"New Bond King": Massive US debt restructuring inevitable, major institutional reforms in the next five years.

20501.3%100 90 2021?2021 20222029I read an article online, where the author said, "I believe interest rates will never rise in my career, as I plan to have a very long career. I have a weekly meeting where all the senior members of the team attend, and it seems they have all internalized the same viewpoint that this interest rate environment will never change. I felt like lightning had struck me. I said, we need to turn extremely negative, extremely defensive."Because there is something I want to do, if one day someone comes to me and says, hey, I read somewhere that you are a bond expert, you know, have you ever bought those negative yield bonds? I want to be able to say, no. I have never been that foolish. For me, if I were managing the Fed, I wouldn't have this army of over 800 PhD economists. I wouldn't even set short-term rates. I would let the bond market do it, because when you really examine it, the Fed is just following the two-year Treasury yield. That's it. So, they were far away from the two-year Treasury yield before they started this easing cycle, they really needed to ease to catch up with the two-year Treasury yield, and then they finally eased, but they were way behind. But what doesn't surprise me is now, right? Since they started easing, this gets back to the crux of your question. Rates have been going up, not down. This has never happened in my career. As I said, it's my theme. Because of the 40-year decline in rates, what you think you know may not be beneficial at all when trying to manage a process in a rising rate environment, which I think we are in now, right? So, since the Fed started easing a full point last September. Our 10-year Treasury rate has gone up over 100 basis points. So that never happened before, but I think it is going to continue. So, I think the most important point is, the next chapter is, when the economy slows, our budget will face a crisis. Interest payments. The interest payments on our debt are much higher than they were three years ago. Annual interest payments on the national debt were $300 billion. Now it is $1.4 trillion, and still rising. It's going straight up because of the bonds issued in 2019 and early 2020, their yield was 25 basis points, 0.5%, 10-year was 1%. Rates temporarily stopped rising, but the 10-year Treasury rate is still 4.5%. There are a lot of bonds coming due that the government is paying 1% on, and those bonds will be replaced with 4.5%. If you think about what happens after these trillions of dollars in bonds come due. We will see a major public discussion about this crisis because we can't have both our current tax system and our current debt management system at the same time because ultimately all of the tax revenue under the current tax system will go to interest payments. Of course, that can't happen. So, we will have to seriously consider restructuring this debt. I'm not predicting that it will happen, but I'm also open to the possibility that it could happen, that we might restructure the national debt to control interest payments. For example, under the 1913 Federal Reserve Act, the Federal Reserve was not allowed to buy public debt. They weren't allowed, but they did in 2022. Yes, they did. So don't think just because something hasn't happened before or it appears to be governed by agreed-upon rules means it won't happen. So, I can easily see our debt being restructured. This would be very bad for some of the people who have lent to us, and very bad for those who haven't considered this possibility. One of the simplest ways to think about it is, you should have the lowest coupon rates, the lowest rates at issuance bond you can find, because if you have high rate bonds, those bonds that were issued with 7% rates just a few years ago, if they say, I'm just doing a thought experiment, if for every bond the government issued, if the rate was above X, I'll use X as 1%. The rate we're paying now legitimately changed to 1%. So, if 7 becomes 1, 2 becomes 1, if you're below 1, it stays at the current rate. Well, if you have 7, and you wake up tomorrow morning, they're not paying 7 anymore, they're paying 1, your price dropped about 80% overnight. Even that's not entirely hypothetical. That actually kind of happened a few years ago in the Bank of England when they had a big interest payment issue, they started issuing a lot of long-term debt, even 100-year debt, but nobody showed up. People said, no, you're running the policy you're running, we're not going to fund it. They had a so-called failed auction, meaning they were trying to borrow money, but no one would lend to them. The rate went up about 150 basis points in an hour because nobody wanted them. So these things are possible. So, I think it's important to consider these major tail risk events because we are on a trajectory of managing government debt, the existing debt amount is around $36 