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FEG INSIGHT BRIDGE PODCAST

We are thrilled to interview some of the world’s leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and thrive in the world of markets and finance.

It’s Good to be King with Jeffrey Gundlach

In this episode, we chat with Jeffrey Gundlach of DoubleLine, who achieved international renown when he was anointed the “King of Bonds” by Barron’s magazine in 2011.

In 2012, 2015, and again in 2016, Bloomberg Markets magazine named him one of the "50 Most Influential" investors and in 2013, Jeffrey was named "Money Manager of the Year" by Institutional Investor.

Jeffrey has also joined FEG on the main stage for two of our investment forums. He consistently receives high marks from FEG clients for the knowledge he brings to these events and we are excited to have him back with us today to discuss his views on the markets heading into 2021.

KEYNOTE SPEAKERS

Jeffrey Gundlach
Chief Executive Officer, DoubleLine

Mr. Gundlach is CEO of DoubleLine. In 2011, he appeared on the cover of Barron's as "The New Bond King." In 2013, Institutional Investor named him "Money Manager of the Year." In 2012, 2015 and 2016, he was named one of "The Fifty Most Influential" in Bloomberg Markets. In 2017, he was inducted into the FIASI Fixed Income Hall of Fame. Mr. Gundlach is a summa cum laude graduate of Dartmouth College, with degrees in Mathematics and Philosophy.

Host
Greg Dowling
Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.

Transcript

Greg Dowling (00:06):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:31):

Today on the Insight Bridge we have the bond king himself, Jeffrey Gundlach. Jeffrey is the founder of DoubleLine Capital and is always an FEG favorite. During his storied career, he has gained numerous awards and recognitions, including being named the "bond king" by Baron's in 2011. Today he will discuss his career, the founding of DoubleLine, as well as his 2021 views on both markets and the economy.

Greg Dowling (00:58):

Alright, big FEG welcome to Jeffery Gundlach, one of our favorites and one of the few people that have shared the stage twice at the FEG forum. Thank you for joining us today.

Jeffrey Gundlach (01:11):

Thanks for having me, Greg, looking forward to our talk today.

Greg Dowling (01:14):

So you grew up in New York. But not Manhattan, you grew up near Buffalo. How does a Buffalo kid get excited about the markets? Was it a passion of yours early on, or when did you get interested in bonds and stocks and just markets?

Jeffrey Gundlach (01:24):

Well, in eighth grade in a social studies class we had a project that went for about a month and it was just following the stock market. And what we did is the teacher asked us to pick one or two stocks and follow it. And my uncle was the head of research at Xerox, and he had told my father that Xerox had a great future and my father actually bought some Xerox stock. And as it happened, that social science class was during the Nifty Fifty, the incredible momentum stock market of what was technology at that time. And one of the darling stocks was Xerox. And so I picked Xerox for the social studies class and as it turned out, that project began right at the very top of the bull market and I watched Xerox stock drop every single day.

Jeffrey Gundlach (02:15):

So I was charting this stock pick of mine, and it was just one of the worst picks possible, because a good day it was down half a point and a bad day it was down three points. And I think by the time that project was over, it was down to like 50. That's what got me sort of following stocks in the first place, but I never really thought about finance as even a potential career, or investing as a potential career, I was just sort of curious about the way that the prices moved and like following it. So I ended up deciding I was going to be a philosophy professor at first, and then I decided that wasn't a really good living and maybe I would get a math PhD instead and turn into a math professor or something like that. And I did that.

Jeffrey Gundlach (02:55):

I ended up moving to Los Angeles--for the weather primarily and rock and roll--and I had to get a job. And I got a job using my math background at an actuarial capacity in an insurance company, which is not terribly exciting. I didn't hate it, but it wasn't terribly exciting. I knew that it wasn't going to be a long-term career. So I was living in Hollywood and I was living in a 1-bedroom apartment that was about $450 bucks a month rent. And all my furniture was donated to me by like my band members and some friends I had. So it was all beat up. I used a cardboard box for a table. I sat on the floor most of the time. I had a black and white TV that my bass player had given me from a previous band and it was this old beat-up black and white thing with about a 14-inch screen or something.

Jeffrey Gundlach (03:39):

And you needed pliers to change the station because the dial had fallen off. And there was no antenna, you had to use a coat hanger to try to get the reception. And in those days there weren't so many stations, but you had the three big networks--ABC, NBC, CBS--on one of them, there was the show Lifestyles of the Rich and Famous. This Robin Leach guy, I don't know if he was British or Australian, but he's got that type of accent. His tagline was: "champagne wishes and caviar dreams." And it was kind of a glorified precursor to probably the Kardashians or something like that. They would have episodes on wealthy people. But I flipped it on one day, not really looking for anything. And it was the show Lifestyles of the Rich and Famous. And they said, "We have a special episode today. We're going to be counting down the 10 top-paying professions in America."

