Jeffrey Gundlach — Waiting For The Next Big Trade (w/ Raoul Pal)

RAOUL PAL: Jeffrey, great to get you back on Real   Vision. It's been a while I think last 
time you spoke to us is with Grant,   and it's really good to have you back.
JEFF GUNDLACH: Yeah, it's good to be   back. It's been a long time, as you say.
RAOUL PAL: I would love, for the benefit   of people– you've had an incredible career. 
I'd love to hear it if that's okay.

Just some   of your career, how you started, and how you got 
where you are today. Because a lot of the time,   you get interviewed for three minutes. It's 
really good to hear how you think and what   you do and to get to the conclusions to get to.
JEFF GUNDLACH: Well, I got into the investment   management business by accident, actually. 
I didn't know what it was. I didn't really   have a career going. I was trying to find myself, 
that was when I was in my 20s, early 20s. I saw a   TV show that was called Lifestyles of the Rich 
and Famous, just by this guy named Robin Leach.   I never watched the show, it just happened to 
go on.

I had a TV set, it was black and white,   it didn't have a dial on it. You had to use pliers 
to turn the station, because it was all beat up. I   had a wire coat hanger for an antenna and only got 
three stations in those days, ABC, NBC and CBS.  Lifestyles of the Rich and Famous came on 
and they said we're going to count down   the top paying professions, the top 10 paying 
professions. I thought this will be interesting,   since I'm looking for direction in life. 
Number one was investment banker. They   said you have to be very hard working 
and you have to be extremely analytical,   but it's actually a very lucrative profession.


decided that and there that I was going to be an   investment banker but didn't know what that was.
I went to the Yellow Pages back when there were   phone books. I went to the Yellow Pages and 
looked up investment bankers thinking that I   would find some local investment banking outfit in 
Southern California and I would get a job there.   As it turned out, there aren't any listings 
in the Yellow Pages for investment bankers,   but there were listings for investment management. 
I figured it's got to be the same thing, and so   I ended up sending a couple dozen resumes with 
a very aggressive cover letter to the firms   that had a bold faced ad in the Yellow Pages.
I actually got three replies, most of them didn't   bother replying to me. One of them was for a job 
interview, and I ended up going in that interview.   They asked me, "You've got a very 
interesting mathematical background,   what do you think you could apply that best to? 
Equities or fixed income?" I said, "I don't know   what those things are." The guy almost fell off 
his chair that I was interviewing with.

He said,   "Well, equities, that's stocks. Fixed income, 
that's bonds." I didn't know what bonds were.  I said, "Well, I want to do stocks." It 
turned out that they need more help in   the bond department for quantitative person 
than in their equity division. I started   in this tiny little bond department. It was really 
little. There was like four people in the entire   bond department.

It was really just a necessary 
evil. In those days, we're talking about the   early 1980s, there were a lot of what we 
call balanced accounts. Pension plans would   give their money to a manager and they would do 
stocks and bonds and allocate between the two.  It was really a stock operation, the bonds were 
a necessary evil, we just bought treasury bonds   mostly, a few corporate bonds, all very, very 
low risk and mundane stuff. It just turned out   that my background was perfect for understanding 
the bond math stuff and within a week, I'd say,   I knew more than the people that were running 
the department, because they were just NICHOLAS   CORREA: Sorry for interrupting your video, 
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think it's something you can afford to be without.   placeholders really. I thought I was doomed 
because it was clear to me that they didn't   know what they were doing, but as I learned later 
in life, that's actually opportunity.

That's   what opportunity looks like when you're working 
for somebody that's really in over their head,   if you can help them out and lend a 
hand, you actually become very valuable.  I started running money. Within six months, I was 
given the Chrysler Pension Plan portfolio to run,   which is a few hundred million dollars, 
because it was a very sensitive account   and everyone was afraid to screw it up. They end 
up giving it to me with six months of experience.   As it turned out, I was really good at it.

I ended 
up just doing more and more stuff. I learned a lot   about mortgage backed securities, which were a 
very rapidly growing area in the late 1980s. It   turned out that I had a knack for it, and started 
a mortgage backed securities related investment   program and about five years later, I was in 
charge of the entire fixed income situation,   right from junk bonds through treasuries, 
mortgage backed securities and all that stuff.  Those were good times because 
interest rates were relatively high.   The markets were really inefficient. Compared 
to where you are today, it was so inefficient.   There were simple securities like Ginnie 
Mae's that would trade with a one point   discrepancy in the market, which was a big deal 
in bonds. Some of the offerings are bought at 99   and you were able to buy it from somebody else 
at 98, you could actually just flip it from one   broker to another, actually.

You couldn't do 
anything like that today with all of our AI   and electronic trading and all that.
That's what happened, and so I ended up,   as luck would have it, I had the best track record 
for many, many years in the entire industry.   After a while, that attracted a pretty decent 
client base. What really set off my career   to into like a retro rocket was calling 
the credit crisis. I was very vocal   in 2006 about the stock market was going to 
crash and the subprime market– the quote that   was carried on five continents, I gave it a major 
conference in June of 2007. When people weren't   fully aware of how bad things were about to 
become, I said, "Subprime is a total unmitigated   disaster, and it's going to get worse."
That got picked up, and within weeks, really,   Countrywide, which was one of the largest 
originators of mortgages and subprime was   bankrupt. Of course, Citigroup essentially needed 
a government bailout, and Bear Stearns went under,   and we all know, it's all in the history books. 
Because I was in the mortgage market, primarily   and completely sidestepped to the entire debacle, 
it left me in a position when things got really   washed out in 2008 into 2009 to deploy massive 
amounts of capital, 10s of billions of dollars,   into the things that had been thought to be 
safe, and then started to trade at 40 cents   on the dollar because there was such a 
huge supply/demand imbalance and such   ugly fundamentals, I was able to deploy all that.
I had this awesome year in 2009, as well,   writing the bounce back.

At that point, I 
think people realize that there might be   something going on here that's worth investing in. 
That's when I really started to get a tremendous   amount of exposure. Then we started DoubleLine 
and we had the best results right out of the
  box in the industry for a few years. It 
was easy for the clientele to just say   this DoubleLine thing is fine with 
me, and that's how I ended up [?].  RAOUL PAL: Obviously, as you go through your 
journey, you're going to make mistakes.

What was   the first mistake that made you realize, "Okay, 
there's a lot of things I need to learn still."   When you're going way back, talk about 
some of these mistakes, because that's   where all the learning lies, being right, 
you learn less than actually being wrong.  JEFF GUNDLACH: It's funny. The very first big 
trade I did was actually the most successful trade   of my career. I actually sold 30-year treasury 
bonds yielding 7% which was thought to be really,   really low. That was an April of 1986.

