Two viewers and audiences worldwide, welcome to a special edition of 'The Close.'
We come to you from downtown Los Angeles, at the headquarters of DoubleLine Capital, the $100 billion asset management company founded by Jeffrey Gundlach.
We are actually going to do something we rarely get a chance to do. We are going to sit down with key members of the same investment team on the same day. That includes the maestro, portfolio managers, individual strategists.
They are going to help paint a vivid picture of where global financial markets are headed. That will require some pointed conversations on the economy, interest rates, fiscal policy, and geopolitics.
You will hear from Jeffrey Sherman on the Fed and a consumer squeeze.
We are also going to have a portfolio manager taking us inside the mortgage market and how it is producing a counterintuitive credit story.
And we get his thoughts on the state of AI fuel.
And the narrowing divide in safety between developed and emerging markets.
And the founder and CEO. Five conversations, one firm, and their view of the world. Let's get right to the portfolio manager who recently authored two major research papers making the case that global bond markets will increasingly price developed market sovereign debt with the same scrutiny historically reserved for emerging economies. Great to have you here.
We talk about this idea of what could be a major structural shift in the way that we view developed economies, emerging economies, and how you invest around it. The E.M. story, is that a short-term cyclical story?
I think we are in the midst of a sea change in global markets. For the past two to three decades, we have seen the safe haven status of developed markets across fixed income markets. That was warranted. We saw strong growth. We saw a very benign fiscal picture with managed fiscal deficits, low debt loads. Then we went into the global financial crisis. Interest rates were lower. Demands on governments increased. Some of those structural benefits that developed markets had experienced for the past several decades started to erode away. On the other hand, emerging markets were put under more scrutiny when it comes to the outlook for the debt trajectory, when it comes to inflation, growth, and specifically the fiscal balance, and the way the government prioritizes their spending versus revenues that they take in. That is important for us as investors, because as we lend money, whether it is to a company, or to a country in this case, we need to know that we are going to get paid back, and paid back in real terms, inflation-adjusted terms, with the risk we are taking.
The story in developed markets -- we saw the U.K. and the gilt crisis. France, whatever is going on with interest payments. What happened when we started to see Brazil and Indonesia and all these E.M. countries get their fiscal house in order? Was that just by accident?
Emerging markets have a risk premium for a reason. The fiscal one is an open question. The reason for that is the populace, the electorate, the people in emerging markets, demanded fiscal spending and government handouts from their governments. And what that led to were a series of, in the late 1990s, when we had debt crises and default crises that needed to be addressed, having the IMF and the World Bank come in. And we have seen a series of packages over the past few decades that have led to interactions between policymakers in emerging markets and the World Bank and IMF officials, to improve the fiscal policy, the fiscal trajectory, across many of the larger emerging markets, to where we are today, where we look at, excluding interest payments, if you look at the primary balance, the fiscal balance for emerging markets, a lot of them are in balance. When we look at the debt trajectories, a lot of them are less than 100% debt to GDP. Juxtaposition that to what has happened over the last couple of decades in developed markets, where electorates are demanding more social safety nets from their governments, increased fiscal spending across developed markets from the U.S. to France to Italy to the U.K. to Japan. They have eroded many of those countries' fiscal profiles. Increased their debt loads to around or above 100% debt to GDP. I think when we look at the forward trajectory of the way that you can either deal with the fiscal imbalance by increasing revenues or you can pull back some of that spending. Pulling back spending is very difficult, especially when you have voting becomes more and more polarized. That historically has been a characteristic of emerging markets, and we have had to price that risk appropriately. We have had to ask for an additional premium when we lend money into emerging markets, which we have not had to ask in many developed markets. When we look at the past decade from the U.K. to France to Japan, and now increasingly these concerns are coming to the U.S. as well, we are going to have to start pricing that in.
