Billionaire bond investor Jeffrey Gundlach, the CEO of $150 billion DoubleLine Capital, joined Yahoo Finance for an exclusive interview ahead of the Los Angeles investment firm’s 10th anniversary later this month.
During our conversation with the bond king, he spoke about the patter of the pattern of U.S.outperforming coming to an end, why investors should start playing defense, the 2020 election, Fed policy, and the culture at DoubleLine, among many other topics.
Below is the transcript of our extended conversation.
JULIA LA ROCHE: And Jeffrey Gundlach, thank you for having us here at DoubleLine — about to celebrate the 10th anniversary.
JEFFREY GUNDLACH: Yeah. Welcome, Julia.
JULIA LA ROCHE: All right. Well, Jeffrey, our viewers definitely want to get your take on where we are in the markets. A lot has transpired in 2019. What do you make of it? And what do you see driving the markets going forward in 2020?
JEFFREY GUNDLACH: Well, 2019 looks really strong when you look at global stocks, and bonds, and gold, and bitcoin, and just about everything. But you have to remember that it came off of an extremely arbitrary point. Year-end was a very low point, because the fourth quarter of 2018 was incredibly weak. And so if you look at things in a broader context, markets are kind of turning around. I mean, treasury yields have been at around 2% on the 10-year for a while. The S&P 500 and the Dow Jones have reached new highs. But stocks outside the United States are still below where they were January 26 of 2018. So we're kind of grinding along. And what's really helped 2019, no doubt, was the massive u-turn by the Federal Reserve. It's really hard to believe how things have changed over the last 12 months in terms of the Fed's outlook and their behavior. A year ago, the Fed was in automatic QT. And they said so in the December conference, that they would be on automatic pilot QT no matter what the data said. And then the markets tanked. They also said they were going to have sequential rate hikes in 2019 and 2020. And that changed a few weeks later too because the markets were tanking. And then all of a sudden, we went not only into no more quantitative tightening, but in response to the repo market's dust-up back on September 17 and some other subsequent dust-ups, we see the Fed is kind of doing quantitative easing part four. But they don't want to call it that. They're kind of using semantics, saying, that, ‘Well, we're not doing it for long-term interest rates, we're doing it for overnight money and short-term interest rates.’ But they're still expanding their balance sheet. And that has driven the market for sure, I think. I think it forestalled the market kind of settling back down in the second half of this year because of the quantitative easing that they've begun. So the markets are at pretty high levels, given that GDP has started to look worse, the ISM manufacturer came out today. The only way to characterize the number is terrible. I mean, across the board we expected to bounce back. Instead, the consensus expected a bounce back. Instead, we got something different. But what's interesting is that the bond market seems to be showing some trouble signs. The dust-up in the repo market basically, to me, shows that the Fed has manipulated interest rates to a level that the market really doesn't accept. Because if you can't float overnight money at a level of the Fed funds rate, it means that the natural demand isn't there, which reinforces my thesis that in the next recession, absent the Fed doing massive monetary purchases, interest rates at the long end of the curve would probably go up because of supply problems. I've been talking about this for a long time — that the growth in the national debt is substantially higher than the growth in nominal GDP. It's pretty amazing when you think about it. We talk about how the economy's so good in terms of employment. It's true. But in terms of other things, the economy isn't that good. And if you weren't expanding the national debt at all, if you were just keeping it constant, we would actually have negative nominal GDP right now. So it's kind of a sobering thought — that the entire expansion that we have had in recent several quarters is all debt-based. The national debt and the deficit as a percent of GDP are at levels that historically have been associated with the depths of a recession in terms of a stimulative policy. So I think 2019 has turned out to be one of the greatest, easiest years ever for investors. Just about anything, just throw a dart, and you're up 15-20%, not just the United States, in global stocks as well. I think that the pattern of the United States outperforming the rest of the world has already come to an end. And I think that in the future what investors should think about is a pattern— I've talked about this chart, which I call the Chart of the Year. We take the world and we divide it into four regions —the United States, Japan, Europe, and emerging markets. And we go back to the 1980s. And we just take the major indices from those four regions. And it's interesting that in the late 80s, Japan was viewed to be invincible. They were absolutely killing it. Their real estate was booming. They were by far the strongest stock market was the Nikkei in the world. And then the recession came in the early 90s. And the Nikkei got completely wiped out. And what's fascinating is here, 30 years later, it still hasn't come close to that high. Then in the 00s, it was Europe, sorry, in the late 90s, it was Europe with optimism that I think was misguided, but optimism about the euro being potentially a reserve currency. And it was just formulated. It came into being in 1999. And it turned out that Europe was killing it and outperformed every other stock market region of the world. And then the recession came in the early 00s. And the euro stocks got kneecapped. And they've never been back to that level again. Then you had the emerging markets, with the dollar being weak in the middle of the 00s and the ascension of China. You had emerging markets were by far the strongest region in stocks in the world. And then when the Great Recession came, they got completely destroyed. And they've never made it back to that level again. So where are we today? Today, we have the S&P 500 is killing everybody else over the last 10 years, almost 100% out-performance versus most other stock markets. My belief is that that pattern will repeat itself. In other words, when the next recession comes, the United States will get crushed. And it will not make it back to the highs that we've seen that we're kind of floating around right now probably for the rest of my career, is what I think is going to happen. Now, my career isn't — doesn't have 30 years to go, but it also doesn't have a year or two to go. So I think that there's going to be a rotation into non-US stocks. I think the dollar's going to be weak. The dollar has been very stable this year. It's really remarkable. The DXY index, the DXY, started this year at 96.25. And today, it's at a 97 handle. So it's been remarkably stable. I think in the next recession, the dollar will fall because of the deficit problem in United States, and that investors will be better served to own foreign stock markets instead of the US stock market in dealing with the next recession.