trillion and currently growing at a rate of 7% of GDP. In the last 12 months, our deficit has grown 7%, right? These are recessionary borrowing numbers, 7% borrowing of GDP has only occurred historically during severe recessions. We have positive growth, or at least the reports say so, our deficit as a percentage of GDP is 7%. From a long-term historical perspective, when recessions hit, the deficit as a percentage of GDP typically increases by about 4% in the past three recessions, averaging about 9%, largely influenced by the experience of COVID-19. Well, assuming it goes up by 6%, picking a number between the two, this means our budget deficit will reach 12%, 13% of GDP, which is a crisis. We can't do that. What I think might happen is that the bond market might be pricing in a recession, which may not necessarily mean that long-term rates will fall. At least initially, they might mean that long-term rates will rise, because people start doing the math, arithmetic. This is not a right-wing issue. This is not a left-wing issue. This is an arithmetic issue, you just need to take the amount of debt, multiply by the rate, that's what you have to pay. They can only change one variable to change these arithmetic laws. In this case, they can change the rate. I have some very basic guiding principles that I think are not controversial. First, don't do it unless you're getting a return on it.Take on any risk. How much return you should get is up for discussion. But if you don't pay anything, don't take risks. On the contrary, if you can eliminate risks with little or no cost, you should eliminate those risks. If you follow what I just said, buying government bonds with historically low interest rates, you don't need to pay any costs. They actually have slightly higher yield, not much. This is related to liquidity, trading volume, and so on. It's a bit strange, but you actually get a slightly higher rate, you actually get a small economic benefit, and you completely eliminate the risk.Therefore, this is one way, I think, this is how you stay in the investment industry, adhere to these principles, you don't have to take risks without getting a return, you must eliminate risk. You can achieve this at low cost. Market valuation overestimation and risk intensification So now, you're talking about market valuation. Now, there's risk everywhere because you mentioned the forward P/E ratio of the S&P 500 index, but we like to use Dr. Shiller's CAPE ratio, which is the cyclically adjusted price-to-earnings ratio, which truly observes and analyzes the P/E ratio relative to a historical range of about 20 years. Today, the S&P 500 index's CAPE ratio is one of the highest in history. It's actually 37. Only once higher, that was before the burst of the internet bubble in 1999. It's not much higher than now. So not only is the stock market overvalued based on CAPE ratios and P/E ratios, but on many indicators, such as price-to-sales, price-to-book value, its valuation is almost as high as at the end of 2021, with about 30 different indicators commonly used. If you put them in percentiles, if 1 percentile means the top 1%, we're at this level on many of these indicators, and possibly in the 3rd to 5th percentile. So very overvalued. Similarly, there are no cheap deals in the credit market either. After the economy shut down, there was a short-term collapse in credit perceptions as everyone was worried about the economy shutting down, companies going bankrupt, and so on. But since then, we've returned to historically the lowest compensation for buying junk-rated corporate bonds relative to the same term U.S. Treasuries. This is the narrowest it's ever been. You only get about a 2.6% extra yield, whereas a few years ago, you got a 6% extra yield, now you only have about 2.6%. So thinking it could return to 6% is not foolish. In fact, it's a fundamental situation, it's just a matter of time. But we live in a world where all these valuations remain unchanged because there are no catalysts. There hasn't been an event like a major economic problem. Inflation problems have been at least temporarily halted. We're not at a 9% inflation rate, more like a 3% inflation rate. The Fed wants to bring it down to 2%, but we've been escalating and deescalating risks. Our strategy has been consistent in almost all aspects for about 18 months now, almost systemic, and we haven't seen any catalysts. We had a long meeting yesterday, and everyone felt there were hardly any real cheap deals in the stock market or fixed-income market. That's why I think we're seeing commodities starting to rise. We're seeing gold, you mentioned gold being the best performer again, in just six weeks in 2025, gold's performance outperformed all major stock indices, with increases of about 12% to 17%, I don't remember the last time I saw it, but it certainly outperformed all the major stock indices. But so far this year, things have been quite stable, about a year, even 18 months, after the huge