저자: JeffreyGundlach · 외국인
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한 줄 결론: 게이틀라흐는 금리가 장기 상승 국면에 들어섰고 미국 재정 적자와 이자비용 부담이 구조적으로 악화되어, 국채 구조조정이나 인플레이션 재발 가능성을 높게 보며 신용·국채 간 상충 리스크 분산을 강조했다. [투자 철학과 경력 배경] 게이틀라흐는 어린 시절부터 주식 시장을 따라가며 투자자 기질을 키웠고, 채권 수학에 대한 이해를 바탕으로 채권 운용에 특화된 커리어를 쌓았다고 회고했다. 그는 실패를 피할 수 없는 영역으로 보고, 치명적 실수(fatal flaw)를 피하는 것이 핵심이라고 강조했다. [투자자의 핵심 자질] 좋은 투자자는 틀릴 수 있음을 받아들이고, 자신의 핵심 가정이 틀렸을 때의 결과를 미리 평가해야 한다고 했다. 또한 투자 결과가 장기간 걸린다는 점을 인식하고, 포지션을 과도하게 공격적으로 가져가지 말 것을 주문했다. 조기 예측은 사실상 틀린 것과 같다는 점도 언급했다. [리스크 관리와 분산] 장기 국채와 저품질 정크본드처럼 서로 상관성이 낮거나 반대로 움직이는 자산을 조합해 리스크를 상쇄하는 방식을 선호한다고 밝혔다. 현 시점에서는 신용 스프레드는 약화되는 반면 국채 금리는 하락해 상쇄 효과가 있다고 평가했다. 손실은 빨리 인정하는 것이 낫다는 원칙도 강조했다. [금리 전망 — 장기 상승 국면] 40년간 이어진 금리 하락 추세가 끝나고 장기 상승 국면에 진입했다고 보며, 2022년 저점 이후 금리가 상승 사이클에 있다는 입장을 밝혔다. 국채 평균 금리가 약 3%에서 4% 쪽으로 이동 중이며, 상황에 따라 더 높아질 수 있다고 전망했다. 방향성 발언: 장기 금리(미국채 10년물) 상승. [재정 및 이자비용 문제] 이자비용은 이미 국방예산을 넘어서 연간 약 1조 3천억 달러 수준으로 증가했다고 언급했다. 재정적자는 GDP의 약 7.2% 수준이며, 경기 약화 시 12%까지 늘어날 수 있다고 봤다. 미 국채 발행 잔액은 약 36.5조 달러이며, 미래 부채·부채 외 채무 등을 포함한 미이행 부채는 약 220조 달러로 GDP의 약 7배 수준이라고 지적했다. [국채 구조조정 가능성] 국채 구조조정(외국인 보유분의 만기 연장과 쿠폰 인하 등) 가능성을 과거보다 높게 보며, 과거 0% 가깝다고 여겨졌던 확률이 실제로는 무시할 수 없다고 주장했다. 다만 구조조정 또는 인플레이션 중 하나는 결국 불가피하다고 봤다. 이 부분은 장기적 관점의 전망이다. [정크본드·신용시장과 디폴트] 고금리 환경에서 디폴트가 증가할 것으로 보며, 특히 은행 대출 부문에서 부실이 나타나고 있다고 언급했다. 기업들이 만기를 연장해 당장의 위기는 피했지만, 향후 재융자 여력은 불확실하다고 평가했다. 정크본드 기준 수익률이 6% 아래로 내려가면 정크로 부를 수 있다는 식의 농담도 했다. [인플레이션과 재정 정책] 과거 경기 침체 때마다 정부가 현금을 살포하는 정책이 반복되며 인플레이션 변동성이 커졌다고 진단했다. 2022년 CPI가 전년 대비 9.1%까지 치솟았다는 점을 언급하며, 다음 위기 대응 때의 재정 살포는 더 커질 가능성이 있고 그만큼 인플레이션 재발 위험이 높다고 봤다. 통화 현상이라는 관점을 강조했다. [지정학과 사회적 긴장] 우크라이나 전쟁, 나토 내부 균열 등 지정학 리스크가 커지고 있으며, 위기 시 각자도생식 분위기가 가속화될 것으로 우려했다. 세대 주기 이론(Neil Howe의 Fourth Turning)에 공감을 표했다. [종목·자산 관련 언급] 개별 종목이나 지수에 대한 구체적 매수·매도 추천, 목표가는 언급되지 않았다. 다만 금리·채권 측면에서 미국채금리(10년물)는 상승 방향으로 보고 있으며, 경기 약화 시 장기 금리도 오를 것이라는 입장을 밝혔다. 주식(나스닥 등 기술주)에 대한 직접 전망은 없었다. [출연자 전망 요약] 단기 시장 방향보다는 장기 금리 상승, 재정 악화, 인플레이션 재발, 정책 대응 가속이라는 구조적 시나리오에 무게를 두었다. 현재 시점에서 신용 약화와 국채 금리 하락이 동시에 나타나는 점을 상쇄 리스크로 보고 있다. [리스크 및 조건] 이 발언들은 장기 구조적 견해이며, 1~3개월 단위의 가격 예측이 아님을 유의해야 한다. 구조조정·인플레이션·디폴트 시나리오는 모두 불확실하며, 시기 예측은 본인도 어렵다고 인정했다.
다듬은 글
Welcome to the Insightful Investor podcast, a weekly series that seeks to share industry, investment, and market insights. Learn more about our show at insightfulinvestor.org. Today I'm joined by Jeffrey Gunlac, uh founder, CIO, and CEO of Double Line Capital. I'm in their uh beautiful studio in uh lovely downtown Los Angeles.
And uh if you're listening to the audio version of this podcast, uh make sure to check out the video on Spotify and YouTube as well. Jeffrey, thank you for joining me. Oh, welcome. Thanks for coming. Thank you. Well, let's go back to the very very beginning. Do you feel that you were born an investor?
Meaning that it is core to who you are? My father bought me stock in a company, the parent company of a chemical company he worked for. It was a very small amount, but I would follow and this was when I was maybe 10 years old. And I would follow it in the in the daily paper. And one day we were over at my grandfather's house and the paper came and I uh went to the stock listings and it was on the American exchange and my grandfather had been a stock broker and uh he he had missed the crash of 29 and he had gotten his clients out of it.
