"The Bond King" Jeffrey Gundlach has issued a triple warning ahead of the Federal Reserve's policy meeting: if the Fed does not raise rates, long-end yields could surge sharply; inflation trends bear a striking resemblance to the 1970s; and AI-related credit spreads have nearly doubled, while U.S. stock valuations are as expensive as "a hotel minibar — there is nothing cheap."

In his latest "Gundlach Unlocked" webcast, the CEO and Chief Investment Officer of DoubleLine Capital systematically reviewed the current macroeconomic landscape, delivering a series of warnings on interest rates, inflation, credit markets, stock market concentration, and the U.S. dollar just days before the FOMC decision next Wednesday.

Gundlach said he remains skeptical that the Fed will hike rates next week, even though markets have priced in roughly a 60% probability of an increase. "I would not be surprised if the Fed does not raise rates next week. If that is indeed the case, I expect long-end rates to rise fairly significantly after that," he stated. Conversely, if the Fed does follow through with a hike, the bond market may simply hold its ground.

His stance is rooted in deep concern over the persistence of inflation and ongoing vigilance regarding the U.S. fiscal trajectory. Backed by extensive data, he argued that with inflation remaining elevated and fiscal deficits badly out of control, the Treasury market, equity valuations, and the red-hot AI credit market are all at an extremely fragile historical juncture.

If the Fed Stays on Hold, Long-End Yields Could Face a Major Shock

Regarding next week's FOMC meeting, Gundlach believes the Fed's pace has once again become detached from what the bond market is pricing. He noted that based on the short end of the yield curve, the market sees about a 60% chance of a rate hike, but he has reservations about that assessment.

"I would not be surprised if the Fed does not hike next week. But if that happens, I expect long-term rates to rise fairly significantly after the meeting. If they do raise rates, then the bond market might stay around current levels," Gundlach said. He presented his proprietary benchmark model for the 10-year Treasury yield (based on the German 10-year yield and the 7-year average of U.S. nominal GDP). The model currently suggests a fair value of around 4.71% for the 10-year yield, versus the actual 4.78%, indicating yields are within a reasonable range. However, he emphasized that after a massive 500 basis point rate surge, the market has seen no substantial pullback, adding "the path of least resistance is likely higher."

Inflation Has Not Gone Away, CPI Trajectory 'Eerily Similar' to the 1970s

Gundlach pushed back forcefully on market optimism over cooling inflation. He pointed out that both core PCE and headline PCE are running at higher 6-month annualized rates than their 12-month annualized rates. "Inflation has not really improved; it is far from the 2% target." More concerning is the historical echo. Gundlach overlaid the inflation trajectory since 2014 on the chart from the late 1960s to the early 1980s. He warned: "The current trajectory is eerily similar to the shape of the inflation disaster before and during Volcker's tenure. It will be very interesting to see if we continue to repeat that path."

In his data dive, Gundlach highlighted his preferred unadjusted, non-seasonally adjusted indicator — import and export price indices. U.S. export prices are up 8.25% year-over-year, while import prices have risen 5.95%. "If you average them, the actual inflation rate is around 7% based on this purest measure." Combined with Brent crude near $100 per barrel and global oil inventories at historically low levels, he believes the floor under oil prices will make inflation stickier than the Fed hopes.

He also cited multiple inflationary pressure signals: the Bloomberg Commodity Index is up 34% since the war began, recently bouncing off its 200-day moving average toward 10-year-plus highs; residential electricity prices have climbed from about 12.5 cents per kWh eight years ago to 18 cents, a rise of over 50% with no sign of slowing; Brent is approaching $100 per barrel; and the Strategic Petroleum Reserve has fallen from a peak of 750 million barrels to 287 million barrels, more than a 50% decline and the lowest level since the reserve was established. Global oil inventories are likewise at their lowest point since 2018 — "this will continue to provide a floor for oil prices, making inflation more sticky than the Fed would like."