volatility experienced due to the COVID-19 pandemic, valuations haven't changed much. But I still like gold. I think one thing is interesting. I think everything changed at the end of 2021. That's when interest rates started to rise. Interest rates started to rise, even as the Fed cut rates. One thing that was once a very valuable tool was the correlation between gold and the 10-year Treasury bond real rates, that is the nominal yield minus the inflation rate, their correlation was very high, until early 2022. Since early 2022, rates have risen significantly. Real rates have risen significantly. This should be correlated with lower gold prices, but that's not the case, it's correlated with much higher gold prices. So I think a lot of relationships changed at the end of 2021. I believe that when the economy weakens, we'll see rates go up. This will lead to a real debt management crisis. The "death spiral" of the U.S. economy: Recession, debt, and social unrest Tony Robbins: Yesterday we were with Ray Dalio, and he described that the forecast we're seeing is a 7.5% deficit. He said his magic number is 3%. If we reach 3%, we can avoid the "death spiral," as you know. So we're discussing this issue, and I asked some questions. One of my questions is, this is $1.3 trillion. Actually, that's the number he said. So I'm curious, do you think that cutting a certain amount of funding, I mean, obviously people are screaming right now because you're taking away their funds. But can cutting enough funds get us to that level, or cutting funds and increasing productivity through artificial intelligence, what do you think? Is there a scenario where we can have a soft landing? Jeffrey Gundlach: Yes, I think we, well, we can gradually address this issue, but I don't think you'll be able to find enough. I do think there will be more restructuring situations. So if there's restructuring, I'm just asking, what impact will this have on America's reputation and future borrowing ability if we do this? Because this changes commitments. I also want to know the timing, meanwhile. Ray thinks it's three years, a year before and a year after we reach the "death spiral," because the amount we're paying and the rates we're paying have reached unsustainable levels. So what do you think the timeline is? I'd love to hear your feedback. I agree we may have 3 to 5 years, but I think 5 years is the upper limit, right? 3 years are on the shorter side. But the real issue is, we have these unfunded liabilities. There are $220 trillion in unfunded liabilities, about 6.5 times the GDP. You can't pay off these liabilities under the current system. So the easiest thing to do is restructure these liabilities. Social Security, a lot of people don't want to talk about this issue, but it was created by Roosevelt, and their eligibility age is 65. The average life expectancy isn't even 65. Of course, life expectancy is high due to infant mortality.And decrease. Thank God, this is no longer a problem. However, you know, life expectancy has reached nearly 80 years. Due to fentanyl and suicide, it is starting to decrease, in some cases, it's a bit like the same thing. But, from an expected life expectancy of 63 years and a qualifying age of 65 to an expected life expectancy of 79 years and a qualifying age of 65, this is absurd. Therefore, we need to start making real efforts to solve this problem and make this solution reasonable.The problem with the 3% deficit target and the 3% growth target is that they are somewhat contradictory. I know when I hear the Treasury Secretary talk about 3%, you know, a 3% deficit, 3% growth. Well, if you reduce the deficit from 7% of GDP to 3% of GDP, you can't have 3% growth, that would make GDP decrease by 4 percentage points. That isn't going to happen. Putting all these things together sounds like a good remedy, but I don't think they are consistent. What really makes this discussion more serious is the rising long-term interest rates while economic growth is declining. We will actually have the problem of rising rates while tax revenues are falling. Unfortunately, I think we have painted ourselves into a corner. I think the way out won't be a large-scale depression. But it will be unbalanced throughout the economy, because you have to deal with these payment commitments that you have never funded. The government essentially provides an economy based on debt. So we see consumers constantly doing this. I mean, when you get a credit card, it's almost a symbol of honor. It means you made it. You know, I have a credit card now, and someone is willing to lend me this money at 23% interest. Yes, indeed. But you know, getting a credit card, I mean, it's not entirely a good thing. We should cut up all our credit cards. But the government is setting an example, because they are effectively operating on one giant national credit card. So far, due to the dominance of the US dollar, I think this has a lot to do with our ability to run this deficit, because of the