Good afternoon everyone and uh happy Friday uh to the Canadian viewers. Uh happy uh early Thanksgiving. Uh we're fortunate today to uh have the Bond King, Long Live the King, uh Double Lines, uh Jeffrey Gunlock, uh joining me, uh on today's webcast. Uh Jeff has uh updated his interest rate and bond market views. Uh as always, he sees opportunities and tranches of the market. Uh if you go back uh to our last call that we had with him back in May of last year, uh I think most if not all of his projections proved to be pretty spot-on. Uh as usual, we'll be discussing everything uh from Jeff's freshened up outlook uh and uh not just on bonds but uh across the asset classes and his economic views, growth, inflation, uh the Fed, uh fiscal policy. Uh and um I'm really looking forward to this. uh Jeff is uh as usual these are uh usually uh very insightful uh sessions uh with you in particular. So uh I want to thank you I'll thank you at the end again uh but I want to thank you at the beginning for taking the time uh to share your wisdom with us. Uh, and as per usual with the format of these, uh, take it away, uh, with your world view, uh, for as long as you want. Uh, and then we'll address the questions that stream in and, um, turn it into a fireside chat as usual. So, with all that, over to you, my friend. >> All right. Thanks, Dave. Nice to be here. You know, you keep hearing people talking about uh the Fed doesn't have any data to look at because of the government shutdown. We didn't get the U3 unemployment report. We might not get the CPI. And if it if it goes on for a few more weeks, there'll be quite a bit of a hole in the data. But it's not really true that the Fed doesn't have any data because the Fed has the markets. And I always uh point out even though I get a lot of push back on this, I wish people would just look at the chart that the Fed follows if the Fed's changes in direction or continuation of an ongoing direction is always led by the 2-year going back to 2004. So going back over 20 years is just utterly unmistakable um that they they lead. When they started easing back in 2006, the 2-year had been falling in yield for quite a while and by about 100 basis points before they finally got in sync. And then they they stayed uh led by the 2-year all through the global financial crisis. And then the 2-year went dead sideways for about 8 years. And so the Fed stayed at zero. They called it 0 to 25 for all that period except for the last year of that 8-year period. the two years started to rise and so what do you know the the uh Fed had to start tightening and then the corporate bond market shut down. There were like 45 days where the junk bond market didn't have any issuance in the end of 2018 and that credit seize up together with the 2-year Treasury falling very sharply led to uh a return to zero interest rates. And then when when everybody thought that inflation was going to go up thanks to all of the stimulus money printing uh in 20 2020 and 2021, the 2-year Treasury was skyrocketing higher and it got to 200 basis points above above the Fed funds rate before the Fed even put in their first their first hike. I was it was the first time I did the Fed post press conference slot on CNBC. I've now done it I think 37 38 times. And I said my advice to J. Paul is paint or get off the ladder. You know, if you're if you're if you're going to take the ladder up, do something with it or else let somebody else do the job. And of course, then they raised rates 500 basis points. And then the two-year Treasury went to the the the type of gap below the Fed funds rate that we experienced at the depths of the financial crisis. And so the Fed was way behind the curve and had to start easing by 100 and now they did another one last month. And but still in spite of that, we're still very suggestive of the Fed cutting rates in October. Uh probably the 2-year Treasury is now at 353 and the Fed funds rate is at 4 and an eighth. So if you take the average and so it's over 50 basis points is the suggestion. Now when it comes to the Fed, it's very interesting. And we got this new fellow that uh showed up at the September meeting named Myin. I've heard people pronounce it Mirin, but I was and I heard people say it both ways in nearly equal quantities, but I've been informed yesterday by someone that claims to know that it's Myin. And right out of the box, the guy wasn't pulling any punches. He says, "I'm I'm dissenting because I think it should be 50 instead of 25." And so he wanted 50 basis points and uh wants another five cuts by year end and there's what two meetings. So he's t he's talking about you know 5/8 of a point twice and it makes you wonder uh where we're headed here with Fed policy going into the end of Jay Powell's uh term as as chair chairman because I would bet almost anything. I I don't follow the betting markets, but I've got to believe that Jay Powell being reappointed has got to be a very very low odds. So, what's going to happen? You know, we've got uh Trump is going to be given a list of candidates. The short list now is being created by the Secretary of the Treasury, Scott Bessant. And I've got a feeling that Trump is going to job interview these fellows or women. And I think the first and perhaps the only question will be, will you put the rate where I want it? And that uh and if you say no, you you're probably shown the door and you bring in enough people until he gets it. Yes, I'm being overly simplistic and somewhat hyperbolic, of course, but the gist, I think, has merit of what I'm saying, which means that the Fed could be running the Trump could be wanting to run an inflationary policy with a negative real interest rate. I mean, the inflation rate looks to me like it's going up into the mid-3s. Um, with we're putting an assumption on there with tariffs, which is very fluid situation and not not directly easy to calculate, but we think the CPI headline year-over-year will end this year at about three 3.3, maybe 3.4 depending. And uh there's not really any uh evidence that we're about to have a decline. Uh the the dollar is declining, which is one of my strongest predictions. It's become a crowded trade, but I still think that that guides investment policy. And so we might have a negative interest rate if Trump does what he commands what he has purported to desire, which is at least from here another one or even 200 basis points of rate cuts with the inflationary policy. There's another wrinkle on the Fed cutting rates too that I think that the Fed is aware of uh because Jay Powell did talk about it at the last press conference. He said, you know, we have an interesting situation where the supply the demand for labor is falling, but the supply of labor is falling as well with uh all the with no more immigration and actually negative immigration. And so we have we have that happening. We also have the baby boomers retiring. And on top of all this, I think what really rattled the Fed was those those two uh establishment survey jobs uh revisions where about 1.7 million jobs went poof uh out of nowhere and I guess they hit need to work on some of their models underneath that then they fine-tune and something happens. So the one thing is that Jay Powell said that employment was running uh at the U3 report new jobs was running at about 100 to 150,000 in that range each first Friday of every month. And now he made the statement that maybe the range now is 0 to 50. And I also notice that the ADP number that came out most most recently was negative for the most recent month. Now the ADP has very little correlation to the U3 and it's very volatile. So one one month doesn't make a lot of difference. But one thing that would be concerning to me is if the Fed was uh cutting based upon low job count and not understanding that it's unemployment is really their job not and and so I I think they're going to keep watching or start watching more closely the unemployment rate which stands at 4.3. Now, one thing that's really been uh character characteristic of the last few years is that at first in around 2023, some of the fast the high