Let's talk a little bit about the U.S. One of your articles, you called it Powell's parting gift. You said by normalizing on the record disagreement, Chair Powell has probably diluted the power of the position. It is an institutional check on his successor, Kevin Warsh. As you said before we started that, perhaps you see the Fed moving more toward a Bank of England type of model.
Historically, the Fed chairman has wielded a lot of power in being able to get consensus in meetings and have very little dissent in voting to decisions. That power, I think, comes with benefits, but risk as well. If we have, like we are seeing in the U.S., questions rising about credibility, transparency in Fed decision-making, I think one of the ways that you can counteract some of that question or that risk that the market is assessing is to reduce that soft power that the chairman has historically had, and opening up the voting to become much more independent. Really, what we want in our central bank? We want an independent institution focused on price stability and focused on maintaining full employment, but really control of markets. If market participants do not believe the Fed is acting in those interests, that is when you can have a lot of unintended consequences, increased volatility in markets. I think Chair Powell recognized that the risks the market was losing its confidence in the Fed were starting to grow. So when President Trump put Stephen Miran on the Fed, I thought it was very interesting. Obviously, Steve Miran was going to start voting for cuts, against what the majority of the FOMC wanted, and that was to be expected. But when we got to the end of last year, I found it very interesting that Powell allowed dissents. Goolsby decided he wanted to dissent against the cut in December of last year. Kind of normalizing the dissents, not only to the direction the president wanted, but also the opposite direction as well. I think what that has done is, by taking that soft power away, it has actually increased the probability that markets will still have that faith in the Fed.
I'm curious. You mentioned this could breed an environment of more volatility, especially if we enter into an environment where the economic backdrop does not point in one direction or another. It is something that could be debated. You make a good point that the chair is just one of 12 votes. That has been kind of symbolic in the past couple of years. Where would you expect to see that volatility expressed if we do enter a Fed that does normalize dissents more?
I think the biggest concern is we are entering an environment where the macro is kind of turning against us. We have this war in the Middle East that has pushed energy prices up and pushed an inflation shock into the system. The longer this inflation shock lasts, the more we have a question on the growth outlook. On the Fed's side, the last thing we need is for credibility to be lost. We saw that around 2015, when there was concern about Fed funds remaining within the corridor and actually popping out. If credibility is lost in the Fed, the ability for the Fed to maintain inflation expectations on a contained trajectory and at lower interest rates when needed to offset slower growth -- that could be taken away. And that would manifest itself into increased volatility in markets. And potentially bad growth outcomes. The mechanism through which that is done is by its own premium. If we think that credibility is lost, interest rates are going to rise. We have already had an inflation shock that put upward pressure on interest rates, following this invasion in Iran. We have no questions about the fiscal, which will put upward pressure on the long end of the curve. If we have a Fed where credibility becomes a question, that would be a third independent variable that could potentially put upward pressure on interest rates.
Is there risk of losing demand coming from foreign buyers?
The foreign buyer situation -- there has been more buying in the long end with the U.S. Treasury curve. They have been looking at allocating capital elsewhere. I tend to think that that is a smart decision at the moment. We are currently, for the reasons I just listed, cautious on placing money in the back end of the U.S. Treasury curve. We prefer to place our investor capital more in the belly of the interest rate curve for the reasons I discussed. And a lot of foreign capital is doing the same. One thing that we have seen is we are kind of keeping -- I'm going to come back to this war in Iran. One large pool of investors for U.S. Treasuries is central banks. Now that we have had this global volatility shock, central banks are selling a little bit of their Treasury holdings in order to have longer term -- to have more liquid cash available for interventions.
It seems like it is multiple banks. If it was just one or two --
It is across the globe. They want to have dry powder just in case things start to get out of hand. There has been a lot of discussion in Asia. Historically, the institutional investors have been large buyers of Treasuries, especially in Japan. Now you see yields having backed up to their current levels. On a hedge basis, there is the discussion of will Japanese banks choose to buy JGBs instead of Treasuries, going forward? We continue to see JGB yields increase because they have the same fiscal pressures that we have. Right now, I think that allocation will still be in the U.S. If the U.S. loses that fiscal anchor and that credibility anchor, and we start to see yields rise because of that reason, I think you could get more of an allocation away from the U.S., and that could cause knock-on problems. To answer your question directly, we are not seeing very large movements as far as the foreign investor demand, away from U.S. Treasuries. We are seeing it on the margin. The potential is over time with these risks that are building, that will increase.