I actually 
sold at the top tick, and the market just started   tanking after that. Then it started to rally back, 
and the big mistake I made was I ended up being   long the market right before it started to drop 
again. I remember feeling that I was trapped in   this trade, I remember thinking that I just knew 
that the market was going to drop, gapped down   like every day, because it was doing that day 
after day after day and I was just trapped in   this position and I was losing tons of money.
I just remember. Actually, I was in a rock band at   the time. It was actually my first career, it was 
in rock and roll. I wrote a song that was called,   Wishing, Hoping and Praying. Because that was 
exactly what I realized I was doing in that   trade. I was just wishing, hoping and praying that 
the market would reverse to the upside even though   in my bones, I knew that wasn't going to happen. 
I started to realize that– the phrase that a guy   actually told me when I explained my situation to 
him, he said, "Your first loss is your best loss."   That's really good advice in investing markets.
You're in the wrong trade.

Maybe your premise   was wrong, maybe new information came out that 
caused a reversal. You just got to get out even   though you're taking a loss. The key thing 
that you learned from something like that   is you just have to act, you can't just 
be frozen in a position and you have to   acknowledge that your first loss is your best 
loss and to get out.

That was that was a big deal.  The second biggest mistake I made was actually 
something I did not do, around something that   I did do. That was in 2003 or 2002, rather, in 
the aftermath of Enron, and the scandals in the   corporate bond market, there was an incredibly 
high degree of flight to quality and the junk   bond market was trashed. In all the accounts that 
I would traditionally run, corporate bonds, I went   to my maximum junk bond position, but for some 
unknown reason, thinking that in my core strategy   where I never took corporate credit risk, for 
some reason, I didn't want to get my hands dirty,   or something with the corporate bonds.
I didn't buy any, even though I went to a maximum   and more diversified accounts where corporate 
bonds were typical, if not consistent investment.   Because of that, I missed the entire massive 
rally from October of 2002 until October of 2003,   the return on treasury bonds was like zero, 
but the return on junk bonds was 30%.

I missed   the entire thing in the one strategy, and so I 
told myself, I'm never going to be so foolish   and narrowminded again. The next time there's a 
big washout in credit, I'm going to go into junky   bonds, even in this low risk, flagship strategy.
What ended up happening though was that the   crash in credit was EPA centered in mortgage 
backed securities. I ended up going massively long   junky stuff in 2009, earlier in the 
year, but it wasn't in corporate bonds,   it was in the things that were actually the 
cheapest, which were mortgages. It's ironic,   I still have never done it in that traditional 
flagship strategy which I've been running   now for over 35 years. I've never owned 
a corporate bond, even 'til this day,   when the corporate bond market crashes, 
which it would have without the Fed.  The corporate bond market was 
crashing in March into April,   I was ready to pull the trigger but the Fed 
pulled the rug out from under the opportunity   with their illegal bond buying activity in the 
corporate bond market, which as you know is in   direct violation of the Federal Reserve Act of 
1930.

They're not allowed to do it, but this is   just a different situation so almost anything 
is possible as we've learned over the past 12   to 15 years out of the central banking community.
RAOUL PAL: How did you navigate the really   difficult bond market of 1994? That was a brutal   period for bonds.
JEFF GUNDLACH:   It was a big interest rate rise in a compressed 
timeframe. The biggest problem of 1994 was that   it came after a big interest rate decline that 
brought short term rates down about 3%, which was   thought to be absurdly low at the time. Because 
of the low interest rates, the mortgage market,   which was the bulk of my investment activity, 
was refinancing in a very rapid fashion.

In fact,   it set records at the time. Those records were 
broken in 2003 but it was really high refinancing.  That created a short term maturity concept 
in the mortgage backed securities market.   If half the mortgages refinance in one year, the 
securities that are backed by those mortgages are   definitionally, very short term assets with low 
durations. The yield curve was very steep in   those days. The short rates were 3%, long rates 
were more like 6% or 7% or something like that.   When the rates start to go up, the refinancing 
went away, because obviously, the opportunity   to refinance wasn't as attractive.

Suddenly, 
the mortgage backed securities market went from   an interest rate maturity of about 
two years to one of about 10 years.  Not only did you have to endure a 300 basis point 
interest rate rise over about a nine-month time   period, but you also had the unfortunate 
experience in the Ginnie Mae type of market   of extending and rolling up the yield curve 
so the losses were pretty extreme. Then you   had a margin call problems. You had Orange County 
that didn't own mortgage backed securities,   there's an urban legend that that's what they 
ran into trouble with, but it's not true. It   was just Fannie Mae debentures, but they ended up 
rolling up the yield curve on them too. They ended   up liquidating those assets unfortunately, 
causing the low of the bond market in 1994.  I had the worst year ever in my most aggressive 
strategy in 1994. I was down 23% in 1994.

In my   more traditional strategies, I was down a small 
amount, but in my most aggressive strategy,   I was down 23% but amazingly, in the first half 
of 1995, the market reversed pretty strongly.   By the middle of 1995, by June 30th of 1995, 
the entire 23% loss had been erased and I   was actually up 53% in the middle of 1995. The 
market was trashed on supply/demand problems,   we were talking about government guaranteed
mortgages, some of them were trading at prices   that anybody that didn't experience 1994, anybody 
that's only been on the market for 20 years,   they probably wouldn't believe 
how cheap these securities were.  The treasury bond market was yielding something 
like 7% or something. There were securities   that yielded to the worst possible case, 16% that 
you could buy in the mortgage backed securities   market, but there was just an overwhelming 
problem of selling. That prepared me tremendously   for the 2007, 2008 period, because it made me 
realize how much prices can drop when you have   a supply/demand imbalance of that magnitude. 
Valuation makes absolutely zero difference   when you're in a true brutal bear market. You 
just go to prices that you just can't believe.  When the market started to crack in 2007, 
one of my guys, he's from Latvia, and I used   to call him a crazy Russian billionaire.

He 
wasn't Russian, really, he was Latvian but he   certainly wasn't a billionaire. He was certainly 
a little bit crazy. He still works for me, he's   now actually the head of my agency mortgage backed 
securities division. The prices of a lot of these   adjustable rate mortgages had never gone 
below 100. They were perceived to be   credit risk free, AAA rated. They were floating 
rate, so they have no interest rate risk to   speak of, and they had never traded below 100.
I'm talking about the AAA rated prime mortgage   backed securities. I'm not talking about 
subprime garbage, I'm talking about really   good underwriting. They've never traded below 
100. Then the margin calls started to come   in the late summer of 2007. One of the 
greatest originators was Thornburg,   a mortgage REIT. They're a really good originator, 
and they got caught in a liquidity problem   and they got margin called one Friday afternoon.
There were hundreds of millions of   dollars in these prime mortgages that 
were being margin called away.

