"New Bond King": The massive amount of U.S. debt will eventually be restructured, and there will be significant institutional changes within the next five years

On February 11, DoubleLine CEO, Chief Investment Officer, and founder, "Bond King" Jeffrey Gundlach, was interviewed on the podcast of success coach Tony Robbins, sharing his views on the current economic situation. Gundlach warned that the current rise in U.S. interest rates, overvalued markets, and massive government debt could trigger a significant crisis. The current U.S. deficit accounts for 7% of GDP, a borrowing level typically reached only during severe economic recessions. If this figure continues to rise to 13%, it could lead to a catastrophic debt crisis. U.S. Treasury bonds may need to be restructured. Gundlach advised investors against taking risks by buying high-yield government bonds and suggested focusing on tangible assets (such as gold, gemstones, and real estate), maintaining liquidity, and investing in emerging markets, particularly India. He also discussed the issue of market overvaluation, noting that a small number of companies account for a large portion of profits. The interview also mentioned the book "The Fourth Turning," where Gundlach believes that cyclical crises in history are inevitable, occurring every three to four generations, and we are currently in a period that may see significant changes. While expressing concerns about potential systemic changes in the future, he remained optimistic, believing that opportunities also exist within crises. Here are the key points from the podcast: The Federal Reserve is merely following the yield of the two-year Treasury bond. Risks should not be taken unless there is a return, and risks should be eliminated. This can be done at a low cost, especially when investing in government bonds. Since the beginning of 2022, real interest rates have risen significantly. This should be related to lower gold prices, but that is not the case; it is related to much higher gold prices. I believe we will see interest rates rise when the economy weakens. This will lead to a real debt management crisis. The problem with the 3% deficit target and the 3% growth target is that they are somewhat mutually exclusive. If you reduce the deficit from 7% of GDP to 3% of GDP, you cannot have 3% growth; that would cause GDP to drop by 4 percentage points. Our deficit is 7% of GDP. Historically, when a recession hits, the budget deficit as a percentage of GDP tends to increase by about 4%, averaging 9% in the last three recessions. We will have to seriously consider how to restructure this debt. I am not predicting this will happen, but I am open to the possibility that there may be a restructuring of government bonds to control interest expenses. I believe what will make this discussion more serious is the rise in long-term interest rates while economic growth is declining. Innovation and technology are revolutionary. New things are emerging, and the system cannot handle them because these revolutionary changes are unpredictable or unconsidered. This change occurs every three to four generations. The last time it happened was during World War II (1945), before that was the Civil War, and the next time is now, in 2025 I prefer non-US stocks over US stocks, and even Europe has started to perform well, which is a bit surprising. But I have advocated for long-term Indian stocks for many years. However, I will only use the Indian market as a placeholder. Here is the full podcast transcript: Tony Robbins: This morning, we have one of the most outstanding financial geniuses I know, Jeffrey Gundlach, the "Bond King." It's great to see you. The last time you were with us, the world was changing as always. For example, one of your recommendations was gold, which has risen 27%. You talked about people's views on cryptocurrencies, which have risen 58% this time. But a lot has changed again. We are eager to understand your worldview. As you know, we are currently in a position where market valuations are high. I think it's at 22 times, but seven companies account for 50% of the profits, and their price-to-earnings ratio is 43 times. Additionally, I don't know how often this situation occurs; perhaps you have more insight than I do. But we are in a rate-cutting cycle, while mortgage rates are rising. Can you give us a rough overview of where you think we are in the world right now and what you believe the Federal Reserve's direction is at this stage? Current Debt Levels Unsustainable, US Treasury Bonds May Need Restructuring Jeffrey Gundlach: Yes, I think the most important concept I've had over the past five years is that we have been living in a decades-long world of declining interest rates. When Ronald Reagan took office, interest rates were around 14%. Money market rates were as high as 20%. Volcker decided to raise all these rates, and he killed the inflation dragon caused by excessive spending and other reasons. As a result, interest rates fell, and for most people's long careers, even my over 40 years, the vast majority of the time has been a period of declining interest rates. About six or eight years ago, I started thinking about a question: you have to be careful not to map a continuously