He was always very proud of that. But I I went and I was looking up the American Stock Exchange and he says, "What are you doing? You don't you don't care about that. You have to look at the New York Stock Exchange." And I I kind of remembered that. So, I liked following the stock market. And then when I was in eighth grade in a social studies class, we did a thing for about a month on on stocks and you had to pick one and chart it and follow it.
And my uh uncle had been uh the head of uh of uh development for Xerox. He had developed the Xerox copy machine and we owned Xerox and I picked Xerox for the stock. As it turned out, that was right uh in the in the teeth of the Nifty50. And right at the day that we started it in social studies class was pretty close to, if not literally the high.
And so I was charting Xerox and it was going down half a point, two points, three points a day, every day. And we owned it. We owned Xerox because my father uh believed in the company. And that was the only time in my time growing up where we was right at that top when we thought that we actually had a little bit of money.
And my mother was begging my father to sell the Xerox. And she was kept getting increasingly angry that it was going down down because it dropped by about it ended up dropping by about 2/3. So I don't know. I I I always followed that sort of thing. But I really have came to develop the idea that I've I'm kind of a natural at looking at financial markets and figuring out kind of what the state of society is by following all the things that go into price movements.
But I never really thought there was such I didn't know there was such a thing as an investment business. Um, I really found out about the existence of an investment business primarily from this show on TV. Lifestyles of the Rich and Famous had a show where they were counting down the top 10 professions pay-wise on average, I suppose.
And uh, I said, "This is great. I can figure out, you know, uh, career opportunities and in terms of what segments might be interesting." And number one was investment banker. And I didn't know what that was. So, I figured I would look into investment bankers in the LA yellow pages. And uh I found out that nobody advertises investment banking in the LA yellow pages, but they do put in investment management.
And so I figured I don't know, this sounds like the same thing to me. And so I sent letters to about 23 different investment management companies in Southern California. And I got three letters back. And one of them was ended up being where I got my first job in the investment business. And they they interviewed me and they said, "You've got a very interesting unusual background because it's all mathematics and I also studied philosophy." And they said, "Do you think you'd be interested in equities or fixed income?" And I said, "Uh, I don't know what those things are." And the guy seemed pretty exasperated.
And he said, you know, equities, stocks, fixed income bonds. And I didn't know what bonds were, but I knew what stocks were. And so I said, stocks. And he says, well, I don't know. We probably need more quantitative firepower in the bond group. So, long story short, I ended up getting introduced to that.
And I had been out of the Yale PhD program in mathematics. And um I got this book to learn about what bonds were. It was called inside the yield book and it was kind of seinal in the literature. And it was broken into two sections. The first was pros, you know, explanations of how uh bond returns are developed and how important reinvestment is.
And the back part of the thing was the formulas, bond math formulas. And so I figured I'll derive them all from scratch. And I learned a lot about how that worked. And I was so un unfamiliar with the investment business. I thought everybody did that. Like that was like everybody would have done that.
And it turned out that nobody did that. Like nobody really understood that stuff. And so the quantitative aspect of bonds ended up being a really good match for me. And so I I don't know. I often wonder, you know, what what what if I had started a steel company or something? What would have happened?
But it didn't work out that way. I just I just fell in half-hazardly into the investment management business and I I got past the chicken and egg problem which is you can't get a track record unless you have money and you can't get money unless you have a track record. But I was lucky that I was given an account at really uh an experience level that was unwarranted.
I was in the business like six months and I was suddenly I was managing a portfolio for the Chrysler pension system and they had a horse race of they had five or six managers and they they this was common in those days in the 80s. Their ass allocation decisions were being made by pension plans in very foolish ways.
If if you had the highest return for a calendar year, they would take money from the other manager and give it to you. So they're buying selling low and buying high constantly. But as it turned out, I was typically first or second. And so my career got going. And I don't know, I just I I still think of investing is not working.
I just think of it as it's just something that I would follow all the time. I mean, even when I was uh at my first job, when I just got out of of undergraduate, I would listen to the radio and I was following CD rates. And it was really interesting because that was Vulkar and so the CD rates were I remember they were over 20%.
I couldn't believe I'd been working for about uh 4 months and I got a cost of living increase of 20%. Because the inflation was that high and interest rates and all that stuff were going on. So I've never once thought about um doing anything else once I fell into the investment business. So I think to a certain extent it's sort of in my blood and uh I I I kind of interpret society through how the markets work and so I don't think I can really distance myself from that because it's kind of part of how I view the world.
Well in your career you've had the opportunity to meet a lot of great investors including yourself. What would you say are the key qualities and characteristics of a great investor? accepting the fact there's many things I'd probably give a different answer in different days but you got to accept the fact that you can't come close to being right all the time and you know failure just like just like you know a baseball player you're great if they hit 350 right that means they're twothirds of the time roughly they're they're not getting a hit.
So you have to accept the fact that you're going to be wrong. And in part of that uh when you understand that and accept it, you you learn that you have to evaluate what your positions and what your results are going to be, assuming that your core assumptions are wrong. And you have to make sure that it doesn't become a fatal error.
That's actually what the double line logo is about. Double line is in your real life on the street. you're not supposed to cross it. It's it's illegal to cross it, but it's also imprudent. So, it's dangerous. And so, you no fatal flaws. The other thing is um I think uh most successful investors come to understand that you might be right in terms of your core assumptions and how you're viewing the course of the future, but it takes way longer than you think.
Way longer. I, you know, I remember I remember things like the global financial crisis. I saw that coming in 2004 and it just 2005 came and went. 2006 came and went. It sounds like you're wrong while you're waiting. Oh, you are wrong. Yeah. You know, when people say I'm early, that's just a synonym for wrong, you know, and so yeah, it takes a long long time.
In fact, I used to write quarterly white papers to send them out to clients. This was this was in the days when people sent letters and I would write on a topic and one of them was that I it came to me it occurred to me that in the in the holiday season people buy poinsetta plants and a lot of times they end up killing them because the leaves start to fall off and they think, "Oh, I need to water it." No, no, no, no, no, no, no, no.