Jeffrey Gundlach (04:22):

And I thought, "Oh, this is great. I'll listen to this list and I'll pick one." And interestingly about midway through the 10 list was actuary, that was on the list, but number one was investment banker. And they said, "You have to work really hard." And I go, "Okay, I do that." And then they said, "You have to have a really strong analytic mind." And I said, "I got that too." And then it says, "If you can push through, it's the number one paying profession." So I decided that evening that I was going to be an investment banker, the only problem was I didn't know what it was. I didn't have any idea. To this day, I'm not really sure what investment bankers do, but I figured that I could find a job by--in those days there was a phone book, yellow pages and white pages--and I went to the yellow pages and I looked up ads for investment banking firms.

Jeffrey Gundlach (05:05):

Not surprisingly, knowing what I know today, there weren't any ads for investment banking firms in the Los Angeles yellow pages, but there were ads for investment management, mostly retail type of stuff, wirehouses. And so I decided to send a resume and an impressive cover letter to every single company that had a bold face ad or investment management in the yellow pages. And I sent out a couple dozen of them and I got three responses. It was interesting because one of them was, "We're a two-man shop." It was called Hillside Advisors. "We're a two-man shop. We're happy to have you work for us, but we can't pay you anything." So that didn't work, because that was the whole purpose--just to try to get some money.

Jeffrey Gundlach (05:44):

Another one said, "You've, you got to be kidding me. You've got no experience, no background." And then a third one showed up, and it looks like the rejection letter from a college, you know, the little thin skinny envelope. It was almost the size of like a small greeting card or something. And I was so disgusted that I just threw it in the trash. But later that evening, curiosity got the worst of me--or the best of me, I should say--and I went to the trash, retrieved it, and opened it up. There's one sentence. It said, "We've had a strong response to our posting, our job posting," which I didn't know what they were talking about. I found out later, it was at UCLA, "but we're interested in interviewing you, call this number." And it was weird because the number that they gave me and the name weren't the person that I had sent my resume to.

Jeffrey Gundlach (06:24):

But anyway, I ended up getting this interview. And on the second round interview, I ended up getting to the head guy that I'd sent the resume to. And he said to me, "You've got a great background. I think we could really maybe use someone like you. I mean, you don't have any academic training, but I'm just curious. What do you think you'd be better helping us with: equities or fixed income?" I just didn't even flinch. I just looked him right in the eye and I just said, "I don't know what those things are." And I mean, he almost fainted. "What is this guy doing here?" And he said, "Well, equities, that stocks. Fixed income, that's bonds." And I didn't know what bonds were, I knew what stocks were, obviously, because I'd been following them for a couple of decades almost by that time, or 15 years anyway. And so I said, well, "I think I'd be better at stocks."

Jeffrey Gundlach (07:06):

And he said, "Well, now really where we have the biggest need is in bonds." So I got hired on a 90-day probationary basis at $30,000 a year. It was probationary, they were going to decide whether I was working out or not after 90 days. And it was weird--between leaving the insurance company and joining the investment business, I got Inside the Yield Book, Sydney Homer's classic. Being fresh out of the Yale PhD program, I went to the quantitative section of the book where there's all these formulas and I derive them all from scratch because I was deep into the math stuff. And when I started at work, I figured everybody did that stuff. I had no idea that there was nobody that ever even thought about doing that. And so it was weird, within about a week or two I knew more than the guy that hired me about bonds, because it was such a quantitative thing and I happened to have the perfect background for it. And that's how I ended up in the investment business. To this day, I wonder if only I had gone into stocks, maybe I would've been truly successful.

Greg Dowling (08:06):

You've done fine. So if you think about fixed income--and you're right, it's very mathematical, but I even think of structured finance and waterfalls as being kind of the next level of math. So how did you go from just fixed income to more of the mortgage side of the business, especially when it's not what it is today, that was kind of the backwater of investing back then?

Jeffrey Gundlach (08:25):

Yeah, when I started in the business, the entire government-guaranteed mortgage-backed securities market was under a $100 billion dollars, and now it's trillions and trillions of dollars. It was very simplistic. It was basically really just Ginnie Maes at that point in time. And I got assigned to this mortgage thing just around that time period it had gotten big enough where you couldn't really ignore it anymore. And yet traditional bond managers didn't really know anything about it. You didn't have any way to calculate a yield to maturity on a Ginnie Mae when I started in the business, you actually had to go to a book of tables where they had prices and coupons. They didn't even have refinancing or prepayment assumptions, they just assumed that it was always going to be 8% per year. It was just the most overly simplistic stuff.

Jeffrey Gundlach (09:10):

And so I've managed to make myself useful by programming a PC, of all things, to be able to calculate a yield to maturity on a Ginny mass. So stuff like that was actually invented, it was such a different era. But it turned out that that area was growing and nobody else had the skillset. And so I got into it and I started to realize that it was a very, very inefficient area because it was so new and there was a lot to be gained from learning and thinking about it and generally understanding that the business was going to evolve and get much more efficient. And on the road from very inefficient to efficient, the people that can handle it the most intelligently make very unusually strong returns compared to traditional bond stuff.

Jeffrey Gundlach (09:54):

So it was the strangest thing. I was less than six months in the business and we got put into a kind of a horse race sort of client situation where they hire six bond managers and they kind of make them compete against each other. It's a structure that is quite common in certain areas of the pension industry. I don't really enjoy it, I turn that kind of business down these days. But we're in this horse race and my boss, who lived in fear of the chairman of the company that we were working at, he was scared to death that he was going to screw it up. That, out of the six bond managers he might come in sixth and lose his job. So he panicked and he put me on as the portfolio manager. And I was under six months of experience. I remember the drive home that afternoon, I was exhilarated for about 15 minutes and then the exhilaration gave way to abject fear and dread.