declining interest rate cycle into the future beyond 2020. Because many things you think you know may only happen in the context of declining interest rates. Therefore, once interest rates start to rise, things will be very different. One thing started to happen because interest rates actually began to rise seriously in 2022. I believe that interest rates will never fall back to the levels seen between 2016 and 2020. Those were very low rates, with negative real rates, and the yield on the 10-year Treasury bond was once only 0.5%. There used to be $18-19 trillion in bonds that actually had negative yields. Governments around the world were able to borrow at negative yields, which to me, I just don't understand why they didn't borrow $25 trillion. I mean, why would anyone pay to borrow money? But, you know, paying someone else to borrow money is just so strange. So, I had an epiphany in July 2016 because the whole world believed that negative interest rates were normal or reasonable, and they might even stay that way for a long time. One day, I read an article on a news wire where the author said, I believe interest rates will never rise during my career, and I intend to have a very long career I have a meeting every week, attended by senior members of the team, and they all seem to have internalized the same viewpoint that this interest rate environment will never change. I felt like lightning struck me. I said, we need to turn extremely negative and extremely defensive. Because there is one thing 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, I mean, 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 Federal Reserve, I wouldn't have this army of over 800 PhD economists. I wouldn't even set short-term interest rates. I would let the bond market do it because when you really look at it, the Federal Reserve is just following the yield on the two-year Treasury. Indeed. So before they started this rate-cutting cycle, they were far from the yield on the two-year Treasury, and they really needed to cut rates to synchronize with the yield on the two-year Treasury, and then they finally cut rates, but they were already very far behind. But what surprises me is, what about now? Since they started cutting rates, this goes back to the core of your question. Interest rates have been rising, not falling. This has never happened in my career. As I said, this is my theme. Because of 40 years of declining interest rates, you think you know that might not be of any benefit in trying to plan a process in a rising interest rate environment, I think we are in that period now, right? Therefore, since the Federal Reserve started cutting rates by a full percentage point last September, our 10-year Treasury yield has risen by more than 100 basis points. So this has never happened before, but I think it will continue. Therefore, I think the most important point is that the next chapter is that when the economy slows down, our budget will face a crisis. Interest expenses. The interest expenses on our debt are much higher than they were three years ago. The annual interest expense on Treasury bonds is $300 billion. Now it is $1.4 trillion and still rising. It is rising sharply, because the bonds issued in 2019 and early 2020 had yields of 25 basis points, 0.5%, and 1% for 10 years. Interest rates temporarily stopped rising, but the yield on the 10-year Treasury is still 4.5%. Many bonds are about to mature, and the government is paying a rate of 1%, and these bonds will be replaced with 4.5%. If you think about what will happen when these trillions of dollars of bonds mature. We will see significant public discussion about this crisis, because we cannot have both our current tax system and our current debt management system at the same time, because we will ultimately use all tax revenues under the current tax system for interest expenses. Of course, this cannot happen. Therefore, we will have to seriously consider how to restructure this debt. I am not predicting this will happen, but I am also open to the possibility that there may be a restructuring of Treasury bonds to control interest expenses. For example, under the Federal Reserve Act of 1913, the Federal Reserve Board is not allowed to purchase public debt. They are not allowed, but they did it in 2022. Yes, they did So don't think that just because something hasn't happened before or seems to be dictated by agreed-upon rules, it doesn't mean it won't happen. Therefore, I can easily see our debt being restructured. This would be very bad for some people who lent us money and also very bad for those who haven't considered this possibility. One of the simplest ways to think about it is that you should hold the lowest coupon rate, the lowest interest rate government bonds you can find, because if you hold high-interest government bonds, like those issued a few years ago with a 7% interest rate, if they say, I'm just doing a thought experiment, if they say that for every bond the government borrows, if the interest rate is above X, I will use X as 1%. The interest rate we are currently paying can legally be changed to 1%. Therefore, if 7 becomes 1, and 2 becomes 1, if you are below 1, it will still maintain the current rate. Well, if you have 7, you