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00:00Welcome back to special coverage of The Close. We're live from downtown Los Angeles at the
00:04headquarters of Double Line Capital as we count you down to those closing bells. Katie, just about
00:0810 minutes away for all you folks giving an eye. Absolutely. And you can see the risk appetite
00:13sort of wobbling in the market today, but we're very close to all-time highs. And you consider
00:18how far we've come in April. Now, again, that momentum really continuing into May. A lot of
00:23questions about, you know, how much steam is left in this rally. We are through the heart of big
00:29tech earnings, but we do have Nvidia coming up in a few weeks. Yeah, we do have Nvidia and that
00:32could
00:32be a consequential one. And of course, there's a lot more going on beyond just the world of public
00:37equities as well. Absolutely. Well, let's talk about it with Jeffrey Sherman. He is Double Line's
00:42deputy CIO. He serves as lead portfolio manager for the firm's multi-sector and derivative-based
00:49strategies. I am so thrilled that he's sitting across from us. It's great to see you. Great.
00:54Great to see you guys. And thanks for coming to the LA office today. Absolutely. So let's talk
00:59about where we are in this moment when it comes to the news cycle, when it comes to, you know,
01:03what markets are having to contend with. I mean, I don't have a laptop in front of me, and I
01:07feel
01:07like I'm checking my phone every commercial break just to stay on top of the news. And, you know,
01:13you think about all the headlines that we're getting when it comes to geopolitics, when it comes,
01:17you know, to whatever is going on in private credit right now, all these different factors. I wonder
01:23how, as the firm's deputy CIO, you're sort of reading these headlines and navigating these
01:28cross-currents because you could get caught up just in the ping pong.
01:32Well, the ping pong, and I think Bill Campbell's coined that phrase around here saying, you know,
01:36it's headline ping pong. But when you think about it, the ping pong is dangerous to investors,
01:41right? You're trying to be an investor. You're trying to look through a cycle. You're trying to
01:44invest for, let's call it the intermediate horizon. And so it's been very challenging because the reports
01:50that come out of the administration, they conflict each other over the course of hours,
01:54right? And so that's what we saw today. We saw a huge reprieve in oil prices to start the day.
01:59Oil is closing higher today. You had, you know, rates rallying on the back of that. Now they're
02:04selling off again. So the thing is, you have to keep a cool head. And so I think at the
02:08end of it,
02:08we have to look through what's going on here. When we talked a month ago, I talked about oil being
02:13a
02:13self-correcting mechanism. It will slow things down. So the Fed doesn't need to hike. But we have to think
02:18about the underlying macro fundamentals. And I think there's a lot of divergence in the economy. But
02:22remember, at the end of the day, the markets trade on aggregates, right? And so I mean,
02:26by the aggregates, we look at the aggregate consumption, we look at the aggregate employment.
02:30And so there's a lot of anecdotes out there that, you know, people are struggling. But in general,
02:34what you find is that the aggregates are making up for it. And so when you talk about the headlines
02:39themselves, you have to say what's truth, what's not. And again, I think you're better off served not
02:45looking at what's coming out of administration each day. I think you're better off going back to earnings
02:49reports, going back to the fundamentals of the economy. Let's talk a little bit about the
02:53fundamentals that we're seeing come through with corporate America, because that has been the
02:56rallying cry of the bulls, because you can take a look at what's going on in energy, what's going on
03:01in rates and get pretty grim. But then you take a look at equities just ripping higher over the past
03:08six weeks or so. And a lot of people say it's backed up by the fundamentals. But how are you
03:13weighing
03:13that versus some of the valuations that we're seeing here? Yeah, well, it is. You talk about the rally,
03:17but don't forget there was a sell-off before that, too. So yes, we had highs coming in and we're
03:22near
03:22the highs once again. But there has been this improvement in the outlook for earnings in the
03:27U.S. And I mean, look, if you look at the S&P earnings, we're roughly like 85 percent through
03:32the
03:32market cap of the S&P. And it's been pretty good, right? So pretty good means that investors have
03:37euphoria. No euphoria, but they're enthusiastic again, let's say that. But you have to think about
03:43where we are and what you're paying for those earnings today. And on a forward basis, you know,
03:47the P.E. is roughly 25 today. So 25 isn't cheap by historical standards. And if you invert that and
03:53call it an earnings yield, it's 4 percent. I can also buy two-year treasuries that yield 4 percent
03:58today. Right now, different upside. Right. I don't make a lot more than 4 percent on a two-year
04:02treasury. But that's kind of what people call the Fed model. So definitely equities are getting to
04:07that kind of stretched area again. But again, it's euphoria. We've grown into this multiple times.