I'm going to bring the dollar into this conversation. You think about central banks buying a lot of gold in recent years. It sort of fits into that de-dollarization. And I just wonder how you are viewing the dollar right now.
We think the dollar is in a structural downward trend. Near-term, I think the dollar is relatively range-bound, but the change in U.S. policy, whether it's trade policy or foreign policy, foreign policy being the biggest surprise this year in the fact that the U.S. has switched from what was thought to be an America-first isolationist policy to now an interventionist policy, particularly in Iran and also Venezuela. I think that adds to the U.S. dollar being the reserve currency and the store of value. I think the best way to play this is through E.M. local trade, whether it's EMFX or E.M. local rates. When valuations are very high, credit spreads are very tight. The last place that you can easily pick up value is E.M. local where you have high yields and still long currencies.
One of the best in the business there, Bill Campbell. Here with our special coverage from DoubleLine's headquarters in Los Angeles. Stick with us. A lot more coming up. This is Bloomberg.
High above downtown Los Angeles, this is our special coverage of 'The Close' from the headquarters of DoubleLine Capital. We want to catch up with some of the conversations we had at the Milken Conference that just concluded here in Los Angeles. Including Colin Roche, who talked about the private equity landscape and his firm's billion-dollar exit.
For a number of years so much money flew into our asset class and drove up prices. It was a rising price environment. And Worldpay was one where we made substantial changes to the business to make it perform better, we created value and were able to achieve an exit based on that performance. We exited an insurance broker that we sold to Gallagher for about 3 billion. It's possible there are one or two announcements in Europe, but we have to pay fair prices when we buy, we can't overpay because that's a headwind against getting liquidity. The other side of it is always carrying values. There are some businesses, because people bought them in another era, the carrying values have just too high but I think we're seeing that change, not as quickly as maybe we'd like but it's adjusting.
What you did with Worldpay, there are questions as to whether that was replicable and whether you are currently indicating that right now.
We are backing an executive and team to make material changes to a business so that it can perform better and then we realize value at a higher multiple. There are many different strategies in private equity but you can only succeed if you have a strategy with consistent, proven results. For us it's operational rational and organizational change.
Is the environment better now?
We like this environment a lot. We say it's fair. There are some overhangs and atmospherics, macro and geopolitical but fundamentally risk is being priced in a much more rational way. If we can pay a fair price, pay a fair price to a seller and improve the business and drive a gain, we've delivered value and can create a return.
I am curious, what you have gotten -- 15 billion in assets under management? Are you being active right now?
Yeah, last year was a big year for us. Liquidity and investing. The first quarter was slow and I think a bunch of these overhangs put a chill on deal volumes and that seems to be dissipating. People seem to be coming to terms with some of the risks in the environment but we want to be buyers when other people are running away. Those are the better times. The better times to be a buyer is when others are scared. It's a good time to be an investor in private equity.
And our thanks to Colin Roche from GTCR. Now, coming up, we have a packed lineup in store for you today. Live from DoubleLine HQ in L.A. This is 'The Close' on Bloomberg.
Welcome back to 'The Close.' It's been an interesting day in markets. Yesterday we were talking about record highs. Stocks down here on the day. The dollar kind of unchanged. And what is moving the market? The headline risks out of the Middle East or something else?
It feels like it's geopolitics reasserting itself. You have the U.S. awaiting a response with a proposal to reopen the Hormuz Straits. But we are close to record highs. Corporate earnings have taken the spotlight. Interesting to see that tug of war.