It's it's the opposite. The leaves it's it's going dormant. the leaves just fall off. And if you water it, you're going to kill it. And so you end up killing it. And what you're what you have to do is just take it, if it's in a pot, and just cut it down. So there's this much above the dirt, put it in a dark closet, and don't even look at it.
I mean, maybe once every two weeks, you probably don't have to look at it for the first eight weeks, but then every two weeks you might want to look at it. And then one day, something magical will happen. this little green chute starts to come up and then you take it out of the closet and it's it's now growing again and you water it.
That's sort of like the investment business. Everybody thinks that you know you have a a daily cycle, a weekly cycle, monthly, quarterly. The investment business cycle is way outside the context of that. It can take many many years for something to develop. I mean we've been talking about the budget deficit problem going back to Reagan.
I mean, uh, Ross Perau, I think it was, had his voodoo stick and there was a book called Bankruptcy 1994 that was popular in the early 90s and it predicted that this was unsustainable. Well, here we are. I mean, we Russ Pearl was right. He was just over 40 years early or 30 years early and so it takes a very very long time.
But, um, then it all inevitably has to happen though and that's the cycles of the market. I I remember the.com situation in 1988 1998 1999 it just went on forever and it just seemed and then at the very end of it the fourth quarter of 1999 the I think the NASDAQ was up 80% in the quarter and it seemed invincible unstoppable that's kind of where we were entering 2023 uh 2025 I think it just seemed like there was a there's a survey they ask what do you think stock returns in the next 12 months will they And it was like it went it just skyrocketed at the end of of 2024 and it was like one of the highest readings of all time kind of rivaling 1999.
So it it you have to be patient things take longer and you have to avoid fatal flaws. And I think that's that's what you see. I mean, um, I remember like Bill Aman was on the cover of Bloomberg magazine and that's always you never want to be on the cover of Bloomberg or mo most magazines cuz you're tempting the fates and Aman then had his worst year ever right after it was on the cover and I was spoke at some conferences with him repeatedly and I would talk to he just he's kind of a tacetern guy but I was talking to him and uh he survived that so it wasn't a fatal mistake it was he had a really bad year, but it wasn't fatal.
And so I think that that's that's really a common characteristic. And I guess part of that is recognizing that you don't know a lot of what will impact the price of your investments and therefore diversifying, not making overly aggressive bets, and just being in some ways humble to the fact that a lot is beyond your control.
And don't put yourself in a position where if you get one or two things wrong, it can wipe you out, right? It's also mean it also means um balancing risks, which I think is easier to do in bonds than it is in stocks because stocks, I mean, sure, there's indices zig and zag differently, but ultimately the beta is kind of a a constant.
Whereas in bonds you can put together and I think this is why I like doing the bond stuff is is uh I I feel less nervous about stuff if I have offsetting risks that so it's not fatal. So you can put together and sometimes it's not possible but often times it is that you can put together things that kind of move in opposite directions are not totally correlated like lowquality junk bonds together with long-term treasuries.
I mean not that's not always a recipe for success but they will tend to move differently. I mean like in our current moment we see that credit is now weakening for the first time in a long time but interest rates on treasuries are falling. So you have offsetting risks and that's a very uh comfortable place to be.
For for quite a few years that wasn't possible. You know, we had interest rates at zero. 10ear Treasury was at 1 one and a half%. There was starvation of yield. So nothing yielded anything. It's hard to believe that a couple years ago that the junk bond index yielded 350. That's to no defaults. 350.
They should have changed the name from high yield to low yield. Yeah. I just call it junk. When when yield gets below six, I call it junk. If it go it goes up to 10, I'll call it high yield again. Let's talk about the macro environment. And I'd like to start out really zoomed out looking at the very big picture.
So if you go to 2022 and you look backwards 40 years, you basically were living in a world of secularly falling interest rates, right? And you could argue now that has shifted and it's in a world of secularly rising interest rates. That's my uh belief that we bottomed interest rates and that we're in a longerterm cycle of rising interest rates, which is going to be very interesting because we had we had a Treasury debt that was like 3% on average and now it's moving towards 4% and depending upon where rates go, it could go higher.
And if you think about that, you get to some very uncomfortable arithmetic regarding interest expense. And this is something that I talked about oh two three years ago. Um when people were saying rates will never go up, rates will never rise. And I use that famous photograph of then cashes clay Muhammad Ali with Sunny Liston I think it was looks like Liston's never getting up.
he looks like he's, you know, out cold. And uh I use that that that graphic and I just said, you know, we've got to start thinking about where this interest expense problem may go. And of course, now that it's higher than the defense budget and not even the official defense budget, the bo the the true defense budget is includes Ukraine and and the Israel situation, all that stuff.
It's the interest expense is already higher than that. So over a trillion I think it's I think it's it's running at about a trillion three right now up from 300 billion just a few years ago and I think that is very strongly um reason why interest rates are in secular rising position uh because the deficit is percentage of GDP keeps going up and the interest rates that are rolling off we still have some 25 basis point stuff that's rolling off and there still will be for some years to and depending and you we have a strong uh possibility that people won't want to lend us money at low interest rates especially for a long-term period of time especially if the dollar starts falling.
So typically in a recession or weaker economy you get lower interest rates and you get a higher dollar. I think it's going to be the opposite because I think we're living in a mirror image of the 40 years that are informed by falling interest rates and a lot of people have never experienced uh high interest rates, rising rates.
And no junk bond investor has ever really experienced a rising rate default cycle because when defaults would show up, the treasury rates would fall and you would have some capability of refinancing. So instead of going bankrupt, you could refinance. That can't happen in rising interest rates. So, uh, I think the corporate CFOs have been very smart and they've definitely managed their their debt burdens pretty well.
They've pushed the maturities out. It isn't a problem in the next few years, but ultimately the maturities will come. And will will they be able to refinance? Will they have to default? I think defaults will be higher in a rising rate environment than they were and in a falling rate environment. Yet, the junk bond market has only existed from the early 80s.
So, it's been nothing but falling rates until recently. And there hasn't been enough economic stress um with these rising rates for the past 3 years or so to cause significant increase. defaults are going up, but espec especially on bank loans, but um it hasn't been a a deluge that you typically see during a significant recession.
