All right. Well, welcome everybody. Thanks for joining us today. I am absolutely thrilled and delighted to be joined by two living legends of the industry. Felix Zulauf of Zulauf Asset Management, Zulauf Consulting, and of course Jeff Gundlach of DoubleLine. Gentlemen, it's a great pleasure to see you both and I'm looking forward to getting your thoughts on what continues to be an incredibly confusing but world filled with opportunity. So, thanks for doing this today, both of you.
So what I thought I'd do is get both of you to just give us an overview before we get into some questions of where you see the world, the things that you're focused on, the things that worry you, the things that you think are opportunities. Felix and I have done this kind of once a year and it's been incredibly popular with people and it's a great way to generate a whole bunch of things. I'm sure we'll find some things you agree on. I'm sure we'll find some things that you maybe differ on and that could be an interesting place to start. So Felix, why don't I give you the floor first? Just give us a little overall view of how you see the world and the things that are on your mind at the moment.
Okay. There are two important things happening. One is we are witnessing the change in the geopolitical order, the world order. We go from a unipolar order to a multipolar order. The US is trying to defend its position and it cannot hold on, and that leads to conflicts and wars and sanctions, etc. And that's what we are seeing, and wars are inflationary, sanctions are inflationary, and therefore we have rising inflation. And on the economic side we have a divided world. Europe is in major decline. China is in a secular rise but is in a long deflationary cycle and trapped. And the US is doing very well, encouraged by easy money that we have seen for long, and it's now dominated by the capex cycle, by new technology, and nothing is as beautiful in the financial markets as the combination of easy money and the new technology that spins the fantasy of investors. And I believe we are in the late stage of that cycle. I cannot tell you when exactly it will pop, but I think it will pop sometime in the next 12 months. And more likely the market may top this year, later this year or so, and then we go into a classic bear cycle. And due to the enormous debt the world has accumulated, and particularly some of the governments have accumulated, that next down cycle in the economy, in the markets first and then in the economy, will create all sorts of dislocations and systemic problems, and it will be a big mess. So I think we are enjoying the later part of the upcycle, and the hurrah could go on into anywhere from the third quarter of this year to first quarter of next year. That's where I see the equity markets to top out, and then a down cycle. And the down cycle will be not 20%, it will be somewhere between 30 and 50%, and a recession. It will not be a bear market based on no recession, just valuation, but it will be a bear market based on recession and valuation contractions. So I think what we are seeing is a big roller coaster market on the way up, and we will see a big down dive sometime into late next year or so from the top that we are expecting. That, in a nutshell and in brief, is the big picture I see.
Terrific. There's a lot of places we can go with that. Jeff, if I can, let me get your kind of opening statement if you can. Let's just hear what's top of your mind at the moment.
Sure. Per usual, my having discussions with Felix tends to be kind of redundant because we seem to come to the same conclusions more often than not, but I agree with the framework that Felix has presented. I'm also pointing out that what I've been focused on now for probably seven years is I've come to the belief about seven years ago that we were at the end of the secular decline in US Treasury long-term yields. At least that's over. And I started to spend a lot of time during those lockdown days thinking about what does it mean if everything that we've learned over 40 years has been largely informed by the fact of secularly declining interest rates, particularly at the long end, and how is that going to change when they start rising. And I've come to the conclusion that basically the amount of debt that the United States has makes it so that it's almost impossible in my view for long-term interest rates to decline even if Felix is right that we get into a weaker economy or a recession in 2027. And that's simply because the interest expense on the debt is so problematic. Most people are aware that we used to pay about $300 billion in the US to interest expense, say, seven years ago, and now it's rising very rapidly at close to $1.4 trillion per year. And of course that's a double-barreled interest expense problem. The deficit keeps growing by $2 trillion a year absent a recession. So obviously that's stimulative. So the deficit keeps rising and interest rates have risen. So we've gone from an average Treasury rate of under 2% across the entire maturity spectrum to now just under 4%, and rates other than T-bills are above 4% across the curve. And so on average that's going to continue to happen. And so I think that what's going to happen is that the interest expense problem during the recession is going to get obviously much worse. And that means that the deficit isn't going to be $2 trillion. It's not going to be 6% of GDP. It's going to be 10% of GDP or something like that. And that's going to cause a buyer strike as we've seen happening across the developed world. We've had long-term interest rates rising now for years. Even Japan has rising long-term interest rates, which some people thought could never happen. So I've been deemphasizing the long-term power of the US bond market. And I believe that it's fascinating that in 2025, and to a lesser extent here in 2026, but 2025 was really the big year when the tariff tantrum came out and the S&P 500 had a pretty big correction. It went down something like 18 or maybe more than 20%. I don't remember because it happened so quickly. But in the past 13, including that one in 