This morning we saw earnings out of Datadog, a smaller software company with stocks surging but concerns about the smartphone market. You still haven't brought a smartphone.
No, I have this tiny phone. Basically a cup phone at this point. Down about .5%. A little bit of a backup in yields. We have a fixed income focus and 10-year yields higher by about 10 basis points.
Our coverage from DoubleLine's headquarters in Los Angeles continues. A conversation about the state of investment going forward. We continue that conversation after the break. Stick with us. This is Bloomberg.
Welcome back to a special edition of 'The Close.' Average rates on a 30-year fixed mortgage creeping back up. Now around 6.37%. This has the U.S. housing market in a bit of a standoff. Is it potential that that paralysis is creating one of the stronger credit backdrops in years? Our next guest is a portfolio manager here where he oversees the residential mortgage team. Great to see you again. Let's talk about where interest rates have gone, where they might go, and the idea of whether this long-term era of outperformance is kind of behind us.
It was a rough spot as rates rose around 2021. It went from one of the worst periods we have seen in a long time. We took all the buyers and came out of the market. Money managers were seeing outflows. Banks are seeing deposit flight. We saw at 120 basis points annualized relative to corporate. That is hard to do in fixed income, right? From the highs in rates, mortgages have done well. We think it is a very interesting place for investors to look, given the fact that corporate credit markets, with so much capex for tech, we think are going to become more correlated. You can think of Treasuries and have very low correlation to tech.
That is interesting. We have talked a lot on the show about the correlation with what was supposed to be the diversifier. You don't hear as many people talk about MBS in that way, or had not until recently. I'm curious -- is this a short-term cycle? Are you willing to bet this is a long structural trend?
Duration assets like Treasuries did not really work because of inflation. It was elevated. When you get CPI coming over 3%, more correlated with each other. Stocks went down. Treasuries went down. In normal times, when you have more normalized inflation, Treasuries and agency mortgages have that more protective quality where when you see risk off in equity markets, it is credit markets that see the head to turn.
You think about the privatization of Fannie Mae and Freddie Mac. It seems the noise has died down, some of the momentum we saw at the end of last year. Think of the non-agency market. What effect would that have if we were ever to see it?
Fannie and Freddie's footprint has grown. It has taken some of the loans that would have gone to the non-agency market. That will make the credit markets and the mortgage market bigger. You are seeing origination happen that might push rates up for borrowers. I am not sure the administration wants that.
Do you think we get it done before 2027, 2028?
They talk so much about affordability. You would need rates to fall pretty dramatically for them to be able to pull it off. It probably makes mortgage rates go up a little bit.
Are investors in the mortgage market looking for shorter duration now? With Fannie/Freddie, you are locked in, more or less. Are you looking for shorter duration?
We have been enjoying buying floating rate securities. There is life insurance companies that need that longer issuance. One reason corporate bonds have done so well is there are pensions and life insurance companies that need that duration. Corporate bond spreads, while they are tight, what else are you going to do?
There is a difference you are seeing now between what is going on in the residential housing market, relative to what we are seeing in commercial real estate. I don't know if urgent is the best way to describe it. Give me a sense of how you see it.
Coming out of COVID, the housing market was an enigma. It turned out people wanted to go buy homes and huddle up and hide away from their friends. And then rates changed and housing did not go down largely because of supply. I think it is all about supply and demand. We had too much supply. And it is really the supply constraint that held housing up. It was a tale of two cities with housing doing well, commercial real estate doing poorly. A peak to trough decline depending on the subset of commercial real estate. I feel like it has flipped. Housing did so well for a while. You are starting to see housing go sideways, some cities going down in price. Commercial real estate has seen such a tough time with rates rising. It finally seems like that is healing. It is starting to see light at the end of the tunnel. The debt market has kind of opened up. We see a bottom in commercial real estate and good times ahead.
Talk to us about how office fits into that picture when it comes to commercial real estate. Coming out of the pandemic, commercial real estate meant office. It was hard for them to shake off that stench, if you want to call it that. What are you thinking about office right now, and how regional is that?
