杰弗里·冈拉克：几乎所有金融资产都被高估，私人信贷或成下一场危机

Have a 70% hit rate.

I've got a long enough career in enough strategies where it's statistically significant and I have a 70% hit rate, which means I'm right 70% of the time, which means I'm wrong 30% of the time.

So I've been at this for over 40 years, so I've been wrong for more than 12 years, right?

But thank God they haven't been in a row.

Really. Three years is when everyone pulls for plug.

If you're if you're wrong, if you underperform, you're one. You're two. When you're three, you're gone.

You know if you're if you're wrong five years in a row. They shut your Janus unconstrained bond fund because you can't have sequential years of outperformance.

It's a very specific example, Jeff

Wonder where that came from.

Hello and welcome to another episode of the Odd Lots podcast.

I'm Tracy Alloway

and I'm Joe Weisenthal.

Joe, we are still in celebratory mode.

It's ten year anniversary month. Really? Yeah.

And even next month, kind of ten year anniversary month.

So we can just extend this for a long time.

We could just make this. Well, we should have made 2025 the Odd lot's ten year anniversary. Year, year. Yeah.

But we're almost at the end of the year.

That's right.

We failed in that respect.

But obviously we're sort of reflecting on the past decade or so. on Odd Lots and things that have or haven't changed in markets.

And one thing I've been thinking about a lot is what's been going on in the bond market.

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

Right.

So you say that and it is true.

Okay.

You know, if you look at if you look at the benchmark ten year yield okay.

Sure.

We're at 4% now above 4%.

And in 2015 we were at like 2%.

Yeah that's changed.

And we went through inflation, which is something we hadn't experienced for a long time in, you know, previous years.

But I also feel like it's changed but a lot of it hasn't.

A lot of the discussions haven't changed.

If I think about what we were discussing, back in 2015, it was stuff like, who's going to buy US treasuries or who's going to fund the US deficit bond vigilantes?

I mean, how many years have we been talking about bond vigilantes now?

The credit market, it was whether or not investors are being adequately compensated for the risk they're taking on.

And the funny thing is, now, you know, if you look at spreads on junk rated bonds, if you didn't think they were being adequately compensated at like 7.2% in 2015, I wonder what you think when you look at spreads of 6.4% in 2025.

This is a really good point actually, because especially lately, obviously we've had all of these, you know, we've had a number of credit events, these little blow ups, Jamie Diamond use the term cockroaches, etc.

but by and large spreads which were sort of infamously narrow last decade remain quite narrow by historical terms.

I feel like we should just mention here we are recording on November 10th.

Oh yeah, things are changing fast in the credit market.

There's a little bit of nervousness creeping in, but you're you're absolutely right.

By and large, spreads are, you know, pretty, very pretty low levels.

And people have been complaining about it for a long time now.

Well, speaking of credit, you also have the rise of private credit, which is something we were talking about even back in 2015.

But back then you were. Well, no, we both were.

But we called it something different. We called it, you know, Shadow Banks.

Sure, sure.

And yeah, that, but that is a space that's much bigger, much more interest, much more scrutiny.

I mean, just the whole, you know, orders of magnitude bigger since 2015.

I don't think people have any real handle on, like, what risk scenarios look like, the quality of the underwriting, etc..

So this is, definitely something.

And it's, you know, we've been talking about it for years, but it continues to grow.

And with some of these, quote, cockroaches, etc., more interest in what's really going on. Right?

So things have changed, but things have also kind of stayed the same in some respects.

But I'm very happy to say we do, in fact have the perfect guest to talk about all of this.

Someone who has, you know, been writing and conversing and going on TV and talking about a lot of these themes and making a great career.

Fantastic.

And all of these actually investing based off some of these ideas.

We're going to be speaking with Jeff Gundlach.

He is, of course, the founder and CEO of DoubleLine Capital, someone we've wanted to get on the show for a long time.

So Jeff, thank you so much for coming on. All thoughts.

Well, thanks for having me.

I'm looking forward to our discussion today.

So let's start big picture because I actually we can take this and you know a bunch of different directions.

But when you look at the Treasury market and when you look at the credit market, which are you more concerned about at the moment?

Because I know you've voiced some worries about both of these things.

Yeah.

I'm, concerned about the financing of long term treasuries, primarily because we are issuing a lot of them.

And, there's inflationary policies that are being run and probably likely to be further doubled down upon when Jerome Powell leaves as fed chairman.

I mean, we've got Scott best interest of Treasury secretary.

Well he's basically, mimicking what the president says.

He basically says rates should be a point lower or two points lower.

I've heard different numbers out of President Trump.

He wants rates at 2%, 3%, but inflation is running above 3% on the headline CPI.

And it's not likely to come down to the Fed's 2% target.

And so there's a lot of interest in artificially lowering lowering interest rates and perhaps taking the maturities of treasuries. Ever increasingly to under one year in maturity.

A lot of investors aren't aware of the fact that something like, 80% of all treasuries issued in the last 12 months, and this has been the case for the last few years, are less than one year.

The treasuries that are issued longer than 20 years. So 20 years, up to 30 years is only 1.7% of the Treasury issuance in the last 12 months.

And what's interesting about that is the fed has been cutting interest rates over the last 13, 13 months.

And historically when the fed cuts interest rates, of course, short term interest rates decline definitionally at the fed funds level, but also two year Treasury rates decline, five year Treasury rates decline.

In effect, long term Treasury rates have always declined, subsequent to the first cut by the Federal Reserve, and particularly when you're in a sequence of Federal Reserve cuts.