Secondary Risk Alert: AI Corporate Bond Spreads See 'Cliff-Like' Widening

In the credit market, Gundlach has detected a severe divergence largely overlooked by the market: AI-related corporate bonds are facing significant selling pressure. Data shows that while broader investment-grade spreads have not moved materially, spreads on AI-related investment-grade bonds have ballooned from 50 basis points to roughly 125 basis points — a widening of 75 basis points. In the high-yield space, the move is even more dramatic, with AI-related spreads surging from about 180 basis points to around 325 basis points.

"This is a huge divergence that we should really be paying attention to," Gundlach said. "Given the astonishing demand for financing from AI and AI-adjacent businesses, this will undoubtedly put further spread pressure on the AI sector... The market is clearly struggling to digest such massive supply, and bond supply from the AI sector will continue to be an avalanche."

Equity Valuations Near Extremes, 'An Extremely Concentrated Market Means an Extremely Dangerous Market'

On equities, Gundlach issued his harshest bearish warning. He pointed out that the Shiller PE ratio on the S&P 500 now stands at 42 times — a level even higher than the frothy peak before the 1929 crash. "At this P/E level, 10-year forward real returns have never been positive. In fact, they have been markedly negative, ranging from negative 5% to negative 9% per year. Buying the market-cap-weighted S&P at this Shiller PE implies massive real losses."

He also highlighted the "distorted" boom in tech stocks. The information technology sector's weight in the S&P 500 has reached a record 38%, far exceeding the concentration seen during the 1999 dot-com bubble and ahead of the 2008 financial crisis. "This is an extremely concentrated market, which means it is an extremely dangerous market. Therefore, I would not recommend any market-cap-weighted equities."

U.S. Dollar and Emerging Markets: Bearish Dollar, Bullish EM Equities and Local Currency Debt

Gundlach holds a clearly bearish view on the U.S. dollar. The DXY index has fallen from a high of 110 at the end of 2024 to below 100. "Over the past year or so, the dollar has barely moved in any meaningful way — it almost looks like it is being managed." But he expects the dollar to continue weakening. He cited historical evidence showing a high correlation between a weaker dollar and outperformance of emerging market (EM) assets versus U.S. assets. In his comparison chart, the Fed trade-weighted dollar index and the relative performance of the S&P 500 versus EM show a striking pattern match — "If the dollar falls, the S&P 500 is highly likely to underperform emerging markets." Since the end of 2024, the S&P 500 has underperformed EM by roughly 20%. He is also positive on EM local currency bonds versus U.S. corporate bonds, based on the same dollar weakness thesis.

Treasuries and Fiscal: $40 Trillion Debt Overhang, Long-Dated TIPS 'Provide No Protection'

Gundlach noted that total U.S. public debt has reached $40 trillion (including Fed and Social Security holdings), and on the current trajectory, it could surpass $50 trillion by 2032. Meanwhile, CBO projections show fiscal deficits expanding as a share of GDP, though those forecasts rely on relatively optimistic assumptions such as interest rates below current levels, deficits lower than today, and sustained positive real GDP growth. "Once you put pressure on those assumptions, it is clear we are on a path to deficits of 7% to 8% of GDP within less than a decade."

He also addressed a common market misconception that those who dislike nominal Treasuries should pivot to long-dated TIPS as a hedge. Gundlach rejected this outright: "Long-dated TIPS (30-year) have moved in lockstep with 30-year nominal Treasury yields since late 2021; the difference between them has barely changed in five years. If you don't like nominal long bonds, there is no reason to believe 30-year TIPS will protect you. Don't buy long-dated TIPS thinking they will hedge your nominal Treasury risk." He also expressed skepticism about the Treasury's newly announced bond buyback program, saying it is unlikely to have a meaningful impact on long-end yields.

Full Transcript of DoubleLine CEO-CIO Jeffrey Gundlach's Latest 'Gundlach Unlocked' Webcast

Thank you all for joining. This is our third "Gundlach Unlocked" webcast, where I share some macro themes and occasionally touch on micro items. Interestingly, over the past three months, the S&P 500 has actually outperformed the NASDAQ. If you build a 60/40 portfolio using the NASDAQ instead of the S&P 500, the return is only about 8%.

