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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of The Odd Laws podcast.

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Speaker 3: I'm joll Wisenthal and I'm Tracy Alloway.

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Speaker 2: Tracy, you know, we've been doing this podcast for ten.

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Speaker 3: Years, I am aware. Yeah, no, a whole decade.

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Speaker 2: And we've been doing episodes about big picture things and

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Speaker 2: things that have changed and what's different now in twenty

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Speaker 2: twenty five or twenty fifteen when we started. And some

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Speaker 2: things are the same, some things that are different, etcetera.

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Speaker 2: But I think, and we've mentioned this before, I think

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Speaker 2: the one thing that could not be more different here's

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Speaker 2: the raids environment. We were right in the middle of,

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Speaker 2: like the zerp decade or the Zerp era, maybe in

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Speaker 2: twenty fifteen. Maybe at that point, the FED had tried

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Speaker 2: to hike one time already and then the market sort

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Speaker 2: of slapped it down and said, oh no, no, no,

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Speaker 2: no more, We're not ready for more rate hikes, et cetera.

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Speaker 2: The raid environment could not be more different than when

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Speaker 2: we first started this podcast.

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Speaker 3: Absolutely. Can I say one thing about the anniversary, Yeah,

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Speaker 3: so we started the podcast in November twenty fifteen. Yeah,

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Speaker 3: we were going to celebrate for the month of November,

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Speaker 3: but we're now in December, So are we going to

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Speaker 3: make this a two month celebration.

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Speaker 2: Well, you know, we're having our ten year anniversary party

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Speaker 2: in December, so I think it's allowed. Well's just believing,

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Speaker 2: you know, it's allowed to bleed the ten years into

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Speaker 2: both months, given that we're formally celebrating in December. I

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Speaker 2: think this is how I'm rationalizing this framing for this conversation.

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Speaker 2: Since yes, we're no longer we're technically no longer an

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Speaker 2: anniversary month.

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Speaker 3: I guess it's our party and we can celebrate as

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Speaker 3: long as we want however we want. But you're absolutely

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Speaker 3: right about the rates environment, and you know you could

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Speaker 3: see that if you go back and look at some

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Speaker 3: of the old episodes. The other thing that strikes me

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Speaker 3: looking back at the old podcast episodes is how many

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Speaker 3: of them were about shadow banking, which of course nowadays

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Speaker 3: recall private credit. And that's another thing that's changed enormously.

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Speaker 3: So the private credit market now basically rivals the public

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Speaker 3: credit market in terms of size, and there's obviously a

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Speaker 3: lot of concern about what that means. The outlooks lots

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Speaker 3: of differences.

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Speaker 2: Lots of differences. Yeah, completely dramatic and setting aside the

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Speaker 2: big picture questions, there are also some small picture questions,

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Speaker 2: maybe how you put.

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Speaker 3: It, immediate questions.

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Speaker 2: At the time we were recording this, it looks like

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Speaker 2: the December meeting is basically a lock that there's going

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Speaker 2: to be a cut. But up until recently there was

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Speaker 2: a lot of market uncertainty.

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Speaker 3: If we recorded this two weeks ago, it would have

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Speaker 3: looked very different.

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Speaker 2: It would looked very different, and you know what happens

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Speaker 2: after December highly uncertain on many dimensions the follow through

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Speaker 2: for the rate cutting cycle. There have been increases in

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Speaker 2: various credit concerns of various source. We've had a few

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Speaker 2: small blow ups, but you know, nothing that big. But

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Speaker 2: like what Jamie Diamond called the cockroaches, we mentioned it

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Speaker 2: on the show that suddenly people are talking about credit

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Speaker 2: default swaps uncertain high tech companies, which is very unusual.

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Speaker 3: But there's that's what Star Wars meme. I haven't heard

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Speaker 3: that word in a long time, that's right.