And that's certainly been the case with now a 150 basis points.

But this time, all interest rates are outside of the two year are higher than they were before the Fed's first rate cut.

That's just never happens historically.

Another interesting thing that has never happened historically is earlier this year, during the tariff tantrum of late March and early April, stock market had a pretty significant correction

and it was going back, back to around 2000. It was the 13th correction in the S&P 500, defined by a drop of 10%, at least 10%

in the in the 12 corrections before the one here in 2025, the dollar went up when the, stock market went down as a flight to quality asset that didn't happen this time.

When we went into that correction earlier this year, the dollar went down, usually goes up by around 8%.

And in the first quarter, early second quarter of this year, it went down by around 10%.

So what is happening here seems to be that the pattern of interest rate movements and currency movements, and what's a flight to quality asset and what isn't seems to have changed because interest rates have bottomed at the long end of the yield curve.

And I've been saying this for five years now, that the secular decline in interest rates at long, at the long term, well, maturities is over.

In fact, in the next session, long term interest rates are likely to go higher, not lower.

And what's happened since the fed started cutting corroborates this somewhat radical idea of mine

when it comes to credit, spreads are tight.

Although you correctly noted that they're not on the types of the year anymore, they're starting to widen.

I think junk bond spreads are up by about 30 or 40 basis points.

And yes, spreads have remained tight for a long time.

But one thing that you also of referenced a little bit is the quality of the public, corporate credit market is better than it's been historically.

It's way better than it was prior to the global financial crisis, where you had all kinds of garbage lending going on.

But in recent years, the garbage lending has not gone to the public markets.

The garbage lending has gone to these private markets and private credit has been very popular and is now increasingly been over allocated to buy large asset pools.

I remember Harvard University, for example. They've got like a 50 odd billion dollar endowment,

and their donors pulled back when they had uprisings on campus, and the donors didn't like what was going on.

So they stopped donating for a while.

And Harvard had no money, a $50 billion endowment, and they couldn't pay salaries.

They couldn't pay the late bills, they couldn't pay basic maintenance.

They had to go to the bond market to borrow.

They tried to borrow about $4 billion, I think.

I think they got away with about $2.5 billion.

But it's fascinating that you have a huge asset pool that doesn't have liquidity to pay the bills.

And I've also heard that another large endowment, I think it's Yale University.

I might be wrong there, but I think it's Yale.

They're talking about selling some of their private equity stakes because they don't have any liquidity either.

And this has bled over into the private credit market.

And I was at a Bloomberg broadcast, an event in Hollywood, Paramount Studios, I think it was.

And I got there early and there was a panel before my fireside chat where the members of the panel were all significant executives at some of the largest private credit firms,

and it was really interesting to hear them talk, because the tone of the message they were giving was far from bullish.

You know, it's kind of like when when you talk to a junk bond manager, say, what's the outlook for 2026?

And the most bearish thing they're going to say is we don't think spreads can get any tighter.

We think they're actually saying they're going to say you're going to earn the coupon.

Well, these private credit people were using words like tension and lack of runway.

These are all euphemisms for bad things happening.

And I think that, you know, we start to see defaults.

And there's something on the Bloomberg News wire today. It's a, on top go that speaks of a home, renovation business that was private credit, like $150 million, issuance of private credit.

And it went to zero.

But anyway, it's called renewable. Yeah. Like this.

And the funny thing is, the argument for private credit has always been a Sharpe ratio argument. At the center of it.

It's that, you know, you get the same return or maybe a little better return than the public markets, but you have much lower volatility.

Well, that's that's like saying that you have no risk in a CD.

You don't have any interest rate risk going to CD, which you buy a five year CD. The price never changes.

Well, that's just because you don't market to market.

You know, of course, a CD that you bought five years ago at, 1.5% is not worth. You couldn't sell it at, at a par value.

You're going to take a discount on it.

That's a private credit argument.

What really happens and this is really borrowed from private equity, which they use the Sharpe ratio argument there too.

They say, well, you'll get the same return or maybe a little better return out of private equity than you will out of the S&P 500. But it's much lower volatility.

So what happens is when the S&P 500 goes from 150, the private equity firms mark their positions down from 180. Now they're not worth 80.

You couldn't sell them in 80.

But that's where they get marked.

And when the market recovers back to 100 on the S&P 500, they mark their private equity up to 100.

So lo and behold, both the S&P 500 and the private equity have a return of zero.

But the the volatility of the S&P 500 is more than double that of the private equity.

So it's basically a Sharpe ratio argument based upon the volatility being underreported.

And that's that goes on. And all of these. So these so-called private markets.

And now it's very fascinating that this Renovo in the article today it basically said that they had a chapter seven filing and bankruptcy filing and their asset, the their liabilities were listed as being between 100 and $500 million.

You just, you know, you check a box, you'll forget a specific number.

So there's ranges and the whole range that their liabilities were in was between 100 and $500 million.

Their assets were listed as less than $50,000 and less than $50,000.

What are you trying to tell me?

That there's these big private equity firms and private private firms with all of their resources, aren't aware of that type of debt to equity ratio.

That's obviously far into a bankrupt situation.

So what's going on here

that private equity firms had this marked a few weeks ago at 100, when it was obvious that their liabilities were vastly, vastly higher than their equity.

That should have been marked down to, I don't know, 5025 one, but been 100.

What's going on?

It's like there's only one price for private.

There's only two prices cuz yeah, 100 zero.

That's it.

