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So, friends. Jeff Gundlach, one of the most respected and authoritative voices on Wall Street . And let's just say, he's been very, very active lately. I want to invite him, the founder, CEO and Chief Investment Officer of DoubleLine Capital, Jeff Gundlach. Jeff, thank you so much for joining. You know, this year I see your name, I see articles, I see headlines, even your social media feed.
There was more of a sense of urgency, more anxiety. What happens that really makes you want to try to get this message out to the general public? Well, I've noticed a family resemblance between the financial alchemy taking place in some private markets and the one that was in the mortgage market 20 years ago.
What I mean is, 20 years ago, we were taking triple-B rated securities and somehow making them triple-A rated securities, and Wall Street was finding a way to pocket the difference by selling low-quality assets as high-quality assets, relying on the ratings. It was based on the rating agencies: Moody's and S&P dominated at the time, and they were giving investment-grade ratings to securities that eventually depreciated to zero in a fairly short period of time, giving triple-A ratings to assets that had fallen below 40 at the height of the crisis.
So now we have something similar. We have ratings in the private lending market that are quite questionable. And we have pricing that is almost non-existent. And then there are portfolios whose valuations—we have historical data for about a year or even a year and a half—are now being viewed by the Department of Justice as somewhat suspicious, because one well-known player in private lending had a portfolio valued at 100 units at the beginning of the year.
There are a lot of loans in this portfolio. We're not talking about Nvidia stock, which can be very, very volatile. We are talking about a large portfolio of loans valued at 100 units. And then one night they changed their mind and downgraded the entire portfolio from an average of 100 to 81. That means either every loan was downgraded by 19 points , or half of the loans were downgraded by 38 points, or, since I keep hearing that everything is fine, maybe 75% of the loans are sound and 25% had to be written down, so they were downgraded to 24.
So which is better? That everything was great, but every loan lost 19 points, or that everything was mostly great, with 25% of loans falling 76 points? And this is being investigated because, of course, there are incentives. When you have incentives, you can predict what subsequent behavior will be .
And the incentive, of course, is to slowly realize the problems, because you will be able to bill your clients, the people in your fund, for 100 instead of 81, which makes your commission almost 25% higher. So , this is a certain problem because there is no transparency. And I always say that when this kind of financial alchemy occurs, it always starts with good intentions and maybe even good results and returns, taking into account risk.
But the analogy I like is the Wild West. The Wild West: you have a town, an agricultural town on the frontier, there are maybe a thousand people there, they all live off the land, they are all God-fearing, and there is not much crime. That is, from time to time, a murder of passion may occur, but people don't even lock the door.
And you have the sheriff, he's like Gary Cooper in "High Noon," with a heart of gold, and he doesn't have much to do, because this is a society of trust and morality. And then suddenly something happens, and the idea arises that there is a lot of money to be made because gold has been found two miles from town.
And suddenly a bunch of people flock there to make a quick buck. Those who want quick money—and many of them are decent people—but there are also scoundrels and con artists who come to grab a piece and run. And it's almost inevitable when we move into such periods of financial alchemy. So we have illiquid securities that used to be sold to so- called perpetual capital, endowments, and long-term pension plans, and they have gradually started to transform into funds that offer liquidity.
They call it semi-liquidity. Well, semi-liquidity was a dying art. Let me interject for a second, because you make a lot of great points, and I just want to expand on this because I'm dealing with this too, talking about it, and I'm feeling extremely frustrated. I've invited some brilliant Wall Street experts, and every one of them says it's much ado about nothing.
Each of them says, " Hey, you know, it's just a little drop." And you just mentioned the problem. The good people of this city allow the villains to act with impunity, but no one but you says anything. How can you explain this? Well, it's just that a lot of people are making a lot of money, and that leads to a lowering of standards.
And everyone who was there, say, 10 years ago, still wants to continue this game because they made a lot of money from it , but others come along and start doing things worth talking about, and no one wants the party to end. So even those who were there in the days of morality want to protect the reputation of their entire class.