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Speaker 2: But with the AI build out and how much that's

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Speaker 2: getting financed by various forms of credit, suddenly people are

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Speaker 2: talking about the fact that big tech companies are credits,

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Speaker 2: which we don't really think about very much. And so

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Speaker 2: there are some big picture of things, but also some

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Speaker 2: things happening right here and right now that weren't further

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Speaker 2: understanding and further explanation from the people who really understand

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Speaker 2: them absolutely well. I'm very excited to say we really

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Speaker 2: do have the perfect guests, someone who we've had on

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Speaker 2: the show before, but someone we love speaking to. We

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Speaker 2: are going to be speaking with Dan Ivison. He is

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Speaker 2: the CIO over at PIMCO, which of course everybody should

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Speaker 2: know about. So Dan, thank you so much for coming

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Speaker 2: back on the Outlaws podcast.

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Speaker 4: Thanks for having me, and congratulations on the big ten

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Speaker 4: year anniversary. It's an honor to be invited back during

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Speaker 4: this series of podcasts.

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Speaker 3: Thank you so much.

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Speaker 2: Yeah, very kind of you to say, let's start small picture.

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Speaker 2: I think this episode will be out before the meeting.

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Speaker 2: The market is saying it's going to be a lock.

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Speaker 2: They're definitely going to cut rates. But beyond that, when

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Speaker 2: you look into twenty twenty six, there's sort of two

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Speaker 2: different questions. There's the ongoing uncertainty about who is going

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Speaker 2: to be the next FED chair, and then there's just

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Speaker 2: the questions about how much appetite this existing committee has

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Speaker 2: to continue a rate cutting cycle, So I'd love to

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Speaker 2: get you know, what are you thinking about for the

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Speaker 2: twenty twenty six and what we could be expecting.

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Speaker 4: Sure, so you know, we do think the Fed's likely

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Speaker 4: to cut rates at the upcoming meeting. We also think

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Speaker 4: that this is a FED that would like to get

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Speaker 4: rates a bit lower into twenty twenty six. The challenge,

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Speaker 4: of course, is that we expect to see a little

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Speaker 4: bit of reacceleration in the economy during the first half

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Speaker 4: of the year, and we also expect inflation to remain

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Speaker 4: comfortably above the central bank targets. So you know, we

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Speaker 4: believe this FED when they say they're going to continue

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Speaker 4: to focus on the data, we do think the data is.

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Speaker 5: Going to be a bit confusing.

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Speaker 4: The general view you know today at PIMCU, with significant uncertainty,

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Speaker 4: is that they probably do get rates down another half

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Speaker 4: of percent or so next year, which is close to

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Speaker 4: what's being priced into the market today. But again, if

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Speaker 4: you see meaningful reacceleration in the growth data, and more importantly,

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Speaker 4: if you see even a modest up ticket inflation, this FED,

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Speaker 4: you know, even with a new chair, will will likely

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Speaker 4: be willing to remain on hold and then I think

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Speaker 4: the other point, and this came up with one of

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Speaker 4: your recent guests, is that there's the front end policy

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Speaker 4: rate and then there's the reaction out in longer maturities.

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Speaker 4: We do think there's a chance if this FED cuts

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Speaker 4: aggressively into strengthening data higher inflation, you may actually get

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Speaker 4: a selloff in the long end of the curve. So

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Speaker 4: that could be a bit self defeating, and I think

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Speaker 4: something that will be a topic into next year if

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Speaker 4: we do get that reacceleration that we expect.

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Speaker 2: There's a lot you said there that I want to

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Speaker 2: follow up on just in that one answer, but just

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Speaker 2: very quickly, what is the idea, the gist behind why

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Speaker 2: you expect dead Q on reacceleration.

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Speaker 4: Yeah, A lot of it's you know, related to significant momentum,

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Speaker 4: you know, in terms of capital investment, you know, associated

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Speaker 4: with AI as well as the delayed positive growth impact.

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Speaker 5: Of the so called Big Beautiful Bill.

