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
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.
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.
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
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.
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.
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
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
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
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,
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
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
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
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
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.
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
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
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
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
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
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
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,
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
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
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
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