And I heard a announcement made from these private equity people at that Bloomberg event.

But they're sort of like as long as we believe that we're going to get paid back, we leave it at 100.

Well, okay.

But once once you have 150 million plus dollars of liabilities and less than $50,000 of assets, it's pretty unlikely they're going to get paid back.

The price should not be at 100, but that's what's going on.

And so you have that Sharpe ratio argument.

Then you have another argument for private credit, which is had been somewhat valid, was just recent history.

I mean, performance, the five year performance of private credit, a couple of years ago was definitely better than the five year performance, at least reported performance of of of public credit.

Private credit did better than public credit.

So you had a, a trailing performance argument, which, of course, trailing performance is no guarantee of future results, which is stated on every single prospectus.

But, recently private credit is not outperforming, obviously with bonds going from 100 and zero in a matter of weeks.

Public market has been performing better than the private market.

And the most ridiculous argument of all for private credit has been private credit belongs in every portfolio because it lets you sleep at night, because it helps you ride out the volatility of your public credit.

Again, that's just a repackaging of the volatility.

If you don't market to market, there's no volatility.

But if the price goes from 100 to 0 in a matter of a few weeks, there's, there's something something untoward is going on.

And so I'm very, very negative on those types of, you know, nontransparent markets.

It reminds me, I've been saying this for probably two years now, that the next big crisis in the financial markets, it's going to be private credit.

It's has the same trappings as subprime mortgage repackaging had back in 20 2006.

Now, it took a couple of years for it to totally unravel.

So this stuff doesn't happen in a week or a year even.

But I'm very negative on that.

And so where we stand on fixed income is we don't like long term treasury bonds at all because we don't we don't think people are going to want them during the next recession.

The deficit is going to go up because it always goes up during a recession.

The deficit, the official deficit is about 6% of GDP.

That's a level that was associated historically with the depths of recessions.

Yeah, because of course it goes up during recessions.

Well, when you go to a recession the deficit goes up on average buy.

Well it depends what long how long a time series you use.

But if you go back for about 50 years, it goes up by about 4 or 5% of GDP.

In more recent recessions, it's been a lot worse than that.

We could argue you could make the case somewhat plausibly, that the global financial crisis was kind of weird and that the Covid lockdown recession was kind of weird.

But during those, the deficit went up by about 8% of GDP on average.

So what happens if the deficit goes from 6% of GDP to 10% of GDP, or 12% of GDP, or 14% of GDP?

All of those are possible.

What happens is that you have to blow up the entire system, because all the tax receipts would go to interest expense.

We're already at a large percentage, or about 1.4, $1.5 trillion of the $7 trillion budget is now interest expense.

Of course, we have a $2 trillion budget deficit.

So there's only $5 trillion of taxes.

And, you know, 30% of that is going to interest expense, and that is going to go higher.

And as interest rates are still elevated from levels of 6 or 5 to 7 to 12 years ago, the bonds that are rolling off have an average coupon for the next few years of of a little bit below 3%.

Let's just call it 3%.

That means the fed funds at three and 7/8 and treasuries at four, up to four and a half.

That means that on average, you're going to have higher interest expense on just rolling over the existing debt.

And of course, you're ladling on a couple of trillion dollars in on recessionary period.

And so I do a thing at Grant's, conference, Jim Grant had his 40th anniversary conference and a couple of years ago

and I did a my sit, the simplest, most succinct presentation I've ever given in my career.

I just went through the interest expense problem using plausible assumptions on where the deficit's going.

And but the conclusion is, and this is an art and not a science.

So there's a lot of assumptions that can be challenged.

But putting it in, you know, rather pessimistic light. So I don't say this is the base case, but by the year 2030, so five years from now, it's quite plausible that under the current tax system and the current borrowing regime, that we have 60% of all tax receipts going to interest expense,

you can make it really, really draconian and say, what if interest rates go up to 9% on treasuries?

And what if the budget deficit goes to 12% of GDP and you make these kinds of, you know, pessimistic assumptions?

Well, by around 2030, you would have 120% of tax receipts going to interest expense, which of course is impossible.

So that means that something has to happen.

And we're not talking about, you know, early in my career, people were saying we can't keep borrowing this money that was under Reaganomics, which people thought was a bad idea because it was deficit spending.

And they said, you know, where we're going, we're going to be broke.

We'll be out of money in Social Security and other entitlement programs by 2050.

And then ten years later, you know, they moved it forward to 2040.

So it was initially supposed to be like a 60 year problem.

And then ten years later it was a 40 year problem, and then it was a 20 year problem.

And now it's like a five year problem, which means it's a problem in real time.

And something has to be done about this.

So long term treasuries look vulnerable to me.

I still like short term treasuries because I think the fed is likely to cut interest rates, and that definitionally leads to lower interest rates on, say, five years and in maturities.

Jeff, first of all, I hesitate to ask a question here because, you know, we could just let you go on.

And here you tear particularly private credit to shreds. That was great.

And thank you also for the plug for both Bloomberg Journalism and the Bloomberg Hollywood event.

That's called Screen Time. That's our conference there.

And then secondly, Joe, I was going to make a Drake joke about private credit.

I was going to say going from 100 to 0 real quick in private credit could be a really terrible Drake song, like most of them are.

But that was five minutes ago, so I don't think my joke is relevant anymore.

Jeff, I'm, you know, in the 20 tens, when we started this podcast ten years ago, an investor could have a really nice, you know, 60, 40 ish portfolio.

And there were all sorts of beautiful things that they have, particularly that sort of inverse correlation that, that exhibited between treasuries and stocks.