frequency recession indicators started to flash warning back in 2023 and uh that ended up not correlating with the announcement of an official recession. But now the the more reliable uh less less high frequency usually almost never give false uh readings of recession coming uh have all are suggesting that there's trouble ahead but it hasn't happened yet and this is one thing that's really kind of curious about the the the last couple of years now. So, the one of the big ones for me is the twos 10's yield curve, the yield spread between a 2-year Treasury and the 10-year Treasury, which has an an absolutely amazing correlation with the direction of the U3 unemployment rate. And when the 2-year Treasury curve goes inverted and then steepens out, which certainly has happened, it usually leads the slowdown on the economy. uh but it's it's consistent with a rise of of uh in the U3 unemployment rate. The gap now between the the the steepening of the yield curve and the relatively benign rise in the U3 unemployment rate is one of the biggest gaps in history. The only time we had gaps this big were before some fairly monumental economic problems, but it hasn't it hasn't led to a recession yet. Another one that has an excellent track record going back to 1990 is the unemployment rate, the U3 unemployment rate versus its 36-month or three-year moving average for in the recessions of the early '9s in the.com bust, the global financial crisis and even uh even COVID that all that was such a shock to type of a you know a flash recession sort of because of all the stimulus when it crosses is above its 3year moving average. It's always been just before the the official recession uh coming into the economy. That was it led in the 2022 the 2002 period. It was coincident in the 1990 recession. It led very slightly. It was almost simultaneous in in the 2008 uh beginning of the recession. and it's closed above its 3year moving average about a year ago. And contrary to the past few times, right after it crosses above its 3-month moving average, uh not coincidentally because it's it we're talking about those those observations, there was a recession right at that moment beginning the U3 the um the uh unemployment rate goes vertical or goes to a much steeper ascent. And that looked like it was happening in about 2024, late 2024, but then it kind of flattened out again. Uh but now it's ticking up. So it would have been nice to have gotten another data point uh last week, but we we didn't get one. So all we have is the ADP number. Uh so it's going higher. Uh so it's it's that that indicator has kind of shortcircuited maybe because of the the changing and evolving uh com composition of the labor market with with jobs first the labor force growing with immigration and now it's really not growing. And then we have uh the yield curve steepening before the recession. This is twos 10 versus its 12 month moving average. And like that uh unemployment rate versus three-year moving average, the two trend spread against its uh 12-month moving average has been a great recession indicator also going back to 1990, but even in the 80s. And what's really interesting, it's it's really the 12-month moving average. When the 12-month moving average of the 2's 10 spread goes above zero after being inverted, it's completely consistent every time with the onset of a recession. Well, this time it's absolutely happened. The 12-month moving average is at plus 55 basis points after it being down at aboutgative 80 basis points. So, it's moved very substantially and supposedly still no recession. But when I talk about still no recession, I feel I I have a feeling that this economy is being greatly skewed by the on average nature of economic statistics. I think the high end of the economy, all the the capex and data centers and people getting rich on the stock market and uh getting rich on gold for that matter. uh w with all that wealth and all of that business activity and the concentrated parts of of tech and AI, I think on average or actually I know on average most people in the middle of the economy do not think things are going well. They don't think they're going well at all. They they they don't care about uh the year-over-year CPI print. They don't even know. I I bet you most people don't even have a ballpark idea of where the 12-mon CPI goes. I think if you ask most people, they'll tell you it's 5%. And it's not because they see prices going up, although certainly some grocery prices and in some places gasoline prices are going up. It's that the price level is just so high. It's gone up by it went up by so much that they are really concerned about getting by uh uh dayto-day. And you you see that most notably I think and just a statistic on the housing market. The housing market has gone up so much in the US over the past few years and uh there's a study done by the Atlanta Fed where they talk about sort of the affordability of housing by taking the housing cost using a mortgage maybe an 80 LTV mortgage you using the current mortgage rate which is around you know was in the mid7s now it's more in the mid60s but if you take that mortgage rate and you calculate what the monthly payment would be and you add on some uh on average estimate of taxes because housing is so different depending upon what region you're in, but on average um you you put in taxes, you take in insurance and maybe PMI if you need it. And so you calculate what percentage of the median household monthly income goes to that monthly mortgage servicing or the housing the housing servicing. Forget about repairs and stuff. We're just talking about paying the loan and the ongoing costs. That percentage of the house cost as a percent of median household income was down at about 28% of mean household income about well precoid. So it's about 5 years ago. Now on average it's 48%. It's gone up 20 points. 48%. And remember, median household income is pre-tax. Amazingly, in the area that my primary residence is, unfortunately, which is a Los Angeles metro area with all the problems that we're having there, it's getting it's on a slope downward. That that metro uh area includes Los Angeles, Long Beach, and Anaheim. It's a pretty big area. that same calculation for that metropolitan district, 90% is the cost of of paying the loan and carrying the the median household med the median home price. So, if you have a median home in the LA area, the immediate household income, it would take 90% of it to go to uh paying for the house. Of course, that's pre-tax and taxes in the United States are are high and people they can afford these houses, you know, they they tend to be wealthy people. So, it's really there it's really basically 100% for the median person to carry a median home uh with their take-home income, which of of course is is absurd. And so, uh, people feel bad about that because things that they used to believe were something that they could aspire to seem to be out of reach. And so, but this all culminates in the incredibly bad M University of Michigan consumer sentiment numbers, which are terrible. They're they're like they like they're at the same types of levels that they were at the depths of the global financial crisis. They almost never go lower. And almost always in the past when you're at these types of levels, it just came out at 55, which is a low reading. Almost always it's it's consistent with a recession or at these levels, the way it's lived here uh for quite a while, it's usually consistent with a pretty bad recession, but it hasn't happened yet. So, how do we position with all this? First thing we we we think that the that there's a possibility of over easing uh with President Trump appointing the next Fed governor. Uh we also think that there's possibilities of very strange behavior uh if interest rates start to rise again on the long end, which uh we did get a pretty big rise in long-term interest rates in spite of the fact that the Fed started cutting rates 13 months ago. long-term interest rates rose. The 30-year Treasury bond rose when the Feds started cutting rates. That doesn't typically