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Speaker 4: A lot of the corporate tax extensions happened retroactively for

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Speaker 4: the consumer of the household in many instances, you're going

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Speaker 4: to begin to see the direct impact in terms of

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Speaker 4: positive refunds coming into the new year. So again, you know,

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Speaker 4: plenty of uncertainty, you know, a lot of cross currents

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Speaker 4: in this economy, but we do think there's the chance

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Speaker 4: that you'll get some moderate reacceleration in the first half

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Speaker 4: of the year. You know, we're looking at a growth environment,

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Speaker 4: you know, for next year in the United States at

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Speaker 4: least somewhere in the one and a half to two

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Speaker 4: percent type range. So again that's an environment we're from

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Speaker 4: a traditional tailor rule perspective. We don't think that the

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Speaker 4: FED needs to cut a lot more from here, although

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Speaker 4: you know, we do think that this FED, particularly with

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Speaker 4: new membership and a new chair, would like to get

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Speaker 4: rates lower.

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Speaker 3: Since you mentioned the new chair, this is more of

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Speaker 3: a long term, thoughtful question. But obviously, for the majority

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Speaker 3: of your career as a bond manager, I don't think

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Speaker 3: FED independence has really been much of a concern, right.

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Speaker 3: We certainly haven't seen the degree of headlines that we

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Speaker 3: are seeing lately with Kevin Hassett emerging as the front

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Speaker 3: runner for the new FED chair position. How do you

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Speaker 3: as a bond manager view that particular issue and do

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Speaker 3: you have to start handicapping the way you invest because

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Speaker 3: of this?

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Speaker 4: I think to a degree, I think if you go

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Speaker 4: back several decades, you know, you can question the concept

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Speaker 4: of FED independence a little bit, and I think even

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Speaker 4: from the perspective of this fed's expanded mandate in recent years,

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Speaker 4: what the market's really focused on is independence related to

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Speaker 4: the setting of policy rates, which you know, of course

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Speaker 4: have a direct impact. So from that perspective, we are

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Speaker 4: monitoring the situation like other investors. We do think less

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Speaker 4: independent FED has implications, particularly in longer maturities, where you

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Speaker 4: may need a bit more risk premium when you're dealing

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Speaker 4: with uncertainty around FED independence. But generally speaking, when we

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Speaker 4: think about you know, who's being considered for the FED role,

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Speaker 4: including Kevin Hasseert, you know, we do think that there'll

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Speaker 4: be a general spirit of independence there. We still think,

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Speaker 4: you know, the chair is one vote, so to speak,

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Speaker 4: and we have a committee that will continue to focus

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Speaker 4: on the dual mandate. So yes, it's a consideration, it's

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Speaker 4: an input into our decisions. It's not a major concern.

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Speaker 4: We do think that you know, the group that's being

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Speaker 4: considered are you know, certainly highly qualified and will likely

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Speaker 4: you know, continue to take a sufficiently independent view regarding

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Speaker 4: monetary policy.

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Speaker 2: Let me ask you kind of the same question, but

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Speaker 2: with a slightly different framing. It's December twenty twenty five

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Speaker 2: right now, so we've had like over four years now,

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Speaker 2: I think over four years now of the FED missing

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Speaker 2: on its inflation on the two on getting inflation durably

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Speaker 2: back to two And if the FED is going to

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Speaker 2: continue cutting as it looks like it's going to do

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Speaker 2: in December, that signals a further willingness to ease policy

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Speaker 2: even with inflation over its ostensible target setting. Aside the

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Speaker 2: strict question of independence, do you think the FED, regardless

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Speaker 2: even the current composition and the likely composition going to

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Speaker 2: be forward, is just not going to take two percent

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Speaker 2: seriously as perhaps it might have in the past.

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Speaker 4: Yes, that's a great question, and I think that in

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Speaker 4: a general sense the two percent target matters, but not

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Speaker 4: so much the current inflation rate. You're absolutely right. We've

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Speaker 4: been operating, you know, and living with an inflation rate

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Speaker 4: meaningfully above their target for quite some time. But when

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Speaker 4: you look at inflationary expectations, and I think when you

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Speaker 4: talk to central bankers you know here in the United

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Speaker 4: States as well as outside this country, the inflationary expectations

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Speaker 4: piece is what's critically important. So when you look at

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Speaker 4: longer term break even inflation rate, they've continued to be

