these risk offset things you get paid on both sides you don't have a lot of risk and uh so fixed income is uh has gotten very interesting again and uh I I think it's been I think it's demonstrably cheap to uh most traditional Equity Investments now stepping back a little bit further so on the screen right now is just a look year-to dat at asset class performance it shows equities are up bonds are down for the most part uh the US dollar is up broadly speaking most currencies all currencies almost are it looks like a couple years ago it like 2022 and commodities are up a lot just thinking about you know when you think about all the food groups right now you said that you know parts of the bond market or the bonds Bonds in general look pretty interesting what other what what do you think about global Assets in general I'm getting more interested in Commodities just in the recent couple of weeks maybe month because Commodities are tend to be momentum oriented and so it's it's a market where if the you're below the 200 day moving average and if that's in a sustained decline pattern you just step aside on kamise and that happened for almost the past two years but that's changing and the kamis have been getting stronger and uh that I think is is becoming a more interesting place which kind of LEDs to what I think L was talking about with the Commodities and and so forth in in some of the Emerging Markets I'm not really gung-ho yet on um non us you know like Emerging Market category because the dollars just too strong still for me I I would need that to to really start start breaking down and it's done kind of the opposite I mean it's kind of Fairly on the stronger side and so we we do own some Emerging Markets but there certainly I notic those those local ones shirted well with the Mexican peso last year that was 28.9% I thought that was a typo but uh that was incredibly strong I do like I mean I I think I like when it comes to equities I like long long term plays I'm not interested in the flavor of the month uh I I'm interested in things where I think structurally you have an advantage and I'm I'm I like India although and this is a good time to buy India by the way it's not up very much this year um because India is is everything that China was 35 years ago and there's they're going to have to reform they have tremendous influx into their um labor force coming over the next generation and there's all kinds of manufacturing and Technology including AI that is being relocated from China to Mexico and and India and so I like both of them and Mexico and India and I I just kind of like Japan because I think they're just they've been they were dead for so long there's a lot of a lot of room to make it up and at least they've gotten out of their negative interest rate fly over there they do they they do have they're in kind of a sweet spot yes they have a huge debt to GDP which is a big problem but their rates are they don't have the refinancing problem that we do our rates are 500 basis points higher than theirs so I kind of like those three as long-term play so I I like for a total allocation like 10% India 10% Mexico 10% Japan and then I we we start an ETF here that's the based on the Fortune of 500 biggest companies in terms of Revenue and we equal weight it and I like I I don't I never like momentum it's just not in my DNA so and momentum right now has really really been on a had gone on a huge tear so I like this eil weighted thing better I I I could see having 15 uh 15% 20% in in that to round out maybe a 40 to 50% Equity basket and I like you know Commodities could be your real asset your real asset play Gold is getting long in the tooth I think it's up 40 bucks today so it's just am amazing it's I like gold was one of my number one recommendations for 2024 but I sure as heck didn't think it was going to go go up from 25% in in three months do you have a speculation on why Gold's on this run I think there's just growing awareness that developed country governments are completely out of control and I feel it I feel like the average person is starting to realize how the the the gravity of of this problem that we're running on a a a a debt based scheme with no end in sight and I just think people are starting to think that maybe I maybe I should own something that is real money and that you know it's probably not a coincidence that bitcoin's up a lot too on a year- to-day basis I think it's they're both part of the same phenomenon but it's also the animal spirits were out there Nvidia momentum andit Bitcoin certainly plays in that as well you mentioned earlier um some of the indicators for the economy that uh you know I I would call what we're in right now some sort of post-pandemic cycle which I don't know what that means I just think it doesn't mean all the business cycle indicators that we use in the past are so are so useful do you think something or things change in the co period I mean there's for example you mentioned India and Mexico the dech if you want to call it that a little bit of move towards that a little bit of more reindustrialization in the US do you think that these are long-term more durable trends that shifted or Peak however you want to think about it I I I I think these are long-term trends M that have that that have been started I I do I mean we're we have a a real problematic relationship with China right now and you just Ladle that on top of what we're doing in Ukraine and similar but very different approach to Israel Gaza situation we we're in we're in pretty deep on these on this stuff and you know the Taiwan one could well be coming so there's a lot of geopolitical problems and that could be a significant variable in why gold is strong and you just you mentioned a couple one of the questions I was going to ask is we've talked about a lot of things what do you see as the biggest risk is it fiscal deficits when you think about global markets is it geopolitics or is there something that we haven't to social I think I think