JULIA LA ROCHE: What's the probability of a recession coming, I mean, anytime soon, even looking into 2020? I know we had discussed this this fall. You had a probability. What is that outlook right now for you?
JEFFREY GUNDLACH: It's around 40% right now. In the summer, around August and early September, things were looking pretty dire. You might remember that there were calls for an emergency interim meeting 50 basis point rate cut from the Fed because the data was getting soft. And it's gotten little bit better since then. So when we look at things the ISM looks bad, like I said, today. That certainly looks recessionary. Consumer sentiment though remains at a decent level. But what we have to watch for is the consumer confidence declining, because that's almost definitional, that it would cause a recession. And we've seen retail stocks getting substantially weaker recently. And there's a little bit of doom and gloom starting to surface about the holiday season. I'm not sure that's going to prove to be fully justified. So I think that the sentiment is holding up. The leading indicators are close to zero on a year-over-year basis. You need those to go negative for a recession. So when we put it all together, I think it's about a 40% chance, which is down from where it was during the summer. And the yield curve is no longer inverted. A lot of people think that that is happy news about averting a recession. But the way history works is that the yield curve inverts. And it did earlier this year. And then actually the Fed starts easing, because they realize that the inverted yield curve is actually giving us information. And people breathe a sigh of relief. But actually, the curve always de-inverts — turns positively-sloped — before the front edge of recession. So, I actually put that in the category of being suggestive of a recession in the next 12 months, non averting a recession in the next 12 months. So you put it all together, it's about a 40%. There's not a lot of information in that forecast that I've given you because that's pretty much the consensus of economic forecasters, which proves once again that I'm not truly a contrarian. Everyone says I'm a contrarian, but I'm not. I just try to think objectively. Sometimes, that objective thinking takes us to a conclusion that's different from the consensus. At this point, relative to recession, I'm pretty much in line with the consensus economists.
JULIA LA ROCHE: Well, another area that folks like to pay attention to when it comes to your calls — the election. 2020 is starting to shape up. You nailed the Trump presidency, I think, before pretty much anybody in the —
JEFFREY GUNDLACH: Before the primaries even started, I said Trump was going to win.
JULIA LA ROCHE: Exactly.
JULIA LA ROCHE: What are you thinking of right now?
JEFFREY GUNDLACH: It's all about the economy. And I think that if the economy holds together— and it just might— into the election, I think Trump's going to win. When you look at the slate of Democratic candidates, it's pretty weak. And you can sort of see that from the polling, that you have a flavor of the month thing kind of going on. Where you had—Kamala Harris looked good for a while. Then Elizabeth Warren looked good for a while. And they've really just tanked in the past few months. And now the flavor of the month is Pete Buttigieg— who I think is just a terrific speaker. When I heard the mayor of South Bend, Indiana had thrown his hat in the ring for the Democratic nomination, I didn't know who he was. Of course, nobody did. I laughed out loud. Then I saw him speak. And I was incredibly impressed. He's just so well-spoken, so good on his feet. But he sort of looks like he's running for student council. He's so young. So it's very hard for me to believe that he's really going to endure, even though he is very talented. I think he has a great future. I look at the Democratic candidates. I don't see any of them as being winners. I said in May of this year that Joe Biden has no chance. I can't find any winners there. So the only way that Trump doesn't win re-election is a recession, I think. And if there is a recession, I don't even know if he can run, because he runs on braggadocious language. And it's difficult to get braggadocious if you have a negative sign from the GDP. However, maybe he's just really diabolically clever after all, and he put on the tariffs to weaken the economy so that the Fed would cut interest rates. We all know monetary policy works with a lag. So the Fed's cut rates three times. Maybe that lag will be enough to keep the economy going into the election. He also has those tariffs on, which he can remove. I mean, think about it. If you were thinking of buying patio furniture — this is a real-life example of my own life — I was buying patio furniture, and I got the invoice. And it said $2,000 plus tax plus shipping plus 25% tariff right on the invoice. And that was a real slap-in-the-face kind of moment, because I realized, for me, I don't really care, but a lot of people I can well imagine them saying, ‘hey, I can wait out another season with my shabby patio furniture, because I could get it without the 25% tariff.’ Well, if you remove the tariffs in, say, I don't know, April, maybe you'll get a boost in patio furniture sales. And that would, and I'm using this metaphorically obviously, that could boost consumer spending. Also, the White House, through Larry Kudlow, has stated twice that they're thinking of tax cuts 2.0. And one of them, they mentioned a few months ago, was a payroll tax cut, which would put — supercharge consumer spending in the short term. Payroll tax cuts go directly to the middle-class. And they go directly to spending. And they also talked about dropping the middle-class tax rate to 15%. I don't know if that's just a campaign talking point. But if you actually, I don't know if you could pass these tax cuts given the political environment, but if you could, that would also keep the economy going. So putting it all together, I think right now you have to believe that the baseline is that Donald Trump is going to win re-election if he runs if the economy holds together.