So that, as you mentioned, typically in a downturn, you get a stock market swoon.

Well, at least the slug of fixed income that you owned, maybe it outperforms then get a little smoothing, but maybe you get some positive real rates.

It all works out really well, I understand.

Okay, maybe there's still some opportunities in the short end because rates are going to go lower, etc.

maybe private, maybe public credit has better standards than private credit. We'll get into that.

But like, do we have to go back and revisit just the case or the for even having fixed income in a diversified portfolio?

Well, I don't recommend

I know that look you had your a fixed income portfolio manager.

So I understand this is an existential question for you.

So I know there's but you know, like you know, how how would you sell the case for even having it?

It would be an existential question for somebody that's been 5 to 8 years in the business, and it's just getting going.

Yeah.

All right.

Because, you know, I've been I've been at this for well over 40 years.

And I really don't, don't need to make money by managing other people's money at all.

So I, I'm very honest what people like about me is they say I get I get stopped on the street and people say, I see you on, on TV.

I really look, I'm really a fan of yours because you're a straight shooter.

You know, I don't.

Yeah, I don't talk any kind of look whatsoever, but I, I think that right now I think financial assets broadly should be lower allocated, have a lower allocation than typical.

You talk about 6040.

That means you 100% of financial assets

I think in equities today you investors should have maximum 40%.

Okay.

And and most of that in non-U.S. equities, particularly if you're a dollar based investor like any a American would normally typically be,

I think you want the is going to fall.

And so you're not going to be making money on the currency. Translation you're going to be losing money.

And that's certainly been the case so far this year.

Again, things are acting differently, now that we're in a rising rate regime and not a falling rate regime,

you're doing much better as a dollar based investor in local currency, emerging market stocks.

I mean, they're up something like 25% year to date.

For a dollar based investor, you're even better off in European stocks because the dollar's down versus versus the euro.

So I think the amount of people should have in fixed income should probably be about 25%, not 40%, maybe 25%.

And I think that it should be some of it in non dollar fixed income.

Again, emerging market fixed income, which is by far the highest performing sector for dollar based investors in the fixed income market this year.

And so that leads to 40% that you're not if you're at 40% in stocks and in 20% or 25% in bonds, you've got another 35, 40% to allocate.

And I've been very, very bullish on gold.

We do a, podcast that gets up on our website in early January every year. It's called, Roundtable crime and Roundtable Crime.

And we have a bunch of thought leaders there.

It's the same group every year.

And we go through one of the segments is, you know what? What are your best ideas?

And my number one best idea for this year was gold.

Because I think gold is now a real asset class.

I think people are allocating to gold, not just the survivalists, you know, and the crazy speculators, people who are actually allocating real money because it's real value

and of course, goals. But being the top performing asset, for the year, certainly for the last 12 months.

And so I think investors I was at one point advocating 25% of a portfolio in gold, like things, real assets, high quality land, gold, you know, high value assets.

I think that's too high right now because I think that that trade has played out so very well.

And gold seems to have stalled out in the last month or so at a very high level.

So is consolidating and scaling.

So I think it goes higher.

But for the time being I'd probably be more like it's at 15% or something like that.

In the rest, I think I would be in cash because I think valuations are just incredibly high.

And the, the health of of the equity market in the United States is it's among the least healthy in my entire career in terms of the PE ratio, the cap ratio, all the classic valuation metrics are off the charts.

And of course, the market is incredibly speculative.

And speculative markets always go to insanely high levels.

It happens every time.

This is not you know, obviously it happened in the dot coms.

It happened the financials part of the GFC.

It's happening now in the AI and data centers and all that stuff.

And you know, it's interesting the probably the biggest thing that changed the economy and the world, in the last, I don't know, 150 years was the electricity.

Electricity being put into people's homes was probably one of the biggest changes of all time.

And of course, around 1900 people realized the electricity to homes was coming.

And so electricity stocks were in a huge mania, and they did it incredibly well.

But the the relative performance of electricity, relative to the entire stock market, us excluding electricity. So everything else but electricity, the electricity outperformance peaked in 1911.

How is this word even broadly electrified by that?

You had to be a very rich person to have electricity. In 1911.

But yet that was that was the outperformance.

And so it all gets priced in very quickly and excessively, because people love to look at the benefits of these transformative technologies.

And they are transformative.

I mean, look at what happened to some of the internet stocks.

They dropped 80, 80, 90% in the early OS, but there were many, many multiples of what their peak was at that time.

But it gets priced in very, very early.

So I think that one has to be very careful about momentum investing during, mania periods.

And I feel like that's where we are right now.

I just don't think there's any argument against the fact that we're in a mania.

I want to go back to something you said just then about how investors should be reducing their dollar exposure.

So this is, you know, the Sell America thesis that was very popular, at the beginning of the year and per your comments, is still very popular with some people.

But we have seen in general, you know, a little bit of a strengthening in the dollar, ten year Treasury yields, have been going down compared to where they were earlier.

What accounts for, I guess, the stickiness of U.S assets in the global financial system and in investors portfolios, even when I think we can all agree that there are challenges ahead for U.S government debt and assets in the form of high deficits and spending and maybe political stasis and things like that.

People are reluctant to make changes to long standing paradigms.

One of the hardest things to do in the investment business is to significantly change your allocations after you've been right.

That's counter-intuitive to a lot of people, but trust me, some of it's done this for a very long time.

That's the hardest thing to do, because when you when you do something and it works really well, it it makes you it gives you satisfaction on every level, economic level and emotional level, psychological level.