I decided,   "Well they were traded below 100 before, they were 
being talked at 97 cents on the dollar, which was   the lowest price anybody's ever seen." I put 
a throw a bit of 93 on a $300 million package   of these mortgage backed securities and I got 
hit. My crazy Russian billionaire guy, he says,   "This is way too cheap, way too cheap.

This is the 
cheapest and I have ever seen." Him saying that   triggered this crack of doom feeling all the way 
down my spine, reminded me of 1994 in the Ginnie   Mae market when the prices got so absurdly low.
I said, "You're going to write that on the ticket,   Vitali. Write it on the ticket, this is the 
cheapest thing I've ever seen because mark   my words, the prices are going to go way, way, 
way lower." I said, "We're putting a moratorium,   we're not buying any more until the yields–" 
and the yield at the time was like 8%.   The bond, it was like at 93 cents on the dollar, 
and with a six and a half coupon or whatever,   it was an 8% yield. I said, "Mark my words, 
these securities are going to go to yields   in the teens," but I was wrong. They 
went to yields of 40% to [?] actually.  It was that experience from 1994 of 
how low the Ginnie Mae prices got that   made me realize when things really go bad, 
they go way worse than anybody thinks. You   get to this level, where they're just completely 
fire sailed.

We managed to navigate through the   Global Financial Crisis, probably better 
than anybody else in the fixed income   business because of the institutional memory and 
experience. One of the things that makes a good   investor is actually you talked about mistakes, 
you'll learn from mistakes. Absolutely having  a memory, an emotional memory and an 
institutional memory that you don't   forget your mistakes is really valuable.
My uncle invented the Xerox copy machine   and he was one of the greatest inventors of 
the 20th centuries in the Hall of Fame. There's   such a thing as the Inventors Hall of Fame. He was 
interviewed and he said, "A successful inventor is   an accident prone scientist that pays attention." 
That's the same thing in the investment business,   you make mistakes.

There's probably 2000 
mistakes you can make. I've probably made   all 2000 of them twice, but thankfully, I 
rarely make one a third time. You have to   have that memory and a lot of it is actually 
emotional memory, what the market feels like.  Like this year, I was very bearish 
on the stock market in February.   I have a fund that I run, it's mostly my own money 
and I was very short, I was actually 300% short   the US stock market and I covered those shorts 
on March 23rd. I didn't go long, I wish I had,   but I covered the shorts it was because the market 
felt total panic. It was that day when Bill Ackman   went on TV and was talking extremely negatively, 
even though apparently he was buying stocks at   the time, but he was talking very doom and gloomy. 
It became a big topic for that morning, I realized   that was the environment where you really have 
the washout. Again, it's that emotional memory   that has served me very, very well and just 
accepting your mistakes and learning from them.  RAOUL PAL: I'm going to talk about your personal 
investing style and then as a business, obviously,   because you run a lot of managers and stuff, 
but your personal investing style, what is that   like now? Do you do use charts? Are you very 
mathematical prices based? Are you a feelings   guy? How do you construct from an idea through 
to the execution? Because that's fascinating,   we don't get to hear about how you do that.
JEFF GUNDLACH: Well, I'm a big believer   in cycles and charts and retracements, and support 
and resistance and all that type of stuff.

I spend   a lot of time analyzing off sides positioning. 
Sentiment call buying, which is absurdly high, has   been for four months now, thanks to retail, and 
the slices and all these other retail products.   I look a lot at sentiment and where things 
are. For example, I'm very, very negative long   term on the US dollar. I've been a dollar bear 
structurally since January of 2017, where I had   been positive on the dollar for about six, seven 
years. Then I turned negative in January of 2017.  I'm actually long the dollar now, even though I 
don't believe in it at all, it's a good investment   for the next five years, but the position against 
the dollar got pretty extreme about a month ago.   There was a double bottom back on the DXY index 
at about 92 down from 103 in January 2017.   It just seemed to me that there was no momentum 
on the downside, there was just a lot of   negative positioning.

For a trade, we went 
long the dollar. We haven't made a lot of   money on it, but we're in the black–
RAOUL PAL: You don't mind trading   against your macro view from time to time 
when you see a specific opportunity coming.  JEFF GUNDLACH: That's right. I will not go 
mega long the dollar thanks to my macro view,   but I am positioned moderately long the 
dollar. My macro view on the dollar,   actually, that is my highest conviction
macro idea, is that the dollar is going down.   I know I'm not alone in that view although I've 
been of that mind for a while.

It has a lot to do   with this absurd deficit problem that we 
have gone into on steroids here in 2020.  The correlation between the dollar going down 
and the twin deficit going up is extraordinarily   tight. The deficit is obviously exploding, forget 
about the trade deficit doesn't matter. It's   trivial compared to the budget deficit. The budget 
deficit is going to just get worse and worse and   worse. The dollar seems almost assuredly, to be 
going lower. In fact, another thing that causes   the dollar to go lower is the Fed has really 
pivoted a lot over the past couple of years   and so you don't have anything resembling a 
strong dollar policy, thanks to interest rates.  I think the Fed has been quite clear 
that they want inflation to run   significantly higher than 2%, at least for a 
while. They have no problem with that concept.   In fact, they embrace it. That's another reason 
to be bearish on the dollar. It hasn't been a   money making trade in any significant way, but I 
think that's the big trade for the years ahead.  RAOUL PAL: Do you mainly now run the whole 
portfolio as a pure macro view? Because obviously,   originally, you were in mortgage backed 
securities, you were much more in the weeds,   you knew inside and out, every part, 
you're now seeing more macro in your view,   you're multi-asset now is that right?
JEFF GUNDLACH: Yeah.

I've really changed   my role in investing very substantially over the 
past 15 years, most of it in the last 10 years.   When we started DoubleLine 11 years ago,   I was doing a lot of trading, a lot of 
micro stuff, a lot of security selection,   a lot of arguing about a quarter point on a trade 
and all that stuff. As the firm grew very rapidly,   my time was not well spent doing those things 
because I've had a team working for me that I've   trained for many, many years.

Many of my people 
that work for me have worked for me for 20 years.  They will come to the same conclusion on the 
micro stuff, because I trained them. We've worked   together very closely for a long time. Let them 
argue about the quarter of a point and let them   decide whether you want Ginnie Mae x or Ginnie 
Mae y or corporate bond A or corporate bond B,   but all I have tried to do is really get us in the 
tailwinds of the macro stuff. I've gotten a big   team built around that. We have a very extensive 
meeting, we just had it this morning, less   a couple hours, going through 250 pages of 
charts. It's very disciplined, but we evolve it,   of course, as the world changes, but we go through 
and we basically rank every asset class in the   world with a fair amount of granularity, actually.
We decide that this is our positioning for   it, really, we're thinking about an 18 month to 
serve a time window as the big centerpiece of what   we're doing.