dominance of the US dollar, people have been willing to lend us this money. Now, there are many variables in geopolitical economics, which could be another problem we face, because if we don't have a global reserve currency, our rates will rise. It's almost certain that our rates will rise. So all these things are to some extent intertwined. In many ways, they are all the same thing, but in different forms, like how we observe objects through different aspects of a prism, but they all fit together. So, I think another thing that defines our era, which has many historical precedents and is not very encouraging, is the existing wealth inequality. You mentioned that 7 stocks in the S&P 500 Index led to a lot of growth, showing that owning the S&P 500 Index is not diverse. No, because you have so much money in 7 stocks, many of which are highly correlated. So inequality causes change. That's why Ray Dalio is talking about it. I have been talking about this issue for 15 years, and we are in a period of societal transformation, which is no longer a hypothesis because we see all these changes happening, you know, lack of civility, radical policies, you know, packing courts and obstructing diplomacy, you know, I don't have to follow your laws. I won't follow your laws. Historical cycles are inevitable, and we are in the midst of a great upheaval. Tony Robbins: Necessity is the mother of invention, right? If it always has been, unfortunately, we wait until it is necessary. So I want to review. So do you think the most likely scenario to avoid this "death spiral" is if we reach a point where it is clearly necessary to change, that is, debt restructuring, as you mentioned the example of lower interest rates. Could it also prolong the time people get money? But more importantly, what impact will this have on our future borrowing ability when people no longer feel certain? Will this threaten our ability to become the world currency? Jeffrey Gundlach: It could threaten that. Midterm, this is obviously very disruptive. I mean. Obviously, you can't look people in the eyes and say, you know, you can trust us, right? Of course. What they will do is, they will say this is a one-time thing. It's a one-time thing. You know, it's a one-time reset. We promise we will never do this again. But people will be very skeptical of this. So in the long run, it's actually positive, because it will force us to practice fiscal integrity. For generations, nobody will lend us money. Okay. We must achieve budget balance over generations. Is that a good idea? Sound fiscal policies, sound debt management. Great. I mean, this will lead to success over generations, but in the process, you know, this will be a very difficult period because when you have all these unpaid debts, you know, if you really want to pay them back with today's money, well, that's impossible, right? You don't have purchasing power. You don't have assets. America's actual assets, financial assets are actually less than the debts that have not been funded. Think about all the financial assets, America has $210 trillion, $212 trillion in financial assets, and our unfunded debts are bigger than that. So, this will be a very significant transition period. But at least we will start with a clean slate, and we can go back to a sustainable path of growth with lower levels of wealth inequality. Tony Robbins: We all are. I know we are all. In 1992, I interviewed one of the co-authors of "The Fourth Turning," and the other one has passed away. I know we have all been attentive to this point because the fourth turning will shake everything up. And there will be a new spring, a new opportunity. I like hearing your mindset, and I share that mindset. Jeffrey Gundlach: Neil Howe, who co-wrote the book "The Fourth Turning," came out with a new book a year or two ago. The title is "The Fourth Turning is Here." It's another thing, like Ray Dalio, like what I'm talking about, like Neil Howe, they are actually all the same thing. Tony Robbins: Yes, indeed they are. Jeffrey Gundlach: It's an understanding of history and cycles, those kind of things.It often happens because political systems are at best incremental, while innovation and technology are revolutionary. Therefore, new things emerge, and the system cannot handle them because these revolutionary changes are unpredictable or unaccounted for. The wealth generated by these revolutionary changes has somewhat disrupted the distribution of the pie, and the means of production and distribution are not synchronized.There, every three or four generations, an event will occur. The last time it happened was during World War II. Before that was the Civil War. You'll notice that it seems to happen about every 70-80 years. That's just how it is. If you add 80 years to 1945, you get to 2025. So, this is us. Looking at physical assets, overweighting non-US stocks, especially in the emerging market of India Tony Robbins: So, as you observe the world now, in this environment, what kind