Jeffrey Sherman – Macro-Outlook: How Should Investors Be Positioning?

Jeffrey Sherman, Deputy CIO of Los Angeles-based DoubleLine Capital, which manages $137-billion in AUM joined us for an hour-long chat last week.

He is DoubleLine Capital's lead portfolio manager for multi-sector and derivative-based strategies. As Deputy CIO, he oversees all of DoubleLine's investment teams and strategies. Sherman was named by Money Management Executive as one of the "Ten Fund Managers to Watch" in 2018. He began his career at TCW where he focused on fixed income and real asset portfolios.

We discuss his career, his beliefs, as well as diving into his macroeconomic and market outlook, his outlook for fixed income, and how investors looking for better yield and ballast can position in this market where traditional government bond yields are at historic lows, and bond and equity valuations are at all time highs. Sherman also shares his thoughts on real assets and commodities.

"We are in bizarro world," says Sherman. "You have this idea that you have some of the highest inflation prints we've seen. And if you strip out the commodity prices and look at core inflation measures, in some instances, it's, you know, the, the highest prints we've seen at 40 years."

"Coinciding with that, you talked about the bond rally over 40 years. We're talking about inflation levels we haven't seen in 40 years. So why are rates where they are? Well, that's the 10 or $20 trillion question when it comes to the treasury."

Sherman shares his strategic thinking on duration, interest rates, and credit risk and how investors could approach the fixed income market, and position their fixed income sleeve not only for yield, but with a view to keeping risk in check. In our conversation Sherman talks about several good alternatives to bonds that investors can consider.

Read the transcript
[00:00:00] Pierre Daillie: Hello and welcome. This is the Insight is Capital podcast. I’m Pierre Daillie, managing editor at My special guest is Jeffrey Sherman, Deputy Chief Investment Officer of Los Angeles based DoubleLine capital, which runs $137 billion in assets on behalf of investors. In his role at DoubleLine, Jeffrey Sherman is involved in all aspects of DoubleLine’s investment management, coordinating, and implementing policies and processes across all of the firm’s investment teams. He also serves as lead Portfolio Manager for DoubleLine Capital’s multi-sector and derivative based strategies.

[00:00:40] Announce/Disclaimer: This is the Insight is Capital podcast.

The views and opinions expressed in this podcast are those of the individual guests and do not necessarily reflect the official policy or position of of our guests. This podcast is meant to be for informational purposes only. Nothing discussed in this podcast is intended to be considered as advice.

[00:00:59] Pierre Daillie: Jeffrey, welcome to the show. It’s great to see you again. I’m, I’m very excited to catch up with you.

[00:01:05] Jeffrey Sherman: Yeah. Well, thanks for having me and look forward to today’s discussion.

[00:01:09] Pierre Daillie: Awesome. So, um, Jeffrey, to kick things off here, just in case there’s anyone out there who doesn’t know anything about you. Uh, although I think that’s few and far between these days, um, please tell us about the arc of your career, how you started, where you’ve been and, and what you do at DoubleLine Capital.

[00:01:27] Jeffrey Sherman: Yeah. So, um, I was, uh, you know, uh, when I went to school, I had no idea what I wanted to be when I grew up. And so I started, um … You know, I keep, I, I entered as a major, as undeclared major, you know, so, uh, very, very defined career path with that.

[00:01:43] Pierre Daillie: Yup.

[00:01:43] Jeffrey Sherman: Um, and after taking a couple mathematics courses, I found that to be easier, it came easier to me than some of the other courses. So I stuck with the, uh, mathematic side and I got a degree in applied mathematics. Uh, I went to grad school after I graduated and, uh, entered into a PhD program and realized that I really loathe physics. Uh, and said, I’ll, um, you, you don’t do a lot of, uh, math degrees without, uh, really being indoctrinated in the world of physics. And so …

[00:02:11] Pierre Daillie: Right.

[00:02:11] Jeffrey Sherman: … at the time, uh, I was studying more on statistical side as well. And there was the new prevalence of quants going to Wall Street. And so, um, I decided that I would try to change the direction of what I was doing and, uh, try to use my application maths to finance. And so, um, I transferred, uh, from the PhD program and ended up in a master’s program in finance engineering. And so from there, uh, I got an internship at an entity called Trust Company of the West. Um, I was an intern there. And, uh, I met a, a gentleman by the name of Jeffrey Gundlach there, uh, who was the, the CIO of the fixed income area. And, uh, just was, uh, very interested in what they were doing. So I got a job on the, on the risk side to begin with. I joined Mr. Gundlach’s team, uh, on the asset allocation side.

Um, and when I started working there, um, a gentleman I worked for, um, at TCW, he was, uh, he was someone who wrote a lot of papers, uh, and was well- well-thought. And so he, uh, wrote something on commodities. And so my first foray outside of the fixed income asset allocation world was in the commodity space. Uh, so we collectively built some commodity strategies that we were pretty successful running, uh, for a few years while we’re there. And then from there, uh, when we split out and create a DoubleLine, um, I started, started at DoubleLine. And, um, you know, the, the career at DoubleLine, I, I’ve worn many hats. You know, I, I started as, uh, you know, the world plays, we’re in training it takes to build the business.

Uh, my first, uh, title at, uh, DoubleLine, I was an East Coast wholesaler. Um, so I, I like to tell people when I interview them, “Where else can you go from wholesaler to deputy CIO in like six or seven years?” And so I was a salesperson because we didn’t have anybody, um, and we were launching a mutual private business and, and no one was licensed. ‘Cause we were all institutional people. So I said, “Look, I can take standardized exams. I’m, I’m good at that. Um, so give, give me a week or two and we’ll, we’ll figure it out.”

So that, that’s the, the first title I held. Uh, I got back into portfolio management after a few months. Um, yeah, we’d launched a macro fund. Um, and then, you know, we, we built a lot of strategies around that. And so over time, uh, my role is, has changed where, uh, essentially, as the deputy CIO, I oversee the investment teams. Um, all of the sector heads report in to me, and you know, I keep an eye on that business. So it, it really meshes well with being an allocator because, um, I talk to the portfolio managers all the time.

[00:04:36] Pierre Daillie: Right.

[00:04:36] Jeffrey Sherman: So as an asset allocator, our team is not just making decisions independently, we’re listening to what the PMs are saying, what they’re seeing. And by having those conversations, it makes them more integrated process. So I, I think it’s, it … Really one of the advantages of our team at that we have a long standing history of working together. We have a lot of average experience, uh, of, of making these decisions. The letter heads changed and the office buildings changed. Uh, well, now the office building is, is home for a lot of us these days.

[00:05:05] Pierre Daillie: Mm-hmm [affirmative].

[00:05:05] Jeffrey Sherman: But what’s really been important is the consistency of that process. And so we’re always innovating, we’re trying to, you know, find new ideas, new security types, new parts of the market to invest in. And to me as an allocator, I think that’s a very, very important thing to have your hands on with the investment team. The people were buying the securities, making those decisions, and be able to compare that think about return and risk and how that fits together. So, um, that’s, that’s a small role I play at DoubleLine.

[00:05:33] Pierre Daillie: Yeah.

[00:05:34] Jeffrey Sherman: Um, we have about, uh, almost 290 individuals today. So we’ve grown significantly from that first part. Um, but, you know, like I said that the thesis and, and the processes really haven’t changed, it’s just the amount of strategies you run, the number of people that are helping make those decisions has changed over time.

[00:05:51] Pierre Daillie: I think, you know, one of the things that has struck me about you, Jeffrey, is, is that you haven’t lost your modesty. And, you, you know, you, you, you, you seem to do what you do in the scale that you do it with a, a, a huge amount of humility. And I, I have to say, I think, I think people appreciate that in general. But I, I, for one, definitely appreciate it greatly. I think that I’m …

[00:06:13] Jeffrey Sherman: I appreciate that. Well, thank you. Yeah, it’s a, it’s a great compliment. Thank you.

[00:06:16] Pierre Daillie: It’s, it’s, it’s, a it’s a, it’s a humbling business. And, and so, you, you know, when you, when you find people who, who approach it, uh, from the core, uh, uh, with humility, it’s, uh, it’s, it’s a really remarkable trait.

[00:06:31] Jeffrey Sherman: Well, if, if you don’t have it, the market will give it to you, right? So we, we get overconfident, and the market will check you. And, and look, I mean, there’s times we’re wrong, you know. We’ll be, we have the wrong view on, on the world. And you have to check yourself too. And so I think that, that’s an important thing is reflecting on, on what you’ve done, what’s worked, what hasn’t worked. And you learn from both sides. You learn from the trades that work but you learn a lot more from the trades that don’t work. And when you do the post mortem on it, um, sometimes you’re like, “Look, I would have the same conclusion.” And that’s really where we’ve been with like how rates have moved this year. Um, you know, the inflation data, we knew there would be some spikes in it from base effects. We did, they’d be as high as they were. But if you did told me that, you know, eight months ago, we’re going to see a pipe handle CPI this year …

[00:07:15] Pierre Daillie: Yeah.