Let's get started. On the screen is the Yield to Worst on the Bloomberg Aggregate Bond Index, with data back to the late 1990s. We can see that starting about four years ago, the index's yield has been in a sideways range: the low end around 4% and the high end near 5%, except for a brief breakout spike in 2024. The horizontal dashed lines represent average yields: the 30-year average is 4.03%, the 20-year average is 3.25%, and interestingly, the 10-year average is slightly higher than the prior 10 years.

So yields can no longer be called "suppressed." There is real positive carry in the Bloomberg Aggregate Index, which is certainly a good thing. Many of our funds have yields at a premium to that, with many currently yielding 6%. If you select higher-risk fixed income, such as local currency EM debt or leveraged loan indices, yields are around 7%. That is quite competitive versus equities — and as we will see shortly, equity Shiller CAPE is essentially at all-time highs.

We are currently in a rising long-term rate environment that has persisted for six years and is entering its seventh. We can see that rates have risen in sync across nearly all countries except Switzerland. The most notable is Japan, where rates were pinned near zero for years and have now risen to 3.97%, leaving a gap of less than 150 basis points versus the U.S. 30-year Treasury yield at 5.24%. All these developed market rates are rising in tandem, with the UK showing the most pronounced increase.

We can see that the 30-year U.S. Treasury yield bottomed in 2020, which was also the bottom of this uptrend. The red line marks two standard deviations from the centerline. From an incredible historical low of 27 basis points in 2020, it has climbed to today's 5.24%. The 30-year bond has lost over 50% of its value since then, and we are still near the highs at around 5.25%.

When a market trades sideways for a long time and fails to bounce, it usually means one thing — we saw a massive surge in bond yields with almost no price correction. Typically, if the market cannot rally to correct such a massive rate move of nearly 500 basis points, the next move is likely to continue along the uptrend. I built this model a long time ago to provide a benchmark starting point for the 10-year Treasury yield. The tan line is the actual 10-year yield, the dark line is the model fit, and the yellow line is the model's forward projection.

The model takes the German 10-year yield combined with the 7-year average of U.S. nominal GDP. Together, they provide a remarkably reliable starting point for the 10-year Treasury yield. Note the box at the bottom of the chart — the R² of these two lines is an astonishing 0.93. If we start from 1990 rather than 1986, the R² is only higher. Currently, the model suggests a reasonable fair value of 4.71% for the 10-year yield, and the actual yield is right at 4.78%, very much in line with the model's range. But again, the path of least resistance appears to be higher, for reasons we will explain further.

I often talk about the relationship between the 2-year yield and the Fed, and they are once again somewhat "out of sync." In 2022, we experienced a severe disconnection — the 2-year yield was already far above the Fed's near-zero rate, exceeding the federal funds rate by 200 basis points. That was the largest gap in my 42-year career. Then in 2025, we saw the Fed clearly swing to the other extreme. And now, based on where the 2-year yield sits, it suggests the federal funds rate should be about 50 basis points higher than current levels. The FOMC meeting is next Wednesday, so we will see.

The "Warp Function" used to gauge the probability of Fed rate changes — determined by the shape of the yield curve — shows about a 60% probability of a hike based on pricing at the short end. However, there are things about Kevin Warsh that I do not fully trust, so I lean against that 60% probability, though I do not hold strong conviction. If the Fed does not hike next week, I would not be surprised. If that happens, I expect long-term rates to rise fairly significantly after the meeting. If they do hike, the bond market may stay near current levels.

Now this chart, which I also used in the previous webcast, is from JP Morgan Asset Management: the vertical axis is the ISM Manufacturing Prices Paid Index. When "prices paid" rise, one would naturally expect the Fed to lean toward hiking rather than cutting. The horizontal axis is the ISM Manufacturing Employment Index. Above 50, one would expect the Fed to lean toward hiking; below 50, toward cutting. There are many dots: blue dots represent Fed cuts (easing), while orange-red dots represent Fed hikes (tightening).