happen. Obviously, short rates tend to go down more when the Fed's in an easing cycle, but going back through time, the longerterm interest rates also fall, but I've been predicting that that wouldn't happen this time. That when the Fed was going to cut rates, there would start to be weak dollar problems. and the weak dollar problems could lead to uh some reversal of foreign flows and I think that has begun to happen. Um it's interesting that 13 the last 13 recessions going back I think it's to 2010 or maybe it's 2000 but the last uh 13 uh stock I'm not talking about recession stock market uh corrections the last 13 stock market corrections the first 12 the corrections this the dollar went up every single time went up about 8 to 10% uh from the peak until the the the draw down ends uh for the correction. But this time with the the the tariff tantrum back in late March and early April, the stock market corrected, went down pretty sharply in a compressed time frame, but the dollar went down. It went down 8 or 10%. So this is all very interesting that we have uh the world seems to be in in the mirror of where it was precoid and meaning that many of the indicators like for example Dave I know that you like looking at M2 a lot and M2 did go negative a couple of years ago and that usually is consistent with with a recession but this time it wasn't because the quantity of M2 that they had pumped into the economy in response to the lockdowns was so big that it it it could go down a little bit and still be at an elevated level. It's sort of the same as the CPI. You remember when they were talking about a 2% average CPI when CPI was coming in below 2% and they were saying it'd be okay to let it go above 2% because the really the ideal situation is a 2% uh kind of long-term trend line. And in fact, that was the case until co Amazingly, core CPI for a few couple of decades was rising at a 2% rate. Uh it was hugging if you just drove a 2% line with an annual compounding of 2%. The CPI, it deviated a little bit here and there, but it really was at 2%. But now it's gone up so far above that 2% number that to get down to a 2% CPI average in the next 5 years would take deflation. It's it's still so elevated they would have to drop down. So you'd have to have CPI the CPI index going down to get back to that trend line unless unless you went for a very long time period to get down to that trend line and and ran you know maybe 1% inflation or something. So a lot of things are backwards and I believe it's because the debt problem in the United States continues to grow. The interest expense problem continues to grow and uh we're in a little bit of a more stable place now that rates have come down, but the bond issuance is still there. Fiscal 2024 just ended uh a little more than a week ago and they officially reported a 7.1% deficit as a percentage of GDP. And of course, as I always point out, that doesn't include the wars, the ongoing wars, which hopefully maybe there's going to be some some good news there. And they don't include disaster relief because those things are thought to be, you know, non-re repeatable. Even though we're always at war in the US, we were at peace after getting out of Afghanistan for all six months before we we started giving hundreds of billions to a proxy war in Ukraine. So it's interesting that the budget deficient of GDP in spite of this being a no recession economy and a lot of people saying this is a lot of talking heads on financial programs they they talk about how awesome the economy is um you know in in spite of that the deficit keeps going up as a percentage of GDP and of course that's primarily driven by you know the deficit adds more bonds that interest has to be paid on but the interest rate has been going up so back when we interest rate started going up, the average Treasury coupon was 1.8%. And then it's more than doubled up to about 3.8%. And so that's a huge doubling in the interest expense. And one of the problems that uh started to seep into the market's thinking about a year ago was the 30-year Treasury broke above 5%. it got up to about 510 or so uh on a on a closing basis and that was the moment when the talk of really radical things started to emerge. There was a white paper that came out just about a year ago that talked about maybe cutting the coupon and extending the maturity on the treasury bonds owned by foreigners. And that concept was picked up by none other than Scott Bessant who would then was the secretary of state uh nominee. And it it's kind of interesting because how how do you know who the foreigners are? A lot of foreigners uh can't be identified. A lot of of of central banks that buy treasuries, they hide behind other entities. So, it's kind of a guessing game. But one of the things that's strange is what if interest rates on the long end continue to stay elevated at about uh 4.7 right now. It's not down very much from their highs with you know the shorter rates down pretty substantially now from their peaks of a year ago. But what happens if this situation where it appears that gold is not being bought by speculators and and you know survivalist lunatics. It's being bought by central banks. They sold off their gold for years and then it bottomed out and then they started buying gold again. And now central banks have gone all the way back to where they were before they started selling their gold. Of course, their management of the trade wasn't very good. They sold gold between 300 and 1,200 and they're buying it back between 3,000 and 4,000. But it created an upward trend in gold that started a while ago now, a couple years ago when it really got in earnest. uh it went up pretty nicely from 1,000 to 1,800 but then it hung out at around 1,000 to 2,000 for a couple of years but the it broke out above 2,000 and when that happened suddenly it was off to the races and so gold has gone up now to over $4,000 an ounce which is a doubling of about 2 years ago. It's funny I was on a a financial show when gold was threatening to go above 3,000. and it was at 2970. And I was asked by the interviewer, he said, "Do you think it'll go to 3,000?" And I said, "What kind of forecast is that? It's a 2970. You're asking me, can it go up a percent?" Of course, it'll go up a percent. So, I hadn't planned on saying this in that interview, but I I had such a such a kind of a visceral reaction to the question that I said, "What kind of forecast is that? I think it's going to 4,000 by the end of this year." And I hadn't really planned on saying that, but sometimes when I blurt things out, it somehow seems almost like it's inspired by by some sort of six cents. And so there it is up at 4,000. Another indicator that used to work really well prior to 2020 is the copper gold ratio. The copper gold ratio, the commodity price copper divided by the spot price of gold, um was an incredibly reliable indicator for where a baseline spot rate might be appropriate for the tenure. It worked really well. They were on top of themselves for much of the couple of decades before 2020. And when they would diverge, it would it would diverge sometimes moderately, but it would it would converge very quickly after that. And this time we have a copper gold ratio which has just collapsed. I mean gold is up so much in the denominator. And copper has been up a little bit, but it's been very volatile, but it's not nothing. It's just totally totally shadowed in the shadows compared to the rise in gold. So, the copper gold ratio actually suggests, get this, that the 10-year Treasury should be at 1%. If you just use the the the correlation from the past and map forward, but it's obviously not working. It hasn't worked all the way through the interest rate cycle of the past 5 years or cycles, I should say. So these indicators that we've learned through 40 years of analyzing them to be helpful most of the time and not have that many false signals have had a tremendous number of false signals and it's been consistent across most of the categories of economic indicators. And so I'm this corroborates my view that we're in a different regime