Jeffrey Gundlach (10:43):

"What have I gotten myself into? Be careful what you wish for. You want to be a money manager or a portfolio manager, and all of a sudden you're thrown into it with virtually no experience or guidance." And so I had to figure it out. As it turned out, the first year, out of the six managers, I was number two. I didn't make it to number one, I was number two. That sort of got me going. That was the mortgage stuff. Then they started--almost exactly when I started in the business they started retrenching. And you talk about waterfalls and structured finance. They started taking Ginnie Maes and breaking them in pieces.

Jeffrey Gundlach (11:15):

So one of the problems with the Ginnie Maes was you didn't know when you were going to get your money back. It didn't happen necessarily economically. Houses burned down, people get divorced, they move, and so you don't know when you're going to get your money back. And so many traditional investors didn't want them because they didn't know if they were going to be around for 12 years or 2 years. And so it was more efficient to break them into pieces so that you would have... Once you got all the payments first. And then once that was retired, the next one, and then the next one, and then finally the last 10% or so would be the last bond in the sequencing. And that was quite popular with pension plans and insurance companies because was going to be around for quite a while no matter what, because it was the last 10%. And it turned out that that market was wildly inefficient. I mean, people make crazy assumptions about how these things would work. And I had the ability, probably because of my background in philosophy, to be skeptical of conventional wisdom.

Jeffrey Gundlach (12:11):

And I realized that pretty much the assumptions that were embedded in market pricing were really wrong in general. They didn't understand that when you've got a refinancing industry up and running and it starts to get real capacity and you would have interest rate declines, you would get monstrously high rates of refinancing way higher than the history had ever shown way higher than anybody expected, except me. So I just had a basic investment philosophy of taking over. Whatever people think the rate of payback is going to be, it's going to be faster. There were ways of getting into the structured finance, where you were buying securities, and thanks to this situation where they split up the securities, they don't just split up the maturity, they can split up the interest payments, so you can get securities... Let's say that mortgage, in those days might've had an interest rate of eight, you could create securities that had a coupon of two, as long as you had somebody getting 14, the average to eight.

Jeffrey Gundlach (13:07):

I was the two guy. I would buy these things with a coupon of two when they were priced at like .60 on the dollar. And what ended up happening is it paid off in a year. So the return on 8% interest rate bond market, the return was like 65% a year. And that type of stuff was possible. In fact, I have to laugh, I was buying all of one type of security and as I was growing a business pretty rapidly--this is in the later 80s now--one of the head trading desks on Wall Street requested a conference call with me that would be recorded. And I was like, "Okay." And he said, "Well, we're going to sell you this stuff, but you're buying a lot of it. And we want you to acknowledge that we take no responsibility for what happens to you in these securities, because we don't think they're worth anything close to what you're paying for them."

Jeffrey Gundlach (13:52):

So they actually were trying to like wave me off out of kindness, I suppose, which is rare on Wall Street--probably because of liability more than kindness. But it was so funny because all I did was buy more. It was really hilarious because it was by far the most attractive thing in the entire bond market and everybody else was afraid to buy it because there was this groupthink that was reflected by that trading head's admonition. People didn't understand it. They thought that the groupthink was correct and that my independent thinking was completely wrong. But I spent literally hundreds of hours thinking this problem through and looking at it, devil's advocacy. "I must be wrong. Everybody tells me I'm wrong. I must be wrong."

Jeffrey Gundlach (14:29):

So I looked at it mathematically, just north, south, east, and west. And I just absolutely concluded that I was right and they were wrong. And so, as it turned out, I had by far the best record in the entire fixed income industry for several years there. That didn't really make any difference though. It was funny. It takes a long, long time to get credibility in the investment business because a lot of people can hit a home run once, but to bat 350 or bat 400, that's pretty rare while hitting for power as well. My track record was so good that it actually scared people. It created a narrative by competitors that "obviously what Gundlach's doing is wild. Seriously, look at these numbers. We all know that nothing comes for free. No, this is wildly risky." But the irony of it was, it was the least risky thing in the entire industry, they just didn't understand it.

Jeffrey Gundlach (15:19):

And it took many years, I would say at least six or eight years, before people started to realize maybe it wasn't just luck, because it was happening over and over again. Then people start imitating what I was doing. And then, as luck would have it again, the big bear market of 1994 hit and all the people that started imitating me in 1993 basically went bankrupt because they didn't understand exactly some of the nuances during a bear market. That all went on for a while. And what I was doing was very different. I've never done indexation. I don't do any passive products. Everything I do always tries to have a value proposition and a uniqueness to it to be differentiated.

Jeffrey Gundlach (15:56):

So there wasn't that much demand for what I was doing starting in the late 90s, because in the late 90s, everybody wanted index funds in bonds because the returns were 8%. Pension plans wanted 8%. It's an actuarial requirement. Well, they got it. The way investment committees would operate. So I said, "Okay. Oh God, we're onto the bond part of today's meeting. Okay, we'll try and make this quick, get it over with. Well, the 1-year return is 8. The 3-year return is 8. The 5-year return is 8. Any questions? No. Any changes, no we're getting our 8." So everybody just stayed in line with that.