JULIA LA ROCHE: Well, we were just talking about the Fed earlier, and the Fed really making a u-turn reversal. From an investor's perspective, has that been frustrating? How would you assess Jay Powell's performance? How would you grade him?
JEFFREY GUNDLACH: I thought when he took over that there was reason for optimism, because he wasn't a PhD economist, and was kind of out of the PE world, and had kind of a pragmatic understanding of how markets work. And he showed that he had his own ideas, and a framework, and all this in the fourth quarter of last year. Unfortunately, the market just laughed in his face when he came out in December with a framework that the market really wasn't accepting of. He was going to do quantitative tightening, reduce the balance sheet. And the market just said, if you follow this path, we're in a bear market. And it completely turned around. And then he couldn't put back-to-back press conferences together with a consistent message. Every press conference from basically December until about June was a completely different message from the one before. And they were getting increasingly dovish. And then he kind of went all in on dovishness, and started to follow the bond market and cut rates. And you'll notice that at this point, he sounds like an NFL football coach after a losing game. They all say the same thing, ‘got to watch the tape, got to play better, not good enough. ‘Now Jay Powell does the same sort of boilerplate. He just says, ‘data dependent, don't know we're going to do, we might’ — he basically wants to say as little as possible. So at this point, I think the Fed is kind of rudderless, and is more shamelessly following the bond market than ever before. So at this point, I'm afraid I would have to give Powell a pretty low grade. I'd give him a C- because of the fact that he's really kind of lost his way as it appears. But the Fed's always really followed the bond market. Very rarely, it's been the other way around. I think you would have to go all the way back to Volcker almost to see a Fed chairman that was really indifferent to the message of the market, and was really driving the market instead of being driven by the market. So Powell seems to be leading the way for kind of cheerleading inflation higher, which is probably one of the reasons why bond yields have risen kind of globally and in the United States as well by about 45 basis points or so. And it's because they make statements that they want inflation to run hot.There was actually an amazing quote that came out today from Lael Brainard. She said that the reasons underneath the Fed wanting to let inflation run hot are very complicated, too complicated to explain to the public. That's what she said, which kind of means that there isn't any foundation underneath it, in my view. It just means that they understand I think underneath all of this, they understand that the national debt is compounding at an alarming rate. And central banks globally seem to have kind of a tacit policy of wanting inflation to be higher than interest rates, which I can kind of understand. If you're tremendously in debt, it's helpful to string out the compounding problem, to have interest rates below the inflation rate. Because then that way, you are slowly debasing the debt. And that seems to be the motivation under this policy. When they say it's too complicated to explain to the public, I think what they're saying is the explanation is not very attractive, and so we don't want to give it — that we have a huge debt problem, and we need to debase it. And we're getting closer to that moment. They're saying things like, we need inflation to make up for past below-2% levels. I don't even understand what that means. Who cares if inflation was targeted at 2% over the last 10 years and came in at 1.5%? So what? It was still inflation. It still wasn't the dreaded deflation that they're so concerned about. So what? Why do we need to make up for it? What kind of economic theory says that you need future inflation to make up for past inflation so you hit some arbitrary average? It really doesn't make any sense. I think it's just gobbledygook for the real reason, which is to keep interest rates low — lower than the inflation rate is the goal.
JULIA LA ROCHE: Well, if it doesn't make sense to you, then I can't imagine it making sense to anyone else. Something else that we have talked about is just the growing negative interest rates worldwide. I mean, what's even the argument for doing that? And why do you think that's going to be problematic?