wake up tomorrow morning, and they no longer pay 7, they pay 1, your price for that day drops by about 80%, overnight. This isn't even entirely hypothetical. It's actually somewhat similar to what happened a few years ago with the Bank of England when they had a significant interest expense issue and started issuing a large amount of long-term debt, even 100-year bonds, but no one showed up. People said, no, you are running the policy you are running, and we will not fund them. They had what is called a failed auction, which means they tried to borrow money, but no one would lend to them. Interest rates rose by about 150 basis points in an hour because no one wanted them. So these things are possible. Therefore, I think it is important to consider these significant tail risk events because we are on a path of government-managed debt, with the existing amount of debt around $36 trillion, currently growing at a rate of 7% of GDP. Over the past 12 months, our deficit has grown by 7%, right? These are recessionary borrowing numbers, borrowing 7% of GDP has only happened historically during severe recessions. We have positive growth, at least that's what the reports say, and our deficit is 7% of GDP. Historically, when a recession comes, the budget deficit as a percentage of GDP tends to increase by about 4%, averaging 9% during the last three recessions, largely influenced by the experience of the COVID-19 pandemic. Well, suppose it rises to 6%, picking a number in between, that means our budget deficit will reach 12%, 13%, which is a crisis at 1% of GDP. We cannot do this. What I think might happen is that the bond market may be considering a recession, which may not mean that long-term interest rates will fall. At least initially, they may mean that long-term interest rates will rise as people start to see the math, the 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 it by the interest rate, and that’s what you have to pay. They can only change one of those variables to alter these arithmetic laws. In this case, they can change the interest rate I have some very basic guiding principles that I believe are uncontroversial. The first is, do not take any risks unless you are compensated for it. How much you should be compensated is open to discussion. But if you are paying nothing, do not take risks. Conversely, if you can eliminate risks at little or no cost, you should eliminate those risks. If you do what I just mentioned and buy government bonds with historically low interest rates that still exist, you do not need to pay any cost. They actually have slightly higher yields, not by much. This relates to liquidity, how much trading volume there is, and so on. It’s a bit strange, but you actually get a slightly higher interest rate, and you actually get a small economic benefit while completely eliminating the risk. So, this is one way, and I believe this is how you stay in business in the investment industry: adhere to these principles, you do not need to take risks without being compensated, and you must eliminate risks. You can do this at a low cost. Market Valuation Overvaluation and Increased Risks So now, you talked about market valuation. Right now, there are risks everywhere because you mentioned the forward P/E ratio of the S&P 500, but we prefer to use Dr. Shiller's CAPE ratio, which is the cyclically adjusted price-to-earnings ratio that really observes and analyzes the P/E ratio relative to about 20 years of historical range. Today, the CAPE ratio of the S&P 500 is one of the highest ever recorded. It is actually 37. There was only one time it was higher, and that was before the internet bubble burst in 1999. It is not much higher than it is now. Therefore, not only is the stock market highly valued based on the CAPE ratio and P/E ratio, but on many metrics, such as price-to-sales and price-to-book value, its valuation is almost as high as it was at the end of 2021, with about 30 different metrics commonly used. If you put them in percentiles, where the 1st percentile means the most expensive 1%, we are at this level on many of these metrics, possibly in the 3rd to 5th percentiles. So, it is very overvalued. Similarly, there are no bargains to be found in the credit market. After the economic shutdown, there was a short-term collapse in people's views on credit because everyone was worried about the economy shutting down, companies potentially going bankrupt, and so on. But since then, we have returned to the narrowest compensation ever for buying junk-rated corporate bonds relative to U.S. Treasuries of the same duration. This is the narrowest it has ever been. You are only getting about 2.6% extra yield, whereas a few years ago, you were getting 6% extra yield, and now you are only getting about 2.6%. Therefore, thinking it could return to 6% is not foolish. In fact, it is a baseline scenario; it is just a matter of time. However, we live in a world where all these valuations remain unchanged because there are no catalysts. Events like significant economic issues have not occurred. The inflation problem has at least temporarily been halted. We are not at a 9% inflation rate, but more like a 3% inflation rate. The Federal Reserve wants to bring it down to 2%, but we