[00:07:15] Jeffrey Sherman: … I just said, you know, rates are in the mid twos on the tenure. And obviously, they’re not today, too. So you know, if I say we, we do those postmortem reflect, but I, I would … We, at this point, in this juncture, we didn’t come to a different conclusion. So, you know, that’s the humility of markets, I think that, you know, no matter what you think about it, uh, it can always go a different dire- direction. And so what I like to say is, you know, fundamentals come home to roost over a long period of time. Um, in the short term, technicals can dominate, but never, ever ignore money flow.

[00:07:48] Pierre Daillie: Yeah.

[00:07:49] Jeffrey Sherman: Money flow is the biggest driver, the directionality of markets in the short term. And it can last a lot longer than you think.

[00:07:55] Pierre Daillie: Yeah.

[00:07:55] Jeffrey Sherman: And that’s happening right now. And I think some of the things we see [inaudible 00:07:59] as a supply constraint.

[00:08:00] Pierre Daillie: Yeah.

[00:08:00] Jeffrey Sherman: Even with the amount of debt we have in this country, um, and the amount that we’re gonna spend on the infrastructure bill. Whether it’s a trillion or three and a half trillion. Big, big gap in those two numbers. But what you’ve seen is that the Treasury had a big balance at the Fed, they just drawn it out, you know. And that’s caused some of the technical pressures the Feds fought a lot. And so, you know, you have to, you have to sit back and say, “Yeah, how did we missed that?” Well, we missed it. But at the end of the day, we didn’t miss it. We wanted it, we just didn’t believe in it.

And it was hard for us to, to think differently. And so, uh, you know, look, you, you talked that up and you say, “Look, we missed it but you can’t kick yourself, you gotta move on.” Every day is a new day when you’re running money. And you got to look at your workflow. Do you like your workflow today? And if you don’t, you have to do something. But you, you can’t run money in the rearview mirror, you got to continue to think forward.

[00:08:50] Pierre Daillie: Yeah.

[00:08:50] Jeffrey Sherman: And you need people around you to challenge your ideas. And that, that’s what I love about our team, is that we have a lot of folks that sit together, come together to make decisions. But it’s not just a bunch of heads nodding vertically, there’s intellectual stimulation, there’s challenging the theses, and we like that. And I think that makes us all better investors and allows us to really try to improve ourself.

[00:09:11] Pierre Daillie: Yeah. I, I mean, you’ve got a great team. You’ve got Sam Lau and, and, uh, Mayberry.

[00:09:16] Jeffrey Sherman: Yeah, yeah.

[00:09:17] Pierre Daillie: Um, I wanted to, I just wanted to touch on just before we continue, uh, down the, uh, the road of the macro discussion. But, but it must have been quite something for when, when you made that jump from having been at a gigantic institutional firm to your own shop. I mean, I think that there’s something that’s underestimated in, in sort of, you know, people say, “Oh, Jeff- Jeffrey Gundlach is starting a new firm and, and Jeffrey Sherman jumped on board.”

But, but as you said at the beginning, I think, I think one of the things that’s really overlooked in your story is how difficult or how challenging that must have been at the outset to jump from being, uh, you know, a senior vice president at, at a large institution, to being, uh, to going to a startup basically, and, and starting from as, a very small base as a new firm, as opposed to a very large base with a team of analysts and, and a bank. And, you know, like …

[00:10:19] Jeffrey Sherman: Yeah. Uh, so most people wanna say, you know, you go from being a big fish in a small pot and you turn into a small fish in a big pot.

[00:10:25] Pierre Daillie: Yeah.

[00:10:25] Jeffrey Sherman: I know, I went the other direction there but …

[00:10:27] Pierre Daillie: Yeah.

[00:10:27] Jeffrey Sherman: But there was a lot that, you know, there was a lot that when we were at the previous firm that we did a lot of things autonomously. We didn’t get a lot of support from the marketing staff. We like …

[00:10:38] Pierre Daillie: Mm-hmm [affirmative].

[00:10:38] Jeffrey Sherman: We, we ran our own compliance off our desk. Like we add that culture of … It was almost our own firm within our firm.

[00:10:46] Pierre Daillie: Yeah.

[00:10:46] Jeffrey Sherman: That made it a bit easier, right? And so we knew that our investment team needed to raise money. Like that’s how we raised money. And we, we supported the clients ’cause we didn’t get a lot of that support or at least there was a perception we didn’t get that support. And so I think that was the culture we already had, that we knew we could do it. Now, we needed a Chief Compliance Officer, we needed HR, we needed these …

[00:11:08] Pierre Daillie: Yeah.

[00:11:08] Jeffrey Sherman: … ancillary things that we didn’t have, but we had our technology teams, right? We didn’t rely on the system, we had them sitting on the desk with us. So there was a lot of it, where it was kind of plug and play. And you know, look, there was literally hubris with us too. We thought, “Hey, we start over, no problem. It’s gonna grow, it’s gonna be massive, it’s gonna work.” And then the humility kicks in where …

[00:11:29] Pierre Daillie: Yeah.

[00:11:29] Jeffrey Sherman: … you know, there’s some challenges you know, there’s some legal challenges and, you know, and then people like, “Well, you’re a new firm now. We, we can’t just pour it over this institutional money.” So it changed the way we thought about things. And we said, “Okay, look, you know, why don’t we pitch institution on, ‘Here, we have a daily liquidity mutual fund. You, you got a problem with us, you can sell it any given time.'” Right? And, and we saw that dynamic change a little bit. And so the timing is fortuitous, you know, the day we launched our total return strategy, if you go back and look at the chart, I won’t forget it for many reasons. But one of them is, it’s the last time the tenure traded with a four handle.

[00:12:04] Pierre Daillie: [laughs].

[00:12:04] Jeffrey Sherman: Um, the, the tenure was 4% back then. What, what, what, what brings yield back then?

[00:12:09] Pierre Daillie: Yeah. [inaudible 00:12:10].

[00:12:10] Jeffrey Sherman: Yeah, and so I think there, there’s part of that. And, you know … But that, at the end of the day, the reason all of us left is that we enjoyed the team, we enjoyed the mentorship, uh, of Jeffrey Gundlach. But also, we enjoyed working with each other. We enjoyed markets, this is what we wanna do and we wanna do it together. And I think that’s something you don’t hear a lot in this industry, people are very cutthroat. Uh, i- it’s a lot of self-serving, um …

[00:12:35] Pierre Daillie: Yeah.

[00:12:35] Jeffrey Sherman: … behavior. And people think they do it all. And so, you know, your compliments to me at the beginning is that I know I don’t do it all. And there’s a lot … I rely on a lot of people around me to make me look at it, you know? And they made me look very good. Even you, your compliments are because of the people around me and I don’t forget that. And so we’re, it’s, it’s an amalgamation of people that make the team and if the people are very important and it’s also we got to motivate and lead those folks to, to continue to strive and innovate. So all those things together, I think, is, you know, why I joined and … Like I was in my early 30s. It was a, it was a good time to take some risk. And as we all said, like if, if it fails, it fails, but at least we tried. And fortunately, it, it, it didn’t fail. It’s been pretty successful. And so, um, you know, as they say, the rest is history.

[00:13:24] Pierre Daillie: Yeah. I, I, I mean, we love the Sherman Show. And, and, uh, you know, we, uh, recently caught up with your, uh, presentation with Francisco Blanche. Yes?

[00:13:35] Jeffrey Sherman: Yeah.

[00:13:35] Pierre Daillie: And, uh, on, on the discussion around commodities. And I, I, I wa- I wanna get to that in this, in this conversation. Um, so Je- Jeffrey, we, we seem to be in this w- sort of weird in between, undecided intro or post pandemic world of permanent uncertainty, uh, massive financial, and soon, hopefully, fiscal stimulus, um, the discussion around whether inflation is fleeting or if it’s decided, uh, I don’t know if you’ve seen, uh, the latest, absolutely crazy Christopher Nolan movie, Tenet?

[00:14:09] Jeffrey Sherman: I have not, no, no.

[00:14:10] Pierre Daillie: There’s a, there’s a, there’s a great line that gets repeated throughout the film, which is a theme of, of the film. And the line is, “We live in a twilight world. There were no friends of dusk.”

[00:14:20] Jeffrey Sherman: [laughs] Yeah, yeah, yeah, yeah.

[00:14:22] Pierre Daillie: All right. So it’s very, it’s very, very, very poetic. What it makes me think of is that, you know, we’re sort of in that in between world, between day and night or night and day. Um, and, and when you know, we’re an in between, we’re possibly in between, uh, you know, in the change of a regime between, you know, the last 40 years where we’ve had falling yields and yields are now at rock bottom. Um, so this kind of goes hand in hand with, you know, portfolio construction, where do you go and, and … But before we get to that, where are we right now and what’s going on in your view in the economy and markets?

[00:15:00] Jeffrey Sherman: Well, we’re in a bizarre world, right?

[00:15:02] Pierre Daillie: Yeah.

[00:15:02] Jeffrey Sherman: Like I said, you know, you have, you have this idea that you have some of the highest inflation prints we’ve seen. And if, if you strip out the commodity prices and look at core inflation measures, in some instances, it’s, you know, the, the highest prints we’ve seen in 40 years.

[00:15:16] Pierre Daillie: Yeah.

