Jeffrey Gundlach, the CEO, CIO, and founder of DoubleLine, known as the 'New Bond King,' stated in a recent live broadcast that the time has come to shift from purely American investments to diversified investments, reiterating a bullish outlook on non-American markets, particularly the European stock market.

Gundlach believes that the US stock market is currently at a severely overvalued level, with the MAG 7 representing too high a percentage of the market cap in the S&P 500, and investors should avoid excessive concentration in a few large Technology stocks. Regarding the US economy, Gundlach predicts a 60% likelihood of recession in 2025, which is more pessimistic than some economists' predictions (30%-40%).

He also pointed out that as the global economy enters a new phase of rising long-term interest rates, the leading indicators for US Treasury yields have shifted from the Copper/Gold ratio to Crude Oil and USD, and both indicators now suggest there may still be room for further decline in the 10-year US Treasury yield.

Gundlach reiterated his bullish outlook on Gold, predicting that gold prices are expected to break through the $3,000 mark, possibly even reaching $4,000. He believes that the current financial system seems to be in turmoil, and the global central bank's trend of increasing gold holdings will not change.

Key highlights from the observations are as follows:

As we enter 2025, the risk markets, particularly the (US) stock market, are severely overvalued. The median forward PE ratio of the S&P 500 is at the 98th percentile, nearly at an all-time high. Non-American stock markets are slightly cheaper, with all markets except China, Emerging Markets, and KBW regional banks above average levels.

Once the USD enters a downward trend, the European stock market will start to perform excellently, and this trend seems to have already formed. I reiterate my advice: first, invest in European stocks, which I've mentioned about three and a half years ago, along with other non-American stocks.

I see many interesting predictions, with people saying that Gold will reach $3000, but this is not a bold prediction since the starting point is already over $2900. The real prediction was made when it was at $1800, not at over $2900. I boldly predict that Gold could reach $4000.

I don't think this trend (Institutions increasing shareholding in Gold) will stop. The characteristics of Gold are changing. In the past, Institutions sold Gold, but now they have started to Hold a large amount of Gold again. I believe this is a recognition of Gold as a value storage method independent of the financial system, which currently seems to be in turmoil.

We used to use the Copper-Gold ratio, but once the deflationary world of declining long-term rates was replaced by a world of rising long-term rates, it became ineffective. I believe we are in such a world now. Therefore, I have been looking for indicators that have been effective in recent years, one of which, clearly, has a strong correlation is the Crude Oil Product price. Currently, this indicates that yields remain relatively high compared to the Crude Oil Product price, which has significantly dropped from around $80 a year ago to $67 or even lower. Another highly correlated indicator is the USD. The USD Index (yellow line) shows that there may still be further room for decline in (American) 10-year Treasury yields.

The government seems to acknowledge that they are not as concerned about the stock market as they were during Trump's first term; they are more interested in navigating through the economic transition period. The last time I heard the word "transition" was in 2022 when the Federal Reserve referred to inflation as "transitory." We will see if this is really an economic transition.

It seems that the probability of recession is rising. We see economists lowering the probability of recession this year to about 20%, but now I hear some people raising their estimates to 30% to 40%. I believe the probability of a recession in 2025 is around 60%.

By cutting interest rates by 100 basis points, the Federal Reserve now better aligns with the interest rate hike/cut expectations and the two-year Treasury yield, which is now around 3.9%. Therefore, the Federal Reserve may cut rates once this year, maybe one and a half times.

At that time, people talked about the risks to the USA's credit rating, the government shutdown, and a rating agency partially downgraded Treasuries, which I think is foolish and still think so.

(USA imports and exports) prices may continue to rise as the tariff issues evolve. Right now, the tariff issues seem to change every hour, being implemented and sometimes canceled, with no clear logic. I know Trump likes to negotiate in public and say things he may not really believe, such as "Canada will become the 51st state." I don’t think he really believes that, but he just enjoys provoking others.

The top five companies in the S&P 500 Index (Apple, Microsoft, NVIDIA, Google, and Amazon) have seen significant changes in their Market Cap proportions over the past few years. Around 2020, it started from about 15%-17% and then rose to 28%. If you add two more companies, if you invest in the S&P 500 Index Fund, by the end of 2024, nearly half of your portfolio will consist of these seven companies. That is why I have been suggesting that investors Hold equal-weighted American Stocks or the S&P 500 Index.