It helps you to have happy meetings with your clients.

Just imagine if you bought Apple at, I don't know, $5 a share and it went up to, I don't know, 700.

And so you get to go to your review with your client and you said, hey, let's take a look at your portfolio.

Look at this cost five less price 700 I am working for you.

You know, I've done a good job for you.

Well, when you sell Apple at 700, you no longer have that line item.

And so you can't point to this great thing that you did for that client.

And so people like to project the past successes of the past.

They like to hang on to them and project them into the future.

And that's a dangerous thing to do.

But when you check, I was I was 100% dollar.

I would own no foreign currencies for decades.

And then starting about 18 months ago, I had to pull the trigger.

I had to say, you know what?

I, I don't think this paradigm is intact any longer.

And I think you're going to lose money by betting on the dollar as a dominant asset.

And it's a scary thing to do because you wake up in the morning and you look in the mirror and say, I'm looking at a at a strong dollar guy.

And then all of a sudden the next day you say, I'm looking at a guy that's no longer confident in a strong dollar or pointing at the mirror going, who am I?

Yeah.

Like, you know, I wonder why I should have to pay taxes.

Quite frankly, when I look in the mirror, I don't identify as a billionaire.

I identify as a homeless 80 year old guy.

Why should I have to pay taxes when I identify as a as a destitute elderly man?

I don't understand.

So, yeah, I think other people, other people might, identify you differently.

I want to go back to, the rates.

Question, as you mentioned, it's sort of historically unusual that we've seen this period of the fed cutting rates for the last 13 months and very little, downward action and the long end of the curve.

We know everyone can sort of look at the same math that you look at in terms of interest expense.

We know that the long end of curve is very sensitive for housing.

And that's something that's very important to the U.S. economy.

We know that President Trump would like to see the long end of the curve go down, perhaps because, he has deep familiarity with it from his real estate days.

Do you think at some point in the sort of medium term future, we're going to see the return of proper yield curve control

and that we're going to see the fed cut rates and not, get the response desired at the long end. And then more drastic action is going to come such that actual steps are taken to suppress that long.

And that's my base case.

And I've been talking about this now for nearly two years that we cannot afford the market to, set interest rates if the deficit spending continues, it won't be tenable.

So what has to happen?

It's going to be some sort of drastic measures.

And I'm not exactly sure what those drastic measures are going to be.

There's a number of candidates for them.

We could do what we did from after World War two until the mid 50s, when inflation was rising and we had significantly negative real yields,

and we had inflation go up to around 8% and the yield curve was kept.

The long bonds were kept at 2.5%.

So you can you can absolutely manipulate the yield curve.

Japan did that for decades.

For decades they kept rates at zero even though there was no demand.

I actually had a meeting with, the guy that ran the biggest pension plan in the world as one of the Japanese public pension plans, and I was really anxious to sit down with them.

And I said, I really want to ask you this question, do you actually own these negative yielding jobs?

And he actually laughed out loud when asked, what's he said, of course, now nobody owns them except the Bank of Japan and the and the institutions that are forced to buy them by the Bank of Japan.

So it's a it's a real thing.

We did the United States for a decade.

They did in Japan for decades.

And, Secretary Bezzant has alluded to the fact that maybe that's on the table, some sort of interest rate manipulation.

So what this leads to is a really interesting dilemma, because what I think is my, my roadmap for the future.

And of course, there's many variations one could use.

But the starting point for me is that interest rates will rise until such time is there uncomfortably high for the Treasury Department.

What is that?

Where is that 5%?

6%?

My guess is six is that it's the highest that it would be full on on uncomfortable, full on at 6% on the long end.

So what happens is you'd want to avoid long bonds while the market forces are in play.

And, Joel, you said that long rates are down very much since the fed started cutting.

No, no, they're up a lot.

Wall rates are up a lot.

The fed started cutting.

This is the first time it's ever happened.

They're up by almost 100 basis points. With the fed cutting.

That's just never happened before.

But with interest rates rising as the fed is cutting, at the long end, what's going to happen is they'll get to a point where all of a sudden it's too uncomfortable, and then something dramatic will happen

that something dramatic could simply be the government.

The Treasury Department buys the treasuries.

And if they announce that they're going to buy treasuries and control long term interest rates, you would have a 30 point rally in the long bond in a week.

So there's a very, very, sensitive, strategy here where you have to be very negative over the normal course of things.

And then once the intervention comes in, there's going to be a step for a significant step function lower in yields.

And so you have to try to figure out how you're going to do that. Pivot.

That's what I spend most of my time thinking about when it comes to the Treasury market these days of a low.

For now, it's way too early for them to panic and start manipulating the rates.

What?

They might manipulate our mortgage rates.

They could.

They could absolutely.

By, Judy Mae's, Fannie Mae's, Freddie Mac's. The government guaranteed mortgages and drive those yields down much closer to where Treasury yields are.

And there's no rule that says they can't go through Treasury yields.

I mean, there are instances where non Treasury yields are lower than Treasury yields at the same maturity.

Just earlier this year, there was a corporate bond that was lower yielding than the same maturity Treasury bond.

That also happened in the early 80s when IBM bonds traded a lower yields than Treasury bonds. At the same maturity,

because investors had greater confidence in the payback of IBM than they did in what they thought was a bad strategy under Reaganomics.

And that has begun to enter the picture here in 2025, with corporate bonds periodically, not only the very best ones, of course, but like Microsoft or something like that, trading through treasuries.