2025, corrections and/or bear markets in the S&P 500, the dollar went up in the first 12 of them, all 12, and it went up around 8 to 10%. And I was watching to see if my thesis was right, that the next risk-off period the dollar would actually go down. And indeed, that's what happened during the tariff tantrum, about 8 to 10%. And so that is corroborating my case that I think during this cycle of rising interest rates, you're not going to get the same reaction function. And there's going to be something of a crisis in the long-term bond market just like there was in the UK when they had that one night. I think the rates went up like 150 basis points because they had a failed auction. I think something like that could come into focus in the United States. And so what are they going to do? Well, one thing could be yield curve control. So you might have a situation where long-term Treasury rates during a weak economy actually go up, which is my forecast, and they go to maybe I don't know, let's pick a number, six, six and a half percent, wherever the pain point is. And Scott Bessent decides that what he suggested early in his tenure as Secretary of Treasury might be a good idea to implement, which is yield curve control, like they did in the aftermath of World War II, where the inflation rate was going up but they just kept long-term interest rates very low and you had negative real interest rates, and that led to ultimately the 40-year bear market in long-term Treasury bonds. And so I think that might happen. That's candidate A. And then I have this candidate B which is more radical. It's more radical. I think it's less probability at least at the outset. I think they might restructure the Treasury debt if push comes to shove. And of course restructuring means extending people's maturities and dropping their coupons. And that sounds like a crazy idea except there was a white paper discussing that, talking about doing it to foreigners that hold US Treasury debt. This was back in the fourth quarter of 2024. And I don't even know if it's possible to do that because I think foreigners can hide behind other entities. I think it's hard to know exactly who's a foreign holder. But they just suggested literally that extending the maturity and dropping the coupon. And obviously that would be a disaster for the long-term Treasury bond market. But maybe that's the solution. Maybe when these bonds drop 50, 60, 70 points overnight because of the restructuring, maybe no one will lend us money anymore. At least that's what I would expect for a couple of generations. And so finally we actually are forced by circumstances to stop running these ridiculous budget deficits during times of supposed prosperity. I also wonder what the default rate and recovery rates might be in the lower parts of the corporate credit market during such a scenario, because everything that we think we know about the default cycles in lower-tier credit were all informed by secularly falling interest rates again. So if you had a junk bond, sure the spreads widened during economic weakness, but the base rate of the Treasury in some cases would fall enough so that it wasn't that painful. You could actually refinance some of the troubled company debt instead of defaulting on it. Those refinancings won't be available under a rising interest rate period. And that's one of the things we're already seeing. One of the reasons we're starting to see cracks in the lower-tier parts of the market, like triple-C bank loans and certainly parts of the private credit market, is because they are used to being able to refinance and quickly get out of deals, and that's not possible anymore. So the cycle as we move forward is going to be difficult for private companies and lower-credit companies broadly because the rates are higher now. The bonds they're rolling off will have to be re-refloated at higher interest rates, and that obviously is stressful. It doesn't relieve stress. It causes stress. So my last point, since I think the dollar is headed lower even if we go into recession, I noticed that the US outperformed foreign stocks, S&P versus the rest of the world excluding the United States, non-stop for years and years, even decades. But that has stopped. Emerging markets have been outperforming the S&P 500 in spite of the S&P 500 having a lot of momentum stocks in it. And the concentration of 10 AI stocks being 41% of the S&P 500, this is a dangerous percentage. It maps right to the tops of previous cycles. So I recommend people own nothing in the way of momentum or cap-weighted US stocks. I'm fine with equal-weighted US stocks. There is an equal-weighted index that the Fortune 500 publishes. We actually have an ETF that follows it. It just started fairly recently. It's doing terribly, of course, because it's equal-weighted and momentum is the name of the game, but it will ultimately outperform I think. But we also own emerging markets. We own emerging markets in local currencies. We have that in bonds. We also recommend that in equities because I think you have a double whammy, which certainly happened last year and it's already happening to a lesser extent this year, where as a US-based investor you had an index return that was superior last year for emerging markets and you had a positive currency translation. So it's an environment where, for the US investor, I've been pounding the table: you've got to get away from all US, you've got to get away from all dollar-based, even if you're, particularly if you're a United States person, because you're going to make money on relative performance and on currency translation. And that's been the case now for a year and a half. And I suspect that we're in the second inning of this, not the bottom of the ninth or something like that.
Yeah, there's a ton of places I want to go there, but before I do, Felix, let me come back to you. I'm curious, those scenarios that Jeff laid out there, I'm sure you've thought both of those through. I saw you kind of nodding along there. I'm curious to get your take on those potential outcomes and any additional ones that we perhaps haven't thought of.