If the trade-weighted USD in the USA declines, this is my expectation from a long-term trend perspective, then Emerging Markets should outperform. The USD must convincingly break below the Index, around 118, before we see some downward momentum.

The following is the full transcript of the new Bond King live broadcast, translated by AI:

Welcome everyone, thank you for joining today's "Total Return" webinar. There is only one month left until the Masters Golf Championship; time flies, especially as you grow older, this feeling becomes more pronounced.

Today's topic is "Not in My Neighborhood." I almost named it "In My Community" because the picture on the screen is of streets in the Palisades area. People often think that their lives will not be affected by certain events. For instance, no one would think that a wildfire could occur in their backyard, destroying about 6,000 to 7,000 buildings in a dense community. But today's discussion will focus on investment topics, and we will explore how to shift from purely American investments to diversified investments.

I have frequently discussed this topic for the past three years or so. Now, the timing seems to be right, and we will delve deeper into it.

DOGE also reminds me of the Concept of "Not in My Neighborhood." Many people dislike the waste and corruption of the federal government, but once someone starts actually cutting spending, people don't want their interests to be affected. It's like you can't cut spending without trimming some things. You must find fraud, waste, and corruption, and truly cut them. I strongly support this approach because it is the only way we can get our finances in order.

I also want to say that the momentum stocks of the Mag 7 (referring to the seven major Technology stocks), especially Mag 7, were once considered unbeatable and have performed excellently. But that is not the case anymore. Every Industry has vulnerabilities, and we are now clearly beginning to see this.

Next, I will continue the discussion through a presentation. This is our starting point for 2025, actually at the end of 2024, on December 27. As we enter 2025, the risk markets, especially the stock market, are severely overvalued. We can see that this is divided into three parts. On the left is the US stock market, with the X-axis representing the starting time of the data series. We will compare the valuations on December 27, 2024, with the time period from the starting point on the X-axis to today.

For example, the median forward PE ratio of the S&P 500 is in the 98th percentile, nearly never this high. This reminds me of 2021 when I talked about the market being overvalued. Of course, 2022 was a catastrophic year for both the stock and bond markets.

The situation in the US market is obvious, but you will find that except for small-cap stocks, we are indeed at the top decile of overvaluation as we enter 2025. The non-US stock markets are slightly cheaper, except for China, Emerging Markets, and KBW regional banks; all other markets are above average. There are no really super-cheap valuations in the non-US stock market at the end of the year.

Next, we see that the fixed income market is different. The corporate bond spreads are nearly the narrowest in history, and overall corporate bonds are similar. As you enter lower-rated junk bonds, their valuations are not as high relative to history (dating back to the 1990s). Then we see that the valuations of CMBS (Commercial Mortgage-Backed Securities) are significantly the cheapest relative to history since 1997. This is the background as we enter 2024. So, what happened on March 7?

Of course, since then, some situations have worsened, but we see that the Dow Jones Industrial Average is the best-performing standard stock index, showing a slight increase. Of course, that is no longer the case. The S&P 500 is down 1.6%, and the Nasdaq has fallen more than 5%. Of course, the losses over the past few days have been more severe. The E-mini Russell 2000 Index has performed worse. The non-US stock market, the global stock market actually saw a slight increase, but the Eurozone rose 12.4%, which is very unusual based on recent historical performance.

We also saw the FTSE Index perform well, up 9.6%, while Nike has slightly retraced. Then we enter the fixed income market, which has outperformed the major stock indices, and this gap is clearly widening.

I believe the SSE Conglomerates Index has performed about 12 percentage points higher than the Nasdaq so far, and Bonds are basically all rising. It's just a matter of where you stand. The worst performers are floating rate bonds, as interest rates have fallen, and floating rate bonds have not benefited from the same price gains.

We saw that this year the USD weakened, and the USD Index fell by 4.3%. This is also part of the reason why Eurozone stocks have performed so well relative to the US stock market.

This is a topic I have been discussing for the past three years, or even longer. Once the USD enters a downward trend, the European stock market will begin to outperform, and this trend seems to have formed. We see currencies like the euro and yen appreciating against the USD. Then we observed a significant drop in the Energy Sector, which declined by 6%. Oil prices are falling, which is one of the government's targets. We will see if this continues.

