저자: JeffreyGundlach · 외국인
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We're going to be speaking with Jeff Gunlack. He is of course the founder and CEO of Double Line 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 in, 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 I know you've voiced some worries about both of these things. Yeah, I'm uh concerned about the financing of long-term treasuries primarily because we're issuing a lot of them. uh and uh there's inflationary policies that are being run and probably likely to uh be further doubled down upon when Jerome Pow leaves as Fed chairman.
I mean, we've got Scott Bessant as the Treasury Secretary. Well, he's basically mimicking what the president says. He basically says rates should be a point lower, 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 there's a lot of interest in artificially lowering lowering interest rates and perhaps taking the maturities of treasuries uh ever increasingly to under one year in maturity. Bob, investors aren't aware of the fact that something like uh 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 out to 30 years, is only 1.7% of the Treasury issuance of 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 fact, long-term Treasury rates have always declined uh subsequent to the the first cut by the Federal Reserve and particularly when you're in a a sequence of Federal Reserve cuts. And that's certainly been the case with now 150 basis points. But this time, all interest rates outside of the two-year are higher than they were before the Fed's first rate cut.
That 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 uh 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 uh 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. It 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 uh maturities is over.
And in fact, in the next recession, 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 tights 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 uh referenced a little bit is the quality of the public uh 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 overallocated to by 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 odd billion dollar endowment and they couldn't pay salaries. They couldn't pay the light bills, they couldn't pay basic maintenance. They had to go to the bond market to borrow. They tried to borrow about four billion dollars. I think I 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 a Bloomberg broadcasted 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 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, but we think they're you're the most bearish thing 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 I think that, you know, we've started to see defaults. And there's something on the Bloomberg Newswire today. It's a on top go that speaks of a home uh renovation business that was private credit like $150 million uh issuance of private credit and it went to zero.
But anyway, it's called Renovo or something like this. And the funny thing is the argument for private credit has always been a sharp ratio argument at the center of it is 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 in a CD. If you buy a 5year 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 one and a half percent is not worth you couldn't sell it at uh at a par value.
You're going to have to take a discount on it. That's the private credit argument. What really happens, and this was really borrowed from private equity, which they use the sharp 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, uh, but it's much lower volatility." So what happens is when the S&P 500 goes from 100 to 50, the private equity firms mark their positions down from 100 to 80.
Now they're not worth 80. You couldn't sell them at 80, but that's where they get marked. And when the 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 sharp ratio argument based upon the volatility being under reportported. And that's that goes on in all 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 7 filing and bankruptcy filing and their assets the uh their liabilities were show listed as being between 100 and $500 million.
You just you you check a box. You don't get a specific number. So there's ranges and the range that their liabilities were in was between 100 and $500 million. Their assets were listed as less than $50,000. Less than $50,000. Are you trying to tell me that these this these big private equity firms and private credit 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 a 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 50 20 five one but it's been 100.
What's going on? It's like there's only one price for private There's only two prices for private credits. Yeah. 100. That's it. And I heard an 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 of liabilities and less than $50,000 of assets, it's pretty unlikely they're going to get paid back. M the price should not be at 100 but that's what's going on and so you have that sharp 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 a trailing performance argument which of course trailing performance is no guarantee future results which is stated on every single prospectus.
But uh recently private credit is not outperforming. Obviously with bonds going from 100 to zero in a matter of weeks uh the public market has been performing better than the private market. And then 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 zero in a matter of a few weeks, uh there's there's something something uh unoured is going on. And so I'm very very negative on those types of uh you know, non-transparent markets.
It reminds me, I've been saying this for probably two years now, that the next big crisis in the financial markets is going to be private credit. Uh it's it's it has the same trappings as subprime mortgage pack repackaging had back in 20 uh 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 by 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 four 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 about 1.4 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 six or five to 7 to 12 years ago, the bonds that are rolling off have an average coupon for the next few years of three of a little bit below 3%.
Let's just call it 3%. That means that with Fed funds at 3 and 78 and treasuries at four out 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 trillion dollars in a non-recessionary period.
