Jeffrey Gundlach: The Fed’s Waterbed Problem | UBS On-Air

[music] >> Hi everyone, Dan Cassidy here. Welcome back to the UBS Market Moves podcast channel. Today, we are excited to feature the annual back to school on the markets conversation with Jeffrey Gundlach of DoubleLine Capital. Leading today's conversation from UBS is Solita Marcelli, global head of investment management. Solita, I'll pass it off to you. >> Good morning, Dan. Thank you so much. And hello everybody. I'm very pleased to be here today with Jeffrey Gundlach, who's the founder, CEO, and CIO of DoubleLine. I don't think Jeffrey needs much of an intro, given he's been one of the most influential thought leaders in the industry for years now, especially uh within fixed income. So, uh Jeffrey, thank you for joining. Uh I believe this conversation is particularly well-timed, given the latest developments uh in rates, inflation, the Fed, and more. So, let's dive right in. Um let's start with the topic of the week, okay? The sharp move in rates yesterday. 10-year yields rose almost 17 basis points to the highest um you know, level since 2007. The 5-year pushed above 5% for the first time since 2007. And 30-year approached its 2004 high. While we received new data like the strong PMIs, it feels like there's overall more uncertainty embedded in fixed income markets. How would you characterize this latest move? >> Well, it's a global move to start with. We have rates rising all across the developed world with the exception of Switzerland. Rates are rising even in Japan. I think we're getting above 3%. People thought the Japanese yield would never go up because it was being so carefully controlled, but the weakness in the yen led to uh led to So, sort of was in policy. One of the things that's really driving all of this is just the supply of bonds. Uh there's there's this huge amount of issuance that's going on because the budget deficit just keeps growing. And there's no end in sight. You know, now we're going to build two more uh army bases in Greenland. I don't know what they're going to cost, but I remember the base base that we gave up in Afghanistan uh when we evacuated from there was something like $300 billion. So, we've got that happening, and then we've got all of this uh AI and AI-adjacent issuance, which is either I've seen different estimates for the coming uh several months, but it's like uh 900 billion or 1.4 trillion. And, you know, this is really putting pressure on uh investors' appetite. And for the first time, we've started to see some initial signs. I wouldn't say they're terribly convincing, but there's initial signs of of credit uh cheering. In particular, if you look at the AI uh names, and you compare them to everything in the corporate bond market other than AI, you see a very different uh complexion. In the investment-grade market, the uh non-AI investment-grade bonds are basically on their tight spreads. They're in the 70s over Treasuries, but the AI bonds over the past, I'd say it's been going on there for about uh 8 months to a year, they widened by about 60 basis points on the AI names. And that may or may not be a credit concern in terms of analyzing credit. I think it's more due to the fact that investors are skeptical of the ratings that are being assigned to some of these uh AI-adjacent bonds. You notice that when SpaceX came out and borrowed money, it kind of surprised people that right after the IPO, they borrowed like 85 billion or something. And they got a triple A triple B minus rating, which, as we all know, is the lowest tier of investment grade. And as long as you have an investment grade rating, you get preferable capital treatment by insurance companies. And the market instantly rejected, almost instantly, that triple B minus rating, and the bonds are trading like a single B type of [clears throat] credit. And if we move over to the high yield category, we've seen much wider widening out in the AI bonds. If you look at uh the non-AI high yield bonds, they're out a little bit, but not very much. They're kind of in the context of where they've been for the past year. But the AI bonds are out by 150 basis points as of last week. I haven't gotten the most recent quote. I've been been traveling, but 150 basis points. So, they're trading like they're some far down to the junk category, not like the Oracle bonds, I think were rated uh double B or double B minus, and they're they're trading like a couple hundred basis points wider. That is more, I think, because these ratings are being challenged. The ratings are coming from sort of non-traditional rating agencies, and some of them seem to be rating an awful lot of bonds relative to the size of their staff. And so, I think the market is knows that these ratings might be inflated, but beyond that, the market is assuming, I think accurately, that there's going to be a lot more issuance of these types of names, and that's in conjunction with the Treasury issuing. I don't think it's a coincidence that Scott Bessent signaled Operation Twist the very day after the national debt on the official like debt clock crossed above $40 trillion. I was doing an interview with a podcaster earlier this year, and we're talking about $4 gasoline, and how that was a psychological level. And it sure seemed out to that it seems out to have been right for the