Well, I fully agree with Jeff that we are entering the next phase of repression, and the repression will intensify, and repression will bring new forms and new rules, and the government will change the rules in the midst of the game. That is going to happen. We have to expect that. I'm not sure whether bond yields or interest rates cannot decline in a recession. I think the window that is open for declining bond yields will be much shorter. But I could easily see, let's say, 10-year Treasuries go from five and a quarter or so where I see the high, approximately, to let's say three and three quarters or something like that, 150 basis points. But I do not believe it will decline for 12 months. It will probably for six months. And at the short end they will push it down as deep as they can to save the system, so to speak. So I fully agree with the secular uptrend in bond yields. I even wrote the report in June 2020, 'The Sale of a Generation' for bonds, and so I'm fully in agreement there. I'm not so sure about emerging markets. When the dollar goes down, emerging markets will have a problem economically, because emerging markets are selling to the US and other major economies, and when their currency goes up dramatically, then it means that they cannot sell as much, and the recession will reduce demand, etc. So I think it will be a new game. I think the emerging market universe will also suffer quite a bit during such a recession. The dollar could go higher first for a while, but that depends on whether Europe enters the war for real or not. I mean, they are playing with fire. The Russians are losing patience with the Europeans, and it is conceivable that war activity could be extended into European NATO countries by just launching missiles and drones, and it would start with the Baltic republics, etc. I do not see how the Europeans could win that, and I do not believe that the US will come for rescue on Article 5 because they will not risk New York City for the Baltic states, so to speak. And if that is the case and Europe gets more involved, it could lead to capital flows from Europe into the US dollar that is still, up to this point, perceived as a safe haven. I agree that it will not remain a safe haven, and foreigners do not have to sell; they just have to buy less dollars, and then the dollar goes down. When you look at the current situation, what is a little bit disturbing and dangerous is that sovereign wealth funds, particularly from Asia, have recently bought a lot of dollar assets. In the old days they bought US Treasuries. In this cycle, or in the last 12 months, they bought into AI stocks, the AI theme. And as they do that, it means that when the market turns, they will sell. So not like Treasuries that benefit from a recession and they keep the dollars, they will sell the dollars this time. So this will add to the selling of dollars and the weakness of dollars. So I'm also turning very bearish on the dollar for next year. Not this year. I think we have some time left, but next year and on a secular basis. Those would be the remarks I would say. The rest, I think we are, despite the fact that we haven't spoken for a while, we are in complete agreement.
That doesn't really surprise me.
I'd like to amplify something about what I said about the bottoming in interest rates. One thing that we've been observing since really 2020, 2021, is that many indicators that worked well for decades in figuring out where, let's just say to keep it simple, a starting baseline where you might expect the 10-year Treasury to be. One of the greatest indicators was the copper-gold ratio, and it worked very well. It was probably the best single indicator in starting out where the 10-year Treasury should be, and it is completely broken since 2020. In fact, I quip at our strategy meetings, maybe we should use the gold-copper ratio, because using it that way suggests that the 10-year Treasury should be at 1% right now, which it obviously is not. This is because gold has gone up so much. It's corrected recently, but I think gold will continue to be embraced as real money increasingly as we move forward. Central banks clearly have been buyers of gold. Another thing, another indicator, we created an indicator of where we would think that consumer sentiment should be, and you use a bunch of indicators: you use the U3 unemployment rate, CPI 12-month change, personal spending 12-month change, and the S&P 500 12-month performance. And if you put these together with certain coefficients, they were the same line. From 1980 until 2020, there was almost no deviation. They were exactly the same line. Ever since 2020, it's completely broken. If you use those indicators to predict where the Michigan Consumer Sentiment Index should be, it should be at a totally normal, healthy reading. Instead, it's at the lowest of all time. So it's pretty incredible. And if you look at it by income level, not surprisingly, the top third income bracket is a little bit more optimistic, but they're way less optimistic than they've been at any time in the survey. And also the lowest third, not surprisingly, is at the all-time low, which suggests that everybody's at the all-time low or near the all-time low, which just suggests that there's a social mood of something's not going right. I think it has a lot to do obviously with the inflation rate, the energy prices, and the like, but this has been the case now for a few years before the oil price went up, before the war. Felix, I'm interested to feel your perspective. I talk about the war going to Europe. I thought the war was over yesterday.
Well, it was the Iran war. I'm talking about the Ukraine war.
More specific, Felix. Too many.