So, yeah, I think I think interest rates are rising and I think um I think there's going to be some pretty radical changes that have to be made. We have $220 trillion of unfunded liabilities. That's like seven times the economy. we can't pay that off in today's purchasing power. It can't be done. You you you need to either inflate it away or restructure it.
And I was I I I came to the idea that there's a non-zero chance of the Treasury debt being restructured earlier this year back in in the the spring. And I was thinking about it and it occurred to me that it's a higher probability than most people think. Most people think it's zero. But then I noticed that there was a research paper that got a lot of play about six weeks ago talking about restructuring the treasury debt.
And then I think uh somebody said I think it was Scott Bessant may have said something about or I don't it may have not been him but it was somebody significant who said maybe we should extend the maturities for our foreign bond holders and significantly chop down the coupon the interest rate that's paid.
And I think Jim Biano did a a a webcast on that a few weeks after that. And I was kind of blown away because I said, "My gosh, that's that's the idea that I had like seven month seven, eight months ago." And I I rolled it out at a couple of conferences where I was speaking and people sort of gasp, you know, they they can't wrap their head around that concept.
But we have 36.5 trillion dollars of debt. Some of it's owned by the Fed, but most of it isn't. And you know it's rolling over at higher and higher interest rates and we're all I think it was uh Stan Junka Miller who shot sort of put some awareness on this issue um and he was using the CBO's numbers and the CBO's numbers are highly optimistic.
They they assume low interest rates. They assume never a recession. I can how are you going to fit fit that into a 30-year forecast? And they assume a deficit that's lower than the deficit is now and we have a 7.2% deficit percent of GD of the econom 7.2% of GDP deficit and we have haven't had an official recession.
So, it's going to go to 12%. Uh, under a weak economy, and I think the interest rates in the next recession on the long end will go up and not down because of fears of this interest expense problem. And I think ultimately we will have some form of restructuring. Either it's the debt or it's the liabilities.
One of those, one of those has to give. there's going to be a very rapid growing awareness of this. I think it's just starting. I think it's really just starting that we're talking about, you know, restructuring foreigners and we're talking about um, you know, the Doge thing has trying to work towards this.
And it's really interesting how people are realizing that cutting means cutting. It doesn't mean, you know, some guy behind the tree that nobody sees. That's that's real people. And the the the uh the reality of that is starting to become a pretty constant headline. People saying, "Well, wait a minute.
I didn't I didn't expect my job was going to go away." So, I I guess there's they're having problems with town halls, even in red states now, with people saying, you know, I why don't we uh why don't we not shut the government down? Why don't we fund it for another nine months and then we'll deal with it.
It's always it's always the next time we're going to deal with it. But there aren't that many next times left, but per per always, it takes longer than everybody thinks. But at some point, you hit the tipping point where it becomes too obvious to kick the can down the road further that it's an unsustainable situation.
Yeah. And I think the awareness of that is starting to really grow and people don't know what to do about it because but people not don't know what to do about a lot of things. I mean, look at NATO. Look at look at just geopolitical broadly. How I I I read a headline today that if uh France and the UK uh back Ukraine that Italy is not going to join in, which that's that's interesting.
You know, it's it's when the when the trouble comes, you get to sort of an everyone for themselves type of mentality. And that seems to be a path that we've been on for quite some time and it's just going to keep accelerating. So I I think I I I quite fond of Neil How's work. He's a demographer. He wrote the book called The Fourth Turning in 1996 or 1995 when he used demography to predict the global financial crisis and he said it would come somewhere around 2006.
So it was pretty accurate. But his work is based upon this concept of turnings. We used to talk about the kondradev cycle years ago. No one really talks about that anymore. It was basically a 75 year thing. And it turns out that it's there's a logic behind why it's every, you know, 75 years or so. And it has to do with the fact that societies get a framework and it starts out in a context of crisis typically but the framework is agreed upon and it's designed to be in harmony with the production called to put it in the Marxian philosophic terms the means of production and the means of production get addressed through how you split up the rewards of the of the of the economy.
So there's the production of the economy and then there's the property relations which is how you divvy it up. And it starts out where they're in sync. But there's a natural tension which is unavoidable where the property relations don't want to change. They get set in place and the people that benefit from them work hard to not let them change.
The the powerful, the wealthy, they don't want that to change. But the means of production change in revolutionary form many times over a 75 year period. Think of television, think of the internet, think of AI, you know, think of the steam engine, the telegraph, you name it. And so they radically change the the means of production and the populations get further and further out of sync with the means of production and it become this tremendous tension and ultimately it's kind of like having one foot on the dock and one foot on the canoe and it keeps drifting and eventually you're going to you're going to get wet.
You're going to fall in and so everything has to get ripped up and you have to start over again. And that that's where we are. And I think people use different frameworks to talk about this, but they're all they're all sort of cousins of each other. And it has to do and usually not not always, but usually it leads to some sort of significant conflict like the Civil War.
World War II. Um, you know, and it happens about every 80 years or so. And you know, Civil War was 1865 it ended. World War II is 1945. add add 80 to that it's 2025. So it's kind of you are here on on the map and it's it's just going to keep going coming faster. So this is this is really interesting.
I I I I thought the financial crisis uh was a really interesting investment period. It was challenging. It was I it it took longer to come than than most people thought including me. But when it came, it was it was brutally difficult but exhilarating to to navigate. I think this is going to be harder.
So, I'm looking forward to it. I I uh I you know, I want to get people through it and I want to see how the movie ends. And do you think it's harder because we threw the kitchen sink at the problem before and now we don't have that any any longer to back us out to back, you know, save us? We've done it over and over again.
And I mean what we did during the uh global financial crisis looks pretty tame compared to what we did in the p in re response to the pandemic and it just keeps notching higher and higher just like the participation rate employment participation rate keeps dropping. I mean irregularly but it's lower lower highs and it keeps dropping.
Um so we we we we threw way too much at the global financial crisis. We broke laws. uh we subordinated senior investors to uh technically less secured investors. Um we modified mortgages illegally uh you know in in the pandemic we we bought corporate bonds from the Fed which is illegal prescribed by the Federal Reserve Act of 1913.
So the the the the responses just keep getting bigger, but it gets to the point where the response is so big that you it kind of can't work. So we we've had a corporate bond crisis in 2003. We had the lending uh the scam lending crisis, the global financial crisis. Then we threw7 trillion dollars of cash at the pandemic.