But there are things that are simply obvious. I mean, you have long-term assets , and they provide quarterly liquidity in some limited amount, but the very fact that they provide it is worrying, and I think the internal mechanisms of all this are not very well explained. This was sold to the retail market through intermediaries who received very high commissions.
Yes. And these intermediaries, when someone tries to sell you a new share of assets, they don't start with a negative. They start with the attractive sides. They may say it is low volatility, which is a myth. This is lower volatility unless you overvalue assets at market price, just as a certificate of deposit has artificially low volatility.
Uh, they had good results. Uh, they had significantly better results than the private markets from 2020 to 2022, especially in 2022, when you had the worst public bond market performance ever due to a 400 basis point increase in interest rates. So, 30-year Treasury bonds lost more than 50% in value in 2022 alone.
And, surprisingly, they are still at that level. The drawdown of long-term bonds starting in 2020 is still 50%, as their yields are still above 5%, which is close to the maximum. This is actually within 10 basis points of the high of this cycle. So, Jeff, let me interrupt again for a second, because we're going on a break, but before that, there was an article in Bloomberg: "Wall Street enlists insurers to unfreeze private markets." You were talking about the retail investor, and suddenly we're all excited because retail customers have access to these amazing things that were previously only available to the rich.
And now they're talking about some trick, like shuffling the cards, because everyone knows the game is over, but how do you get out of this without blowing everything up ? Well, we live on hope right now , and hope is a very bad investment strategy, but sometimes, when you get into trouble, you have to rely on it.
So, when you downgrade your portfolio from 100 to 81, and I'm sure everyone believes: the next revaluation will not be up, but down. So you just hope that this software problem turns out to be not as serious as everyone thinks, or maybe people will change their attitude towards it. You're just trying to buy time.
This is similar to how Kevin Warsh is trying to buy time at the Fed. And I don't blame him for that, he's new here, but he's creating these working groups. And I believe this is intentional. I think he knows that inflation is coming down. We recently received a rather weak CPI report , with inflation falling by four tenths of a percentage point in a month.
So we know that inflation is generally coming down, although it's probably still hovering around 3.5%. But as long as we see consistent improvement in inflation index numbers, Kevin Warsh can hang on. As for these working groups , I'm not a fan of them, Charles. I believe the problem is the way many organizations are run: it is done collegially , just as the FOMC is run by a committee.
Before, everyone somehow supported the head, but now there are so many dissenters, and we are approaching the point where they may even vote against the head, depending on how it is organized. So, he's trying to buy time. Inflation is on his side, but now if we move from one committee, which is probably too big, to five new subcommittees— that's a different matter.
So now we'll have five more committees, and we all know that committees are just a way to slow down decision-making. Let me tell you, I like what he does. I want to delve into this in more detail, into the signal from the bond market and into where investors can find solace, opportunity and peace of mind.
So, if you can, stay with us. We will take a short break and be back soon. Okay, friends, we're back to DoubleLine Capital Founder, CEO and Chief Investment Officer Jeffrey Gundlach. Jeff, I want to continue the topic of the working group. You know , I was hesitant about Kevin Varsh, but I saw him speak at the event, had a chance to talk to him a little bit, and he impressed me with his ideas and thoughts.
I think this working group, which you say is giving him time, will allow him to not only buy time, but also, so to speak, reformat the playing field. You know, if he were acting in the current state of affairs, they would have to raise the stakes right now. If they rethink this, they will find better data sources, more effective data.
Listen, Dallas's truncated average, the inflation rate compared to the core PCE index. You know, maybe in his opinion, we are already much closer to the 2% target. So I think he wants to change the device itself and only then move on. Yes, I think that's right, but what you said, Charles, you just mentioned something very important: if you look at the scatterplot that we created, it looks like it was created by JP Morgan Asset Management, so I want to give them credit.
They took a scatterplot . On the Y-axis, they simply plotted ISM manufacturing prices paid, and on the X-axis, ISM manufacturing employment. And as you would expect , when you have low ISM prices paid and low ISM employment, you end up in the bottom left of the chart. You would think that the Fed would almost always ease policy when you're there because you have no inflation and very weak employment.