And so that's it, that something is up here.

The other thing that they might do, and there was a white paper written about this just about a year ago.

Now that said maybe we should restructure the treasuries held by foreigners, which is a very strange thing to say.

This is the Mar-A-Lago accord, right?

Yeah, I don't think.

Yes it is.

I don't know how you define who are the foreigners.

Foreigners can hide behind entities.

Yeah.

And so it looks like they're not owned by foreigners.

So I'm not exactly sure what foreigners mean.

But why put the word foreigners in there?

Why not just say we're going to restructure the Treasury debt full stop.

What does that mean?

Well, one way to to save on interest expense, to get it back down from 1.5 trillion to the 300 billion it was a couple of years ago.

Why don't you just say all the treasuries that exist today? We're changing their coupons.

The ones that have a coupon above one. The coupon is now one.

The ones that have a coupon less than one. The coupon stays the same.

That would save a tremendous amount of interest expense.

Of course, it would cause a disastrous, tumultuous time in the government bond market.

But people say to me, you always talking about this debt problem, what's the solution?

The solution is get to a point where people won't lend the government money anymore, that the government can't borrow any money, so that if you if you restructure treasuries, that way, they'll be a couple of generations. The government won't be able to borrow any money anymore.

And that would actually put us in a better place than where we are today.

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

I think he watches my CNBC segment just press conference.

All right.

Let's go back to private credit for a second, because that's obviously the topic du jour.

And as Joe pointed out, one of the things that has really grown exponentially over the past ten years,

you've said on the podcast just now, and you've said it before, that you think private credit is the candidate for another financial crisis.

And I understand and the marking issue, I understand the liquidity mismatch.

But when I look at private credit, maybe what's missing in terms of some of our more recent financial crises is that leverage built on top of leverage aspect.

Can you give oh, that's that is that is credit.

It's leverage.

This is yeah.

Okay.

Explain that.

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

Well that's true.

You're not getting the re bundling.

But you are having there's a lot of leverage.

They're raising money and then they're borrowing money to buy more private credit.

It's absolutely leverage upon leverage.

And the other thing, while they're not bundling like putting, you know, the thing about the financial crisis is you took triple be rated and it's questionable whether they even deserve a triple B rated thing and creating Triple-A rated securities out of them.

I mean, just just that that alone should make you just just, you know, just stop even thinking about investing it.

There's suddenly a Triple A's turned into a triple. Triple B has turned into triple AA.

But one thing they are doing is issuing publicly traded vehicles, daily nav vehicles to allow Main Street America mom and pop investors to avail themselves of this wonderful, fantastic opportunity of private credit,

which is totally a liquidity mismatch.

You've got daily Nav funds investing in things that don't trade at all.

And so once there's a run on those, on those vehicles and I don't know how popular they've been, but they're certainly been touted.

But if they become popular in any way, you're going to have the catalyst for a tremendous selling deluge because there is no fuel what to want to redeem.

And they won't be able to get their money out.

And once you get that, once people we're the trouble always comes in financial markets is when people buy something that they think is safe, it's sold to them as safe. But it's not.

Say you buy a Triple-A rated subprime mortgage pool.

You think it's safe because it's Triple-A rated, but it's not safe.

It's extremely dangerous.

You buy CDO equity and you buy CDO squared equity back before the global financial crisis.

And there isn't any real equity.

It's I buy your equity, you buy my equity.

It's we're all it's just a game that's being played.

So to make an illusion of liquidity, that's where private credit is right now.

It's an illusion.

They don't even claim it's liquidity.

But if you package it into a publicly traded vehicle that trades on a daily basis, you have the perfect mismatch of no liquidity with a vehicle. The promise is liquidity.

It's looks like it's safe because you could sell it any day, but it's not safe because the price at which you sell it will be gapping lower, gapping lower, island gapping lower day after day after day.

And so that's where that's where the risk is.

But these things go on forever.

One of the things about the investment business is it's hard.

It's difficult enough to be so-called right about the direction of things we're going.

But it's impossible to be both right on the direction and correct on timing things that if even if you're right on the direction, it's going to take a lot longer than you think.

I turn negative on the packaged mortgage, non-guaranteed mortgage market in 2004.

It took three years for it to even start to decay.

So these things take forever and it goes on much longer than you think, you know.

Remember I turned negative on the Nasdaq maximum negative September 30th of 1999.

I looked like a moron three months later because the Nasdaq went up 80% in the fourth quarter of 1999.

But if you had gone short the Nasdaq September 30th of 1999, 18 months later, you had a profit of 64%, even though it went up 80% in the first three months, it dropped.

So much in the ensuing 15 months that the short would have made you a profit of of of a very handsome profit in a very difficult market,

just very quickly, are you betting against private credit now?

I have no way to do that.

Yeah, I, I don't, I don't really short bonds.

Shorting high yielding bonds is a really difficult thing because the cost of carry is just brutal every day that it doesn't it doesn't decline.

You're paying out a very high, you know, rate.

And so you're losing money all the time.

So I don't really do that.

What I do is I just don't allocate to it.

I allocate to things that will do better, you know, that will be immune, relatively immune or fully immune from the knock on effects of, of of deterioration in private credit.

So that would that would mean higher, you know, higher, credit things, you know, using foreign currencies more than, more than typically.

But no, I don't think you can really short private credit.

What have you learned in, your career about the, longevity in drawdowns or underperformance?

Because, as you mentioned, you can be right.

Or you can be you can correctly identify a medium or long term trend, but it sometimes takes a while to play out.