JEFFREY GUNDLACH: It's one of these things that they view as a short-term solution, knowing that over the long-term it's devastatingly bad. So it's kind of like our national debt. It's the same thing. We've been talking about the problem for decades. Ross Perot ran for president in 1992 basically on the platform that we need to control the growth in the debt. But now here we are 27 years later. And it's massively bigger. And it still hasn't appeared to be a problem. Negative interest rates are kind of the same thing. What they're doing is they're trying to stimulate their economy through negative interest rates. And the banks and the insurance companies are really suffering underneath this policy. When you look at the bank stocks in Europe and the insurance company stocks, they've massively underperformed for obvious reasons. If interest rates are negative, how can an insurance company that has annuities that pay a positive rate— how can they possibly achieve that return? So it's pretty fatal in the long run. But nobody really owns these negative-yielding bonds. That's one of the strange things about it. 97% of all the negative-yielding debt in the world is owned by central banks and the financial institutions that they regulate, that are then required, like banks, to own these sovereign bonds and the like. So nobody really owns them. I went to Japan a few years ago now. And I met with the guy that runs probably the biggest pension fund in the world, one of these Japanese public funds. And I said, ‘I'm so happy to meet you. I have a question I've been dying to ask you. Do you own any negative-yielding bonds in your pension fund?’ He just laughed. He said, of course not. He goes, they're just owned by the central bank. So you have this weird circular financing scheme. But the consequence of the negative interest rates can be seen, let's just use a big, notable example, Deutsche Bank. You see the stock has been down tremendously for a long time. And whenever you get a rise in interest rates, not surprisingly, there is a little bit of a bounce in Deutsche Bank stock. It's rallied quite a bit from where it was in—at the nadir of negative interest rates. When Germany was at negative-70 basis points, Deutsche Bank stock was down about $6 or something. Whenever you get a big rise in interest rates in Europe, you get a relief rally in Deutsche Bank stock. So basically, negative interest rates are fatal over the long term to the banking system. Negative interest rates in the United States are not coming. Jay Powell has said so. And for that, that's why he gets a C-and not a D or a D-, because I strongly and loudly applaud his statement that he doesn't think we should take interest rates negative in the United States. Because if the United States went negative with Japan negative and with Europe negative, I think it would be fatal to the global banking system because there'd be nowhere for capital to go. The United States is a tremendously large market. And so with capital not being attractive in Japan and Europe, at least it can come to the United States. And that's one of the reasons why the dollar has held up. So he knows that if interest rates go negative in the United States and stay there, that capital destruction is going to be overwhelming. And so he has talked about saying that when the next recession comes, he's not a fan of negative interest rates. I'm sure we'll go towards zero. But he would do large-scale asset purchases— which he's already begun. He doesn't want to admit it. It's kind of funny. They called it "quantitative easing" because they didn't want to admit it was monetization. They said, it's not monetization, it's quantitative easing. And now they don't want to even admit that it's quantitative easing. They want to call it — I don't even —"repo facility" or whatever it is as they grow their balance sheet by a couple — $300 billion. But it's still growing the balance sheet. But I applaud the fact that they don't want to go with negative interest rates, because I think that that would really turn the world into a dangerous place.
JULIA LA ROCHE: Wow. I want to talk about what you see coming next— this movie that you see coming. Just for our viewers who aren't aware, you gave the narrative leading up to the credit crisis. You were calling subprime an unmitigated disaster before it happened. You played defense for your clients.
JEFFREY GUNDLACH: I said ‘it's an unmitigated disaster, and it's going to get worse.’
JULIA LA ROCHE: Yes. In June of 2007. And you played defense with your clients. And then you played offense in 2009. But you say that there's another one coming in this movie— a turning, a Fourth Turning, if you will. Explain what you are seeing?
JEFFREY GUNDLACH: Well, when you talk about a Fourth Turning, there's this sort of political philosophy that says that the world moves in cycles. And there's basically four chapters in the cycle. And the first one is the building of institutions with tremendous confidence and buy-in from the public. And then when you get into the Fourth Turning — which is where we are now — you basically have the public rejecting institutions. And the way society operates gets out of sync with the institutions. It also ties into Karl Marx's philosophy, where you have the means of production and the property relations. And the means of production can have innovative change that's really revolutionary, like the internet, like social media, like radio, like the telegraph, like the railroad, like television, and all that stuff. Well, this time, it's social media and the internet. And it changes the means of production tremendously. Just think about what will happen when we have driver-less trucks and driver-less cars. You're going to put thousands, millions of people out of work that have no skills other than to be a chauffeur, or a delivery driver, or a truck driver, what have you. And those people just get left behind by the revolution in the means of production. But the property relations have to do with how the wealth is split up. And they're various in power. And they're very slow to change. They don't change in a revolutionary way. They even resist changing in an evolutionary way, because the people that benefit from the property relations and have the power — they don't want to give it up. So what they do is they pretend that you can somehow keep things together, even though there's a tension developing between the means of production and the property relations. Look around at how things are out of sync right now. People are running for president trying to say billionaires should be illegal, we should eliminate all billionaires, we should be putting free money into