And so, I did a thing at Grant's uh conference, Jim Grant, had his 40th anniversary conference and a couple years ago, and I did a a my 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 in a rather pessimistic light. So I don't say this is the base case. But by the year 2030, so 5 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 kind of uh 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 we can't keep borrowing this money. That was under regonomics, which people thought was a bad idea because it was deficit spending. And they said, you know, way 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 10 years later, you know, it they moved it forward to 2040. So, it was initially supposed to be like a 60-year problem and then 10 10 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 5 years in immaturities. Jeff, first of all, I hesitate to ask a question here because, you know, we could just let you go on um and hear you tear particularly private credit to shreds.
Um that was great. And thank you also for the plug for both Bloomberg Journalism and the Bloomberg Hollywood event. Uh 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 zero real quick in private credit could be a really terrible Drake song like most of them are but that was 5 minutes ago so I don't think my joke is relevant anymore.
Uh Jeeoff um you know in the 2010s when we started this podcast 10 years ago an investor could have a really nice you know 6040ish portfolio and there are all sorts of beautiful things with that particularly that sort of inverse correlation that uh 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 owns maybe it outperforms then you 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 and I know that look, you're you you have you're a fixed income portfolio manager, so I understand this is an existential question for you. So, I know there's but you know, like uh you know, how should how would you sell the case for even having it? It would be an existential question for somebody that's been five to eight years in the business and it's just getting going.
Yeah. All right. because, you know, I 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. Uh 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 love I'm really a fan of yours because you're a straight shooter. You know, I don't 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% in financial assets.
I think in equities today you investors should have maximum 40%. Okay. uh and and most of that in in non- US equities, particularly if you're a dollar-based investor like any American would would normally typically be. I think you want the dollar 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 uh 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 they're up something like 25% year-to date for a dollar-based investor.
You're even better off in European stocks because the dollars down versus versus the euro. So, I think the the amount that 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-doll 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 if you're at 40% in stocks and and 20% or 25% in bonds, you've got another, you know, 35 40% to allocate. And I've been very very bullish on gold. We do a a podcast that's gets up on our website. It's in early January every year. It's called uh roundtable prime double line roundtable prime 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 what are your best ideas and my number one best idea for this year was gold. Uh 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.
Sure. People who are actually allocating real money because it's real value. And of course, gold has been the top performing asset uh for the year, certainly for the last 12 months. And so I I think investors I I was at one point advocating 25% of a portfolio in goldlike things, real assets, highquality 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 it's consolidating its gains. I think it goes higher, but for the time being, I'd probably be more like at 15% or something like that.
And the rest, I think I I would I 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 cape ratio. All the classic valuation metrics are off the charts.
And of course the market is incredibly speculative. Uh and speculative markets always go to insanely high levels. It happens every time. This is not you know obviously it happened in the dotcoms. It happened in the financials prior to the GFC. It's happening now in the AI and the data centers and all that stuff.
And you know it's interesting the probably the biggest thing that changed the economy and the world uh in the last I don't know 150 years was 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 that 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 uh relative to the entire stock market in the US ex excluding electricity. So everything else but electricity the electricity outperformance peaked in 1911. Houses weren't even broadly electrified by 1911.
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 they dropped 80 80 90% in the early OOS but there are 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 u [clears throat] mania periods and I feel like that's where we are right now and 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 the sell America thesis that was very popular um 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 uh 10-year Treasury yields uh have been going down compared to where they were earlier.
What accounts for I guess the stickiness of US assets in the global financial system and in investors portfolios even when I think we can all agree that there are challenges ahead for US 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 longstanding 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 counterintuitive to a lot of people, but trust me, someone that'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 make it makes you it gives you satisfaction on every level, an economic level, an emotional level, a psychological level.
It's 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 you get to go to your review with your client and you say let's take a look at your portfolio. Look at this cost five last 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 or even project them into the future.
And that's a dangerous thing to do. But when you ch I was I was 100% dollar. I owned 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're you you you wake up in the morning and you 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're saying 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 I, you know, I I wonder why I have 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. I I Why should I have to pay taxes when I identify as a as a destitute elderly man? I don't understand. Yeah, I think other people other people might um identify you differently.