of investment portfolio structure do you think is useful for investors to protect themselves and take advantage of some of the changes you described? Jeffrey Gundlach: Central banks around the world are buying gold. Gold is being bought not by speculators as it has been for the past few decades, but as a safe haven, as an insurance policy. As I mentioned earlier, our interest rates are rising, real rates are rising, but gold is also rising. Yes, that has never happened before. Yes, it's solely because people don't trust the regime. So, gold will continue to perform well. I believe gemstones, gold, real estate, physical assets, I have an unusual economic condition, which is not common. But, forget about my ownership of Double Line, I don't even know how to classify. I just think, if I had securities, financial assets, or physical assets, I basically have half of my money in physical assets, which are real estate, gemstones, you know, quality assets. I am completely satisfied with that. And then I have half of my assets in financial assets now. I like holding short-term quality money market funds, that's not wrong. You have real rates. The Fed is not in a hurry to cut rates, and the valuation of stocks and other things is high. You'll definitely get a better entry point on bonds and publicly traded stocks. Absolutely. You'll get a better buying point than you have now. So in the meantime, you can, I would hold about 20% cash. So that's a $100 investment portfolio. I have $50 in physical assets, I would hold $20 in cash. That leaves only 30% in stocks and bonds. At this time, I prefer non-US stocks over US stocks, and even Europe is starting to perform well, which is somewhat surprising. But I have been advocating for many years, the long-term stock market of India. You buy an ETF called India, it certainly won't always go up. Yes, there are risks. But we're talking about a 30-year view, not a 30-day view, and the 30-year view is that they are huge beneficiaries of outsourcing. So, I think you will do much better in India and emerging markets, but I would only use the Indian market as a placeholder. I would buy an equal-weighted S&P 500 index, not the official index, which is market capitalization-weighted. If you weight it by market capitalization, you own those 7 stocks, otherwise, you don't have diversification. I think starting from 2022, all the major trends have reversed. Not all at once, but you know, long-term rates haven't been falling, they are rising. I think equal weighting will outperform market weighting. I think small caps will outperform large caps. I think value stocks will outperform growth stocks. All these long-lasting trends that have mercilessly continued for a long time, some of them for 20 years, I think they are all, I think they are in the process of reversing, some of them. Yes, in my view, that has already happened. So, I don't think strategies in a sustained environment of falling rates will be a good roadmap for the future, because its basis is rates continuing to fall. At least from what we can see now, that's not the case. Tony Robbins: Jerry, this is very helpful for all of us. Your analysis is great, and you have been very generous. A brief question we have been asking everyone is, in such difficult times, perhaps a crisis looming for many, what makes you happy amidst all this? What not only gives you optimism, but joy? What do you enjoy in your life, you know, amidst these turbulent changes? You have experienced many crises in your life, but what is it today for you? Jeffrey Gundlach: I am very fascinated by watching the end of this movie. I have spent a lot of time thinking about the interrelationships of everything we have been talking about today. I helped people get through the global financial crisis almost unscathed, which is rare in the industry. I think this is equally challenging. But I want to get myself through it, I want to get my clients through it. And, you know, I'm 65 years old now, a lot of people ask, why don't you retire? I want to see the end of this movie, I want to help people get through it, for me, the global financial crisis, I worked very hard, but it was very uplifting. Because there were real problems to solve, and if you work hard enough to solve them, you can find real solutions. This may be another magnitude of a problem. So I look forward to it. I'm not worried about where we are, because I've been through that stage. I look forward to the first turning point, which is what's coming next. You can take full advantage of it. It will be a golden period. Trump said it was the golden age of the United States. I think he's about five years early. But I think in the long run, he's right, and I'm excited about that. Tony Robbins: This movie has ended, a new one has begun. Jeffrey Gundlach, let's give him a round of applause. Thank you very much, Jeffrey. You're amazing. This article is reproduced from the public account "Investment Workbook Pro", GMTEight Editor: Jiang Yuanhua.