The commodity market overall rose by 5.7% (Bloomberg Commodity Index) and 1.2% (Goldman Sachs Commodity Index). The biggest winners are metals, with Gold, Copper, and Industrial Metals all rising, especially Copper which had a significant increase.

Gold continues its bull market, which we have talked about for several years. Since Gold dropped to 1800 USD, it is now close to 3000 USD. I see many interesting predictions with people saying Gold will reach 3000 USD, but this is not a bold prediction since the starting point is already over 2900 USD. The real prediction was made at 1800 USD, not at over 2900 USD.

I boldly predict that Gold may reach 4000 USD. I am not sure if this will happen this year, but I believe this is the expected long-term target for Gold after consolidating around 1800 USD. Therefore, the market performance has been mixed up to March 7 this year, with both gains and losses.

We look at the performance of the Bloomberg Aggregate Bond Index in its historical context. Here is the performance data for the Aggregate Index over the past forty-nine years, with this year as the dark line, thicker than the others. We can see that this year ranks 5th among the forty-nine years, making it one of the best performing decile years so far. We note that 2022 stands out completely from the historical context.

Thirty years ago, we considered 1994 a bad year because it dipped slightly. However, the performance in 2022 far exceeded the experiences of other years.

This is the historical drawdown of the Aggregate Index. Since we have been in a long-term bull market from the 80s to 2022 or 2021, drawdowns have not lasted long because with long-term interest rates declining, the market reached new highs. The drawdown that began on August 20, 2020, I do not know if it will be surpassed. It may take years of new bond issuance and economic rotation to achieve that. But now, we are 55 months away from the peak price of the Aggregate Index, and the drawdown is still 17.2%. This is quite a significant price drawdown.

This is the 30-year treasury bond, the longest duration bond. We see that its price is still 48% lower than the peak in August 2020, just like the overall index. Therefore, the loss on treasury bonds since the peak remains substantial, and it will soon be five years.

This is our yield rate chart for the past 10 years. In the top left corner is the yield of the two-year Treasury bond, which has sharply increased as the Federal Reserve raised interest rates, ultimately increasing by 500 basis points, reaching 525 basis points. The two-year yield peaked a few years ago and is now about 4%. The five-year Treasury yield is slightly higher at 4.09%, following a very similar pattern to that of the two-year.

The 10-year Treasury bond in the bottom left corner is the same. Therefore, we have not seen a new rate peak for several years, and the 30-year Treasury bond follows the same trend. This appears to show a consistent movement across the entire yield curve, although there are times when it becomes inverted; we are currently in a quite dispersed yield curve.

We used to use the copper-gold ratio, but once the deflationary world of declining long-term rates was replaced by a world of increasing long-term rates, it became ineffective. I believe we are now in such a world. Therefore, I have been looking for effective indicators in recent years, one of which is clearly strongly correlated: crude oil prices, as shown on the screen (yellow line) alongside the yield of the 10-year US Treasury bond (blue line).

Except for that exception in the fourth quarter of 2024, they appear almost to be the same line. This indicates that yields are still high relative to crude oil prices, which have significantly dropped from around 80 dollars a year ago to 67 dollars, or even lower.

Another highly correlated indicator is the USD. This is almost entirely consistent and almost the same line. This also suggests that the USD index (yellow line) indicates that the (US) 10-year Treasury yield may have further room to decline.

I guess this will require more economic anxiety, perhaps some real recession risk. The government seems to acknowledge that they are not as concerned about the stock market as they were during Trump’s first term; they are more focused on getting through the economic transition period. The last time I heard the word 'transition' was in 2022 when the Federal Reserve described inflation as 'transitory.' We will see if this really is an economic transition. This is the current state of the 10-year Treasury yield.

As I mentioned, the yield curve was previously inverted but is no longer inverted. The current spread between the two-year and 10-year yields is 33 basis points, whereas it was once negative at 108 basis points. Therefore, the steepening of the yield curve is quite significant. The red shaded area indicates recession periods. Generally, when the curve is no longer inverted, a recession is expected. This has not happened yet, at least not officially.