And and it's just going to keep being more. And we've we've already crossed that tipping point. I've been talking about this for decades where you gave enough money to people that you caused the inflation. And I was like, uhoh, because can we really do it again? Can and and and we keep we keep having to bail out somebody else.
And the the the last one that needs to be bailed out is going to be the government and the Federal Reserve system because the Federal Reserve is bankrupt. They thanks to the bare market of of 2023 of 2022 23 they they have a negative net worth. There's no there's nothing there. So I think we're going to end up in a different sort of uh property relations situation and uh the the interesting thing is it will be very very good.
People actually agree to it. They will actually get along. The fourth turning is about people not getting along. The first the first turning is about everybody getting along. It's kind of like how great the US economy was in the 50s. And so it'll be great when we get there. And the baby boomers are going to have to give up their entitlements on on some percentage.
Um, and they will. They're a pretty docel group actually. And uh, you know, means tested, age tested. I mean, we can we can solve these problems very easily. But just like cutting means cutting, you know, restructuring means restructuring. You can't. And there's a lot of vested interests that don't want to do it.
So it' be the easiest thing. All you do is you say if you're above X, I don't know, 50, whatever it is, you know, you're you're good. But you can get it at age 65 or whatever it is, but every year less than that, we're going to start extending and you pretty quickly we pretty quickly uh get to a place where it wouldn't be such a problem.
But people are going to have to going to have to give things up. And they always say that the entitlements are the third rail of politics, but just a little bit, the volume's coming up a little bit on talking about those things and it's going to be uh obviously necessary in in the next recession. We're we're going to have to do it.
So, if we we can't we can't just um we can't just do, you know, a a 30% of GDP deficit. We can't do that. Well, we started with uh the qualities of a great investor and don't get wiped out is priority number one. And and if you just think about where we are, you know, the stretching rubber band and kicking the can down the road and just uh responding with greater and greater stimulus, at some point that ends.
I think I think we're at the last one, right? And then the interest rate cycle, we talked about that. So, one thing that I've learned by talking to investors is they build a playbook and the longer they've been in the business, they feel like they've got it figured out. and somebody's been in the business for 40 years might feel like, you know, I've got this thing figured out, but a lot of those assumptions may be flipped on their head because the world has really changed.
Would you would you talk about that? I talked about secularly rising interest rates and that's that's a that's a very big difference. Um, and it'll lead to it will lead to different relationships, I think. So, I I think uh I think we'll see much higher default rates. Um we're already seeing elevated default rates on bank loans because they repric every 90 days typically.
So, they've already absorbed all those Fed hikes and they're actually benefiting from the Fed cuts a little bit. But uh I I I think that the endless outperformance of the United States equity market will reverse um when that when this with this regime shift. If you just look at the foreign investment position, United States, it is it's gotten so big.
It's $23.5 trillion. uh 15 years ago or so it was like three was the net investment position. So the outperformance of the US has attracted money into the US and that's led to a a virtuous circle of US outperformance because the money keeps piling in because it's a one-way trade particularly versus EM.
I mean it's been going on for like for like decades and versus Europe it went on pretty hard for over a decade but that's suddenly reversing now which I think is a tell on on this this oneway outperformance it's it's driven in in large extent by flows and flows reverse or can reverse and when they do particularly if we're getting bellose with other uh economy and other governments.
Well, you know, China, people used to talk about China uh not reinvesting their treasuries, but quietly they've been doing that for a long time. I mean, they're already down by 600 billion from their peak. And so that that that's already happened. But what if that accelerates and what what if the non-ooperation which uh obviously is the the the terror tariff rhetoric and just just the past month has gotten people not getting along.
I mean, we've got the Canadians booing the NH NHL uh the national the Star Spangled Banner when they play it in in Toronto or Montreal. So I don't I mean that's all part of things uh you know disassociating and so I I do think that um I think the my my my strongest belief on how this regime will play out is the mirror image concept.
I think the dollar will go down as the economy weakens. And I I believe that's happening. I mean, the dollar is already down by 10% from from its highs and it's fallen quite a bit um on just in recent months. And most people say, I I know this. I've been doing this 40 years. I know exactly how this works.
When the when the when the economy goes down, the dollar goes up. I think it's going to be the opposite. And and I think during recessions, you know, the US outperforms, emerging markets don't do well. It's going to be the opposite. And so I really strongly suggest that investors that are US dollar-based and I'm sure this is true the predominance of of of US citizens they have almost all of their investments in the dollar almost all and I think the the the it's been such a comfortable thing to do because it worked in a non-stop way but that's that's starting to change too.
So I I I think the the investment consequences of this is you want to be much more diversified. People talk about 6040 that I think 6040 went out the window with zero interest rates and then we had the bare markets and stocks and bonds uh when the interest rates were rising and uh I think I've been advocating more diversification not just 6040 stocks bonds but just just take a look at what's happening with gold.
gold actually for if you if you take a a very highly convenient start date which is the year January 1st 2000 so it's been 25 years stocks have done quite well gold's done better and if you just look at the the uh S&P divided by gold it hasn't rallied at all so we're starting to see interest away from traditional dollar only 6040 types investments and I that's why I believe gold has been so strong when other commodities have been weak.
It's it's not so much for economic purposes. It's people are by degrees monotonically gaining mistrust in the way all of this is being run from all of these embedded elites. And it's amazing how many politicians we have that were born in the 1940s and they're still in office. They just don't want to leave.
But I think the the dropout due to age or just just death. I mean, you're going to see all that those people that are clinging to this belief that it's still 1960. I'm talking about all of the 80-year-old politicians. They all seem seem to think the same thing. uh and their they will the their ability to hang on to that will will will will decrease by circumstances but just by simple demographics will go away.
And the United States is in a very has been in a very strange position for a long long time and that is spending way more money on retired people than on young people. I I read a magazine article back when there were magazines on airplanes and you had to read them because you were you didn't have anything else to do.
I read an article, this is quite a few years ago, and it said that if you take a look at 65 plus and compare them to I think it was 25 and younger, we spend seven times as much on 65 plus as we do on 25 and under. And spending money a lot of money on 65 plus all you're just giving them, you know, you're just giving them sustenance.