Conversely, when you are on the upper right side of the chart, you have high prices and high employment, and you would think that the Fed would tighten policy. I took their diagram and did one thing: I supplemented it with one idea, and it's on my X account, nickname— the truth gun lock, and I showed that this diagram is there.
And what's fascinating is that under Volcker, that was the only period in the 80s , '82 twice and '85, when there was actually a rate hike with low numbers on the bottom left, meaning low inflation and low employment. They raised rates because Volcker wanted to get rid of inflation. And the only examples in the top right corner of this chart are Arthur Burns, who was effectively intimidated into overly relaxing policy.
And the most interesting thing is that there's only one dot in the upper left, in the upper right corner, where there was actually a softening, not an intensification. And it was Walker, believe it or not. So Walker was really on his own, but it's interesting that where we are now on this scatterplot, according to the latest data, we're in the upper right corner.
They should raise rates based on this data, not think about mitigation. But you're right, the level playing field no longer applies. The Feds have a new sheriff in town. And I like what he says about new ideas. I've been saying this for years, and I can prove it. Um, the Fed has been following two-year bonds since the Bernanke days.
It's just following the two-year bonds. There's no need to even listen to the Fed, but now Warsh, I think, won't be following the two-year bond. And what I like about this is that that's exactly what Walker did. That's how he got rid of inflation. Volcker, when the two-year Treasury was at 15% in the late 70s, early 80s, raised rates to 20% when the two-year was at 15.
And with the two-year still at 15, he lowered rates to about 14.5. So, it absolutely outperformed the two-year bonds, not trailed them. And I like it. I like the idea that we have someone who doesn't act automatically. Just automatically on autopilot. I think it's Kevin Warsh. Um, I'm optimistic that he'll be a better Fed chairman than Jerome Powell.
Me too. Hey, I have 3 minutes left. So many things to ask, but I have to ask about your Kimmy K3 topic, this leap in China's technology from 18th to first, according to some reports, thanks to government intervention. There are some Republicans who say they stole it. In other words, they stole all this information from Americans, added a little bit on top, and then they're going to sell it back to our companies, and that's not capitalism.
What is your opinion on this matter ? Well, I certainly don't think that should be allowed. I remember my uncle made the Xerox copier commercially successful. He actually invented the commercial photocopier. And he spent the last 20 years of his career fighting the Japanese, who were stealing all of Xerox's photocopying technology.
They would, essentially...He had to go to Tokyo and sit in on the trial. And what they did was they took everything exactly the same and replaced one metal part with plastic. That's all. So, he was unhappy about it, and I think that's what the Chinese do. And this is not surprising , because there are so many Chinese students in our university system .
They learn some of these technologies and then they come back and, of course, share this information with Chinese companies. I believe this is an issue that definitely needs to be addressed. Before I let you go, how do you see the markets in the second half of the year? Well, this is a really interesting situation.
Stocks are behaving unpredictably, especially individual securities that are experiencing a period of wild volatility, even though the VIX index is only 17. Meanwhile, bonds are stable as a rock. My best indicator right now, and this is hard to believe, is that the 10-year Treasury bond has to be at a certain level, and that has a coefficient of determination of 0.93 over the last 40 years.
This is an incredibly accurate indicator. This is the 7-year moving average of nominal GDP and 10- year German bonds. I don't have time to explain why this works, but right now it's indicating that the 10- year US Treasury should be at 4.62, and it's currently at 4.63, and there hasn't been any volatility in that metric for about 2 years .
So I think in bonds you're just trying to avoid credit crashes and earn something like the yield on a 5- year Treasury plus the spread to get a bond portfolio yielding about 6%. But I don't want anything rated CCC or a weak B; I want tools with real, reliable credit fundamentals. So, it's going to be interesting, and I think the stock market has probably started a period of growth.
I think we will get good results from some companies on the eve of the reporting, and that is what I think started the rally, as people do not want to remain in short positions before the start of what is considered a successful season. Jeff, I really appreciate you. You have no idea, I've always admired you.
Thank you very much. We've covered a lot , and there's still a lot to discuss. I hope to see you again soon. Thank you. Mhm.
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