Then we'll adjust it for a multiweek 
countertrade or whatever, not in a major way,   but just try to add a little bit more value. I 
spent a great deal of time on trying to understand   the macro stuff and how it's changing. I enjoyed 
it and I've developed a style, I think has been   quite value added. I enjoy it, and I'm good at 
it and everybody fault falls in behind because   it's funny when a lot of people– it takes a 
while working on the team to understand that–  We pretty much get the macro stuff right about 70% 
of the time, which is a very high batting average.   If you can get it right 53% of the time, you're 
going to be successful. Most people get it right   about 48% of the time, and that's the problem. For 
some reason, I seem to have a good vision on that   stuff and get it right about 70% of the time, 
which means I'm wrong 30% of the time, which is   when you've been in the business, 35 years plus, 
30% of the time, I've been wrong for a decade.   If anybody wants to hate on me, that's fine.   I hope you've got a long, long time period, if 
you want a list of things that I've gotten wrong.  RAOUL PAL: Jeffrey, the other interesting thing 
about that is I have a feeling that one of the   reasons why the 70% number which is high, as you 
say, is because your time horizon is different   to most participants.

Most hedge funds are 
monthly mark to market. You're trading with   longer term views. You can accept different types 
of drawdowns in individual positions, you can set   up your portfolio differently, so you can time 
arbitrage because macro, as you know, when we get   one bloody piece of economic data a month, nothing 
changes for six months so it does take time to   play out. Do you think that's one of the secrets?
JEFF GUNDLACH: Absolutely. In fact, one of the   very first things that I did in the investment 
business, I was working– when I started   in the bond department, there was a 
guy who needed some quant support.   He gave me a task of just doing a historical 
study on what time horizon of investment would   be most optimal.

We started out with a study that 
we assumed that you had perfect foresight with a   five-year horizon. We just used historical data on 
every asset class and said, "Let's just say that   on day one, you have perfect foresight, and you 
invest in the asset class that ends up being the   number one returner for the next five years."
You can do that because you're just using   historical data so you're just analyzing 
return series. What we concluded   is that even if you had perfect foresight with 
a five-year horizon, you would probably go out   of business, because so many of the actual 
data series displayed the characteristic   that even though you knew with metaphysical 
certitude that you were in the right sector   for the full five years, so often, it was bad for 
the first two and the return was very often back   loaded in those five year periods. We came to the 
conclusion that your clients would fire you if you   were that bad for two years and refuse to change.
RAOUL PAL: Just when you're [?] and   was about to take off, you've got fired.
JEFF GUNDLACH: It's just like that value investor,   was it Julian Robertson got closed down in 2000, a 
value manager right before value really did well.   We came to conclusion that five years is too long, 
it might be fine for your personal money because   you don't have anybody badgering you about it, but 
when you have clients that want a quarterly and   monthly reporting, they're going to complain, 
as they always do, if you have a bad quarter,   let alone two years in a row.
I came to conclusion that five years   was too long but I also perceived that what most 
people say they do, which they're lying, actually,   they say that they're analyzing markets 
continuously, all the time, which, of course,   is a lie.

When they're asleep, they're 
not doing it. When they're eating lunch,   they're not doing it. Most people, 
they do have like a weekly meeting and   some people make changes pretty frequently, talk 
about hedge funds that have a short horizon.
  I just think that the longer your horizon is, 
the higher the probability of your success.   If I want it to invest for my great, great, great, 
great grandchildren, I'm positive that certain   real estate investments and certain resource 
investments would be obvious winners. Who cares   about your great, great, great grandchildren? You 
have to balance the higher probability of a long   horizon with the tolerance of your investors, 
impatience of your investors. I came to the   conclusion that 18 months was the best horizon. 
It's long enough that you bring your probability,   in my case, up to about 70, but it's short 
enough that you don't have the five-year problem.  I've succeeded in this business by having about an 
18-month horizon, and sometimes it ends up being   two years and sometimes, it ends up happening in 
a year.

I found that to be the real sweet spot   and it served me very well.
RAOUL PAL: I was running a macro hedge fund,   GLG, back in London, back in the day, 
and I eventually left the business   for the reason that I just thought 
the time horizons were mismatched.   Since then, I've written a research 
service, Global Macro Investor, which   I've gone at exactly the same time horizon, 
and I haven't quite hit 70%, but not far off   from exactly the same structures. Nobody's doing 
at the time. Arbitrage is good. If I went to   shorter term trading, I'm just not like, good.
JEFF GUNDLACH: I'm sure my results would be   substantially worse. I think my hit ratio would 
go down to 55% if I was really trying to do month   by month, and a lot of people burn out in hedge 
funds.

That's a very common thing, because they're   so short term oriented. I've talked to many hedge 
fund managers who say that they wake up several   times in the night and have to grab for their 
phone, because they're panicking about the opening   in Singapore or something. That's no way to live. 
I'm not surprised that people that use that very   short term horizon don't have staying power.
RAOUL PAL: How do you think about– before we   go on to your views going forwards, because now, 
we've framed your time horizon, and stuff like   that, which is always really important. Because 
if you don't listen to somebody's time horizon,   you don't understand what they're saying, and so 
people won't be able to do. Talk to me a little   bit about risk management. How do you think about 
sizing a trade? Because you talked about the 300%   trades that you've had, sometimes you 
get these opportunities, but they're   rare, how do you think about trade sizing overall?
JEFF GUNDLACH: Typically, it depends on the asset   class, like, if I'm running a corporate bond 
portfolio of risky stuff, I really don't want   things to be more than about a percent under 
normal conditions, any particular name or   something like that.

In the mortgage market, when 
I used to invest in some really risky refinancing   oriented securities, which can have huge price 
changes, I wouldn't have a single position that   was more than one half of 1%. Because there's 
a lot of idiosyncratic things that can happen.  I'm completely comfortable when 
you get to those rare moments.   I'm pretty comfortable calling all in, but you 
have to be in those rare moments. It only happens   probably once every dozen years or so. It takes 
all the patience in the world to wait, wait and   wait for the prices to just drop, drop, drop. 
Once you get to that level, where you can almost   analytically prove that you're going to get more 
money back, even from bonds here, particularly,   that you might not get all your money back if 
it's a corporate bond situation, you're in a  default oriented commercial mortgage 
backed security, but you get to a point   where it's virtually impossible to not get 
more money back than where the market is   actually willing to sell you these securities.
At that point, I'm pretty willing to go all in.   What I mean all in, I'll actually raise funds to 
do one trade.

I did that in 1994. I did that in   2008-2009. I'm preparing to do it again. The 
market opportunity isn't there yet. It was   one coming, but the Fed screwed it up with their 
bond support purchases. I've started a fund to do   basically, one– and it's almost a beta trade. 
I have two different styles. There's the normal   course of business, where everything's an alpha 
trade. That's where we are right now, clearly.  The opportunities, particularly in the fixed 
income market are pretty paltry. Everything's   an alpha trade, there's no beta that's worth 
anything right now. You have to find parts of the   capital structure that are particularly cliffy 
and all that stuff. Right now, everything's an   alpha trade, but you do alpha trades waiting for 
the big beta trade. When the beta trade comes,   I don't want risk management.