people that have been displaced by the revolution in the means of production. And the people who are in charge — some people call it the deep state. Some people call it the establishment, whatever you will. Some people call it — you could even call it churches. Their ideologies that existed even 20 years ago have been completely rejected. So what has to happen is we need to have a new set of property relations. And that is absolutely the kernel beneath the changes in the political system in the United States that Trump obviously dialed into. And now you see the Democrats are really not a party anymore. The Democrats basically have a socialist party. And they've got the keep-the-genie-back get-the-genie-back-in-the-bottle part of it, which is Joe Biden and perhaps Michael Bloomberg. And none of these factions can get majority support. So that's emblematic of a Fourth Turning. And what it means is that we have to have something resembling a revolutionary change in the property relations of the world. And that's a really big deal. So historically, what have Fourth Turnings led to? Turmoil. The Civil War in the United States was a Fourth Turning. World War II was a Fourth Turning. So it doesn't have to be violent like a war. But it has to be a complete rejiggering. Think about what happened pre-Civil War and post-Civil War. I mean, there's a huge change. And then, actually, the South managed to sort of put the genie back in the bottle with Jim Crow. And that actually lasted a long time. But even that now is echoing and being ripped apart. So we will have very substantial political change. I saw a leading Democrat, not one that's running for office, actually say that if the Bill of Rights, the first 10 Amendments of the Constitution, if the Bill of Rights were voted on today, a significant fraction of it would be voted down. That was his viewpoint. So the level of tension is palpable. And all you've got to do is look at where we are. It would be great if we could have a time machine, where you could go back 20 years in time. And I think you wouldn't believe your eyes at how different things were 20 years ago versus today. But you get these things very gradualistically. It's kind of like the tires on your car, is the analogy that I use. You drive your car for however many miles your tires are good for, let's say it's 25,000 miles, you don't realize how bad the traction has become because you've experienced the decline so gradually. And then you get the new tires. And you're like, ‘wow, I can't believe how well this thing handles, and the traction in the car.’ Well, that's kind of how this has developed. It's so slow. And so where we are in terms of disunity, I think, would be remarkable in the eyes of somebody from 20 years ago.
JULIA LA ROCHE: Well, I want to ask you, from an investor's perspective, how do you see this playing out? What do you think happens?
JEFFREY GUNDLACH: Well, we are battling tooth and nail the next recession. The Fed has done, and the central banks, everything they can to avert the next recession. But a recession will come. And when it does, that's when all of this stuff will accelerate into kind of the parabola. And that's why you should be playing defense right now, just like you should have been in 2006. You were early. I think playing defense is early. You probably should've started playing defense in 2018. And the fact that 2019 has been really good is just a better reason to play defense, because the next opportunity is going to be in corporate credit, not what happened— you never have the same crisis twice. But if you look at the growth of the corporate bond market, it's more than twice the size in the United States as it was in 2006. And as we know, through the prism of 2009, people said, ‘oh, that debt was really ridiculously high, we never should have allowed that to happen.’ Well, now it's twice as big. And we have zombie companies that are allowed to keep going because of these artificially low interest rates. And the corporate bond market is probably significantly overrated, which sounds a lot like subprime in 2006. Some of them were rated triple-A. And they fell to $0.20 on the dollar. Now, obviously it didn't deserve a triple-A rating. Right now, there are leverage ratios in the investment-grade corporate bond market that suggests that nearly 1/3 of the investment-grade corporate bond market probably should be rated junk right now. But they've been given a pass because they say, well, like AT&T is one of them. They've been given a pass because they say, ‘well, we know that we have excessive debt. It's kind of imprudent. But we know about it. And so we will be addressing that problem in the future.’ And they're being given a pass. Well, when the recession comes, there won't be any idea of addressing these leverage ratios. They're just going to get a lot worse when the recession comes. And you're going to see en masse downgradings of the investment-grade corporate bond market. And trust me, when a triple-B-rated bond gets dropped down to a single-B rating, the price doesn't go up. The price goes down. And that, I think, will lead to very significant divestment of a lot of the naive money that's gone into the corporate bond market. Because it's been a pretty smooth ride for the last 10 years. And it's been pretty rewarding this year as well. And so I think a lot of money doesn't understand the risk that exists in corporate bonds, particularly when the next downturn comes. And so I think that corporate bond exposure should be at absolute minimum levels right now. And I also think that non-U.S. exposure should be ramped up to maximum levels. For people that allocate globally, I think they should be moving towards the minimum of their range, whatever that number is. If they say, the minimum that we're going to have in the United States is 40%, they should be moving towards 40%. If the maximum in foreign assets is supposed to be, I don't know, 30%, you should be moving towards 30% and playing defense. And then when the opportunity comes, you'll want dry powder to pounce on it. If you under-perform during this late-cycle kind of end game, you're going to get caught. Because once bonds in particular start to drop— I have a saying — ‘In bonds, you make money slowly, and you lose money quickly.’ They go from — making money is the bonds going from 100 to 103. Losing money is the bonds go from 100 to 50. And so you want to be there with dry powder to buy the 50. And that means selling the 103.
JULIA LA ROCHE: Well, I do want to shift gears a little bit, and talk about DoubleLine Capital celebrating its 10th anniversary later this month.
JEFFREY GUNDLACH: It's hard to believe 10 years already.