I want to go back to um the rates um question. As you mentioned, it's sort of un historically unusual that we've seen this period of the Fed cutting rates for the last 13 months and very little uh downward action in 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 US economy. We know that President Trump would like to see the long end of the curve go down perhaps because um 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 that we're going to see the Fed cut rates and not um 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 end.
That's my base case. Um, and I've been talking about this now for nearly 2 years that we cannot afford the market to uh set interest rates if the deficit spending continues. It's it it won't be tenable. So, what has to happen is 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 II 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 and a.5%. So you can you can absolutely manipulate the yield curve.
Japan has did that for decades. For decades they kept rates at zero even though there was no demand. I actually had a meeting with uh the guy that ran the biggest pension plan in the world. It was one of the Japanese public pension plans. And I was really anxious to sit down with him and I said, "I I really want to ask you this question.
Do you actually own these negative yielding JGBs?" And he actually laughed out loud when I asked him that question. He said, "Of course not. 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 in the United States for a decade.
They did in Japan for decades. And uh Secretary Bessant 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 road map 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 as they're uncomfortably high for the Treasury Department.
What is that? Where is that 5% 6%? My guess is six is is the highest that it would be fullon uncom uncomfortable full on at 6% on the long end. So what happens is you'd want to avoid long bonds while the the market forces are in play. And uh Joel, you said that long rates aren't down very much since the Fed started cutting.
No, no, they're up a lot. Long rates are up a lot since the Fed started cutting. Uh this is the first time it's ever happened. They're up by almost 100 basis points with the Fed cutting. That's has 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.
The something dramatic could that 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 uh sensitive uh 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 a step fun a significant step function lower in yields.
And so you have to try to figure out how you're going to do that pivot. Uh that's what I spend most of my time thinking about when it comes to the Treasury market these days. Although for now uh 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 buy uh Jinny Mays, Fanny Mays, Freddy Ms, 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 of 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 at a lower yield than treasury bonds of 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 regonomics.
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, something like that trading through treasuries. And so that's a tell 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 Mara Lago accord, right? Yeah. Yes, it is. I I don't know how you define what a foreigner is. 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. How? 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, there'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 Bessant about your ideas for how to fix the US Treasury market basically or voice your concerns? I think he watches my CNBC segment after press conference. All right. Um, let's go back to private credit for a second.
Um, because that's obviously the topic duour and as Joe pointed out, one of the things that has really grown exponentially over the past 10 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 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 crisis is that leverage built on top of leverage aspect. Can you give Well, that's private credit. That that is that is private credit. It's leverage. Yeah. Okay. Explain that.
Explain that because as far as I know, we're not seeing the scale of stuff getting rebundled as we saw for instance in the financial crisis. Well, that that's true. You're not getting the rebundling. Uh but you are having there's a lot of leverage. They're raising money and then they're borrowing money to to buy more private credit.
It it's absolutely leverage upon leverage. And the other thing while they're not bundling like putting you know the the thing about the gold financial crisis is you took tripleb rated and it's questionable whether they even deserve a triple B-rated thing and creating AAA 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 in it that suddenly AAA has turned into a triple triple B has turned into AAA. But one thing they are doing is issuing public 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 if they become popular in any way, you're going to have the catalyst for a tremendous selling deluge because there is no people want to will want to redeem and they won't be able to get their money out.
And once you get that, once people the where we're we're where 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 safe. You you buy a AAA rated subprime mortgage pool, you think it's safe because it's AAA 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 just It's just a game that's being played 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 that promises liquidity. It 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 rise. But these things go on forever. One of the things about the investment business is it's hard. It's hard 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 the timing things that if even if you're right on the direction, it's going to take a lot longer than you think.
I turned negative on the packaged mortgage non-g 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 3 months later because the 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 uh 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 I have no way to do that. 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 uh 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 uh credit things, uh, you know, using foreign currencies more than more than typically.
But no, I don't I don't think you can really short private credit. What have you learned in uh your career about um longevity and draw downs or underperformance? Because as you mentioned, you can be right or you could 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 99 to the peak.
That's not actually that long. That was closer to 6 months. Or uh being bearish on some of the housing assets starting in 2005 that took a little bit longer. What is how do you survive as a portfolio manager and be willing to take time where you're just and accept that you're going to underperform for a while?