I added some rectangles to the original JP Morgan chart with additional information: in the lower-left rectangle, nearly all dots are blue with only about three or four exceptions. I used arrows to point at those exceptions — they represent Paul Volcker's moves in early 1982 when he did not follow the bond market at all but acted proactively, sometimes impulsively, announcing rate changes without waiting for meetings. Most famously, on a Saturday night, he raised rates by hundreds of basis points in one fell swoop — the famous "Saturday Night Massacre."

The upper-right rectangle is another scenario — in this zone, one would expect to see more tightening because prices paid are high (inflationary) and employment is also high. Both sides of the Fed's dual mandate point toward tightening, and indeed the chart is almost entirely orange-red tightening dots with only about four blue exceptions. Those exceptions occurred during Arthur Burns' tenure, when he was pressured by the then-president to keep rates artificially low. That, of course, played a major role in pushing the U.S. into a high-inflation era, as we will see shortly.

There is a larger orange dot above the 70 line on the vertical axis and to the right of the 50 line on the horizontal axis. This somewhat implies that if action is to be taken, the Fed should be tightening rather than easing. However, if you look at all the small dots around that large orange dot, some are red and some are blue, without a clear conclusion. For this specific phase, there is no definitive answer, but I think there are slightly more tightening dots than easing blue dots.

Now we are starting to see some spread changes in the bond market. On the left side of the chart, the light blue line represents investment-grade corporate bond spreads excluding the AI sector, while the dark line is spreads for the AI sector alone. It is quite evident that the broader investment-grade market has not seen any meaningful spread widening, but the AI market has seen massive spread expansion relative to the investment-grade universe. We see AI spreads widen from 50 basis points to about 125 basis points — a widening of 75 basis points — while investment-grade spreads have not moved at all.

On the right side of the chart, we do the same analysis for high yield, and it is even more dramatic — AI spreads have widened from about 180 basis points to around 325 basis points, a substantial widening. Meanwhile, non-AI high-yield bonds, the light blue line, are actually near their historical lows for the year. So we have a huge divergence, and this is something we really need to pay attention to.

Everyone knows the Treasury is borrowing heavily at a fiscal deficit of 6% to 7% of GDP. Now the AI and AI-adjacent businesses are generating enormous financing needs, which will undoubtedly put further pressure on AI spreads. I am really not sure who is buying these AI-related bonds. Perhaps it is insurance companies held by private credit firms, which are in turn held by private equity firms that dictate the investment behavior of their insurance subsidiaries. But the market is clearly struggling to digest such massive supply, and AI supply will continue to come like an avalanche.

So we have excessive Treasury borrowing plus seemingly endless corporate issuance demand, and the market — as the dark line clearly shows — is starting to demand higher compensation.

I often hear people talk about TIPS versus nominal bonds. We like TIPS too and hold them in some of our lower-risk funds. We prefer short-dated TIPS because we believe the implied inflation expectations from comparing nominal bonds to TIPS are too low. They essentially imply the Fed will immediately hit its 2% target and stay there. I think that is highly unlikely, so I believe short-end TIPS are undervalued.

But what I have on the screen now is long-dated TIPS — the 30-year TIPS versus the 30-year nominal Treasury. Many people say they like TIPS. I have even seen guests on financial media say they like long-dated TIPS now because they do not like nominal long rates given the size of Treasury borrowing. But it is obvious that these two lines are very similar. Just look at the bottom of the chart, the difference between them, and you can see that this difference has been completely stable for the past five years.

So TIPS do not hedge your risk. If you do not like nominal Treasuries, there is no reason to believe 30-year TIPS will protect you, because since late 2021 their rates have risen exactly as much as nominal bonds. Please do not buy long-dated TIPS thinking they will somehow hedge risk — if you do not like the 30-year nominal Treasury.