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Speaker 4: very very well behaved. You saw a bit of an

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Speaker 4: uptick at the upbreak of the war in Ukraine, and

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Speaker 4: then you saw an uptick around the tariff announcements earlier

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Speaker 4: this year. But when you look at a ten year

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Speaker 4: tip break even rate, just to use one of several proxies,

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Speaker 4: no one measure is perfect, you're down around two and

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Speaker 4: quarter percent on CPI inflation. So to the extent that

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Speaker 4: inflationary expectations remain well contained, we do think that the

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Speaker 4: central banks willing to look through some of the more

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Speaker 4: higher frequency data to the extent that you see those

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Speaker 4: longer term expectations become unanchored. We do think that's a

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Speaker 4: risk for a FED that's too aggressive in cutting rates here.

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Speaker 4: We do think that the mindset will change, not only

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Speaker 4: the mindset of the Fed, but we think the market

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Speaker 4: reaction could be counterproductive, not only in terms of higher

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Speaker 4: long term interest rates, but an impact on risk assets

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Speaker 4: as well. So you know, the markets have let the

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Speaker 4: Fed get away with running fairly accommodated policy into a

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Speaker 4: three percent type inflation world. Because again, there are a

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Speaker 4: lot of other forces at work that very well could

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Speaker 4: be disinflationary over the long term, and there still is

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Speaker 4: significant confidence in global central banks and being able to

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Speaker 4: generally keep inflation close to the target on a longer

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Speaker 4: term basis. So you know, again, so far, so good,

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Speaker 4: but you know, this is all going to be a

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Speaker 4: key source of uncertainty, you know, into twenty six and beyond.

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Speaker 3: I feel like uncertainty is constantly the keyword on our

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Speaker 3: podcast nowadays, since longer dated expectations and yields keeps coming up.

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Speaker 3: In this conversation, I got to ask, do you believe

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Speaker 3: in the term premium or rather, is the term premium

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Speaker 3: a useful concept to you as a big bond investor?

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Speaker 4: It is, and you know, when we look at you know,

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Speaker 4: where we're going to invest, you know, we like to

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Speaker 4: get paid for, you know, taking more risk. We do,

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Speaker 4: you know, see an elevated term premium certainly relative to

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Speaker 4: where we were five or ten years ago, and that's

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Speaker 4: made longer maturity investments a bit more attractive. With that said,

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Speaker 4: there's lots of reasons why the term premium should be higher.

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Speaker 4: Inflation is one of them. Global debt levels, US debt

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Speaker 4: and deficit levels are another. We probably live in a

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Speaker 4: world today given what's going on in terms of focusing

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Speaker 4: on tariffs and bringing back supply chains, you know, to

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Speaker 4: domestic markets, the need for you know, higher risk premium.

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Speaker 4: So you know, as a firm today, we we like

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Speaker 4: longer maturity bonds more, but we're still you know, tend

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Speaker 4: to keep our positions concentrated in shorter maturities, and we

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Speaker 4: would expect over the next few years a little bit

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Speaker 4: of additional underperformance in the very very long end of

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Speaker 4: the yield curve. So we do think it's important. It's

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Speaker 4: interesting people focus a lot on the deficit situation in

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Speaker 4: the United States. As an investor, you don't want to

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Speaker 4: lend to a perfect high quality credit you get paid

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Speaker 4: so much to do so. So in some sense, we want,

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Speaker 4: you know, just enough fiscal irresponsibility where we and our

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Speaker 4: end investors get paid more to lend, but not so

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Speaker 4: much where it becomes a concern in term the overall

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Speaker 4: viability of the system. So we think we're in the

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Speaker 4: midst of that type of market environment today, but things

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Speaker 4: can go a bit too far if we don't get

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Speaker 4: the deficit or the inflation situation under control. Over the

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Speaker 4: next couple of a few years.