past 6 months or so. When the price of gas goes below $4, people don't seem to be that concerned about it. But now I think it's up at about $4.40 at a national average. We're probably at $7 now in California. I've been there in a couple of weeks. It'll be interesting to see what the price level goes to. So, you know, this is a lot of a lot of consternation that's that's going on out there. The $4 level on gas turned out to be significant and the 40 I When I was talking about that 6 months ago in this time of this podcast, I said, you know, 40 trillion on the national debt, which we're going to get to by the end of the year, is might [clears throat] turn out to be a psychological level and it uh it sure seems to be the case. All of a sudden, it's very much in the news that we're over 40 trillion and now we're at 41 uh point 1 trillion is where the the debt ceiling is and we're going to have to do something on the debt ceiling yet again, another another fight over that, which doesn't do the markets any good. But here we are, you know, we're in this seasonal period. For some unknown reason, uh September and October seem to be seasonally weak and this turned out to be a really bad September. Not still a few trading days to go, but bond yields on the the 10-year Treasury and the long bond are up by about 45 basis points in the last month. And so we've seen bond returns on sort of like the the Bloomberg Aggregate Index go from pretty, you know, okay kind of like zero types of returns or maybe negative a half or something now down to about negative 3 and a half uh on on investment grade bonds, which is really putting pressure, not surprisingly, on the valuations of equities. The S&P 500 as of June as of July 31st, the most recent number I have, had a CAPE ratio of 42.04, which is one of the highest of all time. And with rising interest rates, that CAPE ratio becomes more and more challenged to sustain. And if you look back historically, going back a long, long time period, um if you look at 10-year returns, after certain CAPE ratios, when you're up at this level, in fact, if you're above 35 on the CAPE ratio, you basically have never had a forward real rate of return from the S&P 500 that's positive. It's negative all the time. And there's a there's several data points around this 42 area that we are on the CAPE ratio for the S&P. And those data points, the forward 10-year real rates of return for the S&P 500 after uh registering a 42 type of CAPE ratio have been something about -6. And I think the best one is -5. So, this is this is the environment we're in. At least bonds are not as ridiculously overvalued as they were 5 years ago, where we have huge negative real rates. Now, at least the real rate with bond yields at five are positive. But historically, you know, when you're in an environment where people are questioning the way the debt's being managed like it was in the '80s and in the early '90s, you uh investors typically wanted at least 200 basis point real rate of return. And you know, the inflation rate right now is kind of running at There's a lot of different series out there, but let's just say it's three to pick I think a number that's probably a little lower than the inflation rate really is. That would mean 5%. uh say the 10-year Treasury. Well, that's where we are. We're we're at 5.14. But if the inflation rate uh you know, if the deficit keeps going, keeps troubling people's uh ideas about financial market pricing, my viewpoint, I think I want at least 250 basis points or maybe even 300 basis points of real rate of return to be interested in say the 30-year Treasury bond. And if the inflation rate is at three, that would mean a 6% 30-year Treasury bond. And that seems, you know, like if you'd said that to people a couple years ago, they would have thought that would never happen. But we are at 5.44 and it is the highest rate in essentially 20 years. And so the path of least resistance appears to be up given, particularly, that the commodity complex continues to just boom. The number one performing asset class year-to-date is if you just use traditional indices, it's the Bloomberg Commodity Index. It's beaten all stock markets. It's beaten, uh, you know, all US bond sectors. So, I mean, there's a real boom in the commodity market. That's great for commodity investors. Not so great for gold owners cuz gold is kind of stuck in the water after its huge rally last year into the first quarter of this year. But the price of oil just doesn't drop and you we're always looking for, you know, some magical thing's going to happen and the war's going to end and oil's going to go down and maybe it will. But we've depleted our strategic petroleum reserve in the United States by a very large amount and we can't deplete it very much more because you can't take all the oil out of the strategic reserve. The oil becomes corrupted once it gets down to a certain level. And so, you're going to have to refill the strategic reserve and it's not just the United States. If we look at global uh, oil reserves, they're at the lowest level in decades on just a number of barrels units and compare that to the population which has grown over decades and the usage of petroleum which with the population growth has grown over the decades and this is a very low level of reserves. So, while oil might drop if