But if you look at the blue line, which is the 12-month moving average, it has not yet surpassed the zero line, although it is very close. If you look at the histogram for the recession periods, the really decisive moment seems to be when the 12-month moving average crosses above the zero line, which should happen soon.

Therefore, it seems that the possibility of a recession is increasing. We have seen economists lower the probability of a recession this year to about 20%, but now I hear some people raising their estimates to 30% to 40%. I believe the likelihood of a recession in 2025 is about 60%. This chart supports that view.

This is a chart of the federal funds rate and the Federal Reserve's expectations for interest rate hikes/cuts over the next 12 months. We see that, before starting to cut rates in September, the Fed's target interest rate (yellow line) diverged greatly from the expectations for rate hikes/cuts (bottom panel). It also differed significantly from the two-year Treasury yield (which is similar to the rate hike/cut expectations). With a 100 basis points cut, the Fed is now more aligned with the expectations for rate hikes/cuts and the two-year Treasury yield, which is now around 3.9%.

Therefore, the Fed may cut rates once this year, maybe one and a half times. In recent days, the market has readjusted its expectations, believing the Fed might cut rates more than twice this year. I am skeptical about this, but we will see how the data develops.

This reflects the market's pricing volatility for the Fed's rate cut in 2025. Looking back to the end of 2023, we see that for most of the first nine months, the market priced in a lot of rate cuts, but many expectations for cuts were cancelled starting in September. In the last month, rate cut expectations have been priced in again. Thus, it has been like a roller coaster, from about one rate cut to eight rate cuts, and then back to one rate cut, and now back to more cuts.

Therefore, this situation continues to fluctuate. This is the relationship between the two-year and ten-year yield curve and U3 (overall unemployment rate). The trend of the yield curve, the spread between the two-year and ten-year indicates that the unemployment rate should rise. It began to rise and then slowed down.

Therefore, this suggests that employment conditions will further deteriorate. Of course, if the government cuts jobs and waste, the unemployment rate could significantly rise. We will see if this is important, as it is the unemployment rate, or if it has a smaller impact because it is a target sub-industry. We will see what happens.

This is still a chart that indicates a recession. This shows the relationship between the unemployment rate and its 36-month moving average. It appears to be rising, but then it stagnated.

The time points most similar to this are the peaks of risky assets in 2000 and 2007-2008. This chart is somewhat flatter than those periods, but we have not seen the kind of significant acceleration like we did after 2007. Next, I will show some economic charts that reflect the actual changes from the beginning of the year to now. The first is the Consumer Board's expectations for a decrease in jobs over the next six months, which has risen sharply. This may be related to government agencies, but it has already exceeded the peaks from 10 years ago and even earlier.

Since 2010-2011, we haven't seen such a rapid rise. At that time, people talked about the risks to America's credit rating, the government shutdown, and a rating agency partially downgraded government bonds, which I thought was foolish and still believe so. But the last time this peak led to a recession. We will see what happens this time.

But this is a huge change that happened in a short time. This is the GDP forecast from the Atlanta Federal Reserve, which has been fluctuating between 2% and 2.5%. You will notice that earlier this year, blue-chip economists aligned with the Atlanta Federal Reserve's GDP forecast, and then suddenly, as tariff issues intensified, we saw a massive distortion in the economy, one of which was the actual GDP for the first quarter, which the Atlanta Federal Reserve now estimates to be negative 2.5%.

We haven't seen numbers like this in a long time. I don't know why such a huge change occurred in one day, down from about negative 1.5%. Therefore, I will keep a close eye on this.

This is another disturbing trend, but it is not new. This is the federal deficit broken down by fiscal year. The fiscal year starts in October. You will notice that over time, we are further getting into the deficit problem each year, and the fiscal deficit is rising. 2021 was bad, 2022 was worse, and 2023 is the worst year yet. 2024 has started off very poorly.

Therefore, let's hope we can make progress in cutting some fraudulent projects, as the government seems completely willing to implement and maintain these projects. Of course, we want these projects to disappear. I think the level of misallocation of government funds cannot be overstated.

This is the Treasury's monthly bond issuance since 2007. This is interesting. You will notice that the massive number of bonds issued to cope with the COVID pandemic matches the significant borrowing we've seen over the past year. Will this set a new record? I certainly hope not. But in what is considered global economic growth, the amount of debt corresponds to the most spectacular responses of fiscal stimulus and money printing, which is indeed frustrating. The amount of debt we are issuing now is the same as during that $7 trillion period of money printing.