Risk management is 
when you're in the alpha trades. You need risk   management right now. When the market falls apart, 
you don't want risk management, you actually   want to just put the pedal to the metal.
RAOUL PAL: Because you want to take as   much risk as you can when you've got to. JEFF 
GUNDLACH: Yeah, because it only happens what?   Five times in a lifetime? RAOUL PAL: Yeah, 
entire career, you only get a few of those.  JEFF GUNDLACH: Right, and so you have to really 
push it. Like I said earlier, my biggest mistake   was I didn't push it the way I should have across 
the board in the corporate bond market in 2002.   I vowed I would never miss that again, but you 
have to play defense waiting for those things to   come. That means a lot of diversification, small 
position sizings, particularly when you're in a   market that is, I would say, processed, is priced 
for good outcomes, assuming that nothing bad will   ever happen again. We were there in February of 
this year. We were there, I think we're going to   get there again.

This whole situation that we're 
in right now is wickedly unstable, in my view.  RAOUL PAL: Let's talk about 
this a little bit. Look, I have   30 years in this and I'm a bond market guy, 
because that's been the greatest source of   risk adjusted returns of almost anything. Here 
we are, the bond market has got like zero vol.   The corporate bond market has got zero vol as well 
because the Fed have stopped the credit markets,   so yes, I can see that more credit related 
equities are selling off or moving around a bit.   It's a bloody hard market for macro right now. 
The dollar has not done anything much as you say,   so we're stuck. What do you think of this?
JEFF GUNDLACH: We were just having this   discussion this week in one of my strategy 
meetings, where some of the people were lamenting   the state of affairs. I said, you just have 
to take reality for what it is. If you were   only a treasury market investor, right 
now, the situation is truly hopeless,   hopeless.

The yield is 50 basis points. 
The vol, as you correctly stated, is zero.   You have virtually zero income, and there's 
no volatility to trade that you could actually   make something happen through price 
change. It's literally hopeless.  In environments like this, you actually just have 
to not try very hard and just accept the fact that   you're not going to be posting big numbers because 
any attempt to post a big number is probably a   very long shot in terms of potential success.
RAOUL PAL: You could wait for the breakout in   the end, because if you push a position in a 
market like this, as you say, you can lose money,   so then you trade options, you just bleed, 
time decay.

It's just not my kind of market.  JEFF GUNDLACH: I have been way less active 
in the past, I would say, three months than   pretty much any time in my career. I was 
quite active, of course, in March and April,   where we're just trying to stay alive. In the last 
few months, there's just nothing going on. Always,   low volatility leads to high volatility. There's 
a reason why Death Valley is right next to Mount   Whitney. Death Valley is the lowest spot in the 
lower 48 states, and Mount Whitney's the highest   spot, there's a reason why they're right next 
to each other. That dirt is got to go somewhere   and that's what happens. Vol never stays low, 
and so you simply have to pay attention and   wait for the opportunities because the vol will 
go up.

Interest rates, interest rates will not   stay at 67 basis points on the 10-year forever.
RAOUL PAL: No, my view is always that suppressed   volatility leads to hyper volatility.
JEFF GUNDLACH: Absolutely. It's actually   Gundlach's law of investment physics. I say 
the frequency of trouble times the magnitude   of trouble equals a constant. 
The worst thing you can try to do   is invest In one of these hedge funds 
that claims they've got everything,   all the risks are ironed out flat and they find 
a way to make 75 basis points every single month.   At 75 basis points every single month. I've seen 
a few of these come and go and they can do it for   a couple three years. Then comes the bankruptcy 
filing, because when vol comes, they lose 100%.  An attempt to make an earnings stream or 
return stream that's absolutely constant,   at some level, above the risk free 
rate is doomed to a bankruptcy failure.   Because usually, those types of strategies 
also employ many turns of leverage.

That's   ultimately their downfall. Remember, long 
term capital management, which should have   been called short term capital management because 
they weren't even in business for five years? That   was a bad construct right there. [?] never work.
RAOUL PAL: I was running a reasonably large hedge   fund in London back in the early 2000s, and our 
competitor was this other fund that was well known   and it was doing 1.5% a month, 1.5% or 2% a month, 
consistently, and like, but consistently, and our   P&L was moving around, and we were reasonably well 
performing. It was moving around. I'm like, how is   this possible? What are they doing? What are they 
doing? It's 2%, 2%, 2%, and all the investors are   going, well, you guys are idiots. These guys know 
what they're doing, it's just you guys are fools.   2%, 2%, 2%, down 47%. They're selling options.
JEFF GUNDLACH: Well,   one of the funniest things is 
a lot of large investment pools   employ consulting firms to help them analyze risk 
adjusted returns and the like. Unfortunately, they   don't really quite understand how things work. 
They use a lot of CFA manual types of techniques.   I saw one of the most entertaining speeches ever, 
I was speaking at a client seminar conference.   There was this fellow that got up

there, he was really entertaining.   He went through some risk adjusted return analysis 
and he got everybody all hyped up and convinced   that there was this– he was just using actual 
return streams, as an example and he got everybody   to agree that there's one investment they would 
absolutely, positively do.

Then he revealed that   it was the historical record of Bernie Madoff.
You got to be careful on these things that look   like they somehow have solved the entire problem 
of limiting volatility while keeping returns high.   Because I just wouldn't even want to go there. 
I wouldn't give a dime to somebody that has one   of these 2% a month attempts, because you're 
going to lose all your money within five years.  RAOUL PAL: Looking forward, what– acknowledging 
the markets are pretty frustrating right now,   what do you think the good opportunities 
are over the 18-month time horizon? You've   talked about the dollar a bit.
JEFF GUNDLACH: Yeah, I think 18   months is enough for the dollar to 
fall.

Probably the most frustrating   allocation that many investors in pools have 
made, that has not paid off, is the recognition   that the returns of the United States 
stock market, let's just say the S&P 500,   have just been so incredibly dominant versus 
the rest of the world, and that those returns   are really, for the last couple of years, only in 
the S&P 6, the S&P 494 have no return at all over   that time period. I've got this strange advice 
for people, I say, if you want to own US stocks,   you should own those six knowing that you're going 
to take a bloodbath if you overstay your welcome,   but it is a 100% momentum based market, the 
most dangerous type of market in the world.  I turned negative on the NASDAQ September 30th, 
of 1999. I was really negative. Of course,   in the fourth quarter of 1999, it went up 80%. 
One year later, it was down 50% from the September   30th level.