have been upgrading and downgrading risks. Our strategy has persisted in almost all aspects for about 18 months, almost systematically, and we have not seen any catalysts We had a long meeting yesterday, and everyone felt that there are almost no real bargains in the stock market or fixed income market. This is why I think we are seeing commodities starting to rise. We see gold, you mentioned that gold has once again become the best performer, in just six weeks of 2025, gold's performance has outpaced all major stock indices, with an increase of about 12% to 17%. I don't remember what it was the last time I looked, but it definitely exceeded all major stock indices. However, this year has been very stable, for about a year, or even 18 months, after the huge fluctuations experienced during the COVID-19 pandemic, valuations have not changed much. But I still like gold. I think one interesting thing is that I believe everything changed at the end of 2021. That was when interest rates began to rise. Interest rates started to rise, even as the Federal Reserve cut rates. One thing that used to be a very valuable tool was to observe the correlation between gold and the real yield on 10-year Treasury bonds, which is the nominal yield minus the inflation rate; the correlation between them was very high until early 2022. Since early 2022, interest rates have risen significantly. Real yields have risen significantly. This should be related to lower gold prices, but that is not the case; it is related to much higher gold prices. Therefore, I think many relationships changed at the end of 2021. I believe that when the economy weakens, we will see interest rates rise. This will lead to a real debt management crisis. The "Death Spiral" of the U.S. Economy: Recession, Debt, and Social Turmoil Tony Robbins: We were with Ray Dalio (founder of Bridgewater Associates) yesterday, and he described that the forecast we are seeing is a 7.5% deficit. He said his magic number is 3%. If you reach 3%, we can avoid the "death spiral," as you know. So we were discussing this issue, and I asked some questions. One of my questions was, this is $1.3 trillion. In fact, that is the number he mentioned. So I am curious, do you think cutting a certain amount of funding, I mean, obviously people are screaming now because you are taking away their funding. But can cutting enough funding get us to that level, or do you think cutting funding and increasing productivity through artificial intelligence could work? Is there a scenario where we can achieve a soft landing? Jeffrey Gundlach: Yes, I think we, well, we can gradually address this issue, but I don't think you can find enough. I do think there will be more restructuring situations. So if restructuring happens, I just ask you, what impact will this have on America's reputation and future borrowing ability if we do this? Because it changes the commitments. I also want to know the timeline. Ray thinks it’s three years, plus or minus a year, before we reach the "death spiral," because of the amounts we are paying and the interest rates we are paying, we have reached an unsustainable point. So what do you think the timeline is? I would love to hear your feedback I agree that we may have 3 to 5 years, but I think 5 years is the upper limit, right? 3 years is on the shorter side. But the real issue is that we have these unfunded liabilities. There are $22 trillion in unfunded liabilities, which is about 6.5 times GDP. You can't pay these liabilities under the current system. So the simplest thing is to restructure these liabilities. Social Security, many people don't want to talk about this issue, but it was established by Roosevelt, and their eligibility age is 65. The average life expectancy is even less than 65 years. Of course, life expectancy is lowered due to high infant mortality rates. Thank goodness that's no longer an issue. However, you know, life expectancy has reached nearly 80 years. Due to fentanyl and suicide, it has started to decline, and in some cases, it's somewhat like the same thing. But going from a life expectancy of 63 years and an eligibility age of 65 years to a life expectancy of 79 years and an eligibility age of 65 years is absurd. Therefore, we need to start making a real effort to address this issue and make this solution reasonable. The problem with the 3% deficit target and the 3% growth target is that they are somewhat mutually exclusive. I know I hear the Treasury Secretary talking about 3%, you know, a 3% deficit, 3% growth. Well, if you cut the deficit from 7% of GDP to 3% of GDP, you cannot have 3% growth; that would cause GDP to drop by 4 percentage points. That won't happen. Putting these things together sounds like a great panacea, but I don't think they are consistent. I think what will really trigger this discussion to become more serious is the rise in long-term interest rates while economic growth is declining. We will actually face the problem of rising interest rates and declining tax revenues. Unfortunately, I think we have backed ourselves into this corner. I believe the way out will not be a massive depression. But it will be uneven across the economy because you have to deal with these payment commitments that you have never