[00:15:17] Jeffrey Sherman: So coinciding with that, so you talked about the bond rally over 40 years, we’re talking about inflation levels we haven’t seen in 40 years.

[00:15:24] Pierre Daillie: Yeah.

[00:15:24] Jeffrey Sherman: Um, so why are rates where they are? Well, um, you know, that, that’s, uh, you know, that’s the $10 or $20 trillion question when it comes to the treasury market. So, um, you know, where are we? Well, we are in an expansion, there’s no doubt. Um, no matter how you look at it, we are an expansion, the economy. The US is gonna prep one of its best, you know, years, uh, on a calendar year basis in nominal GDP and real GDP …

[00:15:47] Pierre Daillie: Right.

[00:15:48] Jeffrey Sherman: … in many decades. And so, uh, as you look at it, you know, you say, “Okay, well, that’s fine, that’s in the past, what’s gonna happen going forward?” And the difference in this cycle versus let’s say, the GFC, is that you are getting fiscal stimulus. And the, the, I think the powers that be globally have noticed that, you know, if you, if you use monetary policy while providing fiscal stimulus, “Wow, look at what you can do.”

[00:16:16] Pierre Daillie: Yeah.

[00:16:16] Jeffrey Sherman: And so, you know, there’s challenges with, with like, the Eurozone, for instance, ’cause they don’t have that coordinated fiscal policy that we can do here in the US. But, I think, you know, you’ve seen some of those, those benefits sprinkled to the market. So I don’t think that the fiscal authorities all of a sudden become super hawkish on the death of [inaudible 00:16:33] and we’re gonna balance budgets, um, they’re realizing that you can get broader participation of the overall economy. And so I think that’s the thing that’s gonna keep this cycle going. Now, and granted, the, the NBER, which is the, uh, the National Bureau of Economic Research, they declare the official beginning and end to recession. And I don’t know if you saw it here, but a couple of months ago, they came out and told us that we are out of the recession.

[00:16:57] Pierre Daillie: Right.

[00:16:58] Jeffrey Sherman: And, yeah, I think it was July, they came, uh, or … Sorry, June or July, they came out and said it and the recession was over in April of 2020.

[00:17:07] Pierre Daillie: Got it [laughs].

[00:17:07] Jeffrey Sherman: Really, um, a timely data, you know …

[00:17:11] Pierre Daillie: Yeah.

[00:17:11] Jeffrey Sherman: So all the young analysts out there looking at, you know, the, the beginning end of recessions and trying to analyze that. Well, remember, it took them 16 months to realize we’ve been out of recession. So, um, it’s not, it’s not a sibling you can trade on.

[00:17:22] Pierre Daillie: Right [laughs].

[00:17:22] Jeffrey Sherman: But it’s the shortest recession on record. Um, you know, the fastest expansion afterward. And I think what you’re still gonna see with this is that there’s gonna be some more continued fiscal stimulus. Now, what that means is, is that more deficits, right? Because not gonna be a balanced budget. Um, and what does that mean ultimately? And none of us really know. But we do know that there will be some inflationary aspects of that behavior. And it’s not just because of the debt because we found a buyer. We found a new buyer, right?

[00:17:52] Pierre Daillie: Yeah.

[00:17:53] Jeffrey Sherman: Uh, early in my career, you know, the question that was always asked, “Well, what happens when the Japanese stopped buying? You know, there, there … What happens when they stop buying treasuries?”

[00:18:00] Pierre Daillie: Right.

[00:18:01] Jeffrey Sherman: “Who’s gonna buy the debt?” And, and everybody said, “You know, I don’t know.” And then what the answer was? China. Okay?

[00:18:06] Pierre Daillie: Okay.

[00:18:06] Jeffrey Sherman: And then, you know, the, then the question in the mid, mid aughts, and everything was like, “What happens if the Chinese stop buying? Well, what, what’s gonna happen?” And, and the answer was, “It’s the Fed.” Right? And so, you know …

[00:18:17] Pierre Daillie: [laughs].

[00:18:17] Jeffrey Sherman: … these are the things we’ve worried about. Remember that, you know, sovereign entities are, you know, household balance sheets. They could run big deficits, you can run these things. And so, you know, the whole robe of Reinhart research is that if debt to GEP exceed like 85%, 90%, you know, that stymies growth and you’re in this cycle, but, are in this vicious downward cycle. But we haven’t seen that anywhere, right? I mean, you know, Japan has, you know, debt ratios approaching, you know, 300% of debt to GDP. We’re obviously over 100 now in this country. But at the end of the day, you can inflate, you can grow and that’ll change.

So, instead of being, you know, waxing p- philosophically about this, what, what does it mean right now is that we are at an expansion. There’s been a lot made about world bonds of rally, the yield curve’s flattening, the bond market thinks a recession’s coming. I, I disagree with that view. Um, I think that, you know, there are, there are some hiccups out there, you know, removing some of the unemployment benefits that expired, uh, this last week. Um, that’s gonna have a little bit of effect there. Um, I don’t buy into the concept that, you know, uh, people aren’t taking jobs because they’re getting massive stimulus.

I just, I, I believe one, the American psyche and people that want to work and proud to contribute, you’re always gonna have anecdotes about people not working. But I think wo- i- i- it’s a, it’s a change in dynamic. And so, you know, I think when we look back, we’ll say the pandemic was one of those defining moments. Like it changed our society. And not just because of the unfortunate deaths and sickness we’ve seen, but just how we value relationships, how we value workers, right? And I think that dynamic is shifting but I think what you’re also seeing is a rise of labor.

[00:20:00] Pierre Daillie: Right.

[00:20:00] Jeffrey Sherman: And labor has more power than they’ve had. Now, granted, capital’s still winning, right? Because there’s always the push and pull of labor and capital. And so what I mean by that is that labor is voting to say, “We want better wages. You know, we want more f- we want more flexibility.” We hear this from our workers, right? Our staff at WF.

[00:20:18] Pierre Daillie: Yeah.

[00:20:19] Jeffrey Sherman: Saying, like, “Look, we want to have a hybrid environment, we want to be able to work remote a few days a week.” Um, and, you know, given we’re in California, it’s like, “We’re gonna re- work remote five days a week right now.”

[00:20:28] Pierre Daillie: [laughs].

[00:20:29] Jeffrey Sherman: And so I, I think, you know, as you look at it, um, that rise of labor is, it leads into your other part of the equation that it’s me that’s gonna cause a little bit more of inflation.

[00:20:39] Pierre Daillie: Right.

[00:20:39] Jeffrey Sherman: Now, and I say a little bit more inflation or more inflation, people start going, “Oh, we’re going back to the ’80s.” Or, you know, “There’s a lot of things made about, you know, we’re back in the, you know, the, the whole, uh, Jimmy Carter era and stuff.” And my bosses said that, too. And there are some parallels there. But remember, we’re coming off of, uh, an inflation rate of 2%. When we had the Carter era, you came off of the gold standard, right?

[00:21:01] Pierre Daillie: Right.

[00:21:02] Jeffrey Sherman: We’re using fiat currency the first time. You already had inflation running in the six and seven house. So it can get out of control. But what you’re seeing here is that the growth rate has likely peaked, okay? We’re not gonna probably grow at, at double digit nominal GDP for the foreseeable future. I think we can all agree at that the trend line was 2.3% real, um, you know, inf- uh, yeah, back the inflation, the nominal was like four and a half, right? So, okay, we’re getting back to four and a half, it’s kind of our baseline growth rate.

But that being said, you know, we are still gonna grow. Earnings are still growing. They’re not gonna grow at, you know, the insane numbers we saw. But in general, you’re seeing people change the dynamics to this marketplace. And so I think there’s been much made about these, these older signals that say, “Oh, that first flattening, the plot market knows something.” Or what’s happened in the last, you know, five months is that you, you made the bank’s find more high quality assets when they change the leverage ratios that were given because the pandemic and they made them whole work tier one capital. So what did they buy?

[00:22:07] Pierre Daillie: Right.

[00:22:07] Jeffrey Sherman: They buy treasuries, they buy agency mortgages, right? That’s compress spreads. What’s also happened is that you’ve seen foreigners come into our market, right? They’ve been buying because they also were experiencing the Delta wave prior to us.

[00:22:19] Pierre Daillie: Right.

[00:22:19] Jeffrey Sherman: Right? And further to that, hedging costs have come down. So all these things, you know, create this demand for the, the rate side of the equation. So I don’t think you can just say, “Oh, rates have rallied. The bond market thinks the world’s melting down.” Now, let’s talk about, “That’s what’s, what has happened.” What’s going to happen?

[00:22:36] Pierre Daillie: Yeah.

[00:22:36] Jeffrey Sherman: Well, I wish I could tell you, Pierre. And then [inaudible 00:22:39] by the beach and I have to worry about it. But as I look at the inflation data, what I see is that the transitory narrative, it’s, it’s played out. What, what I mean by that is that the Fed has talked about transitory and I agree with them on used cars or autos in general, hotels, leisure, airline tickets, those things were driving the, that temporary spike early in the second quarter. However, um, you’ve seen other things stabilize on reverse. [inaudible 00:23:08] use lumber as an example. I’m like, “Lumber is not in the commodity basket that much. Yes, it goes into housing. But in general, lumber is not a good barometer for inflation.”