I feel like we're in that type of an 
environment. If you're going to own US stocks,   which I don't recommend, but if you want to own 
them, I think the only way it goes is those six   and you just got to have your finger on 
the exit button pretty, pretty close by,   but I think that's your only chance of 
making money and yet, I don't want anything   to do with it. Because this is the NASDAQ.
RAOUL PAL: Do you buy into the theory that people   are thinking of these tech companies like the 
new zero coupon bonds, that these have infinite   cash flow and with zero interest rates, these just 
go to the moon, there's no valuation? I can tell   by the smirk on your face, you don't believe it.
JEFF GUNDLACH: They've already gone to the moon.   It's so strange how faddish the market 
has become.

The one that just blows my   mind is actually not a tech company. It's 
actually a restaurant company. It's Chipotle.   I just can't understand why the stock 
has tripled over the last six months,   it just baffles me. Yet people say, well, 
they're thriving on their delivery. Okay, but   isn't the PE, like 150, or something? That's 
a lot of tacos. Yet the stock is invincible.  I was actually short that stock in in 
February, and as good luck would have it,   I covered it on the low, because it's tripled 
since then so I would have gotten hammered. I just   think we're in late, my thinking is we're in late 
stage, very late stage of this momentum market.   It can always continue longer than you think
possible, but I do think that within 18 months,   it's going to crack pretty hard. I 
think that you want to be avoiding it   for the time being. I think when the next big 
meltdown happens, I think the US is going to be   the worst performing market, actually, and they'll 
have a lot to do with the dollar weakening.  I know a lot of people have diversified out of 
the US on valuation reasons, on just relative   performance differentials, which are really mind 
blowing, how well the US has done versus– Japan   hasn't done anything for forever, Europe's not 
doing anything.

I do think that you're going   to be not well served in dollar based investments, 
which would include the US– and this would be you   don't have to do it today, necessarily, because it 
really needs a rollover to start getting going but   I do think that diversifying away makes a lot of 
sense. There's something that was very popular,   and it gained a lot of money, a lot of 
AUM, it was called the permanent portfolio.  It was very simple concept. I think it had 
four things equal weighted, I think. It was   stocks, high quality bonds, cash and gold. I think 
they were one fourth each. It got very successful.   Because there was a window there in the 
aftermath of Global Financial Crisis,   that it did really well, that mix of assets.

Then 
it fell on hard times when stocks really got going   and the AUM in that particular permanent portfolio 
mutual fund collapsed, but I think that's a good   investment right now. I think we have such 
a potential tail risk of outcomes, such a   dispersed potential outcomes, that you really need 
to have this barbelled asset allocation concept.  I actually think owning 25% gold isn't crazy right 
now. Nor do I think owning 25% cash isn't crazy.   They're the opposites. I also don't think 25% 
stocks is crazy, because one thing about a   potential inflationary environment is stocks can 
add a zero to their prices. You might not gain in   real purchasing power, but you can keep going 
with a nominal value that has some inflation   protection.

The high quality bonds, maybe you're 
supposed to just have two doses of cash instead   of that, because with high quality bonds, 
the yield is not much different than zero.  RAOUL PAL: There is a possibility, 
I'm more of a deflationary guy,   and even in your dollar scenario, it sounds like 
the dollar goes up, blah, blah, blah. That's   deflationary for a period of time so the bond part 
of the portfolio works, maybe rates go negative in   the US, maybe they go to zero, properly, zero, 
30 years. Then after that, we get inflation,   but that whole portfolio makes sense.
JEFF GUNDLACH: I agree with you on that. I am   ultimately an inflation fearing person, but in the 
short term, I do not think there's any inflation.   I think what's happened this year is pretty 
clearly deflationary. Particularly, I think wage,   white collar wage deflation is going to be 
pretty intense.

One thing about work from   home is it gives you a different prism 
through which to analyze your business   and the way businesses operate. I'm pretty 
sure just about every business owner and   CEO has been made aware of ways of working more 
efficiently remotely or maybe they can cost cut   by moving some operations to other places, like 
my IT department has said to me, there's really   no reason for us ever to go back in the office.
They just live on the 16th floor of our building,   off in a corner, you never see them. They're 
just behind a closed door typing away.   They can so easily do that at home. Why do we need 
that office space? That's clearly deflationary.   What about the traveling salesman that can't 
travel right now? I think most businesses  are probably thinking, do I really need this many 
traveling salesman? No. There's going to be a lot   of deflation in the wages of traveling salesmen, 
and a lot of other middle managers, I think,   are going to learn that people have figured out 
that all they're doing is watching people work,   that report to them and not really doing any 
work.

Maybe you don't need so much middle   management. I think all of this is deflationary.
What if somebody moves, they're tired of all the   needles on the sidewalk in San Francisco, 
and they decided they want to go to Boise?   You don't have to pay them as much. The cost of 
living is lower. That's deflationary. If somebody   who felt at risk of losing their job in 
March and April, they're probably still   fearful of an event of job insecurity, I 
think that they're going to take a pay cut   rather than a pink slip. I do think that there's 
a lot of deflationary things, and until weirdly,   as Lacy Hunt points out so academically 
correctly, one weird thing about the deficit   is it really isn't inflationary. It's 
not inflationary until you start actually   declaring the liabilities of the Federal 
Reserve's to be legal tender and actually   giving money to people, which we're starting to 
do. That's why I'm ultimately an inflationist.  When I used to give speeches when there used to 
be gatherings of people, I used to routinely say,   "I know how to get inflation by five o'clock this 
afternoon.

Literally." We have an announcement   from the Treasury Department that every bank 
account in America is going to have a $1 billion   deposit at 4:59 this afternoon, that will cause 
inflation. Because if we don't have inflation,   the lines at the Ferrari dealers would be 
something to behold if you gave everybody   a billion dollars at 4:59 this afternoon. 
You can do it, there just has to be the true   desire, the true commitment to doing it.
Obviously, we've been ramping up this   procedure, ever since the Global Financial Crisis, 
of giving money to people. Actually, it's comical   how people talk about modern monetary theory or 
universal basic income as some wacky idea. We've   been doing it since the 1960s. Not to the whole 
population, but what do you think welfare is?   It's universal basic income, but it's not 
universal. It's just for a certain subset of the   population. It hasn't exactly solved the problems. 
In fact, in my view, it's made it much worse.   You can get inflation, but you have to 
really, really want it and I think it takes   more pain [?] disinflation.
RAOUL PAL: I want to talk about the pain.   One of my thesis is we've got a massive insolvency 
about to happen.