This is a chart I have never used before, but I find it very interesting. We have the relationship between budget deficits and unemployment rates. The percentage of the budget deficit relative to GDP is on the Y-axis, and the unemployment rate is on the X-axis. You can see the trend from 1960 to 2017. When unemployment rates are high, deficits are also high to address the unemployment rate; when unemployment rates are low, deficits are relatively low, and even in some years, there are surpluses instead of deficits.

But now let's look at what happened from 2016 to 2024. We see unemployment on the left side of the X-axis, but the budget deficit near the bottom, accounting for 7.2% of GDP, which is the highest level since then. We have not yet entered a recession.

I know I often mention this issue, but I won't discuss it too much this time. I hope we can truly address the budget problem. I previously had a question, like a "why don't you stop abusing your wife" question. Someone asked me if I still support everything the Trump administration has done. I have never supported everything the Trump administration has done. I dislike the cap on state and local tax deductions, I dislike the tax cuts implemented by Trump, and I dislike certain things done by any administration.

So, let's see what will happen next. I do support the idea of budget cuts. I hope we can find at least $1.5 trillion in cutting space. This seems to be a daunting task.

Next is the overall and core CPI, and we will discuss the inflation issue. Right now, the progress of inflation is one of the troubles the Federal Reserve is facing. They have been saying in press conferences that we are making progress, so let's see what happens next week, but in fact, we haven't made real progress. The core inflation rate is well above the 2.0% target, with CPI at 3.3%, and the overall inflation rate at 3.0%, which is actually rising in the most recent reading.

This is the core producer CPI, which is actually the producer price index. They are even more uncooperative for the Federal Reserve. We see that final demand prices are close to zero but have now surged sharply to an annual growth rate of 3.5%. The core component of final demand prices, excluding food and energy, although it hasn't risen at the same pace, has also not dropped significantly like before because it is less volatile.

The next slide, which I think is the most concerning for the Federal Reserve, is the monthly change in CPI. The above chart shows the overall inflation rate. It is not only rising every month but is almost monotonically increasing. Over the past eight months, each month’s inflation rate has been equal to or higher than the previous month. The inflation rate for the most recent month is 0.5%, which means the annualized inflation rate is well above the 2% target. The middle chart shows food prices rising over the past few months as well as the previous month.

Then we see that energy prices have been better controlled over the past few months, except for the last two months. Therefore, I believe it is the monthly inflation rate in the above chart that worries the Federal Reserve. The core CPI is the same, and the most recent reading is very poor, with a core inflation rate of 0.45%. New data will be released tomorrow, expected to be a bit better than this number, but let's see how the actual situation is.

You can see that the month-on-month change in enterprise CPI has stopped declining. We see that used car and truck prices, after a massive price increase during the pandemic, have gone through a period of adjustment and are now starting to rise again. Then we see that owners' equivalent rents are gradually slowing down. This situation may continue, perhaps not happening in Huntington Palace, where surprisingly, despite the region needing a lot of work to return to previous levels, housing prices are still high at least in terms of quotes or listing prices.

Next is the super core inflation rate. Now no one is talking about this indicator anymore. I think the Federal Reserve may have shelved it because it does not meet expectations. The super core inflation rate excludes super core services (excluding housing). In other words, it excludes food, energy, and housing, which nearly covers most of the essential purchases in people's lifestyles.

The super core inflation rate for the last month was 0.7% and 0.6%, which is a shocking number, comparable to the inflation levels during Jimmy Carter's era.

We have also seen some easing in Medical Services prices, but the price of auto Insurance remains terrible, rising 2% each month. Over the past three years, insurance prices have increased by about 160%.

Next are the year-on-year changes in export and import prices. These data are not seasonally adjusted and do not include any quality adjustments or similar treatments. They were once very inflationary, then saw some pullback in 2023 and 2024, but are now rising again. We see export prices rising 2.7% year-on-year, and U.S. import prices rising 1.9% year-on-year. This does not take into account the impact of further implemented tariffs.