[00:23:17] Pierre Daillie: Right.

[00:23:17] Jeffrey Sherman: So look at oil prices, look at copper, look at nickel, all of these things that were, that are heavy consumption. And so I still think the supply chain side of the equation is not transitory. I think if you wanted to find transitory at 18 months, I think we’re gonna have problems for another 18 months or so of just the, the supply constraint. So that’s gonna put a little bit of pressure on inflation. The other thing that likely to do is that you’re going to see the housing component start to drive a little bit more of CPI, right? Now, if you look at core CPI, it’s almost 40% [inaudible 00:23:50] CPI as the housing market. And we know that we had a record print housing last month, right? Year every year is 18% if you use Case-Shiller, FHFA, any of that. Now, how do you get there? But if you look at the inflation component, the, the housing component of CPI, it was 2.5% year over year. So I don’t know about you, but 2.5 versus 18, there’s a little bit of a difference in those numbers, right?

[00:24:14] Pierre Daillie: Yeah.

[00:24:14] Jeffrey Sherman: Now, is it going to spike? No. But it’s going to put some upward pressure on there. So the thing about the housing market is it tends to be stickier to the downside. So what I’m getting at with all of this is that I think inflation is not going back sub two, right? I do think for the next couple of years, you can easily see three handle inflation, which isn’t the end of the world, right?

[00:24:36] Pierre Daillie: Yeah.

[00:24:36] Jeffrey Sherman: But that the variables in here, it’s gonna be what happens with wages. And remember, wi- with labor gets its way and it looks like labor is kind of winning some of this value. You see it from the administration, right?

[00:24:48] Pierre Daillie: Yeah.

[00:24:48] Jeffrey Sherman: They’re not … You know, Joe Biden came out and said, “Pay your workers. You can’t fire people? Pay them more.” You know, he, he was [crosstalk 00:24:55] at the conference …

[00:24:56] Pierre Daillie: Yeah.

[00:24:56] Jeffrey Sherman: … uh, at the press conference that day. And so those things to me are shifting the dynamic where, you know, it’s, it’s looking out for the people. And if that’s the case, that makes it better society, but it will put a little bit more … Uh, because a lot of the wage pressure, there’ll be more consumption but there’ll be a more robust participation. So yes, will it put some pressure on margins? Sure, right. Labor costs are gonna go up. However, you know, if you think about, you know, setting this, the table for a better rod extension, you’re setting up all that dynamic. So what does it mean? It means that we’re gonna have to live with a little bit higher inflation, it’s not likely to be as transitory as you’ve been told. Which tells me the rates market is extremely overvalued at this point on.

[00:25:39] Pierre Daillie: Right. Absolutely. How does, how does, uh, something like yesterday or today’s news about, about, uh, Amazon, in particular, uh, stepping up and, and offering all of its employees, and it was 700,000 plus employees, a chance to, uh, have their education paid for by the company?

[00:25:59] Jeffrey Sherman: See, I … That’s why I’m understanding labor [crosstalk 00:26:01] power.

[00:26:01] Pierre Daillie: Yeah.

[00:26:01] Jeffrey Sherman: That’s what I’m getting down too. Is that, um, you, yours … It’s a, it’s a societal shift. And this is the dynamic … And like, you … There’s catalyst.

[00:26:09] Pierre Daillie: Yeah.

[00:26:10] Jeffrey Sherman: And I think some of this was not just the pandemic, but what we saw in the social movement last summer, right?

[00:26:16] Pierre Daillie: Yeah.

[00:26:16] Jeffrey Sherman: Where, you know, injustices you know, people are tired of this. It’s like, “Okay, it’s, it’s …” You know, when, when we, when we kind of, uh, you know, have this problem where we have, um, a, a recession, that tends to bring things out, right? You get the angst, the anger, you lose your job, your displays were stuck at home. That gets the tone to steep, and we saw this too, whether it’s the social movements of saying, yeah, there’s racial inequalities, there’s, you know, a gender inequalities, those things are being taught, but how you taught about at every level, right? It’s not just a discussion over the dinner table or, or in certain cohorts, it’s being discussed at, at the political level. Right? We’re seeing that … You’re, it’s being discussed at the Fed. The Feds play the unemployment rate, they’re not focused on that number. They wanna see broader participation [inaudible 00:27:03]. It’s being discussed at the corporate level. This is part of ESG policy, you know.

[00:27:07] Pierre Daillie: Right?

[00:27:08] Jeffrey Sherman: And so you’re seeing this dynamic where, you know, it is more inclusive. And I think that is a societal shift. And so seeing things like the Amazon announcement, saying that, “We want good workers, we want to pay people.” You know, I think if a company like Costco, right? Costco’s always been one of these places. Good benefits, good wages, app in place, great business, right?

[00:27:29] Pierre Daillie: Yeah.

[00:27:29] Jeffrey Sherman: And so I think you’re seeing this where it’s not just, you know, “It’s all about $1. It’s all about squeezing every single thing so that the CEOs can make money.” But it’s broader participation. And, you know, I … The good thing, look …

[00:27:42] Pierre Daillie: Yeah.

[00:27:42] Jeffrey Sherman: … we’re catalysts at heart, right? We all invest in markets, this is what we do. But we also know that, you know, you, you, you can’t just have 10 people have all the wealth in this country because people are angry. You know, that’s when the bricks have those windows. So I, I, I think it’s, it’s good. And, you know, we’ve always believed in paying our employees as well, you know, we have a partnership structure, you know. The- these are important things because you know it’s not just one person doing it. And in general, you know, people need to eat, people need to live.

[00:28:11] Pierre Daillie: Right.

[00:28:11] Jeffrey Sherman: People need to take vacations, right? And so, um, I, I welcome it. And I think it’s, it’s a good thing. And look, your stock may correct in a short period of time or something like that, but it makes for a better workforce and a better company. And in general, I think that it’s a great approach.

[00:28:28] Pierre Daillie: Uh, 100%. It’s, it’s, uh, it’s really synonymous with, with what, uh, European companies have been doing for a long time. I think in particular, Germany, German companies have had a policy of educating their …

[00:28:40] Jeffrey Sherman: Yeah.

[00:28:41] Pierre Daillie: … their …

[00:28:41] Jeffrey Sherman: Yeah. Yeah. And also, you know, I think there’s a little extreme in, in the Euro zone and things.

[00:28:45] Pierre Daillie: Yeah.

[00:28:45] Jeffrey Sherman: You know, like in France, you can never get fired and things like that. There needs to be …

[00:28:49] Pierre Daillie: Yeah.

[00:28:49] Jeffrey Sherman: There needs to be checks and balances. But, you know …

[00:28:51] Pierre Daillie: Yeah. Absolutely.

[00:28:52] Jeffrey Sherman: … giving your people living wages, you know, giving them benefits, giving them time off, you know, it’s important. You know, that’s, that why we have a redundancy, right? You know, when people come back they’re, they’re healthier, they’re happier. Uh, they can’t just sit in front of a Zoom meeting all day, you know, for, you know, for, uh, uh, as long as [inaudible 00:29:09] and, and expect them to be productive, right?

[00:29:11] Pierre Daillie: Yeah.

[00:29:12] Jeffrey Sherman: So there’s things you have to do … And understand, we’re still humans. Every corporation is a collection of human beings, right? And we start to think about that, yeah, you say, “Well, maybe we should treat each other a little bit better.” And, you know, that was my tenet last year, when people were saying, you know, “What’s going on with this?” I’m like, “Maybe we should treat each other better?”

[00:29:29] Pierre Daillie: Yeah.

[00:29:29] Jeffrey Sherman: ‘Cause that was the golden rule, right? It’s just treating others how you want to be treated, you know. And I think that permeates throughout a, a culture. And, and that’s what we try to foster an offer. And, you know, uh, again, we don’t get it right every day or every, every decision we make, but if you have that as your core tenet, I think it’s, uh, I think it’s a good philosophy. It’s a good business nonetheless.

[00:29:49] Pierre Daillie: Yeah. 100%. I, I, I 100% agree with that. So, um, so Jeffrey, what are you doing given your view in terms of investment, uh, portfolio construction, considerations? How should investors be positioning for the current times?

[00:30:06] Jeffrey Sherman: Yeah. So, you know, given my view on inflation, the first thing I, you know, I hear from people is like, “Oh, you love tips.” Right? No, I don’t love tips. Uh, I just, I … You know, the Feds got too big of a footprint. Uh, I don’t wanna buy something that has a, a massively negative real yield today or it doesn’t make sense. And then that means I don’t like the treasury market that much either because of the same component, the nominals, they have a, they have a positive yield, but on an, on a real yield basis, they’re extremely negative.

And so the, the Fed has had too much of an outsized impact on, on the tips market, one. But secondly, you know, I, I think that, you know, the, the key ways to manage the inflation capacity demands a interest rate risk. Because if we get inflation and it’s persistent, and the, the psyche of the bond market changes to say, “Okay, this is not transitory.” What’s gonna happen to yields? They’re gonna go up. And so the, the easiest thing for an investor to do is say, “Okay, maybe I want a, an interest rate or duration risk in my portfolio.” So that’s the first thing we’ve done.