Greg Dowling (16:30):

So it seems like you're doing well, but then you gained increased notoriety following the credit crisis.

Jeffrey Gundlach (16:36):

Well, I was just kind of treading water for a while, and then the housing market went crazy with the interest-only underwriting and finally the pick-a-pay loans where you don't have to make any payments. I realized that the housing market was going to be grossly overvalued due to this reckless financing and I predicted that the housing market was going to crash. And I did so before it crashed, I had an article written about me in the fourth quarter of 2006 and I was predicting housing would drop 35% nationally in value. And, because I expected that, I sidestepped the entire sub-prime problem. That was kind of what changed everything, because I was vocal about it. All expectations, I should have bet. Most people would've thought, "Oh, this mortgage guy is going to get slammed during this housing meltdown." But instead I massively thrived and protected my clients from all those problems.

Jeffrey Gundlach (17:25):

And one of the things in investing that's most important: if you're going to be able to take advantage of a great opportunity, you got to avoid the elevator on the way down. So you have to sidestep it and wait and wait and wait. It's the hardest thing to do is to know when to pull the trigger. Very hard. In the investment business, the hardest thing is to change what you're doing after you've been right. It's the hardest thing. Because being right gives you so much economic and psychological and emotional satisfaction that when you change away from it, you feel like you're losing an old friend.

Jeffrey Gundlach (17:57):

I've known stock people that never sell something that had very low cost basis because they loved making it the centerpiece of their client reviews. "Look at this: cost-free last 88. See, I'm working for you." You sell the thing at 88, you don't have that story to tell anymore. So you lose one of your favorite anecdotes. And besides that, it's your best friend, the thing you paid 3, 4, and went to 88. I mean, you're like married to this thing. And so to get rid of it is really painful. And of course, it's almost never that you have managed to get rid of it on the top tip. I've done it sometimes, but obviously that's not the norm.

Jeffrey Gundlach (18:31):

And so you sell it at 88 and when it goes to 95, you just feel awful. You know, that was your buy. I mean, that was--you were all-in and here you're watching it go up without you. But that's the hardest thing to do. It's also the hardest thing to know, try to figure out when to make that switch. It's funny people say, "What's the hardest thing?" I think the hardest thing is to change your mind after you've been right. I just did that with the dollar. I had been sort of slightly positive on the U.S. dollar since August, and about 3 weeks ago I gave up on that with the tiniest of profits and it went negative again, as luck would have it, that started to work out again. But that type of stuff, it makes the job interesting. I'll say that.

Greg Dowling (19:09):

You had this great run and all of a sudden you're without a job and you start your own firm and you go from zero to $140 billion. Give us the short DoubleLine story, because it's a great one.

Jeffrey Gundlach (19:22):

Well, I made so much money in '08, which was really shocking. One of my heaviest redemptions ever in my most risky strategy was December of '08 because I was up 25% and people just, they needed money. And so sell the guidance up because everybody else is down 30, 40, 50, 60 and I was up 25. So I got redeemed a lot there. And I started a lot of distressed funds to buy the subprime junk down at .40 on the dollar and stuff like that. I raised billions and billions of dollars, and those were very lucrative, locked-in funds. They were 7 to 10 years, there was no chance of redemptions, they had carried interest on them. The returns were going to be very, very high.

Jeffrey Gundlach (19:59):

They already were getting very high. In 2009, I had one very small strategy that was actually up 300%, for example, for 2009. There was massive embedded gains in these carried interests. So the French bank that owned the firm that I worked for decided that they had a great idea: steal all the money from me. All that carried interest, they wanted to just take it from me. So they fired me to basically steal my economics. It turned out that they never got the economics because the investors all threw the riot act and funds all had to cut their fees down to almost zero, and it was a total disaster. But I started DoubleLine, and what they didn't calculate--they thought they could just get rid of me and steal all the economics, because all the economics flowed through me. What turned out, is that everybody that worked for me quit, they didn't want to work for this unethical French bank that was stealing money. I mean, fool me once, shame on you; fool me twice, shame on me.

Jeffrey Gundlach (20:51):

If you've seen massive economics being purloined, you shouldn't hang around to be the next victim. And also they liked working for me and I think they realized that I was sort of the conductor of the orchestra. There's a lot of talented musicians, but somebody has got to conduct the symphony, and that was me. And so we left and we started DoubleLine with 45 people, which I'm sure has never happened before. So I have 45 people and we have no revenue whatsoever. We had to rent office space and buy equipment, buy systems and all this. And I only learned several weeks into DoubleLine that it was illegal to not pay people. Somebody informed me that I was violating California labor law. You have minimum payment requirements. And so I had to install de minimis salaries that met those requirements and do them on a retrospective basis.