you're austrich with your head in sand if you don't think that there's if you think there's not social unrest in this country I mean it's it's it's breaking out all over in fact I I decided to name my next total return webcast which is June 11 1968 because this I was around 1968 and this is extremely similar except this time the people who are protesting don't have anything to protest about in ' 68 people were mad because they were forced to put on a uniform and go to V Vietnam and kill people or get killed they're forced to so and at that time they couldn't even vote you were 18 you couldn't vote but you were sent off to Vietnam that's I can understand why people want to protest against that but the people today they're not protesting against Israel EX in the main in my opin and some of them I'm sure are they're just protesting against how bad the world is particularly if you're a college senior you know you you didn't have a a high school graduation right you had you had two years of garbage college that you paid $90,000 a year for and now you you don't have a you don't have a a graduation ceremony and you're starting to wake up bet your degree in leisure studies is not going to get you a job and so they're they're understandably they feel like they've been swindled and they sort of have them because the Baby Boomers have were just you know it's like born born at the right time you know we I used to talk about this 15 years ago as it's gotten worse how much money our government invests in people over the age of 75 or 65 compared to how much it truly would invest in people that are 25 and younger the ratio 15 years ago was 7 to1 it's gotten worse now that is no way to run a country you should be investing in people that have a future and a stake in the future you you shouldn't be investing in all of these ex hippies that are now running our government and I find ironic that the young people today they are understandably mad at the 80-year-olds that refuse to go away and they they just keep running and they they they stay in until they die in some cases and they they don't have any stake in the future and they've screwed everything up and they're they're getting Social Security and they're getting Medicaid Medicare so why shouldn't I get my student loan cancel I mean it's always helpful to try to instead of saying these people are are are ignorant and naive maybe you should walk a day in their shoes and see what you think about it I I gave a a couple appearances down at this thing called future proof which is very unique Financial events held on at a beach parking lot down in like Huntington or Newport or something like that and it's very much skew to young people I think most of the attendees are under the age of 40 and they were talking about politics at one of them and I lamented the fact that there's all these old you know aifi ex hippies that are in the government I said we why don't we have some sort of new generation why why don't we put age limits what and when I said why don't put age limits on I got a standing ovation when you think about what you just mentioned how do you think that ties back into markets the the unrest the discontent that you're talking about how do you think that as investors is that play out in fiscal deficits and well yeah I mean I I I I think I think the UN United States is going to have to restructure its unfunded liabilities and that there's the conventional way that we'll try to do it like okay we we'll means test Social Security okay we'll raise the retirement age in some sort of some sort of staged way which I favor so if you're over the age of X and let I'll just make up a number I'm not proposing anything if you're over the age of of 50 your Social Security is as is but if you're 49 your your eligibility age goes up by six months or some scheme like that that goes down and that'll be an attempt to to get it under control but it's it's the problem's too big and so I'm I'm thinking so what would be a radical solution what would be something that gets completely out of the box and I think we have a template for that at least a potential template and that was the modification of Residential Mortgages in 2007 2008 because that was not allowed there were Securities that were backed by these mortgages and the prospectuses of those Securities said these cannot be modified but they did it anyway and you just you're just you're just out of luck just like the the GM senior secured Bond holders were subordinated to the pension fund Ian this is this is this is wrong so maybe we'll restructure the treasury what and I'm not proposing this and I'm not nor am I predicting this but it's one way of thinking about the the the options maybe they can say you know what first of all we're not paying back any foreigners that's number one number two so we're cancelling that we don't owe you anything anymore and the next thing is if you have a coupon that's 2% or higher it's now 2% and if your coupon is below 2% it's it's the original coupon and of course that would be a total disaster they would try to sell it as a one-off they'd say we I we know this is really bad we we'll promise we'll never do it again which you got to watch out for that one um and and and uh but what will happen if they do that is it will solve the problem for the future because we won't be able to borrow for a generation or two and so we'll actually have to have a balanced budget right I mean it's just amazing the extent to which people don't understand that you cannot borrow your way to Pro posterity you've been sold that that shtick you know you're you're coming of age you know you've really become somewhat successful when you got approved by a Visa card you know and and you that was like I remember I remember feeling that way I actually got my first credit card I got was a a a card from Sears I applied for it and they gave it to me I thought wow I'm like coming I'm I'm coming my is this in the Hollywood the Hollywood apartment yeah it was it was actually