now. We're in a weak dollar regime. I I know that it's a crowded trade now. I I know everyone's trying to play the debasement trade and all that stuff, but just like gold went up to from 2,00 to 3 thou 3,300. That's a big move and that happened in a few months. Then you some usually you get a correction like maybe it retraces a third or half of a of a huge powerful up move, but that didn't happen. Instead, gold just went sideways at about 3,300 for a few months. And then when it broke above that, it's off to the races, vertical again. And lo and behold, we could make it up to over 4,000. The same is true of the dollar. The dollar fell from a dollar index of about 115 down to uh something like 97. And that was a move that was pretty easy to play if you were a dollar bear like like I've been because there were no corrections. It was like it was going down every day. So, it was the easiest trade to stay with, but then it bottomed out at around 97 and today it's at around 99. I mean, it's just been bouncing around just like gold did not correct. The dollar has not corrected higher after this substantial draw down in any significant way, which leads me to believe the next move lower is going to be a further continuence of the dollarbear market. for this reasons uh and the fact that Treasury bonds have have delivered decent returns other than the long bond um you know so they're not as attractive as they were and thinking that inflation might go up. We've started to uh get more aggressive in avoiding and even shorting the 30-year Treasury bond and picking up duration by owning 2 years, 3 years, and 5 years doing it with futures and getting the duration that way. That's been a tremendously successful positioning this year. But on top of that uh with the spreads tightening on most fixed income sectors, we for the first time in the 16 years nearly that double line's been in business, we bought local currency emerging markets in our core plus in portfolios that have a sufficient risk tolerance where something like that can make sense because obviously emerging markets are volatile versus other bonds at least at times or at least they used to be. But uh the currencies can be quite volatile on top of it. But we bought local currency emerging markets and we added to it last week. So we have conviction on that. We continue to be avoiding long-term bonds or even shorting them in accounts where that's an appropriate strategy and really buying things that are 10 years and seven years and five years and and in on the yield curve. Um we like that part of the curve. We it it lends itself to the sectors that we like as well which on a valuation basis are not cheap by historical standards but not as rich as some of the corporate bond sectors which I'll talk about in a moment. But things like uh well-chosen commercial real estate securities, asset back securities because they're two and three years and they pay off very quickly. uh the the risk-free asset today is at least for the time being in US fixed income are non-g guaranteed uh mortgages 30-year mortgages that were issued say 5 years ago, 6 years ago or so because the the price appreciation on those homes makes it impossible that anybody who knows anything about calculating financial numbers would ever sell their house, ever default on their house, you you probably have a 50% gain. Uh, and if your if you have a 60% gain, you took on an 80LTV mortgage, you know, you can pay your mortgage back and get your and get your 80% back as a profit on top of on top of the the 20% you put down. So, you're pretty good shape and so they're not they're not going to be any defaults. The one thing that's interesting also about what's risk-free and what isn't is there are corporate bonds now. It's only one of them, Microsoft, but there are corporate bonds that are trading through treasuries of the same maturity. That kind of shows you that there's growing concern about the amount of Treasury debt, the amount of deficit that continues to get piled onto the 38 trillion national debt. And you know the interest expense, the good news on the interest expense front is that the bonds that are rolling off, the maturities of the Treasury market for the next three years at least are not at very low interest rates on average. They're at a rate of about 3 uh 8 about 3%. It might be in the high twos, but it's around 3% and it's fairly stable uh at that number for uh three years. So while those those rolling off on average will require a higher coupon in today's interest rate structure, it's not a massively higher coupon like what it was a few years ago when we had 1.8 rolling off being replaced with something close to four. So there was a huge increase there. So uh the corporate bond market is rich. The spreads on investment grade corporate bonds are basically on the tights that were hit historically and they've never really gone through these levels in any meaningful way. Junk bond spreads are also very tight. Not they were tighter in 2007. Not by much. You need a magnifying glass, but they were tighter than they are today. But the quic quality of the high yield bond market, I think, is better today than it was in 2007. I think that the the corporate CFOs did a much better job than the than uh Secretary Janet Yellen in altering the maturities of of the bond issuance. Uh corporate treasurers knew that rates were low. They knew that spreads were super tight uh with the uh support by the Fed and so they extended out their maturities and they locked in some good yields. The Treasury Department didn't do that. In the high yield bond market, the credit quality is also better than 2007. And I think it's because the junky stuff has found a new buyer. And it's found a new buyer that's very, very large. It's called private credit. Private credit has been touted as being the holy grail of fixed income investing. I've sat I I did a thing I I I did a thing for Bloomberg that was broadcast on their system and there was a c private credit panel be before me. And so I watched their panel and I was really it was really chilling. Um they they gave these arguments for private credit that I've heard before that are pretty ridiculous arguments. The first one is a sharp ratio argument that it gives you it gives you the good returns but it's lower volatility. That's the same argument they use for private equity. gives you same or better returns than than public stock investing, but it has lower volatility. But and everybody who's been in this business for a long time knows that that's artificially low volatility. That's like saying a 10-year CD has no volatility. It's because you don't market to market. So the sharp ratio argument is basically this. When stocks drop by 50%, they mark private equity down by 25%. And then when they both make it back to where they started, they have the same return, but the private uh equity has half the volatility. That argument has been essentially ported over to private credit. The second argument, which had been somewhat compelling to naive investors, was hey, look at the last 5 years returns. the last 5-year returns were a lot better than the returns on the public corporate credit market. Well, the cor private credit corporate market gets marked to market and it's got a long duration and so when rates went up by hundreds of basis points in 2022, corporate bonds had huge volatility and very poor returns. So, it's that was an argument that had a lot to do with the peculiarity of that 5-year environment. Now, that's no longer true. if you you don't have uh that same issue and and uh private credit is not really outperforming. In fact, in more recent quarters is actually underperforming. And then the third argument that's used for private credit is a repackaging more diabolically, but a repackaging of the sharp ratio argument. I've heard this actually stated several times by big private credit firms, the big boys, you know, PIMCO, uh, what was it, Clear Point or Clear Star. I I don't remember their names very well, but the argument is you the reason to own significant portions of private credit is it allows you to