You're not investing in the future. There's no such thing as investing in an 80-year-old, but the future is the younger generation. And if you're not developing them, you're not educating them, uh you're you're really uh missing out. So, we see this everywhere. you know, the leaders the leaders of all this are like California seems to lead everything uh in advance of everything and California spends so much money per student on education and yet they have very mediocre results.
So, it's it's like we we're in this place where we're not logically managing and I think it has a lot to do with the in the um political cycle. It's always yield to next election for politicians and it's one of the one of the fall the downfalls of uh democracy is if you have regular elections and the US is really extreme in this regard.
I mean it's set in stone two years four years 6 years well you know that uh it's hard to do long-term planning. So, one of the ways that China managed to keep it together for a long time is autocracy, but we have we have benefits of democracy or the republic or democratic voting. But there's also the the idea that the regime can change awfully quickly as we saw in the first four weeks of Trump's second term.
I mean, things things are changing very very quickly and they can be changed back. I mean, we have one executive order that says one, the next guy comes in and changes back and then comes back and changes it again. So, it's not it's not a it's not a system that has like a a a spirit or a a belief system.
It's just it's a it's devolved into very short termism. And I think what with the US aid thing, I I mean I I know that some of that stuff is probably legitimate, but I mean the the list that they wrote were reading off the first few days of looking into that was pretty horrifying. I mean, it's not a lot of money, but the fact that it's anything like that is reveals and you can only imagine how much rot there must be in the defense department, which fails every audit.
I mean, they never they don't know where the money went, you know, uh you can only imagine what they're going to find in Medicaid, Medicare, and the Department of Defense. I mean, there's a there's a lot there, and I think it'll accelerate the dissatisfaction with the way we keep kicking the can down the road and allowing for blatant corruption.
I mean, just blatant corruption. And and I I I guess everybody always knew that politicians were corrupt, but I I I don't suppose they suspected the extent to which it could it could go. Um, you know, decades ago, people were getting angry because the the government was paying $100 for a for a hammer in the defense department.
I mean, that sounded bad at the time, but that's what we got going on now. This really was unimaginable and unthinkable just 20 years ago. You brought up a topic that I think is worth digging into a little bit, which is obviously the macro environment is highly uncertain. there's a lot of risk and regime shifts and everything we talked about and then you also talked about in in consequence and in as a function of this you want to be more diversified yet when you look at most investors are much less diversified today than they were 10 years ago I think that's right particularly with you know the fads when the when the mania come and we had a mania in 2024 I mean the whole magnificent seven things obvious mania I mean it's exactly a carbon copy of what happened in, you know, the latter part of the 20th century, you know, and so, uh, you get to these these mania and people buy the S&P 500 index fund because they like ETFs are cheap and the whole thing, but they don't realize that seven stocks are this massive piece and they are all highly correlated.
So the amount an S&P index fund has such a massive AI or had it's less now but massive AI sort of awaiting but I I think people need to diversify out of financial assets as the only thing that they so-called invest in. I mean people have a house but you know you can't really sell your house. Uh you got to live somewhere.
But I think the reason gold has gotten new life is because people are buying it as an asset class, not as a speculation, not as some, you know, commodity pool advisor or something. They're buying it because they they they it's outside of what they see is a deteriorating financial management uh at the governmental level and in much of the world.
And so they're they're going to that. And I think uh real estate just just land farmland. I mean I bought I was never a real estate guy but over the past 10 10 years I bought three three significant properties and uh I have a mix now I'm different. You know asset allocation is very personal has a lot to do with where you are in life and what your resources are.
But if when I just talk about everything that's non doubleline because I don't know how to what bucket to put double line in. It's such a unique thing. But when it comes to real assets versus financial assets, I'm basically 50/50. So I believe in in tangibles, I believe in in land. I I believe in gold or other high concentration uh stores of value.
And I I I think I I I'll it'll be a long time before I go out back into financial assets of greater than a 50% sort of sort of a allocation. Uh so I I've gone that that that's pretty that's pretty significant. When I talk about other for other people who aren't in a more in a more more common situation, I've been advocating 25% cash for the last 6 8 months and uh only about 20 25% in stocks and the stocks be equal weighted not market weighted so you actually have diversification in the US.
And then um I like long-term plays and my favorite long-term play and it's this has been I've been saying this for over a decade is is India because of the demographics and the education and the global uh changes in global supply chains and escape from China and they have they have the same demographic profile today that China did 35 years ago which means hundreds of millions of people entering the labor force.
Um, China actually has a decreasing labor force now that we're suffering the back end of the consequences of the so-called one child policy, which was never a one child policy. There was, but uh they did have a low birth rate. And that's that's challenging too for the for the the fourth turning, if you will.
We've got all these developed uh economies and they have horrible fert fertility rates, you know, under two and so they're the their population is dwindling or they need immigration. The most common male name in 2024 in the UK was Muhammad, which is kind of tells you how the demographic shift has been evolving.
And so they, you know, we don't have quite the same problem here, although we've certainly we've certainly decided that uh our falloff in the labor force could partially be replaced ultimately with immigrants. If you had to rank the performance of these four asset classes for the next 10 years, where would you rank them?
US stocks, non- US stocks, bonds, and gold? I think number one would probably be non US stocks. Number two would be gold. Number three, I guess it would be US stocks. It's a close call between that and bonds. Yeah. When if you'd asked me that 18 months ago, I would have been much higher up on bonds.
I mean, the yields were much higher. You could you could easily easily put together a lowrisk bond portfolio with eight or nine% yield. Now, you know, six is the new is the new nine. And yes, stocks might be able to do 6%. But from the starting point of where we were at the end of 2024, I I would think stocks and bonds I I I would think getting getting nine or eight out of stocks from where we started.
It it just seems impossible. The the the the cape ratio, Schiller's sickly adjusted ratio is 30. Was it 37 that it just can't get higher? I mean, it's it's only higher once in history. And I think that was uh 1999. So you you it's all earnings. You you you can't expect expansion from a 37 cape ratio of any of any significance.