[00:31:07] Pierre Daillie: Right.

[00:31:07] Jeffrey Sherman: Is, you know, we continue to be under way duration over the market. You know, we bought some back this year, just gonna sell off we saw earlier in the year. And, you know, we keep kind of replenishing duration. That’s one thing, every day your duration goes down if you don’t do something. So we kinda replenish it a little bit here and there. But we’re not excited about it. I mean, the 131 tenure we have today is not exciting at all. We need to own a little bit to keep up Dallas in the portfolio. Um, so the next obvious thing, if we’re in the expansion, you wanna own credit, right? So the, the natural thing is like, “If I want safety, where do I go? Well, I go the investment grade corporate bond market.” And then you start to dig under the hood, you say, “Okay, well, investment grade corporate market, it’s, there’s really no default risk today.”

[00:31:49] Pierre Daillie: Yeah.

[00:31:49] Jeffrey Sherman: It’s very benign. Um, the spreads are somewhat reflective of that, but the spreads are wider than the default rate. So that means there’s [inaudible 00:31:58]. And you’re like, “Okay, that sounds like a good trade.” And then you look at the market and say, “Wait a second, the market is super long in its maturity.” Right? The duration of the investment corporate market is near as long as it’s ever been and it is the lo- if you e- exclude the last year or so, it is the longest it’s ever been. And so all of a sudden, you, you don’t like interest rate risk, you want your own credit and you jump into IG investment corporate bonds. And all of a sudden, you now have your [inaudible 00:32:25] in, you know, in the treasury market as a whole. So that’s a part we’re very underweight. We like the story, hate the duration. So that’s another thing. So now what do you do? Well, the obvious choice from there is you go down to the below investment grade market. It’s a shorter duration market.

[00:32:41] Pierre Daillie: Right.

[00:32:42] Jeffrey Sherman: Uh, because it’s a high yield, they don’t wanna issue as long a paper, um, it tends to be kind of … Most deals are five year lives of … The duration there’s a lot shorter. Um, well, investors are smart, they figured that out, too. Now, spreads are tighter there. And, you know, when I look at a high yield market, I’m getting three and a half or inside a three and a half as a market.

[00:33:01] Pierre Daillie: Mm-hmm [affirmative].

[00:33:01] Jeffrey Sherman: And they like to trade but I don’t like the investment, right? And so I don’t think there’s a big default risk, um, in the next year or so. Why? Because what usually causes defaults are maturities. So it’s you know, if some company is running a problem, they can’t service the debt. It’s called the maturity wall …

[00:33:18] Pierre Daillie: Right.

[00:33:19] Jeffrey Sherman: … the year it causes the problem. And we don’t have that because corporate America has been able to borrow e- extensively for the last year. So although I don’t care for it that much, I don’t, I, I like it more than IG but I know it’s for risk. So it got to bounce. That’s why I really own some high yield with treasuries than own invest grade corporates, ’cause now I can get back to kind of similar yields that will drive miles on average. Um, what I do like is the loan market, though. And why I like the leverage loan and bank loan market is its floating rate, right? So this is still corporate America. Um, yeah, you know, it, it’s floats.

People are saying, “Well, you have this rate, you know, rates are gonna push up.” Well, the problem is the floating, it floats both to the front of the curve while it’s alive, which is a fluke, right? Until the Fed starts to signal that they’re actually gonna hike, you’re not gonna see improvement there. But it does have upside at some point. And the spread are pretty similar and not wider than high yield in some instances. And so, um, the loans are something we’ve been a buyer of, we’ve added to our portfolios that can take them, um, over the last month or so. There’s been some weakness there. Uh, it, it’s strange. We, we’ve noticed that when rates rally like 40 or 50 basis points on the back end …

[00:34:25] Pierre Daillie: Right.

[00:34:25] Jeffrey Sherman: … there should be outflows in the loan market. So we’re like, “This is a perfect time. They’re selling for the wrong reason. It’s not because it’s a default problem. There’s other things going on.” So we’ve added to the loan book. And so you can’t just run a portfolio of treasuries of loans. You have other things. And this is where the securitized market is, is really the sweet spot today. And when I say securitized, I’m talking about things like the mortgages, um, residential mortgages.

[00:34:48] Pierre Daillie: Right.

[00:34:49] Jeffrey Sherman: Uh, one thing we really like for commercial mortgages, we added a lot, uh, to those positions last year. Uh, we continue to maintain those, we haven’t trimmed those, whatsoever. Um, we’ve rotated some of the exposures around, we’re keeping allegations on those because we think there’s really some good stories there. Multifamily is a strong story. The industrial [inaudible 00:35:07] Industrial Revolution there were …

[00:35:09] Pierre Daillie: Right.

[00:35:09] Jeffrey Sherman: … I’m talking about warehouses, uh, cell phones towers, data centers, those things that inside of the commercial real estate market, um, people focus … They, they hear CRE, Commercial Real Estate, and they think office space. Well guess what?

[00:35:22] Pierre Daillie: Mm-hmm [affirmative].

[00:35:22] Jeffrey Sherman: Office space is a big challenge. But I’ll tell you right now, DoubleLine is paying its lease. You know, we have …

[00:35:27] Pierre Daillie: Yeah.

[00:35:27] Jeffrey Sherman: … you know, we have four floors at downtown Los Angeles. That, there’s nothing wrong with, you know, that space today. Now, long term, maybe there’s a dynamic in shifts, you know. Maybe people have a smaller footprint. But also remember, there’s been a big exodus from larger cities to smaller ones.

[00:35:43] Pierre Daillie: Right.

[00:35:44] Jeffrey Sherman: It’s what they bought, office space, right? So people in Nashville, you know, Atlanta, uh, you, you talk about Charlotte. Obviously, everybody knows about Austin. Austin is a bit overvalued but, you know, Denver. People have shifted those areas. When you go to the office pier, people forget that. So we can, yeah, just pay these buzz terms about markets. And, and retail, retail was challenged going in and it’s, it’s gonna be challenged going forward.

[00:36:09] Pierre Daillie: Yeah. Right.

[00:36:09] Jeffrey Sherman: But so if you pick your spots, you can do well. Then there’s the collateralized loan market, CLOs. I love the bank loan market. I love …

[00:36:16] Pierre Daillie: Right.

[00:36:16] Jeffrey Sherman: … the CLO market even more, because we can use the, the structure to … And give us subordination, we can drill down and get better yields. So if you wanna make that directional bank loan that the CLO market, especially the below investment grade market, um, tough to build big positions in, but you’re talking stuff that easily yield seven today, uh, with relatively low risk to RBI. That’s the [inaudible 00:36:37] market is, we don’t think that’s a low default risk.

Um, the other thing you can do is go into ABS. Um, consumer’s been very strong, another way of [inaudible 00:36:45] the consumer. So notice all these trades I’ve described. I talked about residential mortgages, consumer. We’re talking about ABS, the consumer. Well, commercial … Uh, I’m sorry. Collateralized loans, that is kind of more appropriate America. CMBS, it’s a firebreak corporate and consumer. So now, I’m still betting on the US. But these assets are half to a third of the duration the industry and corporate market.

[00:37:11] Pierre Daillie: Right.

[00:37:11] Jeffrey Sherman: And they offer significant pickup and yield. So we can do a big diversified portfolio of these various credit exposures, still making a bet on the economy, still making a bet on the consumer. Not all land on it, right? But just general that people are gonna service the thing in order to service that debt. And you can build portfolios in these sectors that have yields north of three today. Yeah, sometimes, two and a half to three, let’s call it, and the duration of that can be somewhere between two to four years. So all of a sudden now I shortened now my duration on my credit, it allows me … If I wanna buy duration, I can do it and I’ll put the real market in treasuries where there’s no default risk. I can buy an agency mortgages where there’s no default risk, right? Things like that. So it’s very niche concepts together that I think gives you good portfolio construction today.

Now, you know, look, uh, at the end of it, you know, some managers are just credit all the time. That’s what they buy. And they love corporate bonds, you know, they love them, uh, at six yield, they love them at two yield, it doesn’t matter, uh, they’re all relative value. But today, what I’m seeing is that why take the duration risk? Why take that if you don’t have to? Um, yes, it hurts a little bit when rates rally like they did in the second quarter. But again, it gives you more stability, there’s less volatility out there, adding that’s the way to position today. So that’s kind of my broad asset allocation.

[00:38:31] Pierre Daillie: Yeah.

[00:38:31] Jeffrey Sherman: Uh, we have a little bit of emerging market debt, um, out there today. You know, it’s not as attractive as it has been. We’ve cut that over the last, you know, let’s call it, you know, 10 months or so. We’ve cut that down a, a, a fair amount. Roughly in half. But we still own some. We’re probably as low as we’ll get. Um, but we want something else to ha- … We’re given the macro environment, given how bad the virus has been in these areas, and their response to it, it’s amazing to me how well DM has traded, you know. And so …

[00:38:58] Pierre Daillie: Yeah.

[00:38:59] Jeffrey Sherman: … uh, we’re, we’re looking for a little bit of backup there to add to that. But that’s, that’s what I, I think, uh, an investor should be focused on. I’ll call them nontraditional sectors. The, they’re, they’re nontraditional, but we’ve been trading them for 20 plus years, you know. So, at some point, it’s got to become [inaudible 00:39:12].