So, I guess these prices may continue to rise as the tariff situation evolves. Currently, the tariff issue seems to be changing every hour, sometimes implemented, sometimes canceled, seemingly without a clear logic. I know Trump likes to negotiate in public and says things he may not really believe, like 'Canada will be the 51st state.' I don't think he truly believes that, but he just likes to provoke others, I suppose.

Next is the one-year inflation expectation, which is shocking. It's hard to imagine the Federal Reserve cutting rates with a one-year inflation expectation reaching 4.0%. These short-term inflation expectations are among the highest levels we've seen in the past year. Then there are the Michigan Consumer Inflation Expectations, which have again soared to 4.3%, comparable to the one-year inflation expectation. So, inflation expectations may be because people believe tariffs will lead to rising inflation, and perhaps they will.

This is a concerning issue for the Federal Reserve and has impacted expectations for rate cuts. Next is the Bloomberg Commodity Index, which has recently shown some signs of recovery, primarily due to rising prices of Commodities like Copper and Gold, rather than rising Energy prices. Currently, this index is above its slowly rising 200-day moving average. Thus, overall Commodities are no longer declining and show some signs of recovery. This is clearly unfavorable for the inflation outlook.

Looking at Gold again, the closing price on March 7 was $2090.5, and today's price is almost the same as it was then. You can see the consolidation range around $1800 mentioned in the chart, then the eventual breakout above $2000. When it broke above $2000, you might expect its upward movement to be almost equal to the width of the consolidation range. In my view, this indicates that the price of Gold could break through $3000, and possibly even reach $4000.

We will continue to observe. This is also one reason for Gold's strong performance. Data from the International Monetary Fund (IMF) shows that Global central banks' Gold reserves are rapidly increasing. Since 2010, Gold reserves have increased from $34 billion to $41 billion. While the absolute scale here is not large, the growth rate is very fast. I don't believe this trend will stop.

The characteristics of Gold are changing. In the past, central banks sold off Gold, but now they are starting to hold large amounts of it again. This indicates a recognition of Gold as a store of value independent of the financial system, especially as the financial system seems to be in turmoil.

Next is the balance of trade in goods for the USA, which is certainly related to tariff expectations. We see that the USA's trade deficit in goods reached 156 billion USD in the last month, exceeding levels during the pandemic. The trade deficit now stands at 156 billion USD.

This relates to the theme of "not in my backyard." It seems that the actions of central banks are changing, which is related to geopolitical issues, and ultimately, we believe this may lead to changes in capital flows. This could have a significant impact on the so-called "American exceptionalism," which I define as the performance of the American financial markets being better than that of other countries in the past. We will explore this issue in the next few minutes.

Next is the average tariff rate on imported goods into the USA, a metric dating back to 1930. We see that tariffs were much higher in previous decades, especially before 1950. Now, during the Trump era, tariff rates seem to be rising again. A lot of tariffs have been implemented in recent years, but what is shown here is the average tariff rate on durable goods imports (gold line), the average tariff rate on all imports (blue line), and the tariff rates during Trump’s era (red dots).

Next are our trading partners. The proportion of USA imports relative to each country's total exports shows that 80% of Mexico's total exports go to the USA, Canada is close to that with over 70%, while Japan is only 20%. This is why the trade relationship between the USA and Mexico and Canada is so complex, as they are key trading partners for the USA.

I understand the logic behind Trump's tariff policies, known as "reciprocity," because the tariffs on our imported goods seem to be higher than those on goods we export to other countries. Therefore, some changes will certainly happen, and the market's response so far indicates that this could have a significant impact on what are considered eternal trends, such as the belief that the American financial markets will always perform better, or that the USA's trade position will never change. Trust me, this situation can actually happen.

I know this because my house caught fire on January 9th. Fortunately, it was just the exterior or landscaping that was damaged, with no damage to the interior of the house, but the cleanup and repairs still require a lot of work and expense.

Next is the spread situation in the fixed income sector. We are entering the details of the bond market. The yellow diamond represents data from December 2024, while "current" refers to yesterday's data. We see that the spreads of some sectors have remained largely unchanged. We observe a narrowing of spreads for AAA-rated bonds in the leveraged loan market and High Yield Bond market. The spreads for BBB-rated bonds in CMBS have also slightly narrowed, but overall, the changes in spreads since the beginning of the year have been minimal.