there's good news on on the war and so forth, I don't think it's going to drop down to 50 or 60. I think that the governments would want to start refilling that petroleum reserve. I don't know. I don't know what the number is. I'm not a policy maker, but I I would say probably at 70. Uh, so, it might drop, but it's not going to drop to pre-war levels, and we haven't seen the blast radius from these elevated oil prices really expand the way it will in the weeks and months ahead. We've got, you know, the price of fertilizers likely to go up. We've seen shipping rates skyrocketing. I mean, some shipping corridors are up 400%. So, I don't see the real case for this 2%. I pointed it out at the Fed press conference last week, you know, the dots, the SEP, says the PCE is supposed to end this year at 3.7%. That's the committee's median guess. And at the end of 2027, they're saying it's going to be at 2.3. And that's a 1.4% decline, and I don't know what is the logic for that decline. Either it's it's not just going to magically happen. Inflation's not just going to magically go down with the commodity prices commodity complex where it is right now. So, to get to the 2.3, I would I would think you'd have to hike, and of course, now the bond market with this huge move in rates here in the month of September is gone from and in January, remember the bond market was looking for two cuts in the Fed funds rate this year, and I said that the after the the Fed press conference, I said, "If that's what you're betting on, you're backing the wrong horse cuz there will be no rate cuts in 2026." And now, of course, we're looking at two rate cuts this year. Uh, rate hikes, I would say that the rate hikes this year in October, maybe, and in December. And some people poopoo the idea of October because it's close to the midterms, but I think that's just a ridiculous argument. And the popular There's early voting. People are voting right now. Uh, I know it might look bad politically, but I don't think that's a real election mover. So, the Fed's probably going to raise rates a couple more times, and the two-year Treasury is at 4.9, which sort of suggests that the Fed funds rate should be, you know, sort of about 4 and 1/2% and it's only at four at the high rate of the band. So then I started where should the 10-year Treasury yield be based upon some indicators that have been helpful over the past when I say the past I'm talking the past 40 years going back to 1986. It's a weird how in the old days we used to just use nominal US GDP as starting point for where perhaps the 10-year Treasury yield should be. And right now the 10-year Treasury yield is at 5.15. GDP nominal GDP right now the 7-year average of it which is what we use nominal GDP is now 6.1% and this quarter's GDP looks like on a real basis is likely to be you know, on GDP now we're up in in a five handle. So it seems like 6% is not unreasonable to think about for the US 10-year. But a model we came up with back 10 years ago to factor in the fact the idea that US rates were positive when 19 trillion dollars of other bond yields were manipulated to negative levels. We started to average US nominal GDP with the German Bund 10-year. And using that model it says the 10-year Treasury should be at 5.9 sorry 4.9 right now. So under the GDP model the 10-year it looks a little elevated right now but not by a lot maybe by maybe by 25 basis points or so. But using nominal GDP might go up to to six. I would be I would not be a buyer of long-term Treasuries unless the yield were about 6% maybe even 6 and 1/2 on the 30-year Treasury. We've seen the yield curve flatten a lot now that the Fed has gotten more into a tightening mode. We've seen the curve flatten a lot. The 2s 30s was up at 130 basis points and today it's at about 55. So, that's flattened quite a lot, which makes the long end really even less attractive. So, that's kind of my my take on where we are. We we We've been sort of feeling defensively about all markets since the end of July middle of August, really. Uh largely due to valuation. I talked about the CAPE ratio. Largely due to before this move up in bond yields it looked quite unattractive. So, we were And also this the seasonals are just bad, as I referenced earlier. There's something weird about this September-October period. So, not not that surprising that we're seeing negative returns here in the month of September. So, I'll just stop there and let you take this where you want to go. >> Great. Thank you very much, Jeff. I So, um maybe, you know, you touched on a lot of these things, but to tie it all together, um you know, can you maybe level set on where you see um the best fixed income opportunities today and where of course you feel So, we already know your course is about the long end uh and you like the short, but uh when you look at the entire entire fixed income universe, I mean, >> Yeah. >> um on the securitized credit side, emerging market I mean, uh where are the best opportunities uh from your perspective? >> Yeah. Well, what I've done when it comes to like the bond piece the port- I I break asset allocation to four pieces: equities, you know, regular fixed income, which means like Bloomberg Ag oriented type of thinking, and then real assets, and then finally dry powder. Um in in stocks, really all I'm really looking for is to get