Gunlach Presentation

7/27/2019 Gunlach Presentation

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Investment Cubism

Jeffrey GundlachChief Executive Officer

Chief Investment Officer

June 20, 2011


2/36

Domestic Credit Market Debt as % of Gross

Domestic Product 1929-2009

2009353%

400%

Year 1

Year 1BHO

1933299%

300%

350%FDR

Year 1GWB

Presidency

2001

276%

250%Year 1HST

GHWBPresidency

res ency

Year 1

1951130%

1989229%

150%

200%Presidency RWR

Presidency

161%

100%

293235384144475053565962656871747780838689929598010407

191919191919191919191919191919191919191919191919202020

Source:MorganStanley,FederalReserve,BureauofEconomicAnalysis

2


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Government Promises-To-Pay

Publicly Held Treasury Debt & Accrued Interest

$52.8$56.4

$62.3

$70.0

.

$43.3$46.4

.

$50.0

.

$26.5$30.1

$30.0

.

$7.9

$10.0

.

. . . . . . ..

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009Source:U.S.Treasury,PeterG.PetersonFoundation3


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Nonfarm Payroll

108

110

104

106

t=100 1953

1957

100

102

ess

ionStar

1970

1973

1980

96

98Rec

1981

1990

2001

92

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40

Source: Bureau of Labor Statistics, Bloomberg Financial

4

Months Since Start of Recession


5/36

Federal Receipts as % of Debt:

60%

70%

t

Gross Receipts as % of Debt

Net Receipts as % of Debt

OMB Estimate

40%

50%

FederalDe

h2016)

30%

pts

as%o

f

194

0throu

10%Recei

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012(e)

2015(e)

Source: Office of Management and Budget (OMB)

Gross Receipts equal Individual Tax, Corporate Tax, Excise Tax and Social Insurance and Retirement Receipts

Net Receipts equal Gross Receipts less Social Insurance and Retirement Receipts

5


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Federal Tax Receipts as a % of GDP

25%

20%

%o

fGD

P

09

15%

eceiptsas

thro

ugh

20

5%ederalTax

1929

0%

Source: Office of Management and Budget, DoubleLine Capital

1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

6


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Government Optionso o ve e e t

Problem

* Tried These Alread

7


8/36

Impact of Quantitative Easing onUS 10-Year Treasury

4.5%

3/31/10QE1 purchases

Jan 1, 2009: QE1 Start - $600 bnMar 18, 2009: QE1 Expanded to $1.725 tnMar 31, 2010: QE1 Ends

-4.0%

11/25/08

.Jun 2011: QE2 Proposed End

3.0%

.QE1

announced

3/18/09QE1 expanded

2.5%

Jackson Holespeech QE2 hinted

1/1/09

11/3/10QE2 purchases

begin

2.0%

QE1 purchasesbegin

Source: US Treasury Department, Bloomberg Financial Services

8


9/36

National Debt Ceiling versus Gross Federal Debt

Statutory limits have been reduced 5 times since 1940

25

) Debt Subject to Limit

15

20

rough2

01

Gross Federal Debt

10$Trillion

ea

r1940t

5

dofFiscal

0

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

12(e)

15(e)

(E

Source: Office of Management and Budget, DoubleLine

9

2 2


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Fiscal Year 2011 Requested Budget

Dept of HomelandSecurity1.53%

Dept of HUD1.48%

Dept ofEnergy1.28%

Dept of Justice0.89%

Dept of State0.80%

InternationalAssistance Programs

0.68%

Dept of Health andHuman ServicesDept of Veterans

Dept ofEducation2.63%

Dept of

Transportation2.42%

NASA0.50%

Blue indicates

DiscretionarySpending

.

Social Security

Dept of Defense20.13%

a rs3.47% Grey indicates

MandatorySpending

22.04%

Allowances

FDIC0.41%

Dept of Agriculture4.07%

Dept of theTreasury3.84%

Dept ofLabor3.32%

Office of PersonnelManagement

2.10%

Other Defense CivilPrograms

1.71%

0.60%

Source: Office of Management and Budget (OMB)

10


11/36

Top 0.1% Income Earners

%

U.S Japan U.K.France

Source: Saez and Piketty

11


12/36

Marginal Tax Rate on Highest Individual

Income Bracket

100

70

80

50

60

.