Jeffrey Gundlach (21:35):

So we started the mutual fund company and I was told that it would be virtually impossible to get regulatory approval on a new mutual fund company in anything under six or nine months. But we put tremendous effort into it and Ron Redell, who's the president of DoubleLine and also the head of the mutual fund distribution platform, he was extremely skilled and experienced and so he had a pretty good Rolodex. The SEC and other regulatory agencies, they knew what was going on, they read the newspapers and stuff, so they put the whole thing on overdrive and we got the regulatory approvals in world-record short time. I think it was a month, one month to get the approvals. Now we had to get the prospectuses written... And all this was a huge race against the clock, because there was a lot of energy with 45 people all feeling exciting and you were entrepreneurs starting a business; that can dissipate pretty quickly if nobody's making any money.

Jeffrey Gundlach (22:30):

We had a run rate of $30 million a year of expenses. We did have a couple of clients signed up a few months in, but we had maybe, I don't know, $5 million in revenue against $30 million in expenses. We just went into ultra hard work mode and we raised $50 billion on a mutual fund platform in about two and a half years, which shattered any record, nothing was ever close to that. But, to be fair, there's no circumstance was ever like that. So it's really a unique situation. We had a brand, we had a following, we had a team, we had all worked together. We had an institutional experience. We had retail experience. We had hedge fund experience. I was very anxious to get the mutual fund company started because I knew that just as the team would probably start to lose some of their enthusiastic energy, I kind of felt that the investors wouldn't wait forever for me to get up and running either.

Jeffrey Gundlach (23:23):

They might've parked their money in an index fund, but if it had taken nine months, they might've forgotten my name by then. So we got the mutual fund company started less than four months after we started DoubleLine in December 14, 2009. So we're coming up on our 11th anniversary. And we love 11's. We always celebrate 11/11. I like giving speeches on November 11th. If someone wants me to give a speech November 11th, I request the speaking time be 11:11 AM. So we kind of play around with that. So this is the 11th anniversary coming up.

Jeffrey Gundlach (23:53):

And so we had the mutual fund company. First funds were opened April 6, 2010. So we're coming up over 10 years now in that platform. So we started to hire people a lot because the assets were growing and suddenly we were at 100 people, and then 150, and now we're 280 and we have plans to cross the 300-employee barrier sometime probably in 2021. It's turned into a much more vertical business. It was very horizontal. People wear all kinds of hats. People that used to be analysts for CMBS took licenses and turned into wholesalers just because people want to find out a way to help. It was pretty chaotic. But we were focused primarily on clients, running the money, and we worried about a huge compliance regime, IT regime, and HR regime, which of course we have now in size, but that was a process to build that out. All that was finished probably three years ago now. We're totally at a 40,000-foot kind of cruising altitude, have been for years now.

Greg Dowling (24:53):

You have a great run, right? I mean, you have a team, you have the experience, and it's right after the Great Financial Crisis where sub-prime mortgages are just bombed out. And what a run you had. If we look at it today with the 10-year at 90 bps, can anybody be a bond king anymore with rates this low? It's going to be really hard, right?

Jeffrey Gundlach (25:17):

Well, it takes volatility. It takes dislocation. We had the beginnings of it in March and April, but it was like Lucy and Charlie Brown. The Fed took the football away. I mean, I was getting pretty excited when we were into March and early April, I was like, "We're going to do distressed funds again. I've seen this movie before. It's a good one to watch." But then the Fed sort of took it away. I think that ultimately that opportunity will be back, but you make a good point. Not only is it the rate level, but it's also the Fed's activity. And it's also the low volatility, which is part of the Fed's activity. There was a stretch this summer where the 10-year Treasury yield ranged about 10 basis points high to low. It went on for weeks and weeks. And then finally it broke out and pushed up towards 1%.

Jeffrey Gundlach (25:59):

That's hard to get excited about at 1%, but it's certainly better than where it was in summertime. But also it's the lack of volatility in the bond market. It's been better the last 6 months than it was the 6 months pre-COVID, because in spite of what the Fed did and continues to do, or at least has threatened to do, there are parts of the market that are so directly exposed to some of the policies and consequences of COVID that many investors have stayed away from them. And they've allowed to price at real levels, not really talking about things that are backed by student loans--they're being threatened to be canceled. Things that are threatened to be affected by non-eviction policies. We just extended the one in Santa Monica I think yesterday. You can't evict anybody until January 31. We've had that in commercial real estate, forgiveness and stuff.

Jeffrey Gundlach (26:47):

So obviously, commercial mortgage-backed securities that are non-guarantee have to be reconsidered. You talked about waterfalls and structured finance. That's an area where there's waterfalls, you've take loans and commercial mortgage-backed securities and you break them into first-loss pieces, which are very risky, and then protected pieces, which are AAA. And the ones that are in between are kind of on a cliff. The question is: are they going to take losses or not? So we spent an awful lot of time, not surprisingly, this summer, doing constant deep dives into these waterfalls and how these structured products work. And we came to the conclusion that virtually no BBB-rated CMBS, virtually none of it, will take a loss. Certainly we think no single As will take a loss and most BBBs. I mean, if you go into something that's all malls, second-tier malls, you might have a problem. But broadly speaking, there was a real disconnect between the fear of prices.