out of the epicenter of the silver valuation. At this point, starting really 2 weeks ago, I really went to nothing in uh uh market cap weighted concept. So, instead of being you know, 40 to 50% concentrated in AI and AI-adjacent stuff, which is really driving overvaluation. You You have equal weighted, so you have almost no AI and AI-adjacent stuff. So, I'm not a very conservative in that in that category. When it comes to fixed income, I have a barbell approach, which is kind of unusual. It's It's a approach I had started using really for the first time in my career. And that is to take something that's really safe and has no corporate bonds in it. It's just It's just government uh securities and securitized products and mortgage-backed securities. About What's risk-free right now are mortgage-backed securities that are non-guaranteed that were issued 5 years ago or more. Because the home price appreciation, while home prices are are moderately falling now, the home price appreciation on the underlying mortgages under these pools that are 5 years or more old, they're up like at least 50%. So, if somebody bought a house at 100 and took out an $80 loan, well, the house is now worth about 150. So, you have an LTV that's nearly 200%. So, no one is going to default. You'd have to be dumb as a rock to default a $180 house where your mortgage is $80. I mean, no one's going to do that. So, you're getting a spread on the good days it might be 100 30 basis points. Uh when spreads are particularly tight, it might be 120 or so, 115. But, that's I I believe that's truly a risk-free spread above Treasuries. So, the Treasury bond market in sort of that 5-year area is at 5%. So, you can get up around 6 and a quarter, 6:30 in what I think is a risk-free asset. So, that's one of our significant holdings there. The other uh risk-free asset, which we don't own a lot of simply because uh it's really not It's not good convexity so much are AAA CLOs, which have been popular recently now that people are thinking about the Fed rates, it's not surprising that they want floating rate assets that are at the top of the capital structure. So, AAA CLOs if they take losses, we're in a really big trouble. Not that that's a proper analysis, but I really don't think AAA CLOs are going to take any losses. They certainly didn't in the GFC. So, you're getting there, you know, maybe it's 100 basis points or 110 basis points over SOFR. But again, these are these are significant spreads on my favorite risk-free assets. And that is local currency emerging market. Which is again something I haven't done in a long time. Local currency emerging market is has a double benefit. It's actually the top performing bond sector year to date in traditional sectors. It's It's not up very much. It was up about 4%, but with this route here in September, they're up about maybe 1 1 and 1/2% local currency emerging market. But you also have the benefit of should the dollar decline, you're going to get a a currency benefit. But anyway, you've got a positive rate of return and there's almost nothing in the bond market that's a positive rate of return. Most Most things as I said are down 3 and 1/2, some are down 4 and 1/2%. So, you have to play defense there. Some real asset investing, 20% of a portfolio. Um I think 10% should just be in a commodity fund. And then I've with the recent weakness in gold, I've But now with the decline, I think that uh I think that's that's time to increase it perhaps for long-term accumulation purposes. And so, we're we're looking for things that will protect for higher rates. I've I've been I've been um steadfast in my statement going back 6 years that I think 2020 was the secular bottom in rates. Now that they're up 500 basis points, that's not a controversial statement anymore. But I think the fundamental mistake people are making is from the experiences they've had, particularly for people who've been in the business maybe 20 or 25 years, they actually think that rates are high right now. They feel like this is some really I hear people talking about this great buying opportunity to get 5% on Treasuries. I mean, it's a lot better than three, of course, and the inflation rate is not at two, but it's at least it's sort of stable. It won't It won't really start dropping probably until the the second quarter of next year when we have some high high numbers rolling off on the year over year basis. But, 5% rates is is just not that high. I I think the people have been jaded by the years, say the last I don't know, I guess it's it was 20 years before 2020, where rates were zero. And people think that rates at zero or the long bond sub 2% is some sort of natural state of affairs, but it's not. And I I think that what's been perplexing and confounding investors when it comes to say private credit, private equity, they keep saying, "Well, when rates come down, we'll be able to exit. We'll be able to to, you know, not not keep doing these extensions, continuations. Our clients want their money back, and we can't liquidate. We've had a, you know, trillions of dollars of trapped private companies and and and so forth. But, the rates aren't going to come down like that. That That was abnormal. It was an abnormal condition. We we I think the interest rates at five are completely understandable based upon nominal GDP and