The market is not pricing this   yet properly. It feels that look, 
if you've taken– let's say,   where's GDP year-on year now? Probably down 5% 
year-on-year, this is still the biggest recession.  JEFF GUNDLACH: It's negative nine in the 
United States, year-over-year, June 30th, 2020.  RAOUL PAL: Okay, so this is still the biggest 
recession since the 1930s and we're just coming   off the bottom of a massive quarter but even 
if I look at the real time economic data,   maybe it's down seven or six, or 
whatever the number is. It's still huge   and there's no cash flow, as you pointed out. 
All these deflationary things, every restaurant,   small businesses closed, everything.
JEFF GUNDLACH: Well, I don't think people   fully understand how many business closures 
there's going to be in the next few months.   Because I don't travel out of my property here 
very often, because we're working from home,   and I'm not going to go to a grocery store or 
something.

I've got people for that. I venture out   every now and then and I had to go to the bank. 
I was shocked at the empty storefronts. How
  many empty storefronts there have started to 
develop in the last, say, six weeks. Businesses   have been in place forever, they're now just for 
lease. There's going to be a lot more of that.  I think it's going to really accelerate. We were 
talking this morning. What about the movie theater   industry? What's going to happen there? How long 
can they hang on? I think there's going to be   real problems in the wintertime here.
RAOUL PAL: Even more concerningly,   it's concerning for the individuals. All of these 
small businesses. That's the bulk of American   capitalism, is the small businesses. When you 
look at this massive group of BBB rated companies,   all went into a cliff and the Fed stopped it, they 
stopped what had to be the market clearing event,   which is all this BBB was going to go to junk.
JEFF GUNDLACH: Well, the BBB bond market in 2006,   or 2007 or so, was the same size as the junk bond 
market.

Today, it's 300% the size of the junk bond   market. If one third of the BBBs get downgraded, 
the junk bond market will double in size–  RAOUL PAL: Or have in price.
JEFF GUNDLACH: Something like that. Yeah,   that's obviously some combination of the two. 
That's almost certain to happen, I think. The Fed   stopped it by providing liquidity, but as so many 
people have correctly pointed out, there's a big   difference between short term liquidity and long 
term solvency. The Fed can't stop the insolvency.  RAOUL PAL: But they are buying corporate bonds. 
They're buying bloody Microsoft bonds and GE   bonds and everything else in this Blackrock fund.
JEFF GUNDLACH: They haven't bought very many,   they didn't really need to. It was just doing any 
of it that made people decide that the prices were   supported, and that they had something of a put to 
the Fed.

It hadn't ever occurred in the junk bond   market before and it's not supposed to happen. 
They're that close to just buying equities.   They're one slice of the capital stack away from 
doing the Bank of Japan just buying the equities.   I don't know if they're going to do it or 
not but at this point, unfortunately, because   they're in violation of the Federal Reserve Act 
of 1913 right now, almost anything can happen.  Because why stop there? You've taken the 
guardrails off of the operations that are   deemed legitimate. We'll see what happens, but 
the downgrades have already started to happen.   It's really interesting to look at charts about 
lending standards, surveys of bank loan officers   and the like, and just trying to [?]. The junk 
bond market should probably be right now at a   15% default rate year to date, but it's not. 
The downgrades almost certainly have to come   and clearly, there's just a lot of over investment 
in the corporate bond market, thanks to the way   it behaved this year.

I think there are quite 
a few investors, unsophisticated investors   that believe that corporate bonds have no risk.
RAOUL PAL: One of the things I've been looking   at is I looked at this too, and I'm like, 
it's so frustrating, because as you said,   there should have been a good opportunity 
here, you could sort out the wheat from
  the chaff. What I did is I constructed a basket 
of BBB rated equities so I just took the largest   component of each part of the BBB market 
by sector, then an equity portfolio. That's   interesting, because the equities are moving. 
I'm looking at the European bank stocks as well.   I've been following those for a long time. 
I think the equity goes to zero, but the   bond doesn't, because they get nationalized.
JEFF GUNDLACH: That's possible. Certainly,   one thing we've learned is that negative interest 
rates are fatal to the banking systems. That seems   pretty crystal clear. Japan went negative a long 
time ago, and their banking sector on the Tokyo   Stock Exchange is down 85% from where it was 
in 2006, or even 1990 something.

The Europeans,   once they went negative, it was hopeless.
RAOUL PAL: The UK just got negative.   The 2-year gilts are negative and the 
UK banks are at all-time record lows,   they've gone below 1986 prices.
JEFF GUNDLACH: I know, it's because they   can't possibly survive a negative interest rate. 
You mentioned that maybe US rates go negative,   I certainly hope not. Jay Powell says he 
doesn't like the idea of negative interest   rates. I applaud him for that. Because I think 
if the US wants negative interest rates, I think   the global financial system would collapse.
RAOUL PAL: Don't forget, I went back and   looked at it and Schatz went negative 18 
months before the ECB finally gave up.   5-year gilts have been negative and sure, Sterling 
was negative six months before the Bank of England   gave up.

I think, I don't know whether the Fed 
gets the choice. Powell can say whatever he wants,   the bond market is always I think the truth, 
and it will decide whether it's going negative   or not. I don't know, as you say, what the 
hell does that do to the system? Who knows?  JEFF GUNDLACH: Well, it's one thing for Japan to 
be negative and Europe to be negative, but the US   is a massive capital market. At least capital 
can go the United States and survive capital   destruction of negative interest rates. You don't 
get much of a reward, but you're not getting   destruction. If you start to have destruction in a 
capital market, the largest in the world by far, I   just don't think the system globally can survive.
RAOUL PAL: No, but I think you and I will agree   that, okay, so here's the set of outcomes. It's 
deflationary potentially goes to negative rates,   we don't know but let's assume there's a 
tail risk of it.

Let's assume there's another   larger risk of massive fiscal stimulus financed 
by the Central Bank. There's also a risk that   the Central Bank buy stocks or go more QE, 
if we go back to the 25% allocation in gold,   doesn't seem so stupid, does it?
JEFF GUNDLACH: We're starting to get   to this 40,000 foot overview type of thing, which 
is very important. I've been talking about this,   Neil Howe calls it the Fourth Turning.
RAOUL PAL: That's right.

I'm   speaking to Neil next week.
JEFF GUNDLACH: I've been talking in   the same ideas for a long time 
that I met Neil Howe, it was just  remarkable how we had exactly the same ideas, 
but he was actually much more deep into it.   I realized that

we really, obviously,   are going through this and the institutions are 
not working. People know that something's wrong   and they know that the institutions are 
resisting change, as they always do,   because the elites don't want them to change. 
Yet, they're not working. It really has to go.  We do have to go through this massive fourth 
turning of changing the institutions and   obviously, the wealth inequality problem has 
to be somehow addressed and all of this stuff.   The ultimate magnitude of the change, I think, 
is much vast, much more severe, much larger than   many people appreciate.