First, there was a tightening at the beginning of the year, which is a common phenomenon at the start of the New Year. However, with the recent rebound in the treasury market, many sectors’ spreads have returned to previous levels.

For example, the spread between the high yield bond market and treasury market yields had dropped to as low as 252 basis points, but it has now risen back to above 300 basis points. Therefore, the high yield bond spread has widened by about 50 basis points. This is not due to a decline in high yield bond prices, but because the high yield bond market failed to keep up with the price increase in the treasury market. In fact, in many credit bond markets, prices have not risen; they have just 'stalled' at their price.

Next, we look at the spread between AAA-rated and BB-rated bonds in the corporate high yield bond market. It is noted that the BB-rated bond spread has widened, while the moving average of the AAA-rated bond spread (blue line) indicates that overall, the AAA-rated bond spread has narrowed, though it remains relatively high compared to the past. From the moving average, the default rate in the high yield bond market has started to rise, and the default rate in the loan market has also increased.

The default rate in the high yield bond market is 2.8%, which is not a very high default rate, but it has shifted from a declining trend to an increasing trend. The default rate in the loan market has reached a new local high, which is not surprising given that the Federal Reserve's rates are still 425 basis points above the cycle's low.

Therefore, the interest rates paid by companies in these floating rate markets are over 4 percentage points higher than a few years ago. Over time, more and more bonds are being repriced at higher rates, which will put pressure on companies. We also see the recovery rates of defaulted bonds, with recovery rates for high yield bonds at about 42 cents, which is not an ideal recovery rate and has not been better since 2017. The recovery rate for priority lien loans is 62 cents, which has been relatively stable over the past few years.

Next is the non-institutional CMBS market. We see that AAA-rated bonds have returned to pre-pandemic levels. AA-rated bonds have also nearly returned to pre-pandemic levels, though with slight volatility. This is similar to what we observed in the high yield bond market; it is not that CMBS prices have necessarily fallen, but that they failed to keep pace with the treasury market, especially considering their shorter duration. It is noted that BBB-rated bonds in the CMBS market have never come close to recovering to pre-pandemic levels.

They have recently risen, but from the second half of 2023 to early 2025, the spreads have narrowed significantly from about 900 basis points to around 400 basis points. Therefore, these spreads, like most spreads in the non-treasury market, have recently increased slightly.

Next is the S&P 500 Index, which was far above its 200-day moving average at the end of 2024, when market valuations were overly high. We have returned to the 200-day moving average and are now below that level. This is the situation as of yesterday. Although it seems that the S&P 500 Index might enter an upward range at closing, it did not happen today, and it experienced a slight decline. Therefore, we are now below the 200-day moving average of the S&P 500 Index, and the market still seems to have a downward trend.

Next is a big question: the market cap proportion of the top five companies in the S&P 500 Index. The market cap proportion of Apple, Microsoft, NVIDIA, Google, and Amazon has changed significantly over the past few years. Around 2020, it started at about 15% to 17%, then rose to 28%.

If two more companies are added, and if you invest in an S&P 500 index fund, by the end of 2024, nearly half of your portfolio will consist of these seven companies. This is why I have consistently recommended – I recommended it at the end of the year, in the Just Markets live broadcast, and at the roundtable forum – suggesting that investors hold equal-weight U.S. stocks or the S&P 500 Index.

We say that market cap weighted portfolios have definitely been hit lately because those once considered 'high flyers' cannot escape the consequences of high valuations. They ultimately will be impacted by the astonishing relative strength they held over the past few years.

So, next is the comparison between equal weight and market cap weight, where we see a huge cycle. This is similar to the concentration we saw during the global financial crisis when financial stocks were overly weighted in the S&P 500 Index, subsequently falling all the way down to 0.625 before rising back to the same high as during the financial crisis. While it is still uncertain now, signs of a break seem to have appeared. In a shorter time frame, the performance of equal weight has already surpassed market cap weight by several percentage points.

Next is one of the most astonishing phenomena, which is also the main reason I named this talk 'Not in My Neighborhood.' We see a comparison between U.S. stocks and stocks from other global regions, tracing back to the 'Nifty Fifty' bubble of the 1970s, which this current phenomenon reminds me of. I remember the 'Nifty Fifty'; I am old enough to have experienced that period.