nominal GDP and German 10-year yield model. Uh they're totally reasonable. And GDP seems to be going up, and it might be going up on inventories, which makes me worry about inflation reigniting. Cuz when I was a kid, I remember that people, including my family, would start to feel like prices are heading higher, and they would want to buy in advance. And there's a good example of that last week. I mean, it's just one example, but it is interesting. Costco raised the price of their Kirkland brand motor oil last week by basically 100%. They doubled it. And at the same time, they told their customers that they were rationing it. You You only can buy so many such a certain quantity of the motor oil every month or so. And I think what Costco was figuring, and I I think they're smart to do this, is that when you double the price of something, uh people will say, "You know what? I I I keep hearing about gas prices like $100. And they already doubled the motor oil. Maybe they'll double it again." And so people will start to hoard. They start to sell them and buy in advance. I've noticed that there's been an increase in consumer spending uh in recent GDP now uh revisions higher. And also in inventory building. Which suggests also that perhaps consumers are buying early in anticipation of higher prices. And perhaps uh retailers are are are hoarding inventory thinking, "Well, I'll buy it now, and maybe I'll be able to sell it at a higher price come the turn of the year or something like this." So, I I'm not of the belief that people talk about how it's all real rates and inflation expectations haven't really changed. Certainly when you compare tips to nominals, you can draw that conclusion. But I I don't I don't really buy into that. I I think that I think that the expectations that people have, when you look at consumer sentiment indices, University of Michigan, and uh and Conference Board and so forth. I I I think we're starting to see some movement higher on inflation expectations. So, I think it's you know, it's a it's a time period where you've done well in equities this year. You've done very well in commodities. You haven't done anything good good in bonds at all, except for maybe local currency emerging market. So, you you have to I'm still playing I I am still on the side that long rates are path of least resistance is up until such time as Operation Twist kicks into high gear, which has not happened. Um $6 billion of buybacks is like a day of the deficit. It's It's like nothing. But they can. I mean, they do have the wherewithal to control interest rates. We saw that in the 1940s and mid-1950s in the United States. We saw it We saw it for decades in Japan. And then after all that work to try to keep their yields contained, they couldn't do it anymore. And now they're joining the party of higher interest rates. So um yeah, I I'm I'm I'm I'm still conservative on credit. I'm still conservative on duration. >> Um thank you, Jeffrey. So you know, you mentioned about emerging market local currency, but we talk a lot about uh deficits and higher rates. What What does today's fiscal deficit and higher rate environment mean for the US dollar? >> I think that I think the problem with the dollar is that when and if I think that I should say not if, but when the United States goes into recession, I think the dollar is going to have severe weakness. I don't think it's going to be a flight to quality asset at all. I think we see that in the in the tremendous increase in the price of gold over the past uh you know, 4 years or so. Uh the dollar I think is going to go down on deficit problems. You know, the deficit is already running at about $2 trillion a year. This is going to be the highest Uh we've got one more month to report, so this could change, but fiscal 2026, which ends at the end of this month, has the highest deficit percent of GDP in the last 5 years. And we have nominal GDP or real GDP on GDP now of around 5% for this quarter. So you know, we're running a deficit when the economy is supposedly on a nominal basis doing very well. And when that changes, there's going to be a very large increase in the deficit. Uh we're we're at about 6% of GDP. If you throw in all the wars and the natural disaster relief that isn't counted officially in the deficit, we're more at like 7% of GDP. And we would very likely go to 12% of GDP should a recession come. Well, that would be that would be an outrageous uh a deficit, of course, and it would be something like uh you know, 3.6 trillion dollars or something like this. And that's half of that's more than half of today's tax receipts. So, we're going to have to do have some sort of action taken on this fiscal problem, particularly when the next recession comes. Uh we should we should be doing it now before a recession comes, but that's not the way politics works, unfortunately. So, in the next in the next uh recession, I think the dollar will drop. I think the Dixie Index, which has been remarkably it almost looks manipulated. I mean, it's it's heavily euro influenced, but it's basically that you're you're today the low is around 98, and we're near the high today. I think it's around 101 and a half, but that's that's just not even a 4% range uh on the dollar. So, wh- what when when the when the Dixie starts to go down in the next recession, I think it'll