Jeffrey Gundlach (27:40):

And it was funny, because I would talk to consultants really for ideas for our clients. I'd say, "What you want is BBB CMBS." And you could just see them turn green when you mentioned that, because they're just like, "Oh no, no, no, no. Oh no, there's risks! No, we want the 15%, no risk return." Well, good luck with that one. If you find one, let me know, I'd be happy to get involved in a co-investment basis. But you know, there were plenty of 15%'s out there, there still are a few that are probably in the double digits, but you had to actually expose yourself to the thought of losses, just like you had to do on some of the sub-prime stuff back in 2008.

Jeffrey Gundlach (28:15):

It's like, "I know I'm not going to get 100 back. What do I care if my cost is 40? If I can get back to 50, I'm doing great." That was where the market was. And after the Fed came in and totally manipulated the corporate bond market--in a way that's illegal, by the way, it's a direct violation of their charter. The Reserve Act of 1913 is being blatantly flaunted as we speak, although they're not doing much in recent months, they did a lot of it back in April. The places that they weren't protecting, just sat flat on their back. The BBB CMBS market, parts of airline leases, some of these securitized products, they sat basically near their lows for weeks and weeks and weeks. And then what happened in the last several weeks, the vaccine news really gave powerful support to some of those traunches and they've caught up rather a lot.

Jeffrey Gundlach (29:01):

It's been interesting the last several months. There's still probably a moderate, moderate amount of toothpaste left in the tube on those sectors, but there's no toothpaste in the corporate bond market tube at all. And certainly in investment-grade market, the yield--we can talk about how low treasury yields are, but the yield of the corporate bond market investment-grade isn't much different than the yield of the 30-year Treasury today.

Greg Dowling (29:22):

Or high yield. High yield's not very high.

Jeffrey Gundlach (29:26):

We can't call it high yield anymore. We just have to call it junk because it's not high enough yield to call it high yield. The spreads are in; it's not in all the way in the high yield market, and that's because there are going to be defaults. I mean, there are places where they haven't defaulted yet, but the spread is out at 800 basis points or something because chance of default is reasonably high.

Jeffrey Gundlach (29:45):

Yeah. There's not much there. And the Fed spillover effect--the Fed has bought junk bond ETFs, which is another step beyond their charter. The last step beyond their charter in the financial markets would be equities, which they're talking about buying equities. Why do you need to buy equities? The equity market's trading hands at a peak-adjusted PE that's higher than 1929. Why does it need help from the Fed? People are willing to transact basically all-time record valuations. Maybe that's typical that the government buys at the highest prices ever, but the areas you have to go to are areas... You know, Latin American emerging markets. If you'd mentioned that six weeks ago, people would have run away because the COVID situation in Latin America is much more unknown and the healthcare systems are nowhere near as sophisticated as in the developed world. And so who knows what the economic impact would be.

Jeffrey Gundlach (30:35):

But again, with vaccine news emerging markets went up in some places, 6%, 8% in the month of November, even outperforming the stock market, which reacted well also to the vaccine news. So there's enough volatility to the economic landscape right now. There's enough unknown about what 2021 will bring. There's lots of unknowns as to how this pastiche of a Democratic party will try to get along with incredible contrasting philosophies, depending upon what wing of the party you look at. It's highly questionable how long Biden's going to be in office, if he's going to be in office. I think it's 60% of Democrats polled that they don't believe Biden would make it 4 years. So are you going to get Kamala Harris? Does she mean it, the stuff that she says about fracking and about Green New Deal? Does she mean it?

Jeffrey Gundlach (31:21):

It's hard to know with politicians. They say one thing to get the party's nomination and then they say something else. So there's a lot of political uncertainty. There's certainly massive economic uncertainty. I marvel at how people think that Humpty Dumpty has been put back together since its fall off the wall in March and April. Yeah. I mean, if 16% budget deficit as a percentage of GDP is a healthy economy, then we're in a healthy economy. But my take of world is very different than that. You've certainly papered over a lot of pain with a $3 trillion transfer payment that increased personal disposable income during a huge economic contraction above 10%--not annualized, just 10%. And in some industries, far more than that.

Jeffrey Gundlach (32:04):

Yeah. If you spray money around, you can have short-term snapbacks. But I think people are very much underestimating the way that the unemployment and the wage disinflation is going to climb the economic ladder as we move forward, with more people--not just baristas and waiters on cruise ships losing their jobs, I'm talking about people that are white collar jobs. I've had business partners... My biggest client, for example, who's a variable annuity provider, wildly successful, they announced that in their distribution team, thanks to the COVID lockdowns that back in November, they laid off 150 people. Now these were people that never thought they'd get laid off, but companies will be reassessing the productivity of a lot of this middle management, I believe, and that's going to create further unemployment and just inflation. And the small business toll is going to be ugly this winter. It's ugly already. You look at cleaners and coffee shops and small restaurants. The restaurants here in Southern California have tried valiantly to try to make a go of it. Building tables on the sidewalk with little canvas coverings over them to try to get some revenue. And now what's happened? Well, we just banned outdoor dining last week. So I just think a lot of these small business owners are very close to throwing in the towel with anything that resembles a lockdown.

Greg Dowling (33:25):

All right, that'll be interesting to watch. So we talked about low rates. That's not a great starting point for any sort of fixed income investor with both monetary policy being low and perhaps we'll see some fiscal expansion. Everything you're talking about right now is either disinflationary or deflationary, and you fight that through inflation. So at some point does inflation win? Are we going to see inflation in the next couple of years?