So what are the earnings going to be? Well, people are hoping for 12% this year. They were hoping for 14%. I think the ways are shaping up, I think it's going to be singledigit. So, um, yeah, I I think bonds and stocks are sort of close, but where we are now on yields with some rates now below four again on the Treasury bond market, and I see I I see very uh significant problems for long-term Treasury bonds as well.
So I I I would put long-term treasury bonds as is the least attractive even even uh the rates have come up some. I we have been deemphasizing long-term Treasury bonds and what one of the things that I am still grappling with is we entered this year with very little extra compensation versus historical norms from buying non-treasury bonds by buying junk bonds or corporate bonds.
and um you know it it it it stuck for a long time but and so on a valuation basis you should be saying I don't want to have heavy allocations to these things but I think the reason that we've had such a prolonged period of that dimminimous compensation for taking that risk is I think people are waking up to the fact that that risk might not even it might not even be a risk.
I mean, if you're really w willing to accept at least the notion as possible that they restructure the treasury debt, you might be better off in corporate bonds. When I started in this business, there were corporate bonds that yielded less than treasury bonds. IBM for example. Now IBM's still around so wasn't wasn't a lot of risk there but it was perceived that IBM was a safer bond investment than the you could trust the company more than you could trust the government.
Well well yes and people thought that that the um people thought that the government was running a bad fiscal fiscal policy and we still are. It's worse but it's it's worse. So, I could I I I I think that investment grade corporate bonds really like single A corporate bonds I I think they're safer than long-term treasuries.
Even though the government can print money to pay its debt. Yeah. But they can print it but won't be worth anything. Um that that hurts your corporate bonds too because they're dollar denominated. But the government uh the government has been printing a lot of money and it's getting to the point where it's not your grandchildren's problem anymore.
Remember years ago people used to say social security is going to run out of money by 2050 and then 10 years later it was oops it's 2040 and then 10 years later oops it's 2032. I think they're out of money like in five years. And so this is this is a real time problem. So and this is why non-financial assets, non-doll investments, I think, are more attractive now than any time in the past 10 to 20 years.
And that's part of being diversified. You talked about diversification. So the being diversified across non-financial assets and financial assets, different asset classes. And when you just look at where people are, it is extremely concentrated. It's a heavy in stocks, heavy in US stocks, heavy in a handful of companies.
It's almost the opposite extreme. Yeah. Well, it's like I said, it's highly reminiscent of the last few years of the 1990s. You know, one of you you you ask, you know, something that investors that are successful have have in common. And I think one of the things is um and I I don't know if if if you're born with this or you're there's some way of developing it, but it's sort of an emotional memory where you you remember facts.
Most people can remember facts pretty well, but they don't remember kind of how it felt. That's what I mean by emotional memory. And it's hard to get from reading a book. Yeah. I've been I've been really sort of lucky with that. It's the thing that really really defined my almost unique success during the global financial crisis for someone that wasn't shorting things.
Um I remembered 1994 in the Fed cycle and the bond market was was poor in 1994. It was, you know, 2022 was way worse, but 1994 was not great and there was a lot of malinvestment that was banking on interest rates not going up and then the Fed had to raise rates during 1994 and there was no bid. Nobody had any money because everybody was a seller.
So prices were just gapping lower and certain securities that were in the news as being money losers for some public pension plans and stuff. Nobody wanted to buy them. They they either didn't have the money or they it was it was viewed to be imprudent and the the securities got so cheap it was unbelievable.
It was truly unbelievable. There was absolutely no way to lose. People were just giving them away. I mean, there were securities that if you put on the worst possible assumptions, you would still have significant excess return versus treasuries. The worst possible case assumptions. And I was just amazed at how low they went.
And I learned the lesson. I said, you know, it's not always about value. Somebody has to actually take out a wallet and buy. And this the global financial crisis was just getting started. Countrywide wasn't gone yet. But there started to be problems with the defaults going up. And one Friday afternoon, which is a really terrible time to do a margin call, but a mortgage re a very high quality mortgage, maybe the best one in terms of their underwriting, ran out of money and they got margin called.
And these floating rate mortgages um had never traded below 100. And the prices started to give and they were down to about 98. So not much of a discount. And this list comes in from this read. And there were big blocks. It was a big read and there were there were there were several trades that were in the hundreds of millions.
And they said, "We're talking it at 97." And uh I said uh I don't know uh I'll pay I bid 93 four-point back bid and I got hit on 300 million and one of the younger guys he's he now works at Double Line. He's been worked for me his whole career. He he was this is he's had a Russian accent. He's like this is too cheap.
This is the cheapest pond I have ever seen. And it was like a lightning bolt went off. So I was like, "You're writing that on the ticket. Cheapest bond I've ever seen. You're tacking it onto the the blotter on the on the board cuz mark my words because they yielded at that price of 93, they yielded eight." And I said, "Mark my words, this isn't going to end until these things yield 15." Well, I was wrong.
They actually went to a yield of 40. But the point was I said, "We are not buying any more of these. Period. None. We're not putting on a throwaway bid, nothing." And we're and we ended up there was a small rally early on in the credit crisis. We were able to get out of them at a profit. But those bonds went down to like 45 cents on the dollar.
And today they're like 103 again, right? But there was nobody to buy them. And that's what people don't understand. the the the um popularity of index funds is dangerous because you have index does well attracts money index does better you know the index outperforms 95% of active managers in stocks a bull market has something to do with that because the index has no cash but it's that that thing that people are just reinforced to to buy more and then all of a sudden starts going down and and they start selling and there's nobody to buy it.
And index funds are are very uh susceptible to this because you know you're running an index fund, they give you money, you buy the stocks, you're buying, put some puts them higher, people give you more money and again it's a virtuous circle. And the other side of that is the vicious cycle of selling.
And I don't think investors quite understand the danger of having so much money in uh index funds that have such lack of diversification. So it's this theme runs through everything. It's just a question of degree. And I I think that the worst is US index funds because of the foreign investment position.
We could have 20 trillion dollars come out of this market in the next whoever however many years. Could even happen in a more com compressed time frame. That would lead to tremendous underperformance because that maybe that money goes home because Europe is now outperforming in recent recent weeks. It's now outperforming.