drop by at least 20%. So, the dollar will drop by a lot, and that would mean that uh local currency emerging would probably do well, but also just any kind of non-dollar investment and gold would probably do well under and commodities broadly would probably do well. So, I I'm I just think that the biggest tell, I think, on my structural bearishness on the dollar was corroborated last year when the taper tantrum came. And we had the S&P 500 go into a correction, and it was the 13th correction defined as a decline of more than 10%. It was the 13th correction since around 2020. And in the first 12 of those corrections, when the S&P dropped 10% or more, the dollar went up every single time. The dollar went up versus other currencies by around 8 to 10% on the Dixie index all 12 of those times. But in the most recent correction, which was the taper tantrum back in 2025, the S&P dropped 18% or so and the dollar dropped by around 8 or 10%. The exact opposite of how the dollar typically behaved during uh risk-off periods for for uh for assets like the S&P 500. Well, that's that corroborated my idea that everything changed when we shifted from a regime of secular declining interest rates, which went on for 40 years, from around 1980 to 2020, and suddenly entered a secularly rising interest rate environment, which is what how I characterize where we are right now. I think it's telling that one of the longest time, most economically driven, kind of almost pedantic type of analysis was a man named Lacy Hunt at Van Hoisington, and they turned bullish on Treasury bonds to their credit when the yields were double-digit, and maybe even high you know, mid double-digit back, you know, 43, 35, 40 years ago, and they stayed bullish all the way through until earlier this year. So, they really overstayed their welcome. They were they were uh resoundingly bullish on Treasuries uh in 2021 entering the huge bear market of 2022. They're still bullish all the way through that, but they turned bearish on bonds for the first time in decades in the first quarter or early second quarter here of 2026, which I think is really telling. Because he had developed a framework that he was using for 40 years, and it worked for it worked for uh uh, 40 years or so, 35 or 40 years, and he continued to use that framework, but as he continued to apply it to the post-2021 or certainly post-2020 bond market, it completely failed. And to his credit, once again, he decided that this framework isn't working anymore. The framework was useful and beneficial during a secular bull market, but we're now looking in the mirror. It's no longer a secular bull market, it's a secular bear market. And this is the conclusion he came to. I you know, I mean, he's made some money on that bear call, but he he would have made a lot more money if he come up with it back in 2020, 2021. So, I I think I think we are in backward land, and the most important thing for people to consider is that, you know, the old rules will continue will increasingly apply less and less. I mean, think about how good what good friends we were with Canada. Like, the speak trading partner, we had similar cultural ideas, we had not terribly different forms of government, we were all good friends. Used to When I was a kid, you could just go across the border. All you didn't have to you didn't show an ID. You just said, "I'm going I'm going to, you know, Toronto." And no big deal. You know, now they're talking about becoming an associate member of the EU. They declared us something of an economic enemy. What else do you need to see to know that the the sands of the framework are changing? So, all these things are factoring in my thinking. So, I think the the straw that really breaks the back is when we go into recession, and that deficit goes to three perhaps four trillion dollars. I mean, it's just some unthinkable number. You either have to print that money, which isn't helpful for interest rates or inflation, you know. So, you know, or or you have to restructure the debt. You have to drop coupons or extend maturities or something that that's extraordinary radical and would be met with, you know, an outcry, understandably. So, this is what you should think about. I've I've pointed out I think the Fed has a really big dilemma, you know? If they fight inflation and raise rates to fight inflation, then they're they're worsening the interest expense problem. And that's a really big problem. You know? But if if they if they don't raise interest rates, you know, then then they have a problem, too. Then they have an inflation problem. So, you have an inflation problem, but if you fight the inflation problem, you have a debt expense problem. So, there's there's no there's these are two bad choices. So, perhaps the Fed wants to stay put because I mean at least they they they know where they're standing. But that's the dilemma for the Fed. If you If you hike, it's a problem, and if you cut, it's a problem. To I've been saying that the Fed always said they had two mandates. It was full employment and a stable 2% sort of inflationary. I I say they still have two mandates, but they clearly don't have employment as a mandate right now. Uh Kevin Walsh spends maybe uh one maybe 5% if 5% of his remarks about the employment rate. All he says is employment's stable and strong and in balance and