04:12So we'll have to see how that plays out. But I think definitely that the equity market is
04:17reflecting that kind of that enthusiasm in the market and just assuming that we're playing the
04:22Trump putt again. Right. That when there's enough pain in financial markets, he will come to the
04:26rescue. And we've seen that in a lot of policies. But I'm conflicted on whether or not you can back
04:32out of the war at this stage. It also raises a question about what a rescue even looks like at
04:36this
04:36stage. And I do want to go back to the economy. And you made a great point about this idea
04:39of the
04:39market looking at the aggregate. And the aggregate does look good. There is a lot more anecdotal
04:43evidence coming in that is starting to be aggregated, showing the downside. One of the most
04:47read stories in the Bloomberg terminal today is a collection of comments from corporate CEOs saying
04:51the consumer is basically running out of cash. And these are mostly consumer-facing companies. So
04:56obviously just one pocket of the market, but a big one. Does that worry you? I mean, you've talked a
04:59lot
05:00about the regressive taxes out there, inflation and tariffs and energy, etc. Is it really finally going to
05:05start to show up sometimes?
05:06Well, it has to eventually, right? And so we've lived off of what I'll call the money sprain that
05:11we saw from 2020 and 2021. And that money found homes, right? It went to financial assets. It went
05:17to the housing market. It went to things that built wealth, right? And the nice thing about a housing
05:22market rally, although it's unfortunate for those who don't own homes, is that there's broader
05:26participation. So some of that I think continues to really supply that juice that you need in the
05:32market. That said, at the end of the day, it turns into spending differences. And so when we have
05:37these regressive taxes, such as inflation, such as we had with the tariffs, and we're still starting
05:43to see that leak through the data today. And then also with this new elevated gas price, at some point
05:48you have to forego some other level of consumption. And so even though you're talking about these
05:53consumer-facing kind of CEOs and having some challenges, it's a function of, are you still
05:59employed, right? And so I come back to that. If you have a job, you make money, you spend money.
06:04Now, the thing is, what do you spend it on? You spend on necessities first, and then the
06:08discretionary comes out. And I think what you're seeing in those headlines, the CEOs are more
06:12discretionary spending companies. And so, yes, we can cure one of those regressive taxes by gas prices
06:18coming down, energy costs coming down. But at the same time, that doesn't look like that's in the
06:23near-term horizon. So that's been the concern. But Romain, we could have had this conversation two years ago,
06:28right? And that conversation was taking place. And we've seen the buildup. You've seen delinquencies.
06:33They've kind of somewhat been stable, right? I won't say they've plateaued because they could
06:37still accelerate, but you've seen that. So I think it's a cycle going through. And people talk about,
06:42if you think about six, seven years ago, we had the concept of rolling recessions,
06:47right? And it's rolling across industries. And I think that's what you're seeing here is that
06:50it's certain industries, there's certain pockets that are challenged. And those are the ones focused
06:54specifically on the low-end consumer. If we do, though, hit a situation where there is more
06:58widespread economic pain, do you think the U.S. government, whether it's monetary on the monetary
07:03side, the fiscal side, actually has the capacity to really deal with it in a way like we've dealt
07:08with it in the past? I don't think so right now. And I mean, I go back to the interviews
07:12you've had
07:12with my colleagues today. And we're talking about the fiscal or guests out there. You're talking about
07:16a $2.2 trillion deficit this year before the war. Those numbers aren't calculated in there.
07:22So where does that capacity come from? You can support it. You could cut rates. But
07:26does cutting rates 50 basis points or 100 basis points, what does that do to stoke the overall
07:32economy? Yes, it helps certain floating rate borrowers. It helps certain things. But it doesn't
07:36actually help a lot of the low-end consumer. And so that's the challenge right now. And so because
07:43we've been spending in the good times, we've been borrowing our way to prosperity, it's
07:47hard to really open that up more meaningfully. And this comes back to what, again, Bill Campbell
07:51was saying on your show earlier. It's that where does that next marginal kind of dollar
07:55come from in the Treasury market? So they do have the capacity. We can do it. No one thought
08:00we could extend $6 trillion during the 2020-21 experience, but we did. So it's a function of
08:07the receptivity of the market. And look, because of the bastion of growth the U.S. has
08:11been, we can probably do it. But I think that threshold is high. And so ultimately, I think
08:16cutting rates at this stage isn't the answer because we still have inflationary pressure.