funded. The government has essentially provided a debt-based economic model. So we see consumers doing this all the time. I mean, when you get a credit card, it's almost a symbol of honor. It means you have succeeded. You know, I have a credit card now, and someone is really willing to lend me this money at a 23% interest rate. Yes, right. But you know, getting a credit card, I mean, it's not exactly a good thing. We should cut up all our credit cards. But the government is setting an example because they are actually operating on a huge national credit card. So far, due to the dominance of the dollar, I think this has a lot to do with our ability to run this deficit; because of the dominance of the dollar, people have been willing to lend us this money. Now, there are many variables in the geopolitical economy, which could be another issue we face because if we don't have a global reserve currency, our interest rates will rise. It is almost certain that our interest rates will rise. So all these things are somewhat interconnected. In many ways, they are the same thing but manifest differently, like observing objects through different aspects of a prison, but they all fit together Therefore, I believe another thing that defines our era, which also has many historical precedents, is the current wealth inequality. You mentioned that 7 stocks in the S&P 500 have led to a significant amount of growth, scanning to the point where owning the S&P 500 is not diversified. No, because you have so much money in those 7 stocks, many of which are highly correlated. So inequality leads to change. That's why Ray Dalio talks about it. I've been discussing this issue for 15 years, and we are in a social transformation, which is no longer even a hypothesis because we see all these changes happening, you know, lack of interaction, radical policies, you know, packing the courts and obstructing legislation, you know, I don't have to follow your laws. I won't follow your laws. Historical cyclicality is inevitable, and we are in a period of great change Tony Robbins: Demand is the mother of invention, right? If it has always been, unfortunately, we wait until it is necessary. So I want to reflect on that. Therefore, do you think the most likely scenario to avoid this "death spiral" is if we reach a point that obviously must change, which is debt restructuring? You mentioned the example of declining interest rates. Could it also extend the time for people to get money? But more importantly, what impact will it have on our future borrowing capacity when people no longer feel certain? Will it threaten our ability to be the world currency? Jeffrey Gundlach: It could threaten that. In the medium term, this is obviously very destructive. I mean, you can't look people in the eye and say, you know, you can trust us, right? Of course. What they will do is say this is a one-time thing. This is a one-time thing. You know, this is a one-time reset. We promise we will never do this again. But people will be very skeptical about it. So in the long run, this is actually positive because it will force us to implement fiscal integrity. For generations, no one will lend us money. Okay. We have to achieve budget balance over generations. Is this a good idea? Sound fiscal policy, sound debt management. Great. I mean, this will lead to success for generations, but in the process, you know, it will be a very difficult time because when you have all these unpaid liabilities, you know, if you really want to pay them off with today's money, well, that's impossible, right? You have no purchasing power. You have no assets. The actual assets in the U.S., financial assets are actually less than the unfunded liabilities. Think about all the financial assets, the U.S. has $210 trillion, $212 trillion in financial assets, and our unfunded liabilities are even greater than that. So this will be a very significant period of transition. But at least we will start from a blank slate, and we can return to a sustainable growth path with lower levels of wealth inequality Tony Robbins: We all are. I know we all are. In 1992, I interviewed one of the co-authors of "The Fourth Turning," you know, one of whom has passed away. I know we have all focused on this because the Fourth Turning will shake everything. Then there will be a new spring, a new opportunity. I love hearing your mindset, and I share that mindset. Jeffrey Gundlach: Neil Howe, who wrote the book "The Fourth Turning," released a new book a year or two ago. The title is "The Fourth Turning Is Here." This is another thing, just like Ray Dalio, just like what I am talking about, just like Neil Howe, they are actually all the same thing. Tony Robbins: Yes, they really are. Jeffrey Gundlach: This is an understanding of history and cycles, and these kinds of things tend to happen 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 unconsidered. The wealth generated by these revolutionary changes somewhat disrupts the distribution of the pie, and the means of production and distribution are out of sync with each other. It happens every three or four generations. The last time it happened was during World War II. Before that was the Civil War. You notice that it seems to happen every 70 or 80 