JULIA LA ROCHE: Yeah. You've gone from an upstart with 45 to nearly $150 billion in assets under [Imanagement, more than 250 employees.
JEFFREY GUNDLACH: Yeah. I think we're headed to 300, yeah.
JULIA LA ROCHE: I've spoken to many employees— some of the original team, and some who came on later. And the one common theme is that the culture has remained the same throughout. So is this the firm that you expected? And is this the culture that you wanted to build? And what is that culture? [00:35:48.62]
JEFFREY GUNDLACH: Well, it was pretty easy to build the culture and build the team, because we were really running our own firm for 20 years prior to starting DoubleLine. We were basically a firm within a firm within a firm within a firm, because there was layers of ownership that went all the way over to Europe. And we had to do everything. We had to work together. We had to do our marketing. We had to do our own compliance. We even had to do, for a while, our own accounting. All we really got was HR and legal. And then when we started DoubleLine, we had to build HR and legal. And other than that, we just knew how to do it because we had worked together before. So the culture is one of not competing with ourselves, which I think is the most destructive— I don't want to call it an attribute, but characteristic of many investment firms. They basically have units that compete with each other. Many firms will have four equity departments— small-cap, large-cap, growth, value. And they're all kind of competing with each other. We don't have any products that compete with each other. We have a shared success mentality— one that, if you do well, I'm happy for you, not one that, if you do well, I have a death-in-the-family look because that means that resources will be allocated to you and not to me. So nobody here is fighting for shelf space. So everyone's pulling the oar in the same direction. And I have a saying, ‘No responsibility without authority, no authority without responsibility.’ So people, they have accountability. And they have support. And we try to make it so that the chance of success is maximized. And my other thing is I never yell at anybody. I believe that if something goes right, I'm more than happy to share the credit with everybody. And if something goes wrong, I really think it's my fault. So that— I think people feel good that they're not being kind of kicked like a dog when things go wrong. And thankfully, very little has gone wrong. We had incredibly smooth sailing at DoubleLine. As you suggested, we went from zero AUM to $150 billion basically in 10 years.
JULIA LA ROCHE: Probably the fastest ever of-
JEFFREY GUNDLACH: I'm sure. Well, we went to $50 billion in under three years, which was really my goal. So you asked, is this the firm that I expected? Yeah, it's the only firm that I know. It's the way we ran it for 20 years, as a firm within a firm. We started here. And then it was just a lot easier. Because when you're a firm within a firm, you not only have to manage people. You have to manage up. And I don't think I'm very good at managing up. I think — people seem threatened by me when I used to report to people. They always seemed threatened by me because I think I had more aptitude than the people that I was working with or for. And so they viewed me as a threat. And so we don't have that here. So everybody, I think, is — feels that it's a positive atmosphere.
JULIA LA ROCHE: That also leads me into my next point, is a lot of folks brought that up, that there's a lot of intellectual honesty here. They pointed to you. What are your intangibles? And they said, a lot of it's just the inner workings of your mind, that you're a puzzle-solver. And I know you like puzzles. And do you look at investing as a puzzle?
JEFFREY GUNDLACH: Yeah, it's a space-relations game. I have very few skills. But the one skill that I really have is time and space-planning, which are really the same thing. Time and space are the same thing. There's a phrase in philosophy, ‘If now, then here.’ You can't think of a moment in time without thinking of space. And so I'm really good at piecing together three-dimensional puzzles basically. And I view investing as that — that basically you have moments that there's incredible opportunity. And you can actually fit together a portfolio that has high return potential with very low risk. And those are the great moments. That was 2009, 2010, 2011. Then you have times when there isn't that much of an opportunity set, like right now. And you can't really put together a no-risk portfolio with a high return. If you want to get a high return, you have to take a ton of risk right now. And I don't like that. I don't like risk. So we wait for opportunities. I did a show that didn't last very long. I did— I co-hosted a show back in 2011 for about six months. And it was fun. But it was — it turned out —I think it was a little too highbrow for financial media for national TV. But the hosts— one of the hosts said to me after about three shows, he said, ‘Jeffrey, I've got you all figured out, you just go where the numbers take you.’ And I said, ‘you're absolutely right.’ So intellectual honesty. Yeah. What we do is we try to figure out how the puzzle fits together. And we think about it with as much objectivity as possible, even if that leads us to a conclusion that isn't all that wonderful for our fundamental business. Like in July of 2016, when the 10-year Treasury hit its all-time low level, which I think will never be breached— it was 132 intraday. I said, this is the low in rates, and it's going to be a really challenging bond market for the next couple of years. And it was. Now, with the Fed doing its u-turn, that's been put on hold for a little while. And maybe the Fed is going to buy all the bonds, emulating the ECB and the BOJ. Maybe that'll happen. But if we think that bonds are unattractive, we don't cover our ears, and hum, and say, dalalala, we're mostly fixed-income oriented, we can't speak such heresy that bonds might have a negative return. No. We say, well, we need to get our clients through both the good times and the not so good times. So sometimes, you play offense. Sometimes, you play defense. But we try to be as objective as possible. And very few people that I've run across really have that ability— to contemplate that there might be a bad outcome, and to not just avert your eyes from those facts.