[00:39:13] Pierre Daillie: Yeah. I think, I think, you know, I think the problem is that, you know, the 60/40 or the traditional 60/40, um, portfolio has continued to do well. And, and that’s got investors sort of hanging on to it.

[00:39:27] Jeffrey Sherman: Right.

[00:39:28] Pierre Daillie: Uh, mind you, the, the, the, the look of the 40% that’s supposed to be in fixed income has shifted more towards credit.

[00:39:36] Jeffrey Sherman: Yup.

[00:39:36] Pierre Daillie: And, and, uh, you know, master limited partnerships, that sort of thing.

[00:39:40] Jeffrey Sherman: Yeah.

[00:39:40] Pierre Daillie: But, but the problem there is, is, as you sort of very nicely, uh, described is that duration … I mean, if you consider the equities are the highest duration assets, uh, in the market, and then, and then …

[00:39:53] Jeffrey Sherman: That stock’s being the longest of all.

[00:39:55] Pierre Daillie: Yeah. Absolutely.

[00:39:56] Jeffrey Sherman: Right.

[00:39:56] Pierre Daillie: You, you know, then, then you, you add credit to that as a fixed income allocation. Then, you know, you’re getting into a, a problem where, you know, 70%, 80%, 90% of your portfolio could be exposed to high duration. So, I, I, I …

[00:40:12] Jeffrey Sherman: Well, think of it this way too. So there’s a perception of diversification. And, you know …

[00:40:16] Pierre Daillie: Yeah.

[00:40:16] Jeffrey Sherman: … the, the old joke in, in the trading market is the, the Texas hedge, right? You know, you have, you have your long and your short, and they’re really the same trade. And I, I think about it this way. And this may be caustic to some people and to me a little controversial, but it’s like buying a basket of cryptocurrencies.

[00:40:32] Pierre Daillie: Yeah.

[00:40:32] Jeffrey Sherman: You think you’re diversified but they tend to move in the same direction. I mean, look, look at it, right? Uh, they’re gonna have outsized, [inaudible 00:40:39] to each other. But when they sell off, they all sell off together, right? And the rally we see in the last month or so, they’ve all rallied together, right? And so it, it, it’s that, just a lead a bunch of different assets doesn’t give you diversification.

[00:40:51] Pierre Daillie: Right.

[00:40:51] Jeffrey Sherman: You ought to look at the underlying drivers. I think that’s what you’re pointing out here, Pierre. And I think it’s very important for investors to think about that. You know, and that’s where I’d say a few people got the signals from the bond market. Personally, I think they were wrong.

[00:41:03] Pierre Daillie: Yeah.

[00:41:03] Jeffrey Sherman: Over the last four months, say, “Okay, rates rallied in the second quarter.” Oh, rates peak, earnings had peaks, you know, we’re buying a recession. Here we go again. It, that’s not the signal to take. There was you know, there’s some rebalancing takeaways. The 60 did so well, you know, pension plans and, and spend. Um, again, these … We’re rebalancing, right? ‘Cause they’re like, “Look, I, I need to buy a little bit more, you know. And again, [inaudible 00:41:27] buy it at 175 but they did, it was the right trade, at, at least, thus far.” So I, I think it’s important for investors to understand what drives these components. And you can’t just naively look at it.

And as you said, there’s been, there … You have that credit component, you have more and more duration that side. And so, um, we use a, a simple heuristic. And, you know, uh, we, we look at yield relative to duration, right? And it’s, it a very simplistic thing. And so why do we look at that? Well, yield is a way of thinking about return. And fixed income, if rates don’t move and there’s no defaults, yield is what you get. So that’s off equations return, right?

[00:42:02] Pierre Daillie: Yeah.

[00:42:03] Jeffrey Sherman: Duration is one measurement of risk, right? So return to risk. Wow. What a, what a novel concept here, right? Um, and I, I was, uh, you know, it’s something we’ve always looked at, and I, I think I’ve made a tongue in cheek comment one day, right? I know I made it. And I said, “Man, you know, just look at the yield ration.” And I say, “You know, this, this is like a Sharpe ratio.” It’s a forward looking Sharpe ratio. That’s like, you know, Bill Sharpe, you know. And he got a Nobel Prize for, you know, taking the Z score and calling the Sharpe ratio, completely diminishing all the work he did, right?

[00:42:31] Pierre Daillie: Yeah.

[00:42:31] Jeffrey Sherman: I mean, he’s, he’s, he’s an excellent academic.

[00:42:33] Pierre Daillie: Right.

[00:42:33] Jeffrey Sherman: He deserves everything he got. And I said, “You know, I’m just gonna call it yield duration the Sherman ratio. I’ll wait for the Nobel Committee to call one day.” And, and Jeffrey laughed at it.

[00:42:43] Pierre Daillie: [laughs].

[00:42:43] Jeffrey Sherman: And then he just don’t want the Sherman ratio. So it’s something we actually looked at. I, I hate the, I hate the moniker of it, you know, but it’s something that I think is important to think about, because what’s, what’s the beauty of that component. A- and again, duration should encompass spread duration, which encompasses default risk. If you take that, it’s a valid metric. Okay?

[00:43:02] Pierre Daillie: Yeah.

[00:43:03] Jeffrey Sherman: And so, uh, again, and you should loss adjuster yield. So if you do that, it is a forward looking Sharpe ratio. But here’s the simple thing about it, Pierre. If I tell you that the yield to duration is 0.2, okay? And you’re like, “Okay, who cares?” No, it gives you a very, very intuitive, uh, way to think about your portfolio. What it says at 0.2, if yields go up 0.2%, 20 basis points over the next year, your duration risk will offset all of your yield. So if rates go up for 0.2, right, you will have a negative rate of return. Assuming no reinvestment, there’s some assumptions there.

But if it goes, if rates go up less than that, then you’ll have a positive return. So it’s the [inaudible 00:43:44] thing about having enough income, enough yield to offset kind of that noise in the duration market. And so all things being equal, and again, assuming you’d have your yield assumptions right and loss adjusted, if your duration, right, bring in spreads and defaults and, and, and all that into it, it is a really good way of thinking about your forward looking return to risk.

[00:44:03] Pierre Daillie: Right.

[00:44:04] Jeffrey Sherman: And why I bring that up is because over the last year, the Barclays US aggregate have had the worst yield to duration ratio we’ve had on record. And, and, and, you know, people have read some articles about it because, you know, we, we really harp on this. ‘Cause we think it’s an important way to think about it. And that dynamic hasn’t changed a lot. The yield to duration ratio is pretty ugly, uh, on the Barclays US aggregate today. So it’s, it’s great to say, “Okay, yields go up. And, okay, my stocks are gonna go up because that’s the long term historical relationship.”

[00:44:35] Pierre Daillie: Right.

[00:44:35] Jeffrey Sherman: But it depends on why yields go up. If they go up because of inflation, maybe that relationship doesn’t hold as well, right? And so that’s what you have to think about. So that’s always the challenge of markets. You, you, you were here saying about the, the twilight, uh and, you know, are we gonna see dust? But there’s always uncertainty. You know, people get back to [inaudible 00:44:54] easier. It was never [crosstalk 00:44:56] when you’re making the decisions, right? And so …

[00:44:58] Pierre Daillie: Yeah.

[00:44:58] Jeffrey Sherman: … I think the 60/40 has more challenges. The thing I disagree with a lot of folks about is that we’re like, “We’re gonna go to private markets.” The private markets, you know, we’re gonna do that and I’m like, okay, so you know market to market rate.

[00:45:10] Pierre Daillie: Yeah.

[00:45:11] Jeffrey Sherman: But how, how you value private markets, Pierre? They use something called a [inaudible 00:45:15] called new public markets.

[00:45:16] Pierre Daillie: [laughs].

[00:45:16] Jeffrey Sherman: The, the public markets are [inaudible 00:45:19]. What is that they say back to private markets? So, uh, again, there’s some beauty of it. I like to, to joke that in March of last year, the good news was private equity do what didn’t go down. It didn’t have time to market yet, they weren’t marketing it for the next month or so and the market go back up.

[00:45:35] Pierre Daillie: Yeah.

[00:45:35] Jeffrey Sherman: So it had no volatility. But, uh, you know, the thing is is there’s no free lunch in all of this. And, you know, we’re just gonna be challenged going forward. And, you know, we’ve invest in here saying the valuation of the stock market’s pie, we should expect lower returns. And what are we giving investors? Like 20 handle a year.

[00:45:50] Pierre Daillie: Yeah.

[00:45:50] Jeffrey Sherman: Right? And so at some point, that breaks a little bit, but also, maybe we just take a pause and we grow into it. So I don’t hate the equity market. Uh, I like it relative to the bond market ’cause bonds look extremely rich. But when I say bonds, I’m talking about treasuries, they look extremely rich, Pierre. But weights back up a little bit, the equity market can take it. Um, but we need to grow into this. So, uh, uh, I think, you know, you know, having a little pause in the equity market’s good, having some drawdown’s great, because it cheapens things out. And again, it allows you to reschool.