Whether it's the case from September 99th to the peak, that's not actually that long, that was closer to six months or, being bearish on some of the housing assets starting in 2005.

That took a little bit longer.

What how do you survive as a portfolio manager and be willing to take time where you're just an accept that you're going to underperform for a while?

Well, you have to have, think very carefully about your time horizon.

When I started in this industry, when the first things I was tasked to do was to do a study on what would happen if you had perfect foresight, in financial markets, perfect foresight.

Of course, you can do a study like that by using historical data.

So you take stocks, bonds, real estate, commodities, every every asset class.

And you just look at the historical returns and you can say, let's, let's say at the beginning of every year I invest with a five year horizon, and I pick the asset class that I know with metaphysical certitude is going to have the highest return for those five years.

Because I'm looking at historical data, I came to the conclusion that if you had a five year horizon, you would go out of business, even if you, with metaphysical certitude, would have the highest performing asset class.

And that's because so often the first two years of the five years that best performing asset class was not a good performer at all.

It was very frequently back end loaded.

So I said, we cannot invest other people's money with a five year horizon.

I think that most people that invest other people's money use to short of a horizon.

However, a lot of a lot of investment managers talk about they have their constantly reallocating, they're constantly read. You know, they have a little one week horizon at a weekly meeting in The Changer.

That's not going to work.

It's not going to work because the chance of you being right in a week is very low.

You're even if you're going to be right for over a two year period, your chance of being right in a week is very low.

So I kept modulating time horizon, and I came to the conclusion that the sweet spot was between 18 months and two years.

For a time horizon and what I've learned is that having done that, I have a 70% hit rate.

I've got a long enough career in enough, strategies where it's statistically significant and I have a 70% hit rate, which means I'm right 70% of the time, which means I'm wrong 30% of the time.

So I've been at this for over 40 years.

So I've been wrong for more than 12 years.

Right.

But thank God they haven't been in a row.

Really.

Three years is when everyone falls out.

If you underperform, you're one, you're two. When you're three, you're gone.

You know, if you're if you're wrong five years in a row, they shut your Janus unconstrained bond fund because you can't have sequential years of outperformance like that.

It's a very specific example, Geoff.

Wonder where that came from.

Well yeah.

So but the the it really it comes down to about having a not the sweet spot on. Yeah. Not being overly overly active and not being overly you know, fixated on your long term idea.

And I had a match to do that.

I've never I've never really had three years in a row of underperformance.

So, that's, that's been a good thing.

And it's probably I call myself off as an anxious or churchgoer because The Last of the Mohicans, John Fenimore Cooper I'm the last one.

I'm the last man standing when I started in this.

But every single person of significance that's been in the business since I started my career, they're all retired or gone.

I'm the last one standing.

Dana Emery was the only one left, and she was a Dodge and Cox.

But she retired, at the end of June, so I'm I'm.

It's less the Mohicans.

Just gorgeous.

How does that work, Jeff?

Junkies kind of, very quickly, you know, again, we're sort of we're very we're being very introspective and retrospective on the show.

But over the past ten years, what's been the thing that surprised you most, either in terms of the markets or the financial industry itself?

The thing that's surprising and as equally distressing as surprising is the magnitude of money printing that occurred in 2020, 2021, 2022.

I just the fact that the Federal Reserve broke the law and bought corporate bonds surprised me.

It probably shouldn't have surprised me because they broke they broke the law when they, modified mortgages during the global financial crisis.

That was that was not allowed for the prospectuses of trillions of dollars of securities, but they did it anyway.

And so what I've learned is that the rules can be changed.

Yeah.

In spite of the fact that they seem to be set in stone.

And that's why I say and what I say this people really act very in a, in a shocked type of reaction.

They don't believe that they can restructure the Treasury debt, but yes, they can.

They can restructure the Treasury debt and I think that that sort of has to happen in some fashion,

whether it's the coupon adjustment that I talked about, whether it's whether it's doing the yield curve control that Joel brought up earlier, I think something like that has got to happen,

because when something is impossible and paying our interest back in today's buying power dollar is impossible to pay off our debt. It's impossible.

Then you have to open up your mind to a radical change in the rule system.

And of course, that is happening on every level.

I mean, you talk to, you look at surveys of people that are in, say, 35 and younger. They don't believe in the institutions of this country at all.

Yeah.

They don't believe in the Constitution.

They don't believe in religion.

They don't believe they don't believe in anything.

And they people need something to believe in.

And that's what has to replace the system, a system that people can believe in.

And what's been floated now just blows my mind, and that is that we're going to because we have tariffs that are raising a few hundred billion dollars a year.

If they stay in place.

Well, that means that we should give $2,000 to everybody.

It's a tariff dividend.

We don't have any money.

We're borrowing $2 trillion.

We don't have $2,000 to throw away at people.

Again.

We didn't.

We learned that in 2020 to 2022 that giving money to people causes inflation.

Remember, people talk about, modern Monetary theory.

What a joke I've heard of.

You know, you never heard anybody talking about that anymore.

Because by what is not true. So how come no one talks about that anymore? Because inflation went to 9.1% is true.

Can I use one last question?

Are you like it seem like you know, you mentioned Trump floating the idea of a $2,000 tariff dividend to the public.

It's a problem.

But do you like are you was there an opportunity, in your view, for Trump to have changed the status quo,

like are you disappointed that someone with sort of Trump's persona energy sort of perceived outsider status did not do, has not done anything that actually changes some of whether the fiscal or economic, trajectory.