about it was actually the two apartments later when I had to buy curtains all right I we'll save a little room here for questions I think I actually don't know how much time we have left I have to admit that um what what's that go to questions yeah um one last question and then I will go to questions what's the most important lesson you've learned during your career um begin every day and every strategy knowing that you're not going to be right all the time knowing that you know you're going to go out of business if you're wrong more than you're right so you you have to have a belief that you're going to be right more than you're wrong and I've can slice and dice 40 plus years of my record and I'm right about 70% of the time that sounds like a lot but when You' at if when you're at something more than 40 years 30% you're you're wrong for over a dozen years so there's plenty of years that I'm wrong right because I've been at it a l time but what but if you respect the fact that you're not going to get anything right it changes your mindset to say I let if this goes wrong how can I structure so that it's not fatal how can I avoid fatal mistakes that's the whole thing so it's funny when I get interviewed by by uh journalists and stuff they always say well you said the rates were going to fall and they fell by 200 basis points so you were right but how come you didn't own anything but the 30-year treasury bond that's how you go out of business right when because that's that's that that is so telling that that journalist has never managed any money do anything about the business because he can't do that because you're going to be wrong and you have to be able to to to survive it and that that's where you know a lot of these these these people they just blow up because they're willing they're willing to to go all in I remember when the one of the guys that blew up the bond market in 1994 was this guy running a hedge fund his name was David Askin and he made the uh unethical mistake prob it was intentional so it wasn't a mistake of misrepresenting his strategy his strategy was go massively long and he advertised it as as duration neutral and then rates Rose and he lasted about 6 weeks into the rate rise and completely blew up and I ended up doing a consultancy call with his clients so they wanted some advice on what to do with this disaster and I prepping for that call I talked to the guy oneon-one and he said look I made a bet if the FED would have held off one year and raising interest rates I would have made hundreds of millions of dollars so he was intentionally betting the Ranch and I I suspected when you bet the ranch I suspect you've run into the 30% problem more than the 70% problem yeah I I suppose you could you know I I I suppose you could and that could be that could be non-conventional option as well I've often wondered what happened what would happen if the Fed bought all the bonds and then canceled them what would happen maybe we'll see in Japan yeah maybe we'll see in Japan I mean I guess you just I guess you just restart but the problem with cancelling you know with modifying the um the the coupons and that sort of stuff is there's a lot of people that think that that's money that's coming and what what about the pension systems you know they would you you would collapse the pension systems so yeah there's all kinds of strange uh possibilities but there we we can't keep doing what we're doing that's and when I started this business it was known to be a future danger but it was perceived to be 80 years away and then 10 years passed and the debt was increased so suddenly it was 60 years away and then 10 years passed and S it was 40 years away well now it's per the trustees of the social security system 10 years away and they're being optimistic and by the way Medicaid and Medicare they're going to be out of money by 2030 using the CBO estimates so it's it's getting to be crunch time and it's going to be very very interesting I mean people say I I've I've named myself uncus who was James femore Cooper's Last of the Mohicans was the last Mohican when I started this business there were a lot of bond guys and they're all gone I'm I'm the only one left that was from that era that's that's of any significance and I people ask me like well I've done this a long time why don't should I just hang it up and I'm like I want to see how this movie ends and and I want to get myself through it and I want to help get my clients through it and that's that's that's I I was I mean I handled the credit priceis better than any other uh fixed income investor in America by a lot and this was it's going to be just as hard this one's really tough because we have we're going to have riots uh we've already have a highly corrupted investigatory and judicial system we've got RFK Jr who's more popular than people think um and he's pulling around 9% it could easily flip the swing States but I think that the it's difficult for the incumbent president to not own social unrest I Trump got tanked by social unrest um and Biden has to own the social unrest and I I think that I think this looks a lot like 1968 when uh Johnson dropped out in March 1968 because he lost in New Hampshire to Eugene McCarthy and it was just shocking I mean I I don't think he lost to MTH it was so it was so close people were shocked because the the war was a problem well the wars are a problem and we have the social unrest so I think Trump is going to win i i i i Lots can happen with this kind of volatile environment but I think Trump is going to win I don't think I don't think you find any buyers for it I I think the probability is very very low they they should have done nothing but 100-year Bonds in 2021 but they were to they're too short-sighted which is typical in politics particularly Democratic politics elections every two years for the congressman you know it's sort of like well if we issued this 100-year Bond might be at 3% we borrow zero so we borrowed at zero and we we lost that