But when we talk about the market, you can always, you know, are we talking about large caps and small caps, growth, value. There’s always ways to play it. And so I think it’s just, it’s more of a, it, it’s more of a pickers market, where that’s a sector picker, a stock picker, you know. You’re picking, uh, uh, country specific risk. Um, you’re looking at, you know, various nuances of single idiosyncratic gains. I think that’s why you’re seeing active management shine a little bit here.

[00:46:46] Pierre Daillie: Yeah.

[00:46:46] Jeffrey Sherman: And, uh, I think that that’s a new trend that we’ll see in this next environment.

[00:46:50] Pierre Daillie: That’s amazing, you know. I, I, I’m just reflecting on your idea, the Sherman ratio idea, you know, it’s surprising sometimes how, how an idea can germinate into, you know, an oak tree. And, um, you know, [laughs] don’t be surprised if that comes, comes back to you that way, you know, as as [laughs] …

[00:47:11] Jeffrey Sherman: Yeah. I mean, look, I, I really [crosstalk 00:47:13] to call me still, um, you know. But it’s a [inaudible 00:47:16] we use, uh, you know, stuff … Some of our … You know, I’ve seen some people write about it and attribute to me and that’s, it’s nice, it’s flattering.

[00:47:22] Pierre Daillie: Yeah.

[00:47:23] Jeffrey Sherman: But at the end of it, it’s just, it’s, it’s trying to think about ways to explain concepts, right, and …

[00:47:28] Pierre Daillie: Yeah.

[00:47:28] Jeffrey Sherman: … that’s a- that’s also our job as investors is now, look, we invest, but a lot of it is doing what we’re doing right now. Having discussion. How do we distill this [inaudible 00:47:37]? Why do you like this versus something else? Well, here’s, here’s how we’re thinking about it. And it’s, you know, a few were like, “Well, you must love bonds, you work in the bond market.” No, we can hate bonds.

[00:47:46] Pierre Daillie: Yeah, yeah, yeah.

[00:47:47] Jeffrey Sherman: Um, but you, you’ve got to do something. And what do you do and, and that, these are concepts that we just, you know, we’ve refined over the years. And, um, again, it, it, it distills down to a simple message. And I think that’s what allows people to have confidence in that, “Okay, well, I kind of trust these guys to run our money. They’ve been doing this stuff for a while. But these things make sense to me.” And like, “Look, either you’re gonna focus on the bond market day in day out or you gotta outsource it.” Because there’s a lot of landmines in that market.

They’re not gonna, they’re, they’re not gonna explode today but there’s the potential for a lot of things to go wrong. And so that’s why I say, you know, you can index it, indexing in the bond business and get on bias [inaudible 00:48:27] you did that in your book, you know, ’cause we run active portfolios. But indexing the bond business is, is different than indexing in the equity market. The more debt you issue, the larger piece of the index you are. So, Pierre, as you borrow more and more money from me, are you a better credit or a worse credit, you know?

[00:48:44] Pierre Daillie: Mm-hmm [affirmative].

[00:48:44] Jeffrey Sherman: And, and the all things being equal, the more money you borrow, the less of a credit worthiness you’d have, right. And so this is the dynamic on-

[00:48:52] Pierre Daillie: But bond market, the investors do the exact opposite where …

[00:48:55] Jeffrey Sherman: Right.

[00:48:55] Pierre Daillie: Yeah. Yeah. I mean, the indexing credit or indexing, uh, the bond, yeah, absolutely.

[00:49:00] Jeffrey Sherman: Yeah. So that’s, that’s … I think that’d be … You can’t up- it’s not, it’s not this one size fits all approach. And so again, um, you know, there’s times that the index is gonna do quite well, you know. And you saw it in March of last year, you know. That because the rate rally, it’s dominated by a rate risk, it doesn’t have a lot of credit risk in it. Even though corporate bonds were down, a peak to [inaudible 00:49:20] investment at corporate bonds were down almost 20%. People can’t believe that. This is where the raise and part of the curve was down like 15%, 17%, right? People don’t believe that. They’re like, “No, that was, that didn’t happen on this market.” That’s how bad things were.

[00:49:36] Pierre Daillie: Yeah, right.

[00:49:36] Jeffrey Sherman: It’s just that the ratio on the other side of treasuries and the mortgages held out. But rates have been going up since March of last year. You know, uh, people are like, “Oh, well, they look at …” They, they bought them back then. And even the, the rally we saw on July of last year, it was still above the lows in March. And so I just think that, you know, there’s a lot of complacency out there. There’s a lot of focus on the bad and, you know, people are saying, “Well, you know, the, the Fed’s gonna have our back.”

I was just talking to some equity derivative strategist before here. And they’ve … Uh, it was a great phrase he used. He said, “It’s the high strike put from the Fed.” And what he means by that for people who don’t know the, the options where I say in that the Fed won’t allow it to go down very botch. It’s not that there’s a put out there at 20%. But, you know, when I look at the Fed, the Fed’s doing the best they can, right?

[00:50:22] Pierre Daillie: Yeah.

[00:50:23] Jeffrey Sherman: And they’re gonna get out of buying bonds, it’s gonna take them a while. So the taper does not mean rate rise, it doesn’t mean they stopped supporting the market, it’s five less. They’re gonna do it very slow, the unwind. They’re gonna be, it’s gonna be very messy, it’s gonna be very calculated. They’re gonna convey it. They don’t wanna screw this up, right? And so they’re not going to hike at this unless, you know, they start seeing more exogenous signals here. But given that we have Delta, you know, Lambda’s coming. And as we see, there’s cases in California …

[00:50:49] Pierre Daillie: Yeah.

[00:50:49] Jeffrey Sherman: … it’s here already. You know, for those of you that, that didn’t study statistics, you got to learn the Greek alphabet. Um, you know, but, you know, we’re halfway in the Greek alphabet already?

[00:50:58] Pierre Daillie: Yeah.

[00:50:58] Jeffrey Sherman: And, you know, I, I think that you’re, you’re gonna see more support there. So I, I just, I, I wouldn’t fight the Fed. That’s the old saying, I wouldn’t do it today. But also, they’re not omnipotent, either. They’re just, they’re a collection of people doing the best they can. And they’re gonna continue to support the markets, which means so many things will be distorted for a longer period of time. But that doesn’t mean you should be complacent and accept that. Always look for good ideas and ways to fill a hole in your portfolio. That’s the best portfolio management advice I can give.

What is the risk to your portfolio that, that will hurt your portfolio today? And if that happens, is there a way to bring something into there that will help offset that? And in the bond world, we could … If you could do it positive carry, I mean, can I buy something that yield something that offsets my risk? That’s a beautiful thing. We don’t have to do hedge, you don’t have to give up some return. You gain incremental return and diversifying that.

[00:51:53] Pierre Daillie: Well, uh, Jeffrey, you make a really eloquent case for, for the idea that, that investors … You know, given the increasing complexity of the market and the environment that we’re in, um, the, the market in the environment that we’re in. Um, and speaking of, of, uh, reducing duration and portfolios, I wanted to get to the subject of commodities ’cause that’s something that you’ve been talking a lot, uh, uh, more and more about, uh, this past year.

[00:52:18] Jeffrey Sherman: Yeah.

[00:52:18] Pierre Daillie: Um, how, how can investors think about incorporating commodities into their portfolios so as to, uh, lower the duration of their portfolio?

[00:52:28] Jeffrey Sherman: Yeah.

[00:52:28] Pierre Daillie: And also, uh, maybe participate in, uh, the inflation that, that’s coming?

[00:52:34] Jeffrey Sherman: Yeah. I mean, the, the, the, the negative case against commodities … Well, uh, I’m a bad marketer, I’ll stop there.

[00:52:39] Pierre Daillie: Yeah.

[00:52:39] Jeffrey Sherman: That’s when I had to get out of the sale side, you know, I fell back to what I do. Uh, but, you know, the thing is, is the negative case for commodities is they went up a lot.

[00:52:45] Pierre Daillie: Yeah.

[00:52:46] Jeffrey Sherman: Like and, you know, people that they’re like … Uh, unlike stocks … And stocks go up, people like them more, they want to buy more, but, uh, in most asset classes, they, they did the, that’s the negative case. But they also went down a lot last year. And we’re at age …

[00:52:58] Pierre Daillie: Yeah. It’s, it’s kind of early innings still, even though they had the, the sharp increase this last year. But go ahead, sorry.

[00:53:03] Jeffrey Sherman: Really believe that because …

[00:53:04] Pierre Daillie: Yeah.

[00:53:05] Jeffrey Sherman: … change and why I think that. So that there’s … Uh, now I’ll give you the positive cases for clients. You know they’re up 20 plus percent and on, on a broad basket. Um, people have been burned in commodities so they don’t like the asset class. But there’s some structural reasons to really like it. So first of all, we have a lot of supply constraints still in the commodity market. Uh, the number one being the oil market, right? The US shale production got halted. And we know it’s much more difficult to bring back online quicker, right? So you’ve seen OPEC Plus have a better control in the market. They have a bigger market share because of the eradication that we saw some production last year.