sleep at night as you ride out more comfortably the volatility of your public credit which is just this the the the sharp ratio argument put in a different context and one that is probably uh you know equally as untrue but more diabolical. So I think private credit is going to have problems and we saw a failure uh quite recently and we're starting to hear a lot of talk about investors are getting uh anxious that they were supposed to get their money back in 3 years or four years and now it's coming on to five and six years and there's still nothing happening and so there's become a lot of tension in the private credit market. I'm watching it very closely. I think the private credit market is going to be at the epicenter of whatever next financial shock happens to the fixed income market. Uh and so the good news for the public market is that the the the the private market has now become a dumping ground just a way CDOS's were dumping ground for civ commercial paper back in 2006 and 2007 and ended up failing uh fairly miserably. Also, we have a liquidity risk that's in in the markets. When Harvard had their problem with the donors stepping back because they didn't like what was going on on the campus at Harvard, Harvard was revealed to be using a pay as you go way for for funding operating expenses. They would just take today's donor money and pay their operating expenses. when the donor money uh when it when it dried up, they had to tap the bond market and they wanted to get 4.5 trillion in municipal municipal bond market, but there wasn't a sufficient appetite. They did get a couple billion out so that that helped them, but it was very fascinating that a $50 billion endowment doesn't have the cash flow. They have to go to the bond market to pay operating expenses. It shows you how very locked up and illquid they are which also reminds me of the period of 2006207. So a lot of lock up money, lack of liquidity uh and we're going to be seeing a lot of retrading of private equity private credit private equity interest I think. So we're positioned in fairly high credit. We've been moving for the last two years higher in credit broadly. We've been having a little bit more government bonds incrementally month by month, a little bit less in credit, particularly lower credit. We're we have the lowest triple C waiting in accounts that can do that. Now that the Fed's easing, we're a little bit more comfortable with the the borrowing costs coming down, helping perhaps but we're still at very low leverage levels. And we're we're avoiding the long end. And uh we think the Fed's going to cut rates this month because the 2-year uh is in the right place. And and anecdotally, the the jobs market seems to be stagnant uh in terms of u demand, you know, for new hirings. Doesn't doesn't seem to be happening. I hear anecdotally a lot of people complaining that it's very hard to get a job if you're if you're laid off. So Dave, I'll stop there and uh a lot to dig into of course I'm I appreciate your patience. >> No, that was great. Um just in terms of drilling down to the um what you like um you've been adding to your treasuries but um 10 years and shorter, >> right? >> Um so steepener trade into next year. Um, you like the front end, the mid part of the curve. Um, you're stepping up quality in uh the corporate bond market. You like mortgages shortdated 2 three year ABS. Uh, and you like local currency emerging market bonds, >> right? And I also like I didn't mention it. I also like they've they've performed very very well in the last four months from a very cheap value proposition where the agency guaranteed mortgages Fanny May Freddy Mack and Jenny May that was the one sector that was cheap versus history four four months ago. Everything else had probably tightened back tightened most of the way back in from the widening of March and April. But there was some sort of a buyer strike going on apparently relative to agency mortgages. Then all of a sudden uh they started to perform and the spreads came in by about 35 basis points in about 6 weeks. So they performed well and now they're no longer very cheap by historical standards but they're fair uh kind of average versus historical standards which is better than most sectors. >> But in additionally I believe that there's the potential for the government to manipulate long-term interest rates lower. I think one of the reasons would be to try to give some relief to mortgage rates. I think that the the government could very likely buy they're now actually doing quantitative tightening relative to agency mortgages of a trivial amount every month. I am I am I'm not you know predicting this but I'm open to the idea certainly that they might manipulate interest rates down. They might even directly buy mortgages, might do quantitative tight easing on agency mortgages and get them to lower levels because that would help to alleviate this housing affordability problem that I talked about 48% of median household income going to to to home ownership if you're if you're homeowner. I think that could happen. I also think that if we get uh the 30-year bond rate pushing above five and a half and heading towards 6%, I think we could see yield curve control for real be discussed where they might talk about issuing T bills to buy back uh 30-year Treasury bonds. >> The old operation twist. >> Yes. Yes. And and the problem with that idea is that there's hardly any long-term bonds out there. So it's it it's not like it's not like you're ch you already have 84% of Treasury issuance in the last 12 months is inside of one one year or less. It's 84% T bills. The the amount that's what that's 20 to 30 years is only 1.75% of the last 12 months issuance. And so it's not like it's not like it's going to save you a ton, but it it might at least calm the jitters of the bond market. You remember in the when the Bank of England uh when they when the in the UK, they put in some crazy policies. Was it Liz Trust? and and the the guilt the 30-year guilt yield went up by 150 basis points in like a day or two causing a 30 point a 30% 35% drop in the price of those guilts. That kind of panic might be that kind of rejection, buyer strike on the few long-term bonds are being issued might cause a spike in yields that would lead to a reaction because Scott Besson has talked about this stuff and there is precedent for operation twists for for yield curve control. We did it this country right after World War II for almost a decade in the United States. Inflation was rising but we kept rates at 2 and a.5%. Of course, we all know Japan was suppressing interest rates and doing yield curve control for two decades with the rate being kept basically at zero or even negative at times. So, there's precedent for it. And I think that people are starting to realize that just mapping the the three decades or four decades before 2000 into today's world doesn't seem appropriate. Nothing is working the way the way it used to work. I think it's because the faith in central banks, the faith in in paper currencies is is declining and foreigners willingness to buy US assets has reversed for the first time in about 18 years. 