Jeffrey Gundlach (33:51):

When the society truly wants it, we'll get it. I remember in the 70s and the early 80s where people thought that you couldn't get rid of inflation, but they desperately wanted to get rid of the inflation eventually. And so Volcker came in and actually did it. And that wasn't accepted as a success for at least another 10 years. The inflation rate was down at 4% in 1984, 4% inflation rate and a 10-year treasury yield of 14% and people didn't want it because they were so sure that inflation was going to come back into the double digits. The mentality has been completely flipped. People believe that inflation will be at 2% forever. And the Fed actually wishes it would get to 2%. When you look at these surveys of inflation expectations, looking forward 5 and 10 years, they've been flat on their back at around 2%, really over 20 years now.

Jeffrey Gundlach (34:42):

We started quantitative easing, zero interest rates, and a lot of people warned that this would cause inflation, but it doesn't. And it doesn't because we're not actually printing money. It's a very wonky distinction that I won't go into. It's kind of deep into the weeds of economics, but as you borrow more and more money and get more and more indebted, the debt is actually disinflationary while you're doing that. You get a collapse in monetary velocity, which has happened tremendously since COVID, we've pushed out all of this money and we don't have any inflation at all because the velocity is so low. As you get very indebted, where we are now as a nation, with the government alone having $157 trillion of unfunded liabilities, that's about 750% of GDP. Clearly you cannot pay that off with today's purchasing power. It would take three generations of -10% GDP.

Jeffrey Gundlach (35:34):

GDP is just going into debt repayment, which would never happen. But as you get to that indebted level, what happens is every additional dollar that you take on gives you less bang for your buck. So it used to be that you would get like $3 of economic growth per dollar of federal debt. And now it's down to like .30 or something and it just keeps getting less and less. So what would cause the inflation? Well, what would cause the inflation would be true money printing, and to get to true money printing, the Fed would have to violate its charter. Oh, they're doing that right now. So I've already got my antenna up that the Fed could do things out of the bounds of the Reserve Act of 1913 cause they're already doing it in plain sight and nobody seems to even care.

Jeffrey Gundlach (36:17):

If they declared their liabilities legal tender, we would have inflation within six months and it wouldn't be 4% inflation, it would be hyperinflation. If we decide we want inflation, we would go to true money printing, which would take the form of universal basic income which, once it gets started, it can always be amped up. And don't forget, we started basic income programs--not universal, but basic income programs--over 50 years ago. We've had welfare for over 50 years. It's not the whole population, but it is a transfer payment and it is basic income. That's the definition of it. Well, all we have to do is expand those programs, and we're getting quite close to it. We did it sort of this summer, although we did it again on borrowed money, so we didn't actually "run the press," exactly, and declare the liveliness of the Fed and legal tender.

Jeffrey Gundlach (37:08):

But what happens when you go to true money printing I think it's a clean sweep for all of recorded human history. What happens is you have the middle-class--what used to be the middle-class turns into what used to be the poor, what used to be the poor die of starvation, and the people that are running the monetary distribution system become fabulously wealthy. That certainly happened in the Weimar Republic, it certainly happened in Rome, and certainly happened leading up to the French Revolution. So you end up with outrageous wealth inequality.

Jeffrey Gundlach (37:38):

The stuff that we have now will be child's play by comparison because you actually get people starving. I mean, think of how angry the mob had to be in Paris in 1789 to actually March in a torrential rainstorm the 14 or 20 miles or whatever it is to Versailles, many of them barefoot wearing rags in a torrential rainstorm who went through this mud because you're so angry that you want to either kill the King Louis the XVI, or they ended up not killing--they put him on a cart and dragged him back to Paris, where he was imprisoned for four years before they chopped his head off in 1793. So that's what ends up happening with money printing. So I hope we don't go there.

Greg Dowling (38:19):

What does that mean when the U.S. is also the world's reserve currency?

Jeffrey Gundlach (38:24):

For now it's the world's reserve currency, but it's pretty clear that China has every intention of taking a seat at that table. And since we have such an incredible borrowing mentality, deficit mentality, it seems that the dollar is sort doomed. My strongest conviction point of view on markets since really January of 2017 has been that the dollar is going down. It's going down because when you have this amount of debt in the government operating system, your currency cannot hold up. Foreigners are not buying our bonds anymore. Treasuries are being sold by foreigners now on a net basis. And that's been going on for years. Pension systems don't want government bonds at one and three quarters when their pension system needs 7%.

Jeffrey Gundlach (39:11):

So what does that leave? It leaves you and me, like retail investors, to actually buy the bonds. I'm not going to put my money in size into a 30-year Treasury bond at 1.7% or 1.8% when I'm getting taxed over 50% on investing in that so I'm basically down to 1%, and the inflation rate is higher than that. So we have a strange situation where the rates should be going up on the long end, and they have been very slowly since they bottomed out back in April, but they are up 100 basis points on the long bond from their intra-day low, and they are up about 60 basis points on the 10-year. But the path of least resistance would be higher if not for the fact that the Fed has been so clear in their guidance that they believe that economic hardship should be met with large-scale asset purchases.