Secondly, the US has been heavily indebted in that sector on the energy side. So it’s gonna take time. They, they did want to do a lot more of an investment and it’s exploration because they already have a high bar. And this is a big component of the high yield market, right, where it was financed there. So, um, what you’ve seen there is its reticence to really come back and, and try to CapEx, and ex- expand a lot. So even though there was this revolution coming into the pandemic, uh, from US production, I think that that has been curtailed a bit. Secondly, it’s gonna take a lot longer to bring back online.

Uh, but you also look at the other component and the growth can possibly come back. And that’s the metals, the industrial metals. And so, you know, people focus on copper, there’s a reason copper is the barometer for the health of the economy because it is the most consumed industrial metal. And I think copper is highly constraints still, right. Now, we talked about the supply concern of, of energy. But when you come on to industrial metals, you know, that felt like just digging a hole in the ground and finding oil. That’s digging big holes in ground, paving roads, smelting plant up. Like using energy as an input cost into it to bring that to market.

And so mining, you know, a, a, a good mine takes three to five years of a CapEx outlay to be able to do that. So even if they want for branch production, it’s three to five years max, right? And you could say, “Okay, maybe it’s two to four.” ‘Cause there was some of that been, uh, done last year. So I just think with the … Especially with this electrification of vehicles, there’s gonna be a lot of demand from that side. And the supply is just there, right. And so it’s going to be constrained for at least a couple more years. And so you mentioned Francisco Blanche, I think, you know, uh, he has a pretty decent price target, uh, on copper being about 50% higher than here. Jeff [inaudible 00:55:22] Goldman has the same thing. And we completely agree with that. So I, I think that’s one area people should focus on. Um, but also, don’t forget, the ancillary industrial metal like nickel, I think it’s very imp- too …

[00:55:33] Pierre Daillie: Yeah.

[00:55:34] Jeffrey Sherman: … right, for the galvanization of all this. And so when you start to look at what’s going on there, you find that there’s going to have to be a lot of consumption, these traditional commodities to move us away from the combustible engine, right. And then you have the electrification of everything. So, um, I’m very bullish still on the industrial metals. Um, the agricultural side. And just given climate change, uh, in general, and what we’ve seen … Look at this year, right? Um, I mean, just floods. We have fires here in California and floods in New York subways in the same day, right.

I mean, just the extreme weather, the hurricanes, and the severity of them. So this is hurting crop production across the globe. So I do think there’s a challenge there. There’s gonna have headline risk where it’s the commodity investors are evil, they’re causing food price inflation. But the inflation is coming from the other side of the equation. It’s coming from, you know, bad crop production. So I still like the agricultural sector. So here we go, those are the three main components of the commodity market that have very positive fundamental stories.

[00:56:28] Pierre Daillie: Yeah.

[00:56:28] Jeffrey Sherman: Now, the other side is precious metals. And people buy gold, some people buy silver, you know, um, you know, when you think about the precious metals. But gold has been one of those things that, you know, it hasn’t done very well. Yeah, since the pandemic lows, it’s done okay. We got for 2,000. We set a new high in nominal dollars last year. But if you think about what happened with the dollar over the last few months, the dollars rally is not alive. You know, they have 4% or 5%. Um, and gold’s hung in there. You know, uh, yeah, it’s, it’s, it’s what, wallowed, but it hasn’t sold off massively. And usually, you would see that relationship. So I, I still think gold makes some sense here. If you wanna get speculative on inflation, silver has a better beta. It, it, it moves faster with it.

[00:57:08] Pierre Daillie: Yeah.

[00:57:09] Jeffrey Sherman: And silver value to the gold looks very cheap right now. So if someone wants to play, I direct that on the inflation side, yeah, I, I like the silver trade o- over gold. But why, why have to bet on one? Bet on all of them. They have this support.

[00:57:21] Pierre Daillie: Yeah.

[00:57:22] Jeffrey Sherman: You look at the broad-base index. Today, the broad-based BCOM index, it’s, it’s been just vacillating while the dollar has been rallying.

[00:57:30] Pierre Daillie: Right.

[00:57:30] Jeffrey Sherman: And it’s right at these five levels. So if you’re a technician, wait for the breakout. We’re on the cusp of it. But I think the catalyst here, here with a lot of these trades is the dollar. When the dollar starts to depreciate, that’s when some of these things take off. And so I’m a big fan of the commodities market. Today, we’re, our asset allocation, we’re kind of neutral-ish. We’re waiting for that breakout or a, or a breakdown in the dollar.

[00:57:53] Pierre Daillie: Right.

[00:57:53] Jeffrey Sherman: And that, we would really go overweight at that point in time. So, um, you know, so we run commodity strategies still at DoubleLine. So it’s something that we think is, uh, important piece to really think about. An investor have had some bad experiences over periods of time, uh, we think it is time to revisit that allocation.

[00:58:10] Pierre Daillie: Jeffrey, wow. I mean, this conversation has just been, just the blow out. Thank you so much. It’s, uh, I, I’ve, I’ve got one last question for you …

[00:58:19] Jeffrey Sherman: All right.

[00:58:19] Pierre Daillie: … before I let you go. Um, uh, uh, so would you rather … Question, very technical?

[00:58:26] Jeffrey Sherman: Okay.

[00:58:27] Pierre Daillie: Okay. Would you rather be the worst player on an awesome team or the best player on a terrible team?

[00:58:39] Jeffrey Sherman: Obviously, the former. I’m a team guy. Like, like, it’s all about the team, how do I contribute? Being the worst player, uh, means I have a chance to improve, right?

[00:58:47] Pierre Daillie: Mm-hmm [affirmative].

[00:58:47] Jeffrey Sherman: I like to learn from those around me. Hopefully, uh, depends on if it’s the athletics, uh, maybe, maybe I can get, garner those skills, but absolutely, uh, be the worst player in the team or be the, the least smartest guy on the team, right?

[00:58:59] Pierre Daillie: Yeah.

[00:58:59] Jeffrey Sherman: Because of the ability to learn. And so to me, that, that’s the, that’s, that’s the better approach. And, you know, surround yourself by people smarter than you. Hire people smarter than you. That’s the way to have a best type of business. And as you said, I’ve got Sam Lau, I got Jeff Mayberry, I got these guys.

[00:59:14] Pierre Daillie: Yeah.

[00:59:14] Jeffrey Sherman: I’ve done some very good hiring over the years. And, um, I surround myself with smart people. I like to be the dumbest guy in the room.

[00:59:21] Pierre Daillie: Yeah. It’s wonderful because they, they, they I think they share your humility as well, having, having heard enough and seen enough of your, of your, uh, content.

[00:59:31] Jeffrey Sherman: [laughs].

[00:59:32] Pierre Daillie: So Jeffrey, where can people find you very quickly?

[00:59:34] Jeffrey Sherman: Yeah. So if you’re looking for some stuff, we put all on Twitter, it’s @ShermanShowPod.

[00:59:39] Pierre Daillie: Right.

[00:59:39] Jeffrey Sherman: Uh, we have our Sherman Show Podcast. Um, it’s on all the, all the po- providers out there. Obviously, the DoubleLine website. Uh, we talked about Sam Lau and Jeff Mayberry, they have a podcast now weekly called DoubleLine Monday Morning Minutes.

[00:59:52] Pierre Daillie: Yup.

[00:59:52] Jeffrey Sherman: Um, you can, you can look that up, uh, on the Twitter as well. They put out a lot of macro stuff. So, uh, complimentary to what we’re doing, The Sherman Show Pod. And so that’s the YouTube channel,, um, you can find all the videos and stuff we put out there. And so, um, you know, we have our webcast out there. You know, go to the DoubleLine funds website, you can check out our webcast. Uh, we, we do them every few weeks. So, um, especially in this world, we’re putting out lots of content. So, um, you know, anybody wants that, you can do fund info at and, and, and ask questions and you’ll get replies from, uh, all of my, uh, all of my co- colleagues around us so.

[01:00:30] Pierre Daillie: Awesome. Awesome. Jeffrey, thank you so much for your incredibly valuable time.

Listen on the move


About Jeffrey Sherman

Jeffrey Sherman, CFA

Deputy Chief Investment Officer
As DoubleLine’s Deputy Chief Investment Officer, Jeffrey Sherman oversees and administers DoubleLine’s Investment Management sub-committee coordinating and implementing policies and processes across the investment teams. He also serves as lead portfolio manager for multi-sector and derivative-based strategies.  He is a member of DoubleLine’s Executive Management and Fixed Income Asset Allocation Committees.  He can be heard regularly on his podcast “The Sherman Show” (@ShermanShowPod) where he interviews distinguished guests, giving listeners insight into DoubleLine’s current views.  In 2018, Money Management Executive named Jeffrey Sherman as one of “10 Fund Managers to Watch” in their yearly special report. Prior to joining DoubleLine in 2009, he was a Senior Vice President at TCW where he worked as a portfolio manager and quantitative analyst focused on fixed income and real-asset portfolios. Mr. Sherman was a statistics and mathematics instructor at both the University of the Pacific and Florida State University. He taught Quantitative Methods for Level I candidates in the CFA LA/USC Review Program for many years.  He holds a BS in Applied Mathematics from the University of the Pacific and an MS in Financial Engineering from the Claremont Graduate University. He is a CFA® charterholder.
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