Now let us look at inflation. Kevin Warsh made clear at the last press conference that 2% is their target and they will achieve it. He committed to using the PCE deflator to measure inflation. He cited the 12-month PCE deflator and correctly noted it is at 3.7%. He further noted that the 6-month annualized change in the PCE deflator is actually higher, meaning the past six months have seen faster gains than the prior six. So the PCE deflator has not really improved. Core PCE's 6-month annualized rate is above the 12-month annualized rate, and both are far from 2%.

Let us look at year-over-year data, both core and headline. Core inflation is 3.3% and headline is 3.7%. Both seem to have been on an upward trend since mid-2024, though the rise has paused in the most recent reports. What the next inflation print brings will be very important to watch, as I think it will heavily influence the direction of Fed policy.

This next chart is more for fun. We overlay the inflation experience from the late 1960s to the early 1980s, measured by headline CPI. In the 70s and 80s, CPI rose to 12.5%, then broke above to nearly 15% in the early 1980s. Then we have the recent experience from January 2014 to 2026. Strikingly, the blue line (recent experience) is eerily similar in shape to the red line (the period around and before the Volcker era). At least the blue line has turned down for now, but it will be very interesting to see whether we continue to replay the trajectory of that inflation disaster.

Everyone knows my favorite inflation gauge is the import and export price index because it has no adjustments, no seasonal adjustment — it is pure price data. Currently, export prices are up 8.25% year-over-year and import prices are up 5.95%. Both are at quite elevated levels. Averaging them gives about 7%. So based on this purest measure of inflation, inflation is actually running at around 7%. No wonder consumer confidence is at such depressed levels.

Here is the Bloomberg Commodity Index. It had a pullback mid-year and then rallied, bouncing right off the 200-day moving average (the red line). It now looks to be breaking out to highs not seen in over ten years. On inflation, let us also look at retail electricity prices for residential customers. I am not particularly focused on year-over-year data; I just look at this dark line, which is cents per kilowatt-hour. About eight years ago it was at 12.5 cents, and it has now risen to 18 cents — up 50%. And there seems to be no slowdown in the trajectory of this line. That is another reason consumer confidence is suffering, and why the polls for the current administration are not good.

The other inflation issue is, of course, oil. Brent, the true global benchmark, is near $100 per barrel. We can see that since the war began, the Strategic Petroleum Reserve has drawn down dramatically and is currently at the lowest level since the reserve was established in the 1980s. It is now down to 287 million barrels from a peak of 750 million barrels — a decline of more than 50%.

When the SPR starts to refill — which will inevitably happen at some point — that will provide a floor under oil prices and make inflation stickier than the Fed would like. But it is not just U.S. reserves. Look at global oil inventories going back to 2018, roughly ten years of data. The dashed horizontal line marking the latest level is basically the lowest ever, comparable to 2025 levels. This adds further upward pressure on the oil price floor.

This is a very interesting chart. It shows the performance of various asset classes since the end of February when the war began. The results are quite striking. Commodities, especially the energy sector, have delivered outstanding returns. The Bloomberg Commodity Index is up 34% since the war began. Equities have also done quite well, particularly EM stocks, and Japan has performed well too. Nearly everything has done well, all with double-digit gains. The worst performers appear to be MSCI Europe and the UK, but essentially all assets have delivered double-digit or even 20%+ gains. All commodities are rising, with the Bloomberg Commodity Index up 34% as mentioned.

Bonds, however, have fared terribly. The best-performing bond category is leveraged loans, up just 3.1%. EM sovereign bonds are slightly higher, while investment-grade categories — Treasuries, MBS, and corporate bonds — have all posted negative returns, with MBS the least negative. This is very odd. We see a huge "donut hole" — assets on the outer ring have delivered rich returns, while fixed income has delivered next to nothing.