years. That's how it is. Add 80 years to 1945, and you get 2025. So, that's us. Gundlach: Favoring tangible assets, overweighting non-U.S. stocks, especially Indian emerging market stocks Tony Robbins: So, when you look at the world now, in this environment, what kind of portfolio structure do you think would be useful for investors to protect themselves and take advantage of some of the changes you described? Jeffrey Gundlach: Central banks are buying gold. Gold is being purchased, not so much by speculators as it has been in the past few decades, but as a safe asset, as an insurance policy. As I said here, our interest rates are rising, real interest rates are rising, but gold is going up. Yes, this has never happened before. Yes, this is simply because people do not trust this regime. Therefore, gold will continue to perform well. I think gems, gold, real estate, tangible assets, I have an unusual economic situation, which is not common. But forget about my ownership of Double Line; I don't even know how to categorize it. I just think that if I have securities, financial assets, or tangible assets, I basically have half of my money in tangible assets, which are real estate, gems, you know, quality assets. I am completely satisfied with that. Then I currently have half of my assets in financial assets. I like it; I think holding short-term quality money market funds is not wrong. You have real interest rates. The Federal Reserve is not in a hurry to cut rates, and valuations for stocks and other things are high You will definitely get a better entry point in bonds and publicly traded stocks. Absolutely. You will get a better buying point than you have now. So in the meantime, you can, I will hold about 20% in cash. So this is a $100 portfolio. I have $50 in physical assets, and I will hold $20 in cash. That leaves 30% in stocks and bonds. At this point, I prefer non-U.S. stocks over U.S. stocks, and even Europe is starting to perform well, which is a bit surprising. But I have advocated for long-term stocks in India for many years; you buy an ETF named India, and it certainly won't go up all the time. Yes, there are risks there. But we are talking about a 30-year perspective, not a 30-day perspective, and the 30-year perspective is that they are huge beneficiaries of outsourcing. Therefore, I think you will do much better in India and emerging markets, but I will only use the Indian market as a placeholder. I would buy an equal-weighted S&P 500 index instead of the official index, which is market-cap weighted. If you calculate by market cap, you have those seven stocks; otherwise, you have no diversification. I think all the major trends have reversed since 2022. Not all at once, but you know, long-term interest rates have not fallen; they are rising. I believe equal weighting will outperform market-cap weighting. I think small-cap stocks will outperform large-cap stocks. I think value stocks will outperform growth stocks. All of these almost relentlessly sustained major trends, some of which lasted for 20 years, I think they are all, I think they are in the process of reversing, some of them. Yes, in my view, it has already happened. Therefore, I think strategies under a continuously declining interest rate environment will not be a good roadmap for the future because their foundation is based on continuously declining interest rates. At least from what we can see now, that is not the case. Tony Robbins: Jerry, this is very helpful for all of us. Your analysis is fantastic, and you have been very generous. A brief question we have been asking everyone, in this tough time, perhaps a crisis is looming for many, what makes you feel happy amidst all this? What not only gives you optimism but also brings you joy? What do you enjoy in your life, you know, amidst this turbulent change? You have experienced many times in life, but what is it for you today? Jeffrey Gundlach: I am very fascinated by watching the ending of this movie. I spend a lot of time thinking about the interconnections of everything we are talking about today. I helped people get through the global financial crisis with almost no harm, which is rare in the industry. I think it is equally difficult. But I want to get myself through it; I want to help my clients get through it. And, you know, I am 65 years old, and many people ask, why don’t you retire? I want to see the ending of this movie; I want to help people get through it. For me, the global financial crisis, I worked very hard, but it is very exhilarating. Because there are real problems that need to be solved, and if you work hard enough to solve them, you can find real solutions This could be a problem of another magnitude. So I look forward to it. I'm not distressed about our position because I've already gone through that phase. I'm looking forward to the first turning point, which is what will happen next. You can make the most of it. It will be a golden period. Trump said the golden age of America. I think he was about five years early. But I believe he is right in the long run, and I am excited about it. Tony Robbins: The movie has ended, and a new one has begun. Jeffrey Gundlach, let's give him a round of applause. Thank you very much, Jeffrey. You are amazing