Well, you have to have uh think very carefully about your time horizon. When I started in this industry, one of the first things I was tasked to do was to do a study on what would happen if you had perfect foresight uh in financial markets. Perfect foresight. And of course you can do a study like that by using historical data.
So you take stocks, bonds, real estate, commodities to 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 though 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 backend loaded. So I said we cannot invest other people's money with a 5year horizon. I think that most people that invest other people's money use too short of a horizon. However, a lot of in a lot of investment managers talk about they have they're constantly reallocating. They're constantly re you know they have a they have a oneweek horizon.
They have a weekly meeting and they change. That's not going to work. It's not going to work because you the chance of you being right in a week is very low. Your 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 what I've learned is that having done that I've I have a 70% hit rate. I've got a long enough career in enough uh 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 the plug. If you underperform year one, year two, and year three, you're gone. You know, if you're if you're wrong five years in a row, they they shut your Janice unconstrained bond fund because you can't have sequential years of outperformance like that.
It's a very specific example, Jeeoff. Wonder where that came from. Well, yeah. So, but the the so really it comes down to about having enough the sweet spot on not being overly overly uh active and not being overly, you know, fixated on your long-term idea. And I've managed I managed to do that. I've never I've never really had three years in a row of underperformance.
So, uh that's that's been a good thing. And it's probably I I call myself uh is it Unk or Chennichook is the last of the Moheakans and John Fenmore Cooper. I'm the last one I'm the last man standing. When I started in this 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 Emory was the only one left and she was at Dodge and Cox, but she retired uh at the end of June. So I'm I'm last of the Moheakans. Jeff Gunus. Does that work? Jeff Gunkas kind of. Um, very quickly, you know, again, we're we're sort of we're very we're being very introspective and retrospective on this show, but over the past 10 years, what's been the thing that's surprised you most either in terms of the markets or the financial industry itself?
The the thing that's surprising and as equally distressing as surprising is the the magnitude of money printing that occurred in 2020, 2021, 2022. I I I just the the fact that the the Federal Reserve broke the law and bought corporate bonds surprised me. Uh it probably shouldn't have surprised me because they broke they broke the law when they uh re uh modified mortgages during the global financial crisis.
That was that was not allowed per the perspectuses 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 when 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 I think that that sort of has to happen in in some fashion, whether it's the coupon adjustment that I talked about, whether it's whether it's doing the the yield curve control that Joel brought up earlier.
I 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 say 35 and younger. They don't believe in the institutions of this country at all. 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 need 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 being 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 as 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 learn that in 2020 to 2022 that giving money to people causes inflation? Remember people talking about modern monetary theory? What a joke. I've heard of it. You know, you never hear anybody talking about that anymore because by modern monetary theory,
Joe, how come no one talks about that anymore? Because inflation went to 9.1%. That's true. Can I ask one last question? Are you like, it seemed like, you know, you mentioned Trump floating the idea of a $2,000 tariff dividend to the public. It's a bribe, 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 uh trajectory? He he can't the problem is look look at 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? Shouldn't Shouldn't 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 entranced interest that is the the kind of the uniart government that will fight tooth and nail.
Just look at all the lawfare. Look at look at all the indictments, all this 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 Mandani.
Montani won because people do not believe it's a it's a little bit different. Well, 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 uh with lockdowns and all all 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 aren't 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. And so they are not going to go along with this. And so that's why Montami won. 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 uh 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 gunlock idea. I wouldn't be surprised if they start 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 could put it together, an age tax that if you're over age 55, you have a sir tax based upon you had a better environment to accumulate wealth than the the subsequent generations have.
And so you you you should you should give some of that back. I I think that might actually happen. That would be a popular platform with certainly a a specific demographic. Are you gonna run, Jeff? Do you have plans? Uh, absolutely, positively no. No chance. Absolutely no chance. All right, we shall leave it there.
Jeff, thank you so much for coming on Opt. Really appreciate it. Well, thanks for having me on. I'm sure kind of all over the map today, but I hope your audience enjoys it. They will. Thank you so much, Jeeoff. Really appreciate it.
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