JULIA LA ROCHE: Right. And sometimes, you have to skate to where the puck is going. And DoubleLine's diversified a lot. You have the CAPE Shiller Enhanced fund. You have the REIT fund.
JEFFREY GUNDLACH: Yeah. We have a lot of funds that people have not that great awareness of. I mean, our equity fund, the Schiller fund, is just a world-beater. It's just crushed it, outperforming everybody. I think it's number one in its category by far. And it's rules-based. And it's a strategy—we have over $10 billion in that. We have the REIT fund, which is small because it's only been around for a year. So the returns are ridiculously good. But I can understand if investors say, one year— it's also been easier. I don't know about that. But we also have commodities. And we have closed-end funds. And we have opportunistic funds. Yeah, we're very diversified. When we started, our total return strategy for which we're most known was 85% of our assets, I think, at the end of 2010 or so. And today, it's — I don't even know. I think it's less than 40% or around 40%. So yeah, we're much more diversified. And I like that. I like doing different products, particularly, we try to launch products when we think that they're going to work in the near-term. So we don't do me-too products. For example, in 2011, there were mortgage-related REITs, mortgage securities REITs that were being floated. And I think there were about 14 of them that were filed. And every investment banker on Wall Street was calling me up saying, ‘You should do a REIT. With your reputation in mortgages, with your name, you could just do a big capital raise.’ And I said, ‘I'm not doing it because I don't believe in it.’ As it turned out, before those REITs got floated, even though they were filed for, the market turned, and I think only one of them got done. And it was kind of a failure because it didn't raise enough capital to even be profitable. So in 2011, we were desperate for assets. We were losing money in 2010. And we were trying to grow into our infrastructure from an asset base. So I had a lot of incentive to throw caution to the wind, and say, ‘Sure, I'll do a REIT. It's permanent capital. Love it.’ But I didn't believe in it. So we didn't do it.
JULIA LA ROCHE: Right. You had to be prudent. This is something that came up, where thought of there aren't many folks working who have lived through a prolonged bond bear market. I mean, you've been in the business for a long time, going back to the mid-80s. Is that a risk? Or how do you think about that, when you think of I guess even the younger talent?
JEFFREY GUNDLACH: I used to think that that was a really big risk, because I thought that orthodox monetary policy would be continued. So I always felt that when the Fed started to raise interest rates, it would cause problems for people who had never experienced a rising Fed funds rate, particularly investors that use leverage, like hedge fund investors. I think before the Fed started raising interest rates in December of 2015, I think something like 70% of all hedge fund managers had never seen a Fed rate hike. They'd never seen one. So I think the fact that people haven't experienced a bond bear market has colored their thinking. I look at it a little bit differently though. I think when we look at data and we look at markets, the real important moment that shapes people's fundamental ideas was really the early 80s. Because from the end of World War II into the early 80s, there was no growth in debt-to-GDP ratios. The United States had real economic growth. It was real. And the debt was constant as a percentage of GDP. Then Ronald Reagan showed up and started deficit spending. And we've been on that curve ever since. And I think that the data prior to the early 80s is irrelevant because it's a different regime of economic growth. Since the 80s, it's all been debt-based economic growth. And so I think that the real risk is –that people aren't familiar with is, what happens when we can't keep debt-based growth going anymore? What happens if we actually have shrinkage in debt? I think it will be a very, very different market. When will that happen, I don't know. Because Trump ran on deficits under control. And he's made it much worse. So when will polit- and the Democrats that are running, they're all running on even more debt with giveaway programs. And they say they're going to tax billionaires. That's fine. But you're not going to get anything close to the money that you need for these programs by taxing the top 0.001%. It's just not going to happen.
JULIA LA ROCHE: But don't you think they would just leave? What can you do?
JEFFREY GUNDLACH: Well, you can't leave. The proposal is that if you leave, you basically have a 40% exit fee. So if you take Elizabeth Warren's original plan, which was 3% on over $1 billion— she out of nowhere turned it into 6%. So I think that was when she peaked in the polls. That was the moment that she peaked, was when she just went from 3% to 6% to try to outbid Bernie, I think it was. She peaked in the polls. But she has this exit fee concept, which means that if you leave, you have to give 40% of everything you own to U.S. government. Well, that's quite a few years. That's 13, 15, if you're under a billion, it's 2%— you're talking about 20 years. So there is no way out. And now they're talking about global taxation as well as a theme that's starting to pop up at these global powwows. So no, I don't think leaving is much of a— is going to be much of a solution.
JULIA LA ROCHE: Have you given much thought to MMT?