It is very regional. Office is roughly 20% of the commercial real estate market. It is one of the subsectors that is not doing so great. But it is region by region, city by city. We are in downtown L.A. and across the street is a half vacant building. If you go down, it is occupied, clean. Those properties are in high demand. Very low vacancy. You come to downtown and it is a different story. Without traffic, we are about 30 minutes away. With traffic, your guess is as good.
Is there something called no traffic in L.A.?
There was so much construction even at the hotel I was at. You had to navigate all these different construction vehicles to get a cup of coffee. When you talk about office and say it is city by city, how much do local politics factor in? How much are you taking that into consideration when you are evaluating different spaces?
It is a good -- a big thing. Friends with medium-size businesses are moving because they won't have to pay as much tax. I think politics has a lot to do with it. California is not that business friendly and downtown L.A. is not that business friendly. There is an election coming up. We will see how things go.
Spencer Pratt has been crushing it on social media.
I have heard that. I want to talk about -- you made a comment about 2026 as the year of terror. I want you to encapsulate it for me, where the opportunity is.
It seems hard for interest rates to fall in this environment with what is going on in the Middle East and energy prices elevated. We look at inflation breakevens. Future inflation predictions are starting to creep up. A big growth scare does not seem likely if you look at earnings. It is hard to see bonds fall. You are going to clip your interest carry, and the front of the curve has risen a lot. The two-year at 4%, credit assets, 120 basis points over that, the return is pretty good.
It is so good to see you in person. Usually we talk over Zoom. It is very different.
Thanks for coming to our offices.
That is Ken Shinota. Special coverage from DoubleLine continues with Jeffrey Sherman and Jeffrey Gundlach himself. This is 'The Close' on Bloomberg.
Welcome back to special coverage of 'The Close' live from DoubleLine headquarters in Los Angeles, California. We came earlier in the week for the Milken Conference and we continue those conversations today. We do want to sort of go back a couple of days. We had a chance to catch up with Samantha Davidson, the head of global investing over at Cambridge Associates. We talked a lot about the state of portfolio management. Take a listen.
It is really hard to know if these trends are here to stay or if they are more temporary in nature. When you really don't know what that future brings, that is really when we continue to say you plan for various outcomes. That ends up bringing in -- you seek diversification, looking for those asset classes that -- you are looking for historic trends. You are relying on some historic trends. You are taking a view on a range of asset classes so you can manage the outcome you can.
How has the distribution drought affected planning? Lockups, some of them have gone even longer, merely because of the capitalization of some of those investments. Are we almost through that phase or that cycle of distributions, if you will?
I think we are all thinking there are reasons to believe that distributions will increase and we will start to see more normal distributions. Really, it is a question of how are investors thinking about private assets. What is the role? Are they continuing to commit the same capital that they have been historically. I think investors continue to see real opportunity in the private investor space but the dynamics in that market right now, as you know, you see, there is a new investor base in terms of private assets. There are capital inflows because of it. That means there's increased competition for assets, which may be good for asset sales but may mean it's changing valuations. And of course we have the liquidity you're talking about. There are absolutely opportunities in private assets but selectivity is critical.
And our thanks to Samantha Davidson, President, Partner and Head of Global Investing at Cambridge Associates. A great conversation as we count down to the close on this Thursday. A little bit of a drawdown when it comes to the equity market which feels like we haven't seen in a little bit.
We haven't. Of course the losses in the S&P relatively contained and we tend to see this quite often when we get sell-offs and then it seems like a couple of days later all that gets recouped and more.
Absolutely. We're hanging out around 101, 102. The bond market is resuming its sell-off.
The Russell is being hit harder.
We're going to put it all together next with Jeffrey Sherman. He's going to count us down to the closing bells next. This is 'The Close' on Bloomberg.