opportunity now if they issued all of that volume in in in 100e bonds it might it might have been 8% I mean who knows what the appetite is for it but right now I I don't I don't see it I I like my my bias is to avoid the 30-year Bond let alone let alone buy a 100-year bond I think last I checked those Austrian 100-year bonds are down a bit 80% yeah I think they got to like 240 or something some ridiculously high price but I think they're at something like 70 now something yeah they're only 90e bonds now yeah as rise back I I had lunch with Henry Kissinger years ago years ago and he he likes to drop names and so he told me the story about he led the leader of China met the leader of China and he asked him what about Taiwan and he told Kissinger we are very patient we don't have your political system we can wait 100 years to get Taiwan back and said kisser said he met with him 30 years later or his successor when was the same guy and he said I do you still have 100 Years of patience to take over Taiwan he said the guy said no no that was 30 years ago we have 70 years that was probably 30 years ago too right that was probably 25 years so yeah they're down to 45 years their economy is so much stronger that they they'll probably accelerate the time lot well fixed income I would have at about 35% and I 15% in real assets um gold was was a good choice several months ago but I think now it's just land is a is a good real asset to own um I actually never thought that I would own a second house but I ended up buying a 1200 acre Timber rat in in southeast and so I think that's phenomenal investment I've got water I've got protein Supply I I mean I've got I can flip a switch and be off the grid be 100% solar I just think that that's going to be worth a fortune so I like stuff like that we do have models um one of them works really really well although it's not terribly out of consensus typically but we basically make some estimates on on a shelter and we use the uh Energy prices and you get fairly accurate short-term readings from that when I say shortterm it might be three months 6 months at the be at the end of last year that model strongly suggested that we were going to have inflation below three in the middle of this year but not anymore is because Energy prices have gone up and so now I think that's one of the main reasons why we have this uh change in Attitude it's hard to believe that in December the market was pricing in seven 25 days of Point Cuts I think you'll be lucky to get two in fact I I think it's going to be one um based on where things are going and if if if oil goes to $100 which it hasn't moved much lately it's been centered around 80 you have no chance of getting a 2% inflation I I think J Powell is he's he's done a couple of things wrong the first was introducing supercore which did a Jackson Hole in I think 2022 because that was looking favorable at the time well super core pce is not is uh not so bad but supercore CPI is at 4.8% year-over-year 4.8 and sound like to and the other problem is if you take those recent inflation prints and annualize them this is the other mistake Jay made he justified the November 1 rhetorical pivot by annualizing three months numbers and six-month numbers that became that became very fashionable in financial media at that time well the reason to do that was that no as of November 1st annualizing those numbers it was 2% you had 2% inflation three months annualized but that's not working anymore and so that's one of the reasons that these these these cuts are going away so but we look at all of these things we look at we we've we've we've come to look at inflation for the last two years rather one year the last three years we we look at pce we look at we siize all of them annualize at the whole thing sometimes they tell a consistent picture but now the numbers seem to be skewing higher than expected and that's further going to be propelled by if this commodity price turn has any legs to it so uh I I'm very skeptical J Paul at this last press conference I mean I I I sort of like J Paul I I think he tries to be honest but he does do a little uh peric and he was he was he he said inflation was at 2.7% of all the numbers you could pick that's the lowest one that's the that's the pce the lowest number 2.7 super cor CPI is at 4.8 there's plenty of threes and fours out there depending on how you want to what series you want to look at how you want to slice and dice them I I have much less confidence than Jay Powell seems to exude that we're going to see that 2% inflation number during JP's term in fact we might not even see a single year-over-year with the two handle on this on the CPI I think that I I think the already there I I think I think Jay wants to continue to represent his approach his ideas not change them in at at in the bottom of the ninth inning because he's not he's he's going to be gone I I don't think he wants to come back he's been there for a while but he certainly if Trump wins he's not going to be there so I but I I I think I think one of the ways that you deal with this debt problem is you to run inflation I like I said earlier on I'll I'll end it at this monetization will be part at least a component of the solution to handling this deep problem and it's not just a US phenomenon it's it's it's it's happening in other places too so you have start having a global uh inflationary policy and this is why bond yields are probably secularly in a rising mode which could probably last like that fellow said in 2016 very long career I I don't I can't have a very long further career it could be reasonably long but not long I I I think that rids will rise in a in a trend sense for the rest of my career

Channel: DoubleLine Capital

Views: 41,647

Keywords: DoubleLine, Portfolio Manager Sam Garza, hosts this DoubleLine macro talk with CEO-CIO Jeffrey Gundlach, Global Macro, Rethinking Recession and Saving Social Security

Id: kMj0KZaEZsA

Length: 54min 47sec (3287 seconds)

Published: Thu May 23 2024