08:20Well, I do wonder how potent the Fed is in this environment. Because whether they cut
08:2625, 50 basis points, whether they hike by 25 basis points, I mean, you think about what
08:32we're dealing with when it comes to the economy, this energy supply shock. I mean, do the Fed's
08:37tools really make a meaningful dent in some of those forces?
08:41No. The answer is no. Remember, the Fed looks at inflation X food and energy, right? So that's
08:48not in their model that they're thinking about things. And again, they can hear the pain.
08:53The local governors will say, here's what we're hearing from our constituency. And it'll cause
08:58some reverberation upward. But in general, cutting rates 25, 50 basis points, what does that
09:03do to the in-consumer that's out there trying to buy gasoline today? How did that impact that?
09:08So you can say that at the margin, maybe it incentivizes businesses to do a little bit
09:12more hiring. But they're dealing with those input cost shocks as well. So ultimately, I
09:18think the Fed really can't be in play too much. What you can do is you can subsidize in some
09:22way. We can mail out money. We can do some sort of spinning spree. But that doesn't feel
09:27very popular right now. Maybe it's going to be popular to help in the midterms. But in general,
09:31that's not something I think that the market would like either. So I think the Fed's really
09:35out of play right now. And for that reason, you know, again, we have a new Fed chairperson
09:40likely incoming. I thought it was pretty amazing to hear Jay Powell say he's going to stay on as
09:44long as the investigation's there. I think it's one of his kind of, you know, one of his pardon
09:49shots to say, I'm not going anywhere. I want to see this whole thing through.
09:53Right. We just want to acknowledge the closing bells in New York right across the screen for
09:56all of the major indices here in the U.S. The biggest decline, though, on the day,
10:00that's going to be the Russell 2000. It's going to close lower by more than a percent on the day.
10:04And, Katie, it's kind of interesting, too. We saw yields up, oil drifting back up,
10:08still holding around that $100 level. But I also thought it was interesting.
10:11We saw a huge rally today in emerging markets. They were up more than a percent.
10:15Absolutely. And that's something, you know, we've been talking about with the good folks
10:18over here at Double Line, basically the idea that emerging markets look pretty good in this
10:23environment, especially if you're talking about the local currency here. So I do want to bring
10:28that into this conversation as well, because, again, you think about the geopolitical situation
10:33and, you know, some of the energy shocks that we're talking about. You know, there's this idea
10:37out there that the U.S. is more insulated, given that we are, you know, a net exporter of energy,
10:43that it's being much more acutely felt in Asia, in Europe, for example. And I wonder, you know,
10:49when you think about your baseline view on emerging markets, how are you factoring in
10:53what we're starting to see in that daisy chain? Well, ultimately, some of these are commodity
10:57producers at the end of the day, right? So it's not just the benefits that some have seen from the
11:01oil markets, which we're all focused on today, but just think about the rise of the price of gold,
11:06right? There's a lot of emerging markets that are exposed to that as well. If you think about
11:09the differences in just the fiscal situation, I know you discussed debt-to-GDP ratios, right?
11:15They're in much better, you know, fiscal order than you would see in the developed world. And I think
11:21part of it, too, is a play against the dollar. I mean, let's just face what it is. The sell
11:26America trade has never materialized, right? You know, there's been talks of it. It has not
11:31materialized. But that diversify away from the U.S. seems to be occurring. I think part of what
11:36you're seeing in that is, go ahead, Rainer. Well, that was kind of like the famous quote from
11:39Katie Koch a while ago, the quiet quitting that we've seen. I am curious, though, I mean, are you
11:43actively shorting the dollar at all in terms of your strategy? Well, we're not actively shorting. We are
11:48inherently short by ultimately buying local currency. So if you're buying another currency,
11:53you're against the dollar. So we're not outright shorting really as much against the developed
11:56world. And the reason for the developed world is that as a bond investor, we give up yield to do
12:02that, right? So if I go invest in European bonds, I give up yield to do that. And so I
12:07have to be right
12:08as a local currency investor much quicker than I do in the emerging markets. Because at the emerging
12:12market level today, you're still buying bonds. You can build a diversified basket that's close to 7%.