there's no problem at all. So, he they That's really not part of their mandate in my view, at least what they're focusing on. I think their dual mandate now is the interest expense and the inflation rate. Unfortunately, they're they will forever be at tension. It was one thing, you know, uh Jay Powell would say that the the the dual mandate of employment and inflation, they're they're compatible right now. And then as the year went by, his his last year, they they were more in tension. He started talking about tension between the dual mandate, but then that settled down when the unemployment rate stopped stopped rising and going back down to 4.1. But now if the dual mandate is forever in tension because it's it's inflation and it's the interest expense and you cannot deal with both of them simultaneously. You push you push on one it's like a waterbed. You push on one spot and it's just going to get a bump on the other spot. You're just pushing the problem around. So it's a difficult situation that it's but it's one of our own doing. I've been railing against this deficit and this expense problem being ignored for solidly for for for I don't know, 20 years. And people ask me this well what should we do? And I say well, have Elon Musk invented a time machine and we'll go back 20 years and we'll we'll start being fiscally responsible. Of course that's impossible and I'm being facetious. But uh someone did ask me what would you do? If you were in charge, what would you do? And I I would say I would tell Congress you must cut spending $1 trillion. You must You must find a way that you have to cut spending $1 trillion by the end of fiscal '27. That's how I would start attacking this problem. It would it wouldn't be good economically but our chance to take do things that would be less harmful has passed unfortunately. >> So Jeffrey, you mentioned the impact of recession but you don't expect expect one anytime soon, do you? >> Oh I think I think when the AI sector retrenches which I feel I think we're past peak AI. I I I sort of feel that way June July when it went from it went from uh AI is the best thing in the history of the world. We're all going to be able to retire and live on Tahiti in a life of luxury and the AI will do everything for us and all of a sudden around June it went to uh except you're going to lose your job first. You AI's going to kill jobs but that wasn't enough to scare people. So now we've got starting a couple weeks ago we've got AI is going to kill us all perhaps by the end of this decade. Now, that's a scare tactic if I ever saw one. I think that's designed to create some sort of government intervention to try to build moats around the existing AI companies, but government intervention is not going to help. So, I think when AI when the AI enthusiasm turns into AI uh skepticism, which I think is underway, we're going to see a really big drop in CapEx. Uh I don't know when that's going to happen. I don't know if that's going to be you know, uh in the next 6 months or for the next 18 months. I don't know. Nobody knows. So, the recession will probably come within within the next couple of years. I think the AI situation is is sustainable in any way under its current format. So, that that would you know, that's our our economy has been driven exclusively by AI by CapEx. I mean, that's what's driving the the whole thing and it's an it's an enormous unprecedented CapEx cycle. You've got earnings based upon this for the S&P 500 or up. I don't even know what percentage is the forecast now for this year, 30, 36% or something. Um and then people are thinking they're just extrapolating forward that earnings growth is going to continue not as high, but something abnormally high. And I would I would save that idea in a in a big way because these things they all look they all look unstoppable until all of a sudden something goes wrong. And it's dot-com-esque. I mean, it's a very different dynamic than dot-com. It's Some of these Some of these companies are making money, but a lot of them are are bleeding money. So, there are some there are some similarities there, but that was what would cause a recession. And when it does, like I said, there's going to be a very, very large like come-to-Jesus moment for the way we're running our government. >> All right. Well, thank you so much, Jeff. You You left us with a lot to chew on. It's always a pleasure to hear your insights and we've had a pretty impressive you know walk through of perspectives across many things from rates to inflation and Fed and global markets and geopolitics portfolio construction equities so really thank you really appreciate it and we hope to be back with us >> thanks for having me again I've enjoyed doing this I feel like we've done it for a few years now and I'm really appreciate the partnership between our firms it's been very very very enjoyable and gratifying so thanks for having me and everybody let's let's go Bills two and oh and I'm going to the next three Bills [music] games in person so it's going to be pretty exciting so everybody have a great end of the year and and good luck >> Thank you for tuning in. Be sure to visit ubs.com/studios to view the entire UBS studios suite of podcast channels along with their video offerings such as UBS trending. 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