I just looked at the 14 points of the memorandum of understanding regarding the Iran war, and obviously 10 minutes ago or so, or half an hour ago, Vice President Vance signed it, and this is a capitulation document. When you read it, it's just a catastrophe for the US image. And it's of course a catastrophe for Israel as well. And after the war, Iran is a new regional power that dominates the region, and you see the shifts going on. Saudi Arabia, Pakistan, Turkey, and Egypt, they are trying to form a new organization, a military-industrial complex, to reduce dependency from the US, etc. So a lot of things are moving, and I think the US is losing out in relative terms, losing power and influence in the world and in that region. And Iran, and certainly China and Russia behind Iran, have gained in importance. Now the war in Ukraine. I, you know, Europe would be at war if it could, but Europe has no military to go to war. It's just the rhetoric that the political leaders are using in Europe is just ridiculously aggressive. Turning to one of the measurements or yardsticks that didn't work, or the rules that didn't work. You know, gold did go up usually when inflation went up, and in this cycle gold went up and inflation went down. And it also went up when the dollar was relatively strong. And when you look at gold, the gold movement was primarily dominated by China and China buying. And when you look at Chinese liquidity indicators, you see how the gold price went step in step with the liquidity indicators in China. And the Westerners missed a big part of the move. Those who have been in them, they have been in them for a long time, like Jeffrey and myself. And those who play it from time to time in the Western world missed it a lot. You see the ETF investors came in very late and then went through the whole correction that we have just seen. The correction may not be fully over, but I think this is a pause in a secular bull market, and it will go higher because nobody trusts the other guy, and you cannot store your savings as a nation in the other guy's currency anymore. That's the problem. And therefore, you try to store it in some stuff that you can bring home and keep within your own borders. And that is the main driver behind gold. And the cycles speak for the late '20s as a peak coming, and that fits very well with the next major crisis that I see coming from '27 on.
I agree with you. I noticed that I've been talking about the entitlement programs' dire finances for a long time. And it's one of these things where it used to be our grandchildren's problem, and then it looked like it was going to be our children's problem, and suddenly it's on the doorstep. I mean, the Social Security Administration just last week acknowledged — you know, when I started this business they said they were good until '60, and then 10 years later it was good until 2050, and then a few years later it was 2040, and then it was 2038, and now they say they're out of money in 2032. Now 2032 is close enough, but since the date of running out of money keeps rolling forward because the assumptions are too optimistic, it means that it's before 2032. And I've been targeting somewhere around 2029, maybe even 2028, that this has to be really front and center. But here it is. We're getting to the second half of 2026. So we're talking a couple of years on this thing and it's going to have to be addressed one way or another. So it'll be interesting to see — what the Social Security Administration said last week was they're trying to get people's attention by saying we're going to have to cut benefits by 20 — it's a round number, they had a more specific number but it was close to 25% — and probably start cutting some people out of the program and that sort of thing. And that's another one of these systems that used to work that doesn't work anymore. All these systems that were put in place 80 years ago that aren't working anymore. And so I really agree that the repression is monotonically increasing and it's going to accelerate. In fact, this means that we have not only an economic problem and a financial problem, we will also have a social problem of major proportions.
And that's important. I mean, in Germany, they just announced they want to cut some benefits and they give more money to Ukraine, which disappears in the war. You see, things like that. That is an outrage for the people, and I think the move to more and more protest parties is gaining momentum. You see the Le Pen party in France, you see that the AFD in Germany is gaining momentum. UK Reform — the old parties in the UK that dominated for almost 200 years are down at 10% in the polls. You know, they disappeared. They are gone. And we are going — that's why the next decline in the markets and the next recession will be of huge magnitude, because it is compounded by so many factors into the social situation of so many people, and it goes for the whole Western world.
Right. You remember a couple of years ago — well, people don't want to give up hope yet. They want to believe that the system that they've relied upon and have come to believe is immutable, that they have to come to realize that it's not sustainable. Remember in France a couple years ago, didn't they talk about decreasing a benefits age by like a year or something? Riots because it was some sort of —
One year! And they had huge social unrest on that. So that shows you that they haven't given up hope yet, or they haven't come to grips with the magnitude of the trajectory and the slope of the trajectory that we're on.
But in the United States you can see that the reaction to negative sentiment and unhappiness — the reaction has been more government programs. Look at Mamdani in New York City and those types of people are gaining momentum, not losing momentum. And so —
Which feeds back into the financial system to make it even worse than it already is.
And accelerating the whole situation and pulling it forward, as Jeffrey mentioned.
Yeah. There's a thread that runs through this which I'm finding really interesting, whether it's the bond market, whether it's the governments, whether it's the politics, whether it's people and inflation. And Jeff, this comes back to a conversation you and I had in 2015. And you said something to me then which has been in my head ever since. I've quoted you so many times with this. And we were talking about greed and fear. And you said to me that there's something that's more powerful than both, and that's need. And you said, you know, when you need to do something, you don't have a choice. And what I'm hearing right the way through this, what you're both saying, I see this thread of need running through everything. The government needs to keep rates low. They need to keep entitlement spending higher. The people need to get the politicians out. They need to bring inflation down. So if we're moving into an era where just about every decision is going to be dictated by need rather than wants and dreams and hopes and aspirations, which is kind of where we've been for 40-odd years, how does that change things, Jeff? Let me come to you first with that because it's a material change.