Welcome back to special coverage of 'The Close.' We're live from downtown Los Angeles at the headquarters of DoubleLine Capital. Closing bells just about 10 minutes away.
Risk appetite sort of wobbling in the market today but we're very close to all-time highs and you confer how far we've come in April and now again the momentum continuing into May. A lot of questions about how much steam is left in this rally. We are through the heart of big tech earnings but we do have NVIDIA coming up in a couple of weeks. Let's talk about it with Jeffrey Sherman, DoubleLine's C.I.O. Great to see you.
Great to see you guys and thanks for coming to the L.A. office today.
Absolutely. Let's talk about where we are in this moment. When it comes to the news cycle and what markets are having to contend with. I don't have a laptop in front of me and I feel like I'm checking my phone every commercial break just to stay on top of the news. You think about all the headlines in geopolitics, to whatever is going on in private credit right now, all these different factors. I wonder how you're sort of re-reading these headlines and navigating these cross-currents. Because you could get caught up just in the ping-pong.
Bill Campbell has coined this phrase around here. The ping-pong is dangerous to investors. You're trying to invest, look through a cycle and it's been very challenging because the reports that come out of the administration conflict each other over the course of hours. That's what we saw today. A huge retreat in oil prices to start the day. Oil is getting higher. At the end of it we have to look through what's going on here. A month ago I talked about oil being a self-correcting mechanism. It will slow things down so that the Fed doesn't need to hike. There's a lot of divergence in the economy but at the end of the day the markets trade on aggregates. The aggregate consumption and the aggregate employment. People are struggling but in general, the aggregates are making up for it. So when you think about the headlines, you have to think what's truth and what's not? I think you're better off not looking at the reports out of the administration each day and look at the fundamentals and the economy.
Corporate America has been the rallying cry of the bulls. You look at what's going on in energy and in rates and get pretty grim but then you look at equities ripping higher over the past six weeks or so and a lot of people say it's backed up by the fundamentals but how are you weighing that vs. some of the fundamentals?
Don't forget there was a selloff too. There has been an improved outlook for earnings in the U.S. S&P earnings, we're roughly 85% of the market cap of the S&P and it's been pretty good. Pretty good means investors are enthusiastic again but you have to think about where we are and what you're paying for those earnings today. The P/E is roughly 25 today. That isn't cheap by historical standards. You call it an earnings yield, that's 4%. Treasuries yield 4% today. That's kind of what people call the Fed model so definitely equities are getting to that kind of stretched area again but again it's kind of euphoria. We've grown into this multiple times. We'll have to see how it plays out. When there's enough pain in financial markets, assume that Trump will come to the rescue and we've seen that in a lot of policies. But I'm conflicted whether or not you can back out of war at this stage.
I do want to go back to the economy. And you made a great point and the aggregate does look good. Showing the downside is a collection of comments from corporate C.E.O.'s saying the consumer is basically running out of cash. These are consumer-facing companies. You've talked a lot about the regression of taxes, inflation and energy and tariffs, etc. Is it really going to show up sometime soon?
It has to eventually. We've lived off the money strain from 2020 and 2021. That money went into housing market and financials. The nice thing about a housing market rally is that there's broader participation, although unfortunate for those who don't own homes. Some of that is continuing to apply that juice you need in the market. At the end of the day it turns into spending disks so when we have things such as the tariffs and with this new elevated gas price, at some point you have to forego some other level of consumption. Even though you're talking about consumer-facing C.E.O. and having some challenges, it's a function of are you still employed? You spend money on necessities first and then discretionary. What you're seeing in those headlines from the C.E.O.'s, those are more discretionary spending companies. That's been the concern. But we could have had this conversation two years ago and that conversation was taking place and we seem to build up -- you've seen delinquencies. They've somewhat been stable. I won't say they've plateaued but you see that. I think it's a cycle. Six, seven years ago we had the concept of rolling recession and it was rolling across industries. I think that's what you're seeing here. Certain industries are affected and those are the ones specifically for the low-income consumer.