30

40

0

10

1913

1916

1919

1922

1925

1928

1931

1934

1937

1940

1943

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Source:InternalRevenueService,DoubleLineCapitalLPasofDecember31,2009

12


13/36

U.S. Housing Market

13


14/36

S&P Case- Shiller 20-City Home Price Index

220

11

180

x Fe

bruary

2

160

Price

Ind

001

throug

h

-32.6% decline

120January

2 July 2006 to April

2009

100

Source: S&P Case Shiller, Bloomberg Financial Services

14


15/36

U.S. Homeownership Rate

70%

60%

65%

Rate

010 -4.2% drop from

1930-1940

2.7%dropfrom

20042010

55%

eownershi

0t

hrough peaktotrough

45%

50%Ho 19

40%

Source: U.S. Census Bureau

*1900-1960 based on Decennial Census Data; 1965-2010 Annual Census Data

15


16/36

New Single-Family Home Sales

1400

1600

's) ,2011

1000

1200

lRate(,

000

ughApril3

600

800

SoldAnnua

1,1

963thro

200

400

Units

January3

0

1/1/1963

1/1/1964

9/1/1966

7/1/1968

5/1/1970

3/1/1972

1/1/1974

1/1/1975

9/1/1977

7/1/1979

5/1/1981

3/1/1983

1/1/1985

1/1/1986

9/1/1988

7/1/1990

5/1/1992

3/1/1994

1/1/1996

1/1/1997

9/1/1999

7/1/2001

5/1/2003

3/1/2005

1/1/2007

1/1/2008

9/1/2010

Source: Bloomberg Financial Services

16

1 1 1 1 1


17/36

Housing Starts

300

200

t=100

1960

150

essionSta

1973

1980

1981

50

Re 1990

2001

2008

0

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38


Source:Bloomberg

Financial

Services,

US

Census

Bureau

Aninvestmentcannotbemadedirectlyinanindex.17

17


18/36

Building Permits

250

150rt=100

1960

1970

100

cessionSt

1973

1980

1981

50

R2001

2008

0

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38


Source:BloombergFinancialServices,USCensusBureau

Aninvestmentcannotbemadedirectlyinanindex. 18


19/36

New Home Sales

200

250

150art=10

0

1970

1973

100

ece

ssionS

1980

1981

1990

50

R

2008

0

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36


Source:BloombergFinancialServices,USCensusBureau



20/36

SubPrime Serious Delinquency and

Conditional Default Rate

43.4%50%

60%

60++

40%

0++ay2011

CDR

20%

30%

eCDRvs

5through

8.5%10%

Subpri

anuary20

60++referstoseriousdelinquencydefinedasloans60 or90dayslateinmortgagepayments,oralreadyinforeclosureorREOstatus.r me e ne as > an 725andLTV>=75

SubprimedefinedasFICO


21/36

Alt-A Serious Delinquency and Conditional

Default Rate30%

60++

.

20%

0++

May2011

8.3%

10%

15%

-ACDRvs

005throug

0%

5%Alt

January




22/36

Prime Serious Delinquency and Conditional

Default Rate10.7%

10%

12%

60++

8%

++May201

1CDR

3.3%4%

eC

DRvs6

05through

0%

2%Prim

January20

60++referstoseriousdelinquencydefinedasloans60 or90dayslateinmortgagepayments,oralreadyinforeclosureorREOstatus.Jan-0