18 years ago, foreigners had a $3 trillion net position long in the US. You know, so you just do the the the gap on investment. It was $3 trillion of foreign money net had been invested in the US. It went up by one measure to $28 trillion a year ago. That would mean that over 18 years $25 trillion came in from foreigners invested into the US. No wonder stocks went up when versus foreign stocks. When you've got that type of of money flow, it's obviously leads to buying and it leads to uh higher prices and greater overvaluation. But in the most recent couple of quarters on this data, that position has reversed. And so I' I've been thinking about one of my negative dollar uh calls and why I'm so convicted with it is what if they pull out not don't go crazy and pull out all 25 trillion which would absolutely be a calamity for US markets but what if they take out I don't know a third of it you know 8 trillion that's going to be have a significant impact and so this is another reason why gold is going up foreigners buying gold. Costco now sells gold. They can't keep it in stock. It's it's moved to retail and I I know it's a momentum trade and I'm I'm not a momentum investor in stocks ever because I think it's all based upon kind of fictional narratives and people start buying into the narrative and the narrative starts to take on a life of its own. for gold. The fundamentals are very very good with with buying across the board and uh even now the miners are going up. So I continue to be long gold. But I recommend for my own personal money I I want non- US stocks. I I want emerging market stocks. I want European certain European stocks, Southeast Asian stocks. I don't want US stocks versus foreign stocks. I I I think that US is in is in a topping process of relative performance and it's been a very volatile US versus Europe but on an index basis S&P 500 versus MSEI Europe US stopped outperforming really on a trend basis about 3 years ago and it's been volatile. We've had big European rallies followed by big versus the S&Ps followed by big setbacks and right now European stocks are about the same year-to date on an index level basis about the same year to date here in 2025. But when you put in the currency translation, you've done much better in European stocks. So if you own them and you don't hedge the currency, so you you own them in the that currency, you've made an extra 10% uh this year in European stocks. So you're up a lot more and that so that's true of emerging market stocks as well. So I have a very different uh allocation. I I recommend for for for risk-taking people. I'm not talking about closet indexers and people that want a 6040 portfolio and go to sleep and hope it works. I I think at this point I I started out this year talking about maybe 15% in gold, but that's turned into about 25% in gold because of >> M. You're now 25. >> I was I was going to ask you between stocks and some gold. >> Yeah. 25 25 gold. I would say 40% stocks, but all non US. >> Okay. >> And then I would have uh you know, we've got about 35% less. I'd probably have 25% in fixed income uh of the type that I that I discussed. The one thing nice about a local currency emerging market, it's also got a yield on it. I mean, you you can get 7 to 8% on that on that type of thing. And with the currency translation, you could very easily get get 15% peranom for the next three years. And so, I like I like the fixed income for about, you know, 25 20 25% of it uh with the mix that I've talked about. And I at this juncture >> 10% >> cash. >> Yeah, cash would be the 10% if that if that's the residual. >> I started out this year being more like 20% cash, but uh I I liked the local currency emerging market bonds. We did a little bit of that. >> Let me let me ask you know the one thing um well I mean the emerging market stocks I mean even with the run they've had they're like 145 Ford multiple against 23 for the S&P. So they still trade >> relative with a with a abnormally >> large discount. >> Um I was going to ask you I was going to ask you a question about um with your inflation view. I just don't know uh you say 3334 but I don't know does it go up and then come back down. Um you know we had when oil got to 150 back in 2008 inflation went up and then it came right back down. >> Yeah. >> Um the question I have is uh you didn't mention tips. I don't know if you if you're a fan if there it's already it's already priced in. >> We own five we own tips out to five years. Uh we bu we we started buying tips earlier this year as well. >> Um and they they've moderately outperformed nominals. Long tips have done badly. Long tips have underperformed. Long long bonds generally long treasuries tips are nominal have done badly this year in the United States on a price basis. Uh but we have liked two years uh you know two years to fiveyear tips. They did very well uh up till about three four months ago and now they're basically pacing it. It used to be they were outperforming every single week and now now it's one week outperforming one week underperforming. But we we still like tips. uh be you know we think inflation is going higher and uh the Fed is >> sounds like you're you're you're very mindful of your duration right now across your fixed income portfolio. >> Well, we shorten duration a little bit. We were at the index duration to start this year which is uh which we are very rarely are. We're usually a little bit short duration but we were on the duration of the market for the first part of the year. Uh and then when we're near the lows in rates, which we we're pretty pretty close to again now for the year, we uh we chopped the duration down to about 5.5 versus a market of about six. But we don't really feel that we're short in duration because we think that be being at 55, we're it helps just position us further in on the curve. So we're not we're in the area of the curve that's performing better. So the yields are falling more on that area of the curve. And so the half year we're short in duration even though rates uh at least in parts of the curve have fallen you know moderately this year. It hasn't really hurt us because we we were overweight on the parts that are having the best number of basis points in terms of yield decline. So that we kind of feel that we're we're we're sort of neutral to interest rate volatility as long as rallies are are uh happening coincident with ste uh the curve steepening which is very very much been the case this year and I think with the Fed leading you know with the market uh believing the Fed's going to have serial rate cuts uh I'm I'm I'm sort of agnostic on that. I I'm I know we're going to get cut in October. At least I think I know. And I don't know about December. It depends if we get any data. And you know, we could have a huge data dump of economic statistics, Dave. You know, before the December Fed meeting, it could be it could be like two three months of data. >> And who and what if it tells a consistent story of what Jay Paulo's afraid of rising employ rising inflation and and punk employment uh new jobs? I I think they I think they would be having a difficult time. So Jay Jay's in a tough place. He he started this year. He was loving life. You know, inflation was was at a low level and falling. Unemployment was was round, you know, high threes, low fours, and now everything's going the wrong way, and he doesn't know what to do. Now he doesn't have any data. So all he can do is follow follow the two-year, which they do. >> Well, I think I I think that look, I I don't expect the shutdown will last into December. Um, I don't know who's going to blink. Um, I guess the the polling numbers will point in that direction, but look, >> you just had two of the most influential people on the Fed, Williams and Waller >> pretty well cast their vote in their recent comments they made in the past 24 hours. So, I think they're they're cutting in October no matter what. >> I I was I I was traveling. What was the What was the comments? >> Uh, both about Okay. Well, um, both about the labor market. So, these are two guys very influential that very concerned about the labor market. >> Yeah. >> Waller Waller was on CNBC. He was viferous. Actually, tell you the truth, it was basically my view. He came right out and said that um the the problem with the inflation view in a softening labor market and he provided evidence which I agree with that it's much more demand related than supply related. And he said if it was supply related, wage growth would be accelerating, but it's decelerating. Look at the price of labor. It's decelerating. And um and he said this is the tariff shock on the inflation side is going to hit the wall in the labor market. So what you're basically left with is crimped profit margins or declining real wages. Pick your poison unless you believe that exporters are just going to cut their prices, which is globally deflationary. >> So um he was actually I thought Waller was excellent. Um, uh, Williams, I think less emphatic, but you you could see that both these guys are