Emerging markets have started to perform. May maybe maybe that becomes a trend and everybody wants to switch to the new the new ball game and I think that the odds of that again it might take longer probably will take longer than people think but it's going to be very severe and the underperformance is going to be very acute and painful and that's what that that's what will uh accelerate that uh turnover from sector to sector from country to country uh And that's I believe it's start it has started.
And if I were to tease out the insight in what you just described, the way I would summarize it is as an investor, you have to be very careful about the assumptions that you make. And and in some ways, the ones who have been in in the market for a long time have deeper assumptions that they feel are investment truths.
And when you go through a big regime change and the backdrop changes radically, you got to be really careful because that's what can wipe you out. Yeah. I I I put it in a very simple practical uh way of of of operating every single time that and I learned this probably 30 years ago through ex through through painful experience or two.
Every time you make a change or you're reconsidering allocation, the first question I ask myself is if and when this goes wrong, how am I going to explain it to the client? what's what what what what is the the the spectrum of my assumptions and somewhere within that spectrum there has to be um analyses done that assumes that this is going to be wrong and then say you know yes it was wrong but I had legitimate thesis it was very very well thought through but I'm wrong about 30% of the time which is quite a low number.
I mean, most people are wrong more than 50% of the time. And people that are reasonably successful in investment business, they're right like 55% of the time. 70 is very high, but I've been doing this for over 40 years, and I've got tons of data, so I it's statistically pretty significant, you know?
So, you you you know, you're going to be wrong. So, you just say, "Okay, this is one of the 30enters that I got wrong, but this this is how it was risk mitigated. this is how the loss was contained and how it didn't become a fatal risk. And that's really important. Um because there's nothing worse than I I've seen some I've seen some real horror shows.
I I've been in meetings with pension committees years ago now where they would have all their managers come in and the managers would present with the other managers present going around the table. And I'll never forget one. It was during the um emerging market, the long-term capital management meltdown that rolled the markets.
And this poor firm had had really abysmal performance. It was like, and this is in bonds, too, and it's many percentage points below an index one. And they said, "So, can you explain this to us?" And the guy from that company, wow. He said, "You know, we have no idea what happened. We're just as confused as you are." He was fired on the spot and he he deserved to be fired on the spot, but it was just like we we were It almost sounds like, hey, you know, we're throwing some darts one day and this is where they landed.
There was nothing there. So, I'm I really think it's important to say when and if this goes wrong, how am I going to explain? I mean I we had when when we had that tremendous interest rate suppression that yield zero interest rates for so many years we had owned some securities and they had because of the yield starvation the lack of volatility they had gone down to very low yields and in fact it got to a point where the yield on under the most likely outcome was negative actually negative because it was a premium dollar price and the mic could be returned quickly enough that you would have bigger dollar loss on the price than the interest you received.
And one of the guys that was helping to run that product, he was like, I don't know what to do because this looks so unattractive, but there's nothing to buy. And I said, we cannot own something whose base case is a negative return in a way that's not even conjectural. I mean, it's just very simple mathematics.
I said, we just can't do it. I'd rather own cash. I I can explain to the investors why we have 30% cash a lot better than how I why I own this. So sometimes you you just have to you just have to uh you just have to really think no I I can't just sit here and do nothing you know and the investment the problems that people have in the investment business they're very emotional every upday they're bullish every down day they're bearish right and the other problem is lack of action there's a there's a syndrome uh in a lot of people that says ready aim aim aim aim and they just can't pull the trigger.
And uh that's that's you first question is what about investing and makes people good investors. You got to act and it's you know and it's and there's an old bond phrase. It's probably true in all investment classes. Your first loss is your best loss. What that means is don't hold on to something praying for a recovery, right?
If you small losses more often than turning back into profits turn into bigger losses. So you have to be able to accept that and you know move on. So that's that's that's important. The the last question I wanted to ask you and thank you for your time is on inflation. So one of the assumptions and it may not be overt is that inflation volatility has been relatively low for a long period of time.
It was yeah yeah until recently but you basically had low and stable inflation for a long period of time and then and then all of a sudden inflation spiked. It came down but it seems that inflation volatility is a thing now. And that has a significant impact on the way you you invest because that is something that you could see people undervalue because it was not an issue for a long period of time.
Right. Um I've been predicting for over two decades that the response to recessions or economic weakness would increasingly be money giveaways. And we did it under George W. Bush, it was a few hundred dollars in the global financial crisis and that that's not enough. And then, you know, there's different rounds of this stuff, but you get to a certain point where it's too much.
And the the monetary authorities and certainly the the the leadership in government, they have no idea where that is. But we obviously passed that by the inflation rate going from 1.4 to 9.1 on the year-over-year CPI. And the next round, I'm afraid, is going to be bigger. And so inflation went up to 9.1 pretty quickly.
So few people in the Fed saw this coming. And yet it just seems to me that anybody without you don't need economics lessons. There's if you give when I was like five years old, we didn't have any money. And I remember saying, you know, mom, why doesn't the government just give everybody a million dollars?
No, everything would be great. She says, Jeffrey, if the government gave everybody a million dollars, an apple would cost $1,000. And I was like five years old. And I said, "Hey, she's right." because it's just not now not I used to in speeches I used to say every I hear commonly the most ridiculous idea that you cannot bring inflation back because of demographics and all this stuff.
I said I can bring inflation back by 5:00 this afternoon. have the Treasury Department declare, and I'm going to be hyperbolic for dramatic effect, that they're going to give every single American $1 billion. I said, if there isn't inflation by 5:00 tonight, the lines at the Ferrari dealers are going to be something to behold, right?
Of course, you can get that happening. It's for always and forever a monetary phenomena and that amount of money. So, I I do I think you're right. We had inflation was so stable. I mean, it was it was two plus or minus for so long and it didn't matter what terrible policies we ran. It didn't matter that we started giving money away, but we've crossed the Rubicon.
We we did it. And I don't know if that will and they won't suddenly get a new dose of caution and fiscal rectitude because when the trouble comes, it's always the same thing. We've got to do something. You know, desperate times call for desperate measures and the next and these crises keep getting worse.
And so I think it's base case is the next one will be worse than the last one. And that means a bigger response and that's going to be the catalyst. Well, Jeffrey, I appreciate you sharing your insights. I I always enjoy our conversations and I hope our listeners did as well. Thank you. Thanks everybody for listening.
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