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Speaker 2: Can you talk about the role of bonds in a portfolio? Again,

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Speaker 2: this is something that in twenty fifteen, bonds fit beautifully

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Speaker 2: into a diversified portfolio because they were paying something, but

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Speaker 2: also they had that nice and verse correlation and so

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Speaker 2: you got that natural hedge, et cetera. We haven't had

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Speaker 2: that very like that beautiful inverse correlation between risk assets

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Speaker 2: and bonds for a long time, which undermines one of

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Speaker 2: the cases for the diversified investor of having like a

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Speaker 2: big slug of perhaps longer duration assets. How do you

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Speaker 2: think in twenty twenty five, how do you sell the

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Speaker 2: case that diversified investors should still keep some allocation to

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Speaker 2: duration or fixed income.

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Speaker 4: Yeah, so it's interesting. I know this is a ten

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Speaker 4: year anniversary show, so you know, went back it looked

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Speaker 4: at the performance of bonds versus other things, you know,

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Speaker 4: over the last ten years, and the divergence in performance

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Speaker 4: over the last decade has been remarkable and it explains

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Speaker 4: a lot. If you look at the S and P

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Speaker 4: five hundred over the last ten years, in absolute terms,

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Speaker 4: you generated a return of about fifteen percent a year

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Speaker 4: adjusted for inflation. I think it's up close to twelve

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Speaker 4: percent or so I'm rounding a little bit. When you'll

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Speaker 4: get the performance of you know, the Bloomberg aggregate index

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Speaker 4: over that ten year period, the return annually has been

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Speaker 4: below two percent in absolute terms. When you subtract inflation,

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Speaker 4: you ended up with negative returns in bonds for ten years.

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Speaker 4: So not only has the correlation broken down, but you

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Speaker 4: didn't make any money in owning bonds. When you look

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Speaker 4: at the starting valuations today under any type of reasonable

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Speaker 4: longer term valuation framework, none of which have to mean

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Speaker 4: revert quickly, but you know, you look at a you know,

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Speaker 4: a Schiller pe type arrangement or equity risk premium type argument.

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Speaker 4: You don't need a great correlation on bonds versus equities.

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Speaker 4: What the relative valuations would suggest is that there's a

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Speaker 4: good chance that bonds outperform stocks over the next five

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Speaker 4: or ten years, or at least have returns on a

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Speaker 4: risk adjusted basis very very close to stocks. So you

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Speaker 4: don't have to rest on a correlation argument. You know,

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Speaker 4: you don't have to focus on well bonds do well

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Speaker 4: during periods where people are losing their jobs or you know,

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Speaker 4: income growth is negative. You can just from a pure

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Speaker 4: valuation perspective, find the acid class quite attractive absolute and relative.

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Speaker 4: I think the second point around correlations is that correlations

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Speaker 4: between stocks and bonds will tend to break down when

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Speaker 4: inflation is the primary risk factor. Today, yes, inflation is

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Speaker 4: above central bank targets, but there's a lot of uncertainty

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Speaker 4: on the economic side. You do have this complex economy

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Speaker 4: where tremendous value you know within the tech sector, tremendous

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Speaker 4: capital and investment, yet lower income households are feeling considerable pain.

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Speaker 4: If AI is very very successful at increasing productivity, that

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Speaker 4: could mean significant job loss across key segments of the economy.

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Speaker 4: So the bottom line is that risks are more balanced.

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Speaker 4: We don't think correlations are going to ever come back

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Speaker 4: to the really, really neat clean levels you know a

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Speaker 4: decade or so ago, when inflation simply wasn't a problem

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Speaker 4: at all, you know, across the global economy. But we

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Speaker 4: have seen correlations improve a bit, and we would expecting

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Speaker 4: to go forward basis correlations to improve further. I think

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Speaker 4: it's important again to look at a global opportunity set.

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Speaker 4: I think that the correlation arguments are stronger in areas

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Speaker 4: of the world that have the best fiscal position. But

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Speaker 4: in general, you know, not only do we think that

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Speaker 4: the valuations are quite attractive, you know, we do think

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Speaker 4: the correlations will be a bit better certainly that we experience.

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Speaker 5: It's coming out of the culture tray.