Debt growth is clearly a problem. U.S. nominal GDP is the blue line, and total Treasury public debt is the red line. We can see the red line is growing far faster than the blue line, especially accelerating clearly since the Global Financial Crisis, with no end in sight — the trajectory just gets steeper. Total debt, including Fed and Social Security holdings, is now $40 trillion, and on the current path, it could reach $50 trillion by 2032 — that is almost certain.

What is even more notable is that even the Social Security Administration itself has said that under the current funding and benefit system, Social Security will run out of money by 2032. Of course, their assumptions have historically been overly optimistic, which means we could actually face this problem in 2029 or 2030 — at which point Social Security must be reformed or face cutting payments by about 22%. That would be very difficult for the baby boomers who have paid in for years and are still alive. But we will see. We have a very serious problem, and it is clearly not getting any better.

This is the federal annual deficit by fiscal year, with data back to 2021. We set new records here — in the middle of this year, on a year-to-date basis, fiscal 2025's deficit was slightly lower. But it ultimately set a new high. The current "leader" is fiscal 2026, and this fiscal year is ending soon. We will be entering fiscal 2027 shortly, and it looks like this fiscal year will set another record.

Here we have the federal budget deficit as a percentage of GDP, with CBO projections extending to 2035. The yellow line is interest expense, and to the right of the gray vertical line are future projections, which are not optimistic. These projections rely on fairly optimistic assumptions — that rates will be below current levels, deficits as a share of GDP will be smaller than today, and real GDP growth will remain positive throughout the projection period. Once you question those assumptions and apply some pressure, it becomes very clear that on the current trajectory, deficits as a share of GDP could well reach 7% to 8% within ten years, but still below 10%. That is certainly not good.

Gold's trajectory is quite similar to commodities. Gold had a strong rally in Q1 2026, followed by a fairly substantial correction, breaking below $4,000. Now it is starting to move higher again. I think gold should be part of everyone's portfolio. And it is very clear that as the dollar weakens, central banks and institutional investors are broadly leaning toward holding gold rather than fiat currencies.

Now look at this chart — the Shiller PE is currently 42 times. In 1999 it was higher, but not by much. We can see this data goes back to the 1870s, and the current level is far above the 1929 bubble period. So stocks are absolutely not cheap. This is a very interesting study.

This is a scatter plot covering 1965 to 2015, showing the 10-year forward real returns based on the CAPE ratio. There is a downward-sloping regression trend line. You can clearly see that when the CAPE is at current levels (now 42), 10-year forward real returns have never been positive. In fact, they have been significantly negative, ranging from about negative 5% to negative 9% per year. That means buying market-cap-weighted S&P at this CAPE level implies huge real losses. Interestingly, there have also been substantial negative real returns at lower historical P/E levels, which looks somewhat anomalous. But in the last 15 to 20 years, we have become accustomed to higher P/E levels than in the past. In any case, this is definitely not an endorsement of heavy exposure to market-cap-weighted equity portfolios — quite the opposite.

In fact, I do not recommend any of the above. It is interesting that equity market concentration is extremely high, which everyone knows as tech and AI have grown. Here we can see a light blue line representing the weight of the information technology sector in the S&P 500, and then that line suddenly disappears. The dark blue line represents the weight of the largest sector. This means that since 2008, tech has been the largest sector in the S&P 500, and it has now reached a concentration of 38% — a level higher than the top sector concentration in 1999 and far above the period before the GFC. So there are really not many bargains in the S&P 500 market-cap-weighted index; it is like a hotel minibar — nothing cheap there.

Here we see the historical evolution of equity market concentration, going all the way back to the railroad era. I cannot vouch for the accuracy of data around 1840, but if we look at the 1920s, the "Nifty Fifty" of the early 1970s, the 1987 stock market bubble, the period before the 1999 dot-com crash, and now the mega-cap AI ten, we can see the current situation. This is an extremely concentrated market, and that means it is an extremely dangerous market. Therefore, I would not recommend any market-cap-weighted equities.