Apr-0

Jul-0

Oc

t-0

Jan-0

Apr-0

Jul-0

Oc

t-0

Jan-0

Apr-0

Jul-0

Oc

t-0

Jan-0

Apr-0

Jul-0

Oc

t-0

Jan-0

Apr-0

Jul-0

Oc

t-0

Jan-1

Apr-1

Jul-1

Oc

t-1

Jan-

11

Apr-

11

r me e ne as > an 725andLTV>=75



23/36

Historical Loss Severity

72.6%

70%

80%

Prime

Alt-A

59.3%50%

60%

ityhMay2011

Subprime

47.5%

30%

40%

Lo

ssSeve

2005throu

0%

10%January




24/36

Loss Severities Increase With Longer

Source:Amherst

Securities

as

of

April

30,

2011

24


25/36

Loss Severities Increase With Longer

Source:Amherst

Securities

as

of

April

30,

2011

25


26/36

Liquidation Lag Times Are Systematically

Source:Amherst

Securities

as

of

April

1,

2011

26


27/36

ABX 07-1AAA

100

120

11

80

AAA

June1

3,2

60

B

X2007-1

07

through

20May10,2

0

y-0

7

l-07

-07

-07

-08

r-08

y-0

8

l-08

-08

-08

-09

r-09

y-0

9

l-09

-09

-09

-10

r-10

y-1

0

l-10

-10

-10

n-1

1

r-11

y-1

1

Source:MarkIt

27

Ma J

Se

No

Ja

Ma

Ma J

Se

No

Ja

Ma

Ma J

Se

No

Ja

Ma

Ma J

Se

No

Ja

M Ma


28/36

ABX 07-1AAA v. Bank of America Stock

60

100

110

11

11

ABX 2007-1 AAA

4080

90

tockPrice

June1

3,2

AA

June1

3,2

BAC Equity

20

30

50

60

70

fA

merica

007

through

ABX07-1

007

through

1030

40Bank

May10,2

May10,2

020

Source:MarkIt,

Bloomberg

Financial

Services

28


29/36

S&P 500 Index and Shanghai IndexYear-End 2007 throu h June 13, 2011

6000

1400

1600

2011

2011

4000

5000

1000

1200

itehJune

13,

hJune

13,

3000

600

800

SH

Compos

20

07throu

S&P500

20

07throu

1000200

400

cember31,

cember31,

00DD S&P 500 Shanghai Composite Index

Source:BloombergFinancialServices,DoubleLineCapitalLP



30/36

30


31/36

Rolling 5-Year Volatilities of InvestmentGrade Bond Sectors

Historically, mortgages have had lower volatility than other investment grade credits

7.0%

5.5%

6.0%

.

dStandard

ay201

1) Municipal Bonds

IG Credit

MBS

4.5%

5.0%

hAnnualiz

rch1996-

3.0%

3.5%

4.0%

ing60-mon

eviation(M

2.0%

2.5%Roll D

Source: Bloomberg, BofA/Merrill Lynch IndicesAn investment cannot be made directly in an index. 31


32/36

Rolling 3-Year Volatilities of InvestmentGrade Bond Sectors

9%

rd Treasury

7%

izedStanda

-May2

011)

Municipal Bonds

IG CreditMBS

5%

6%

nt

hAnnual

Ma

rch1996

3%

4%

olling36-m

Deviation(

2%

R



33/36

Rolling 5-Year Volatilities:Hi h Yield Com arison

14%

16%

eviation

Treasury

Municipal Bonds

10%

12%

Standa

rdD

y2011)

Long Treasury

High Yield

8%

An

nualized

h

1996-M

4%

g60-month

(Mar

0%Rollin



34/36

Rolling 3-Year Volatilities:Hi h Yield Com arison

18%

20%

eviation

Treasury

14%

16%

Standa

rdD

y2011)

Long TreasuryHigh Yield

8%

10%

An

nualized

h

1996-M

4%

6%

g36-month

(Mar

0%

2%Roll

in



35/36

Hedge Fund Investment Cubism

Weightings Sector

Yield

(Cash

Refinancing

Capital AtDepression

RisingInterest

RateRisk

Flow) Risk

(Duration)

1 25% GNMAPrincipal

Paying 14%

5.7

5.7 5.0

2 15% GNMAInterestOnly 27% 15.0 0.3 2.2

3 5% OtherGNMA 6% 0.1 0.6 0.6

4 40% AltARMBS 11% 8.3 6.0 1.6

5 10% PrimeRMBS 8%

1.6 1.0

0.2

6 5% OtherMBS 18% 0.5 0.5 0.2

100% Total 14% 0.2 1.5 6.2

RateHedged 12% 0.2 13.9 0.0

35


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