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Speaker 2: Twenty fifteen, bonds were an easy sell. It turns out

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Speaker 2: they weren't the best investment. Twenty twenty five maybe a

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Speaker 2: harder cell, but the math says that now is actually

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Speaker 2: the time to expand your exposure.

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Speaker 3: Well, I guess in ten years when we do the

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Speaker 3: twenty year anniversary, we will be able to judge. But Dan,

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Speaker 3: you know, since we're talking about why people should buy bonds,

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Speaker 3: one of the surprising things that happened this year was

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Speaker 3: we had the big tariff drama and we saw markets

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Speaker 3: go down, We saw a bond yield spike. Everyone was

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Speaker 3: talking about the sell America trade. So this idea that

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Speaker 3: you didn't want to hold onto US assets because of

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Speaker 3: all that policy uncertainty. And now you know, in December

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Speaker 3: twenty twenty five, yields have come down quite a lot,

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Speaker 3: although I have to say the dollar is still fairly weak.

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Speaker 3: You were always kind of resistant to the sell America idea,

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Speaker 3: and you pushed back on it. What did you see

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Speaker 3: that perhaps others didn't.

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Speaker 5: Well.

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Speaker 4: Again, I think a lot has to do with starting valuations.

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Speaker 4: After a significant period of underperformance across the US fixed

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Speaker 4: income or global fixed income, you ended up with a

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Speaker 4: decent valuation cushion. So I think that's always important in markets. Yes,

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Speaker 4: there was news that in a narrow sense was negative

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Speaker 4: for bonds and negative for US bonds or US assets

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Speaker 4: in particular. You started with a decent yield cushion. You know,

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Speaker 4: we began the year, you know, with yields ten year treasuries,

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Speaker 4: you know, up near five percent. A five percent yield

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Speaker 4: even in a three percent inflation worlds not that bad.

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Speaker 4: I think the second point, though, you know, we weren't

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Speaker 4: overly convicted in just owning the United States. And I

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Speaker 4: think if I could, you know, you're part of the

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Speaker 4: most important thing I can say today is that global

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Speaker 4: bond investing is back. For so many years, capitalists poured

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Speaker 4: into the US markets. It's poured into the US markets

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Speaker 4: focusing on private credit, you know, which has grown you know,

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Speaker 4: the most here in this country. But very very quietly,

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Speaker 4: you've seen underperformance across the global fixed thing come opportunities

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Speaker 4: set where today even you know, from a US dollar

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Speaker 4: based investors perspective, there's great yield, great sources of diversification.

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Speaker 4: So it's not that we were, you know, insistent on

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Speaker 4: just owning US assets. In fact, we've gradually diversified into

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Speaker 4: other areas of the market. We just thought that there

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Speaker 4: was good value and good yield in the US, a

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Speaker 4: sufficient cushion, and then by extending into these other markets,

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Speaker 4: a great way to generate incremental return by good old

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Speaker 4: fashioned relative value trading in markets today that are less

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Speaker 4: correlated than they were during those years coming out of

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Speaker 4: the global financial crisis and where you just have a

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Speaker 4: really really exciting time to troll dual fashion training across

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Speaker 4: yield curves, across markets and avoid what.

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Speaker 2: Changed because it seemed like, you know, it felt like

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Speaker 2: international investing across any acid class was like a real

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Speaker 2: suckers thing. It's like, oh, this is going to be

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Speaker 2: the year that we're going to diversify internationally. You didn't

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Speaker 2: get paid at all for it. Flipped such that actually

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Speaker 2: both stocks too, because international equity markets have done very

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Speaker 2: well and have outperformed the US. It's kind of surprising

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Speaker 2: in many respects. But what switched such that now there's

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Speaker 2: been real opportunities to make money.

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Speaker 4: Looking abroad, Yeah, well again, valuations have improved. You know,

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Speaker 4: we talked about, you know, the real poor performance of

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Speaker 4: the US bond market over the last decade. As we

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Speaker 4: all know, yields were outright negative in many areas of

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Speaker 4: the world, So we talked about low yields. You subtract

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Speaker 4: that low inflation rate, you end up with a negative number,

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Speaker 4: and big portions of the global fixed income opportunity set

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Speaker 4: you'd have to subtract anything you started with a negative number.