Jeffrey Gundlach (39:59):

And they have said in plain English repeatedly that there is no ceiling on the amount of bonds that they are capable and willing to buy, which means that they ostensibly are willing to do yield curve control, which is a term that they've used, which was first used in the 1940s and 1950s when they pegged interest rates at something near today's levels in order to work off the World War II debt. So what happened, of course, once they stopped yield curve control in the mid-1950s, you went into a 28-year mega-bear market in 30-year Treasuries. Yield went from 2.3 To 15; that's a big loss. I mean, I remember zero coupon, 30-year bonds trading at prices of like 8, almost like a call option type of a price. So what's happening here is the institutions of our society are no longer functioning relative to the economy.

Jeffrey Gundlach (40:52):

This is what happens through human history. You go through a period of turmoil, be it a nation being formed or civil war or World War II, and when you come out of that sort of situation, you have a reset where you get back to a new type of normalcy, where you have institutions that are very much in sync with people's feelings, their philosophies, and the way the economy functions. And it works great for while, but then something happens, which is on the one hand, very positive, and on the one hand, ultimately fatal to the system, and that is massive innovation. So massive innovation happens, be it the radio, the railroad, the television, the internet, social media, and suddenly the society's rules, they can't contemplate dealing with this new economy.

Jeffrey Gundlach (41:42):

Think about sales tax on Amazon, stuff like that. The tax code can't contemplate future developments. So you get into a vacuum where the tax code doesn't really apply, and yet you have to somehow make it apply. And it leads to wealth inequality. It leads to a winner-take-all type of economy, the robber barons back in 1900, you know, the social media titans today. And it gets to a point where the tension between what Karl Marx called "the means of production," which evolved very quickly through revolutionary invention and the property relations, which are the rules of how society works economically, the tension gets so big that it falls apart. And that's what's happening before our eyes. And it's been happening now for really, since probably 1995.

Greg Dowling (42:30):

So let's do a quick lightning round since we're getting late into this podcast. Real quick, you're in a band, I believe you were drummer. You're living in Hollywood. What is the coolest band you either saw or rubbed elbows with when you were playing?

Jeffrey Gundlach (42:44):

Guns and Roses.

Greg Dowling (42:45):

Wow, that is cool. I'll have to ask you more about that over a beer. Will the Bills ever win a Super Bowl?

Jeffrey Gundlach (42:51):

Yes. I actually think that the Bills will win the Super Bowl within three years.

Greg Dowling (42:58):

We'll see what happens. I know you are a big art lover. Favorite artists and why.

Jeffrey Gundlach (43:04):

My favorite artist is Piet Mondrian and the DoubleLine logo is fashioned after his signature style. It's really Mondrian that got me transitioned from pretty pictures, which is what I used to think art was, pictures of oceans, mountains, and fields that are very pretty, Monet and all that sort of stuff to more non-representational art. And it was funny because it happened in the blink of an eye. I was sitting at the Tate Museum in London and I went there to see traditional pretty pictures, particularly one by John Singer Sargent, which is a beloved American painting though it lives in London. It's called "Carnation Lily, Lily Rose" and shows these two girls in kimonos, lighting Chinese lanterns. A very, very beautiful picture. I went to the Tate to see it, and I wandered around. The place was empty, It was like a Tuesday afternoon, and I got lost and ended up in the modern art area.

Jeffrey Gundlach (43:51):

I saw this Mondrian, they had a couple of paragraphs on the wall talking about it, and it was like lightning struck or something. I thought it was like the greatest thing I'd ever seen. Because it's truly non-representational. It has to do with arrangement of space, has to do with balance without symmetry. It has to do with capturing the infinite and the finite. Because when you look at Mondrians, you feel like they're almost on a galactic scale, you can envision that they just go on forever. And the double line actually amplifies that feeling, because you have the sense that parallel lines go on and they never meet. They go on forever. Of course there is no infinity. It's strange that people think about that.

Greg Dowling (44:31):

So what is your most non-consensus prediction for 2021?

Jeffrey Gundlach (44:37):

I'm not sure I know what the consensus is for 2021. I'll put it in a broad stroke. There have been very persistent trends that have gone very significantly overextended over the past multiple years. One is the S&P outperforming the rest of the world by a mile. Another is growth outperforming value by a mile. Another is small caps underperforming the S&P six--which I call the super six, Google and Facebook and all that--by a mile. Gold going up for the last two years. And I think all of those trends have already begun to reverse and will be all in reverse gear for 2021.

Jeffrey Gundlach (45:16):

Well you heard it here first. Jeffrey, thanks so much for your time. This was wonderful and we always appreciate hearing from you.

Jeffrey Gundlach (45:24):

Well, it's fun doing it. Thanks, Greg, for having me once again.

Greg Dowling (45:28):

If you are interested in more information on the topic, please go to our website where we will have a list of relevant FEG publications. And don't forget to subscribe to our communications at www.feg.com/subscribe so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views or opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of FEG.

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This was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Past performance is not an indicator or guarantee of future results. Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. The views or opinions expressed by guest speakers are solely their own and do not represent the views or opinions of Fund Evaluation Group, LLC.

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