It really is the frog 
getting boiled in the pot. If you could go back   to 1995 or 2005 even in a time machine and 
explain to people what the world looks like today,   they simply would not believe it.
RAOUL PAL: No way. No way.   It would sound ridiculous.
JEFF GUNDLACH: It just doesn't seem possible,   but it's happening at such a rapid pace. The 
presidential election is just a microcosm of the   whole thing. It's just fantastic, the world really 
is characterized by this fantastic computer thing,   where two people can listen to it, and one person 
hears Jani and the other person hears Laurel and   Davies, have you tried that? You should Google it.
It's mind blowing, but it actually has something   to do with physiology, about how like, sound in 
your ears, something like that, because actually,   I've actually found a way to hear both of them. 
You have to move around and stuff and you can   hear like Jani, Jani, Jani, Laurel, Laurel. 
What? Jani? Jani? It goes back to Jani, and   it really plays with your mind.

That's a perfect 
metaphor for how people process what's happening   in our world today through current events. They 
just simply see something completely different,   and it has to get resolved. People 
are seeing things the same way again,   and that's the first turning.
RAOUL PAL: Yes. I hundred percent   agree with all of this. It is because it's so 
overwhelming, that people actually just filter out   something, so they stick to one truth. There 
is no universal truth. We all know that. It's   a blended thing. People can't deal with the 
magnitude of this. It's very difficult. Those of   us are slightly burdened with financial markets, 
because you go and speak to somebody else,   and you're like, listen, this is really bad, and 
there is a huge change coming, and I don't really   know how it plays out, but it's going to get ugly.
JEFF GUNDLACH: I think people in financial markets   are attuned to it, because it's part of 
their professional life. If you go to   Wyoming, go to Meeker, Colorado, or go to 
Wyoming and you will go to these little towns,   it's a different world.

People, they're going 
through the regular life. They don't watch the   news. It's amazing how different life is for those 
that are in major urban centers or in financial   markets where you're forced to be hyper aware 
of all of this dissension and you go to these   quiet Hamlet's, and it feels like it's 1955 or 
something, and they don't know the magnitude   of the tension that exists in the more densely 
populated urban centers that are obviously going   to have monumental changes in the next five years.
RAOUL PAL: Have you caught the Bitcoin bug yet?
  JEFF GUNDLACH: Bitcoin, I don't believe in 
Bitcoin. I actually have made good advice. I've   never bought Bitcoin, but I actually recommended 
Bitcoin twice, and I recommended selling it once.   All three of those trades were really good. I 
just don't believe in it. I think that it's a lie.   I think that it's very tracked, 
traceable.

I don't think it's anonymous.  RAOUL PAL: It's not anonymous.
JEFF GUNDLACH: That was its big allure,   was supposed to be anonymous, and it's not.
RAOUL PAL: No, it is actually a beautifully   constructed pristine asset. It is like gold. 
It's very divisible. It's transferable. Forget   the anonymity of it, forget that. Because it's 
fixed money supply, it's the only asset with a   purely defined money supply that its flow 
versus the stock of it is always diminishing,   it becomes extremely interesting as a hard asset.
JEFF GUNDLACH: I don't really have a strong   opinion about Bitcoin. I think it's a fantastic 
trading vehicle. RAOUL PAL: Yeah, well,   obviously you've got the skill for it.
JEFF GUNDLACH: It's got huge volatility   and I've actually been positive 
on Bitcoin pretty much all year.  RAOUL PAL: My guess is because of 
your larger big picture construct,   spend a bit of time with Bitcoin, I think you're 
going to like it because I looked at it and like   in the end, I couldn't find– no, it's not going 
to go to zero, but it could fall 50% and never   rallies, fine.

I can't find anything with the skew 
a risk reward where I'm not paying option premium,   there's no time decay. For me, it just even– 
when I look at– you like charts, so I look at   the chart versus gold, chart versus equities, 
chart versus almost any asset, it's like, okay,   this is breaking out against every single thing 
on daily charts, weekly charts, monthly charts,   and like, this is really super interesting.
JEFF GUNDLACH: I hear what you're saying,   I'm not at all a Bitcoin hater.
RAOUL PAL: It's just not something you do.  JEFF GUNDLACH: I prefer things that 
I can put in the trunk of my car.   I prefer gold or really, really precious 
stones, stuff like that. I believe in that.   They're not terribly liquid, but I like that 
kind stuff.

I've got quite the art collection,   that kind of stuff. I just enjoy it. I don't 
really need wealth preservation anymore. I   just want peace of mind and lifestyle 
quality. I prefer my Mondrian on the wall to   a digital entry that has the same value.
RAOUL PAL: Yeah, I get it. I get it, and why   would you not? Let's say we're in the middle of 
the Fourth Turning, it should happen because we're   at the election point, we've got the big crisis, 
we've got the debt thing. Almost everything   should be in place that Neil talked about that 
we've all been looking at, what's the big trade   outside of gold? Forget gold. I think a lot of us 
agree with that. When it comes and these things   aren't setting up yet, I don't have to say it.

JEFF GUNDLACH: I like that permanent portfolio   concept. I'm just going to stay 
there. I want massive diversification.   I'm worried about deflation and so cash sounds 
good.

I'm worried about the inflationary   response so gold sounds good. I don't like 
the dollar in any case. At a pullback, I would   substantially– with a big, big pullback, I 
would substantially buy stocks but at this level,   I think 25% is really basically all I can 
stomach in the stock market. It's just this   four pillared highly diversified thing.
The other thing is I feel, like we said earlier,   the opportunities that are really good are very 
rare and I want to have liquidity when the next   one comes, because I think it's coming in a couple 
of years, not 20 years, maybe five years. It's   very outside, but maybe very well two years or 
18 months. The trade is to wait for that trade.  RAOUL PAL: Where do you think that trade is 
going to come? Is it going to be credit? Is   it going to be equity? What do you think 
the trade that's going to set up is? The   one that makes you go, "I'm waiting for this?"
JEFF GUNDLACH: I think equity, but we're talking   about a PE in the single digits when it happens.


turned positive march of 2009 on equities because   everybody was so bearish and the PE for 
about two days was actually below 10   on the S&P 500. Unfortunately, I sold out with 
about a 50% gain because it was just too easy.   I think that's coming again. It will be quite 
a pleasant experience to not be in the car on   the first wheel of the roller coaster that's 
coming. I just want to be very low risk right now.  RAOUL PAL: You might make some money 
shorting it as well if it plays out that way.  JEFF GUNDLACH: I probably will short. I 
don't really want to press shorts right   now. I do think there's a
trade on the short side.  RAOUL PAL: Jeffrey, listen, thank 
you very much for your time.

A   really great conversation, thoroughly enjoyed it.
JEFF GUNDLACH: I did too. Thanks a lot, and good   luck. RAOUL PAL: Yeah, and you. Take care.
JEFF GUNDLACH: Bye now.  NICK CORREA: I hope you enjoyed this special 
episode of the Interview, the premier business   and finance series in the world. However, 
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