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Speaker 4: So a lot of this has just been the repricing

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Speaker 4: of markets that started not only at low levels, but

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Speaker 4: negative yield levels. Then the second piece relates to policy

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Speaker 4: coming out of the global financial crisis. Not only were

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Speaker 4: yields low, but you've had such incredible policy activism where

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Speaker 4: on any signs of economic weakness you had a massive

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Speaker 4: fiscal response, a massive monetary paul response COVID, you know,

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Speaker 4: the ultimate example of that. And today, you know, with

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Speaker 4: debt levels and deficit levels where they are, policy makers

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Speaker 4: don't have that flexibility. So you're back to an environment

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Speaker 4: where markets increasingly have to stand on their own based

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Speaker 4: on fundamentals and that's just an exciting time. It means

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Speaker 4: more risk premium in markets, more term premium, higher yields,

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Speaker 4: with significant valuation cushion absolute and relative to what looked

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Speaker 4: to be quite expensive equity markets, and then just less correlation.

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Speaker 4: You have situations even over the course of the last

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Speaker 4: couple of months where a political surprise in Japan or

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Speaker 4: France creates lots of local volatility in those markets. Uncertainty

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Speaker 4: and French politics impacts UK politics because they have similar

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Speaker 4: challenges in terms of getting their deficit situation under control

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Speaker 4: in economic productivity higher. So it reminds us a lot

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Speaker 4: more like the mid nineties, you know, back before you

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Speaker 4: had this massive volatility, suffocation from policy, and again with

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Speaker 4: deficits where they are, with inflation where it is today

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Speaker 4: versus central bank targets. It's likely that over the next

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Speaker 4: several years, you know, you're going to continue to be

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Speaker 4: in this type of environment good value, good relative value,

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Speaker 4: and then much less correlated markets, which you know lead

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Speaker 4: to you know, some some good opportunity to generate incredential

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Speaker 4: return above starting yield levels.

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Speaker 3: Well, we wanted to talk about private credit as well, because,

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Speaker 3: as we said in the intro, this is one thing

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Speaker 3: that has changed quite a lot since twenty fifteen. People

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Speaker 3: obviously have different characterizations of private credit, but I'm curious

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Speaker 3: how you think about that space and how you would

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Speaker 3: define or how you would measure things like transparency and

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Speaker 3: opaqueness and customization in the credit waterfall and things like that,

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Speaker 3: because again, one person's extremely transparent market can be another

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Speaker 3: person's opaque morass of potential defaults.

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Speaker 4: Yes, I talked for the rest of the show here

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Speaker 4: in this topic. First of all, surprise it took this

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Speaker 4: long to get to the private credit topic. But look

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Speaker 4: at you know, not much of this is new. You know,

437
00:23:07,840 --> 00:23:11,359
Speaker 4: when I joined PIMCO back in the late nineteen nineties,

438
00:23:11,560 --> 00:23:13,560
Speaker 4: I spent the good portion of my initial time at

439
00:23:13,600 --> 00:23:17,439
Speaker 4: the firm focusing on the underwriting of private assets. You know,

440
00:23:17,520 --> 00:23:19,479
Speaker 4: we call them pure privates, but these were you know,

441
00:23:19,520 --> 00:23:22,280
Speaker 4: four A two privates that were created as part of

442
00:23:22,320 --> 00:23:25,760
Speaker 4: the Securities Act of nineteen thirty three, one forty four

443
00:23:25,800 --> 00:23:28,359
Speaker 4: A privates, which are quite popular. I think the first

444
00:23:28,359 --> 00:23:32,360
Speaker 4: one was issued back in nineteen ninety. The technology that's

445
00:23:32,400 --> 00:23:36,280
Speaker 4: being utilized to fund AI infrastructure today, some of these

446
00:23:36,320 --> 00:23:39,760
Speaker 4: off balance sheet contingent or make whole guarantee type frameworks

447
00:23:40,240 --> 00:23:43,080
Speaker 4: were around in the mid to late nineteen nineties. The