12:17So that 7% is better than we get in the U.S. market, right? Plus, I have the ability
12:22to bet
12:22against the dollar. So inherently, we're short. We're not outright short just saying, hey, we want
12:26to be short the dollar. It's coupled with that idea that we can increase yield. Obviously, we increase
12:32risk. We're cognizant of that. And so it needs to be dialed down in the appropriate measures inside
12:36of your portfolio. But we are doing that today. I am curious in your thoughts on gold prices. I mean,
12:40obviously, they're still elevated, but well off where they were. And maybe some of that's a function of
12:44people selling in order because obviously what's been going on with regards to the FX trade here.
12:48But do you see more additional, meaningful additional upside there? I do. I really do.
12:53And, you know, look, we saw what happens. It's when you have a crisis, you sell whatever you can.
12:57And I think that's what you saw central banks selling. But central banks have been net buyers
13:01since the beginning of this Trump administration. And so I think that trend continues as we go through
13:06here. Because again, this wasn't America first policy. Then we kind of became neocons again.
13:11And we're intervening in the rest of the world. Right. So from that standpoint, I think that only
13:15gets exacerbated through gold prices. And, you know, there's been these stages, you know, with
13:19the dollar, whether the hedge money will stay in place throughout a cycle. And it's been challenged
13:23many times. And so far, the orthodoxy has not been broken. But it does seem that now there is this
13:29more conscious behavior of a systematic global ex-US of trying to build things against the dollar.
13:35And so from that standpoint, I think if you want to be short the dollar, if you don't want to
13:39play
13:39the carry and the vol inside of emerging market bonds, which, by the way, is lower than the vol
13:44of gold, I think gold does make sense for investors. And, you know, at this roughly $4,500, $4,600
13:49price, it looks still interesting. We do think there's meaningful upside throughout the rest
13:53of this administration.
13:54It's really interesting to think about the buyer base of gold, because, yes, central banks
13:59certainly have been increasing their allocations there. But then you also have companies such as
14:03Tether, which fascinates me on a ton of different levels, basically emerging as a new central bank in
14:09terms of their gold purchases. But I think we only have time for one more question left with you,
14:14Jeffrey Sherman. And it is always such a treat to talk to you. So I guess I want to end
14:18with what
14:19you think is the biggest underpriced risk in markets when you take a look at the landscape right
14:24now. Yeah, I think it was Fed on independence for a while. I think we're getting through that a little
14:29bit. I think that's still out there,
14:31because, again, we still have the Lisa Cook opinion we haven't heard about yet, which then puts Jay Powell
14:36seated. There's a lot of things that could happen there. But talking at the Milken Conference, I was
14:41hosting a panel there. And during it, what one of the panelists said, the labor market in the U.S.,
14:46the supply of labor, the immigration policy. And I think that's an underpriced risk to markets today
14:51because the knock-on effects are so severe. It takes a long time to change immigration policy.
14:57And so if we're cutting people off from being here, to want to welcome them back into this
15:02country. And so I bring that up because we need more workers. That's the challenge we have in this
15:07society, too. So you think about downstream effects and we talk about commodity prices. We don't talk
15:13enough about skilled labor and skilled labor being from the vocational schools, right? The plumbers,
15:18electricians. Everyone's talking about HVAC these days, right? But the point being is that we need more
15:24of that as well. And we've lost some of that base also. And we did not invest in it for
15:28two decades.
15:28We were all encouraged to go the intellectual academic route. And so from that standpoint,
15:33I think that's an underappreciated risk that could ultimately be a slowdown in growth and can stagnate
15:39our growth if we don't have that. Remember, one of the GDP formulas includes efficiency and it
15:44includes productivity, but also that labor force growth. And I think that's the one thing that
15:49could be it. But that's not a risk to May of 2026. That's a risk as we go over the
15:54next few years.
15:55Yeah, well said. And we actually just heard from Mark Rowan at Apollo kind of talking about this exact
15:59issue.
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