At that time, the concentration of just 50 stocks in the U.S. stock market was considered absurd, but it then fell about 80% from its high. Looking back at the Internet bubble period, although not as severe as the 'Nifty Fifty,' the valuation of U.S. stocks relative to stocks from other global regions has become very outrageous. We have reason to believe that the capital inflow driving U.S. stocks to outperform is fragile and may reverse; we will discuss this later.

But look at the huge reversal since December 24, 2024; this has been a significant turnaround. I believe this trend will continue. Therefore, I reiterate my suggestion: first, invest in European stocks, which I mentioned about three and a half years ago, as well as other non-U.S. stocks. This is a comparison of stock prices with stocks from other global regions, narrowing the time frame to around the last ten years, we can see the extent of this reversal.

We are almost back to 2022 levels, although we have not fully reached them yet. This is the investment position of the USA, which essentially shows the net investment of foreign investors in the USA. Thus, foreign investment in the USA has increased from about 3 trillion dollars fifteen years ago to 23.6 trillion dollars now. When there is 20 trillion dollars of net capital inflow into the USA, this will obviously drive the U.S. market to outperform the foreign market.

However, with the various disputes surrounding tariff issues at present, and Europe suddenly feeling that the USA is no longer willing to bear the costs for NATO indefinitely, Europe needs to begin self-defense, and Germany, the United Kingdom, and other European countries may re-industrialize to become more self-sufficient in defense. This will almost inevitably lead to a reversal of capital flows and may result in non-American Stocks consistently outperforming American Stocks, possibly for years, or even decades.

Looking at Europe again, this is incredible. Our Double Line Capital first invested in Europe around 2021, marking the first time in the history of Double Line Capital that we invested in Europe. Initially, it did not go smoothly. When the blue line began to rise again, the USA started outperforming. Then in 2022, Europe seemed to really show progress and outperformed the USA, but that was during a bear market.

I have always believed that the USA would perform poorly during a stock market downturn, and that has indeed been the case. Now we are back at the levels of 2021. So, if you had bought European Stocks instead of American Stocks in 2021, you would experience a painful period from 2023 to 2025, but now European Stocks have gained significant momentum.

Looking again at the USD, it does not appear obvious in this display, but it does show a significant downward trend, especially against the Euro.

This is also one of the reasons why I believe European Stocks can begin to outperform, as the USD has weakened from its highs a few years ago and has dropped several percentage points in the past few months. Looking at Emerging Markets, the performance of American Stocks relative to the S&P 500 Index and Emerging Market Stocks has been so strong that this trend has lasted for 10 years. The timeframe can be stretched further, and this trend remains significant. Except for a brief reversal during the bear market of 2022, there have been no other reversals.

This once again indicates that in negative markets, the USA may perform poorly instead of outperforming. My prediction is that during the next economic recession, the USD will drop, and the American market will perform poorly. This is not to say that "this time is different", as I have mentioned multiple times in previous live broadcasts, that we are not currently in a long-term declining interest rate environment, but rather in a long-term rising interest rate environment, especially regarding long-term rates.

I believe that during the next economic recession, the USD will decline, the American market will perform poorly, and the yields on 10-year and 30-year Treasury Bonds could rise further.

This is a very different environment, as the background has changed. Therefore, Emerging Markets have even begun to outperform. This did not just begin after the elections; Emerging Markets had already started to peak and reverse before the elections, but the more recent situation is indeed like this.

This is the relative performance of the S&P 500 Index compared to Morgan Stanley's Emerging Markets Index, which we have compared to the USD trade-weighted index. This is not the DXY index but the trade-weighted dollar index, which has a higher correlation with Emerging Markets rather than being dominated by euros like the DXY index. It can be said that these two lines are similar.

So, what we see here is that if the American trade-weighted dollar falls, which is my expectation from a long-term trend perspective, then Emerging Markets should outperform. The dollar must convincingly break below this index, around 118, before we see any downward momentum. So, let's conclude here. This will end the market live broadcast on March 11, 2025.

This year's start is interesting, and it certainly doesn't look like a repeat of 2024. So, good luck to everyone. Thank you all for your attention today. Thank you for trusting and having confidence in Dual Line Capital. Goodbye for now.

Editor/ping