going to cast their vote, uh, if it was today. Um, that they'd vote to cut. Um, so, uh, so, but I think December meeting, I mean, we'll see. And in the 2026, this was I was going to ask you, we have a time for a couple of questions here. And look, I I I agree. You started off talking about um Trump's choice for chairman. uh and um he's talking to a few people, but I think we have to get serious that uh I don't know who you're who you think it's going to be. I don't think anybody can really know or even handicap it. Uh I am looking at two extremes though. Uh Myron is not he's he's not going to be the chairman. But I think there's >> I think it'll either be Hasset or Worsh. And Worsh probably gives you 100 basis points. See, we know he wants to cut now. Um it's like you said, but um Hasset would be like you gave 100 to 200 basis point range in terms of where the funds rate can go down from here, right? >> Yeah. >> Based on Trump based on Trump's imprint on the Fed, I think that's what you said near the beginning of the of the show. >> Right. Right. >> Well, Mor is probably 100 basis point guy. I mean I mean not not not knowing exactly what's going how things are going to play out with the economy but let's just say status quo and and um Hasset is definitely a 200 basis point guy. Yeah, sure. >> And and so there's a So I guess I'm asking you because you know you're moving a lot of money around. Um how consequential um is that going to be? And they're thinking like this is uh Hasset goes in that's got to be more bullish for the front end. But I mean the um the Fed futures contracts are priced for like a 100 basis points plus. like would not would you would you be looking at the swaps the swaps market or the Fed futures contracts if if you if you got a sense a super dub is coming in would that be one of your first trades that you'd put on because I'm pretty sure that that's what I would do. >> Well, I I I feel like we're already we're positioned the appropriate way for easing and it doesn't really matter if it's 100 or 200. I think if it's 200, you're going to get a very steep yield curve. And we're positioned for that. It's one of those things where it's the direction, not the magnitude. Uh that's how I manage money. If it's hard enough to get the direction right, you're lucky you can get it right 70% of the time. And I've been fortunate through my career to be that's about my hit rate percentage- wise. If you're trying to get direction and magnitude, you're really trying to thread a very, very tight tight window. You got to be so right on everything. So, like people ask me what what what you know at the beginning of the year, what do you think the 10ear rate's going to be at the end of this year and I say, I'm not even going to give you a number because I' i've seen the 10-year Treasury move 50 basis points in the last week of the year. And they'll say like, you said it was going to be four and instead it was 350. I'm like, well, it was for December 28th. You know, it's it's the it's the direction's hard enough. the magnitude you have to I I I think direction you can use a longerterm horizon which I really favor in investing magnitude you you have to be very accurate in the short term and I I haven't I I found I found magnitude to be almost almost uh impossible to do reliably whereas direction I think you can get more than 50% of the time certainly >> fair enough I I I had uh one last question from me and then a question that came in. >> All right. >> On the screen. Um, now, okay, you mentioned local currency emerging market bonds, uh, to diversify overseas. Uh we did quite a bit of work on what is our favorite our favorite developed market, fixed income market, and I want to get your reaction because what we found is that the guilt market stands out as having value right now. >> Well, the rates, they've risen a lot there. You got that going for you. Um but I don't know. I I I I I I think UK is has some real problems and it's not so much financial market problems. It's it's it's unrest. It's it's population not getting along problems which keep getting >> well it seems to be a global it seems to be a global problem. Just our work showed that inflation is going to come down faster than the consensus expects. >> Yeah. I think Starmer's going to be pushed into fiscal tightening. Yeah, you're not getting fiscal tightening in the US in the coming year. You're getting fiscal tightening in the UK. This is based on the work that we did and we think inflation >> and we think the Bank of England is going to be forced to cut rates. So, it's then the bonds there carry better. So, that was basically I just want want to get your views. I agree with you, but it's um it's just something that's uh been in our mind and we acted on it. And the I guess maybe two other things just to cover and then I want to get to this last question that came in from the field is um how important is uh Japan and um I mean you had this um you know the the new LDP leader now the coalition falls apart but just having her take over the LDP caused what like a 14 basis point meltup in the in the 30-year JGB yield. Um, >> so it's the biggest bond market in the world and so how import how important is how much are you looking at Japan in terms of what you're doing? >> The yen is a cheap currency. It's kind of it's been cheap and getting cheaper. >> Yeah. >> On a trend basis, but it's a pretty cheap currency. >> No, we we we own it, so it's been a I mean, it's been going sideways for the most part, but our work shows it should be 120 to 130. >> Yeah. >> Waiting for God. >> That would be that would be my attraction to it. the yield is is not very interesting. Uh but I I I think that you I think that the yen appreciating is I I would I think it's going to happen. Uh it it things take longer than you want and longer than you think they're going to, but I I I would that would be my directional concept on the end. >> So uh continue to ride it out is your is your advice. Yeah, we >> now now I I want to throw this out there and then finally get to the question that's a good question. I think you might see it too. But I I think that the the surprise between now and the end of the year that nobody's talking about is what and I want to ask you how would you change your mix, change your duration, change anything if this one thing happens, which is what if the Supreme Court rules against Trump on the tariffs? What if they side with the lower courts? What what would you do if that happened? because that's the tail risk. I I I I think that would be just one more negative for the long end of the US Treasury curve >> because they'd have to repay the hundreds of billions of dollars uh of um the tariff money back that they organiz I I just think that the knee-jerk reaction of the market would probably be that it's going to be positive for economic growth if that happened. I tend to think that it's going to unleash just a lot more a lot more uncertainty because he's got other avenues that are going to be a lot sloppier. Uh I mean the the broadbased tariffs come out but he's going to find ways cuz he's got which he's already done with steel, aluminum, and >> uh lumber. >> The one thing the tariffs are doing >> I think it's just I think it's going to make it a lot more chaotic. I like I think people the knee-jerk reaction is that this is bullish for risk on assets, but I'm not so sure. I think it's going to cause more uncertainty, >> my opinion. I mean, but then they're going to ask you out. I think there's reason to believe what you're saying uh and predicting because when they announced the tariffs on April 2nd, there was massive uncertainty and a a flash crash just basically uh on risk assets and then and then people just didn't know what to make of it and then there was the uncertainty because the numbers and the timing kept moving around and I I think that if that ruling came down the way you're we would be in the same position. It would be a position of what does this mean? >> And usually that just means uh and I and when I think as a bond investor, I think people would say we just lost $350 