You can't the problem is, look, look, look at this government shutdown.

You know what is going on here.

Why why do we have to pay taxes if the government is shut?

Should shut taxes not be charged for 41 days.

Shouldn't you have, like an 11% tax rebate?

Because what's going on?

Well, it's just because there's this massive entrenched interests that is the kind of unit party government that will fight tooth and nail.

Just look at all the lawfare.

Look at look at all of the indictments, all the stuff.

I mean, they'll do anything they can to hold on to power until such time as the people that vote these people in say no mass, no more of this.

And that began with Trump.

It's been furthered just this month with Mamdani.

Mamdani one, because people do not believe it's a it's a little bit different.

It's Trump was more like the lower middle class.

They felt that nobody was listening to them.

Now it's just young people, just broadly people under, I don't know, 35 years old, people that lost three years of education, with lockdowns and all of these, these policies,

they feel like they have no chance of ever having the life experience that the baby boomers had.

Home prices are more affordable, less affordable than they've ever been.

People have educations that are worth anything.

Jobs aren't available.

Nobody's hiring.

They feel like there's no future for them that looks anything like what they look at. Nancy Pelosi and Chuck Schumer and Mitch McConnell and all these other people had they don't have it.

They don't have it.

And so they are not going to go along with this.

And so that's why Mount Tammy One, it's just like, I don't have a shot here in New York City as a young person.

And that's what's taking over.

And so Trump can't do it himself.

He he caught on to something that was obviously, kind of hibernating within the psyche of part of the population, but it's now become a generational thing.

I wouldn't be surprised.

Talk about another crazy gun lock idea.

I wouldn't be surprised if they are putting in place an age tax, not a wealth tax, which they're doing to a certain extent through electricity bills and stuff like that these days already.

But you can put it together an age tax that if you're over age 55, you have a surtax based upon you had a better environment to accumulate wealth than the subsequent generations have.

And so you you should you should give some of that back.

I think that might actually happen.

That would be a popular platform with certainly a specific demographic.

Are you going to run off to your plans?

Absolutely. Positively, no.

Not yet.

All right.

You know, chat.

All right.

We shall leave it there.

Jeff, thank you so much for coming on. All thoughts.

Really appreciate it.

Well, thanks for having me.

I'm sure kind of all over the map today, but I hope your audience enjoys it.

They will.

Thank you so much Jeff.

Really appreciate it.

Clearly a lot to unpack there.

Jeff.

One of the things actually this was towards the end. So that's why it's in my mind.

But you know, when he was talking about the fed buying corporate bonds in 2020, I really think that was an underappreciated moment in financial markets because I remember, again, we're being very introspective here.

I remember writing pieces about the corporate bond market being problematic in like circa 2015.

Yeah.

And I used to have commenters who were like, okay, so what's the worst case scenario?

And the most extreme scenario that we used to talk about was, well, what if the fed has to come in and buy corporate bonds?

That was the extreme scenario, and that's what happened in 2020.

So I kind of I take his point about how quickly these things can change and you can deviate from norms.

Totally.

Remember we interviewed Bill gross on the beach a couple of years ago, and he called out Jeff for like, being the pretend bond King.

Anyway, I liked, Jeff returning the favor by pointing out the short lived, the short lived Janice Unconstrained Fund. That, bill ran after having left, Pimco.

So I see that the rivalry, the rivalry continues.

Yeah.

We should have them both on and just let them do it.

Just let them do good.

How it seriously, it's like, just do it.

Yeah.

Just both.

Come on. People would love their.

Oh, I'm sure I'm sure that would raise some money for charity or something like that.

That was great.

Okay.

It Jeff, if you are still listening and Bill, if you are listening, we should put pretend banking in the headline and maybe lure him on.

Yeah.

Open invitation to come on in and debate.

But on a serious note.

More serious note, I thought the point about how everyone's been piling into private credit because it's outperformed public credit.

That is changing now, you know, empirically, that has changed this year.

But then secondly, everyone's been piling into private credit because of that low volatility pitch, which is one that we've heard a number of times on the podcast.

Now, this idea that, well, you don't have to market to market. And that's actually a big strength that sales pitch starts to lose a lot of power and conviction when you're going from 100 zero in the space of one month.

I don't like how their new ones like every day.

Yeah.

What I'm saying, it's like each one of these little credit cockroaches are pretty small in the grand scheme of things.

But two things a they're small and yet they seem to be touching a wide number of love.

And I don't like how they keep popping. Right.

I'm a little I'm a little anxious because you think the scale is small, but then it just keeps the news story.

Well, this is also why why the cockroach analogy is so perfect, right?

Because if you see one, you know you have more than one.

Yeah, I once read an entire book about cockroaches just because I figured, like, know your Enemy in New York.

And it was actually really interesting,

Shall we leave it there?

Let's leave it there.

Okay.

This has been another episode of the All Thoughts podcast.

I'm Tracy Alloway, you can follow me at @TracyAlloway

and I'm Joe Weisenthal.

You can follow me @thestalwart.

Follow our guest Jeff Gundlach. He's @truthgundlach

Follow our producers Carmen Rodriguez, @carmenarmen

Dash Bennett @dashbot

and Cale Brooks @calebrooks

For more all thoughts content you should subscribe to our daily newsletter.

You can find that at bloomberg.com/oddlots

And, you can join fellow listeners in conversation about all of these topics in our discord 24 - 7 thats discord.gg.oddlots

And if you enjoyed this conversation, then please like or leave a comment.

Or better yet, subscribe!