JEFFREY GUNDLACH: Yeah. I think it's ridiculous. It has a false appeal. it just says, hey, if you're borrowing your own currency, you can just have infinite amounts of money. Basically, what they're doing is they're saying, as long as the interest rate is below the growth in the economy, then everything's fine. And so it's OK to have basically tons of debt as long as the economic growth is there, and so on. But the idea that you can borrow infinite amounts of 10 and 30-year money just because GDP is growing for the last five years — that's meaningless. Because GDP can turn. When you issue all the bonds for 10 or 30 years, that's a fixed interest rate. So the fact that interest rate is lower than the growth of the economy that sounds pretty good. But what happens if the growth of the economy then turns negative? Well, then MMT gets blown out of the water. There are mismatching time windows. They're using the past to talk about economic growth. And the debt is for the future. But you don't know what economic growth is going to be in the future. So MMT is highly illogical. And I've seen videos of these people— there are some professors that are big proponents of it. And it just makes your brain hurt to watch these videos, because they use these bizarre analogies that actually the government is not borrowing money, they're investing in the economy, is kind of the way they try to turn it. And when you watch it, you can actually get kind of sucked into the logic. And then you kind of suddenly get a big, a cold bucket of water drops on your head. And you go like, this is just pretzel logic taken to— pretzel logic on steroids really. So MMT is just completely nonsensical.
JULIA LA ROCHE: So I'm a millennial. And my generation— it's the generation that's saddled with student loan debt. We're probably not going to get Social Security. I mean, what do you say to the millennial generation? What would you say to them?
JEFFREY GUNDLACH: I say please create good institutions for the First Turning. Because when I talk to millennials, and ask them about baby boomers, and I just say — and I asked some of my employees, ‘What do you think about baby boomers?’ The word ‘hate’ comes up a lot because of the issues that you've described, which I can really kind of understand. It's sort of like we created this ridiculous idea that everybody has to go to college. We created government-guaranteed loans so that they can, so that people can buy them. The money becomes available. And then the tuition went on an absolute tear higher as the costs exploded. And this idea that everybody should have a college degree, it debases the value of a college degree. Far too many people are going to college. And the costs are way too high. And we see that through the student loan problem. And now we're just talking about eliminating it. I mean, that's Elizabeth Warren. It's Bernie Sanders and the like. But student loan debt, the way it is right now, survives bankruptcy filings. There's only two things that survive bankruptcy filings, your taxes and your student loan debt. And you can understand why student loan debt survives bankruptcy. Because if it didn't, when you graduate from college, you just declare bankruptcy. That would be it. You just don't pay it back. So yeah. And the Social Security system is completely out of control. I mean, when FDR put it in place, the eligibility age of 65 was longer than the average life expectancy. Life expectancy is presently falling because of suicide, and opioids, and the like. But it' still up in the upper 70s. So we went from you probably have kind of an iffy chance you're ever going to get Social Security because you might not survive and live long enough to get it. Now you get it— well, most people, they think that they're going to live into their 80s. And so you have tremendous cost to that system. And it seems to me that the wind in the political environment right now is to even make it more generous as opposed to cut it. So this is all part of the Fourth Turning again. The social security system — completely unsustainable. It has to be fixed. Super easy to fix — raise the eligibility age. That's it. It's so easy. And I think that that will go through once it's perceived to be a crisis. At the present time period, people are covering their ears and humming, there is no crisis, there is no problem with the debt, we can actually give more freebies away. And we create illogical economic theory, like MMT that you brought up, to kind of justify sort of the mass psychosis of the programs that are being floated right now.
JULIA LA ROCHE: Well, we're heading into 2020, a new decade.
JEFFREY GUNDLACH: It's hard to believe, yeah. It's been a decade.
JULIA LA ROCHE: I know. It's crazy, right? What's your outlook for the next 10 years? I know that's a broad question, but—
JEFFREY GUNDLACH: It's— well, we're going to have the crescendo of all of this during the 20s. It's pretty interesting. Because the 20s — in the 20th century, the 20s were super boom times. And weirdly, I think the 20s this time will be very much different than that, with real turmoil. And we're going to have to face Social Security, health care, all of these things, deficit-based spending— all of that is going to have to be resolved during the 2020s because the compounding curve is just so bad. The CBO puts together forecasts. And their forecasts assume a pretty benign future— no recession, interest rates not very high, and all of this. And they say that the interest expense as a percentage of GDP, which was at 1.25% for the last several years— it's started to go up a little bit recently. But they say that by 2027, it's going to be about 3-3.5% of GDP. That's a big, big increase. And that's coming. And when you do that, it kind of says, hey, GDP is going to be knocked by 2%-2.5% because we have to pay interest. So I think the Fed knows all this. And this is why they're talking already with nominal GDP over 4%. They're talking about large-scale asset purchases to combat the next recession. Because they know that this problem is going to really hit the headlines when the next economic downturn comes. And I think it's foolish to believe that there will be no economic downturn for the next 10 years considering where we are right now.
JULIA LA ROCHE: Jeffrey Gundlach, CEO of DoubleLine Capital. Thank you so much.
JEFFREY GUNDLACH: Thank you, Julia. It was good to see you.