billion >> of of revenue. So we just we just added $350 billion to the deficit. Mhm. >> And you know what what's what's going to be the counterplay from Trump? Uh and >> well, he's got he's got probably three or four other avenues where he can he doesn't where he doesn't necessarily have to invoke whatever you know uh national security. I'm sure that they're working on it behind the scenes, but it's going to it's just going to be >> more a more as chaotic as it's been. I think what the the market liked the fact that I mean up until today with China the market like the fact that we didn't go into a global trade war people didn't go and start coming back with their count with their own tariffs >> and they went instead cap in hand to Trump okay that's what that's what happened the everybody was nervous we're going to have a a real global trade war but it was just a one-sided trade war imposed by the US and then what people didn't see was he's giving all these reprieves reprieve reprieve reprieve and what does the US get in return on all these deals. Now, I think they're phantom deals, but the market believes they're real. And that's what the market's liked about this whole tariff force is we're getting deals. We're getting all this foreign direct investment, which is a fugazi. Anyway, >> if they if they if they if they actually follow through on it. >> Yeah. Well, as you can see with this uh what's happening in Japan is they you know, they can see what's happened in terms of the rhetoric in the US and they want to that's not quite what we signed on to. So it's basically but of course we moved on to other things uh to talk about um but then it's back on but then it's back on today the tariff files but back on today with the rare the export controls by China so we'll see how this plays out but the last question that's >> I just last one one comment I think predicting the outcome of that Supreme Court uh hearing is perilous but I've I I think I I really doubt that they're going to not shoot it down. I mean, we've had tariffs for a long, long time, you know, for 250 years. >> Well, you had two courts already provide their ruling. So, it's a it'll be interesting. >> They might be they might be uh specially chosen courts. We've seen it pass. >> I I think that the reason nobody's talking about it is everybody believes that the Supreme Court, especially this Supreme Court, is going to side with Trump. That's why I said this is actually tail risk. >> Yeah, it sure is. And you're thinking you probably want to if you're thinking about this without having to do a real your best hedge would probably be buy the move index and buy the VEX, right? Cuz it's going to be >> that that would that would probably be that that's that would almost assuredly work. >> Okay, let's get to the last question. Um, it's a good one. How much risk do the banks have in lending to private credit firms? And do you feel there could be a contagion effect? >> Yes. I don't know what the numbers are, but I I think that private credit is on is the leading candidate for the next financial significant d disruption slashcrisis. And I don't think there's one close to it. I I think it's clearly the one. And so I I've I have a very good sort of emotional memory, which is one of my best a attributes for investing that I kind of remember how people are talking about something that is a fad and h how much how much excuses they make for why it's really good. And the and when the excuses feel like they have been feeling for the last two years and now there's there's tension in the private credit industry and the the the big the big firms are now punishing the little firms when a few years ago they were all one big happy family and they were all just part of the same club. But that was the easy times when it was like selling water in the desert. But now uh they're they're basically at odds with with each other. And I I think volatility to the economy, volatility even even what you're talking about on the tariff front could cause some of the crack the fissures to widen and we could see uh we could see failures. uh and the types of things that you see in credit crisis because one sector has been misunderstood, overinvested in, uh we're at that point now in private credit where they're doing the the the ultimate sin. They're talking about doing an ETF so retail can take advantage of this wonderful private credit opportunity. That's a round peg in a square hole in a major way. That's an illlquid security by very definition that's being put into a daily traded fund and that is going to the investors in that type of a thing do not understand the risks and they're going to manifest themselves. >> Well, you know what? Like you, we we probably have uh between gold, silver, and the miners in our model portfolio, we're we're over 20% exposed to say precious metals. another 5% in in rare earths. >> Yeah. But when you get your statement, it's going to be more than that. >> Yeah. Well, we already did a rebalancing. We took five we were up we were at 25% and took five percentage points off cuz uh I I've learned uh the uh the perils uh the greed is not always good. Um >> yeah, I know I know it's all about risk management. >> Success your judgment. Uh but this the one thing is that if we got the sort of situation you're talking about and we got to remember what happened with the gold price. Now it wasn't permanent but you know you get the uh people have to raise collateral they'll sell their winners and uh this is the people say to me what's what's my biggest concern you know I I am concerned that there would be that sort of fund flow it it doesn't really affect what I'm going to be doing. Um but the one mitigating factor is that um it's just as you said uh I read a statistic somewhere Jeff that um only 1% of household assets are in gold. I mean it's not even with the with the runup. Um who's been doing the buying has been the central banks price sensitive and and they're doing it's a secular reallocation. We went through a 20-year secondary reallocation from over 70% gold waitings in these global central bank vaults down to 10. Now we're just over 20. >> So there's a people forget there was a there's a 20-year bare market in gold before the bull before the real bull market started when it got to 255 an ounce back in late 99. In any event though, um we're already 15 minutes over almost and uh but this was absolutely sensational. Um, uh, that was a, uh, you put a lot of meat on the bone. You put a lot of pig on the skin, my football friend. Anyway, Jeff, uh, I I just want to thank you again, uh, for today's contribution, which was immense. So, good luck with the Bills on Monday. >> Yeah, we we uh we we we didn't show up at our own own stadium. I think the problem with that game on uh Sunday night, I turned on the television to watch it and I the whole crowd, the Bills had these white and silver uniforms. It was the rivalry uh with the uniform uh was a Bills week for that. And I had no idea that the team had encouraged the local media encouraged all the fans to wear white. And so the it goes on, you know, the Bills, all the fans, they wear they wear red, white, and blue, mostly red and blue. And the stadium's all red and blue. And I turn on the TV and the whole stadium's like a, you know, of what is it? The white flag, you know, it's like we're going to lose. We give up. It had that kind of look to it. >> I guess that was the right the way the game turned out. It was the right analogy. >> And I just turned And then I just turned before the kickoff. I just turned to the people that were watching it with me and I said, "We're going to lose. This doesn't this this it's not a Bills game. They don't even feel like they're at a Bills. We're not going to have any energy for this game." That sadly that's what turned out. >> Well, I I think you'll make up for it against the Falcons. So, Jeffrey, once again, thank you so much. That was uh top drawer. Uh and uh to everybody on the call, uh enjoy the weekend again. Happy Thanksgiving to all the Canadian listeners and viewers. And that concludes today's call. >>