The internal mechanics of the stock market have also changed. Here we see the rolling 120-day return correlation between the AI sector and the S&P 500 ex-AI. From 2021 to 2025, and even into the first half of 2026, the correlation was quite high. But in the past few months, this has changed markedly. At roughly 20 trading days per month, this represents about a six-month average. Now the two have turned negatively correlated.

This is interesting — when the AI market performs well, the rest of the market moves the other way. Currently, we have a slight negative correlation, sliding from around 0.5 earlier this year to negative 0.14 now, and the trend is strong. So I do not think this will reverse anytime soon.

It is also worth noting that the S&P 500 Equal-Weight Index has begun to outperform the market-cap-weighted index. This chart starts in 2017, but the equal-weight index started outperforming about one year to fifteen months ago. Once a trend begins a possible reversal, we can look back at 2020 as a reference — we saw the relative performance of market-cap versus equal-weight start to flatten, then a major correction with equal-weight significantly outperforming. Now equal-weight has started to outperform again, though not yet enough to convince that it is the start of a major trend, but at least it is no longer lagging.

Additionally, U.S. stocks are no longer outperforming the rest of the world. When this line goes up, it means U.S. stocks are stronger relative to non-U.S. stocks; when it goes down, it means non-U.S. stocks are outperforming. Over the past year and a half, this line has been roughly flat, but U.S. stocks have clearly stopped outperforming. Shortening the time frame, the same chart shows this actually started about two years ago — U.S. relative strength peaked nearly two years ago and saw a fairly significant relative underperformance from mid-2025 through Q1 2026. From a trend perspective, I think this line will continue lower. So I think it is meaningful to think long-term rather than just short-term. On foreign stocks, I have been investing in foreign stocks. But now I am pulling my focus back closer to home because I do not like the current risk landscape.

The dollar has been falling since the end of 2024, when it was at 110 on the dollar index (Dixie Index), and has since fallen below 100 and is currently hovering just under 100. Its movement has been remarkably smooth, almost as if it were manipulated. I mean, over more than a year, it has barely made any meaningful move.

But interestingly, as the dollar has fallen, we have seen non-U.S. stocks begin to outperform, and global price-to-book ratios are severely imbalanced. This is an argument against U.S. stock valuations. The MSCI U.S. Index has a price-to-book of 5.72, while the rest of the world (ex-U.S.) is only 2.49.

You might think the U.S. is the best investment destination in world history, but you will note that at certain times, especially during market corrections, the brown and light blue lines converge, which will lead to significant underperformance of the Morgan Stanley U.S. Index versus the Morgan Stanley Global Index.

Looking at the S&P 500 versus the Morgan Stanley Emerging Markets Index, the underperformance is quite clear. The U.S. equity outperformance stopped at the end of 2024, and it has now underperformed by about 20% — a significant amount. I further believe that this gap will continue to widen in the future. Here is the relative performance of the S&P 500 versus the MSCI EM Index, which is the red line. A rising red line means the S&P is outperforming EM; a falling red line means EM is outperforming the S&P. The blue line is the Fed's trade-weighted nominal broad dollar index. You can see that the shapes of the red and blue lines are very similar. Therefore, if the blue line (the trade-weighted nominal broad dollar index) falls, the S&P 500 is highly likely to underperform EM.

I am also sensitive to seasonality right now. It is early September, and September and October are typically difficult months for risk assets, which is one of the reasons for my following recommendations.

Now looking at the U.S. local bond market versus the corporate bond market, comparing the total return of U.S. corporate bonds with the JP Morgan EM Local Currency Index, the brown line is the local currency index relative to the Bloomberg total return. I have a dark line here representing the dollar index (inverted), so when the blue line rises, it means the dollar is falling. Similarly, the brown and blue lines have very similar shapes. Therefore, if the dollar falls — which is what I expect to happen — we would expect EM local currency bonds to outperform U.S. corporate bonds.

Alright, with that, let us charge into the holiday season. Thank you all for joining this call and for your support of DoubleLine. Goodbye!