448
00:23:43,119 --> 00:23:46,840
Speaker 4: difference today is that you have this massive capital investment need,

449
00:23:47,520 --> 00:23:49,480
Speaker 4: so the deals are larger, but a lot of the

450
00:23:49,520 --> 00:23:52,200
Speaker 4: technology has just been dusted off, so to speak, for

451
00:23:52,680 --> 00:23:55,560
Speaker 4: the new era. And the other point that's important, and

452
00:23:55,840 --> 00:23:59,240
Speaker 4: when we're talking about historical returns, I think this explains

453
00:23:59,400 --> 00:24:02,680
Speaker 4: a lot, is that what's been so unique in terms

454
00:24:02,720 --> 00:24:05,879
Speaker 4: of credit asset performance in general has been the post

455
00:24:05,880 --> 00:24:08,760
Speaker 4: global financial crisis period. Well, we have it at a

456
00:24:08,760 --> 00:24:11,720
Speaker 4: sustained period of economic weakness. In fact, one of my

457
00:24:11,760 --> 00:24:16,720
Speaker 4: favorite data series is looking at how lower quality lending

458
00:24:16,920 --> 00:24:20,600
Speaker 4: performed since way back during the Michael Milken days when

459
00:24:20,640 --> 00:24:23,400
Speaker 4: he helped to create that market. If you go back

460
00:24:23,400 --> 00:24:25,520
Speaker 4: to the early nineteen eighties all the way up to

461
00:24:25,520 --> 00:24:28,879
Speaker 4: the global financial crisis, if you had just blindly bought

462
00:24:29,359 --> 00:24:32,920
Speaker 4: the lowest quality credit that's out there proxy by high

463
00:24:32,960 --> 00:24:37,320
Speaker 4: yield senior secured loans direct lending blend the index, you

464
00:24:37,320 --> 00:24:39,280
Speaker 4: would have ended up with only about a half a

465
00:24:39,320 --> 00:24:43,760
Speaker 4: percentage point of incremental performance versus high quality bonds over

466
00:24:43,800 --> 00:24:46,760
Speaker 4: that entire period. And the way it worked was that

467
00:24:46,800 --> 00:24:47,840
Speaker 4: you made a lot of money. You have a lot

468
00:24:47,840 --> 00:24:49,080
Speaker 4: of money, a lot of money, a lot of money.

469
00:24:49,080 --> 00:24:51,080
Speaker 4: Then you gave it all back. Then you made a

470
00:24:51,320 --> 00:24:52,600
Speaker 4: lot of a lot of lot, gave it all back, and

471
00:24:52,680 --> 00:24:55,960
Speaker 4: we'd go back to the late eighties when you had

472
00:24:56,240 --> 00:24:59,320
Speaker 4: that period initial period of aggressive underwriting. You had the

473
00:24:59,359 --> 00:25:02,240
Speaker 4: savings and loan crisis of the early nineties, you had

474
00:25:02,240 --> 00:25:05,200
Speaker 4: the LTCM or the Asian Financial crisis in the late nineties,

475
00:25:05,280 --> 00:25:07,560
Speaker 4: than the Internet bubble and the telecom issues of the

476
00:25:07,600 --> 00:25:10,800
Speaker 4: early two thousands, then of course the Global Financial Crisis.

477
00:25:11,560 --> 00:25:15,520
Speaker 4: That was a more normal credit environment since the GFC

478
00:25:15,800 --> 00:25:19,200
Speaker 4: just blindly buying the lowest quality credit on the board,

479
00:25:19,280 --> 00:25:22,439
Speaker 4: whether it's private credit or lower quality public credit, you

480
00:25:22,560 --> 00:25:26,000
Speaker 4: generated seven percent a year more than high quality bonds,

481
00:25:26,480 --> 00:25:29,520
Speaker 4: and that explains a lot. Not surprisingly, you've seen massive

482
00:25:29,560 --> 00:25:32,719
Speaker 4: growth in that area of the market. Now, you know,

483
00:25:33,000 --> 00:25:35,439
Speaker 4: weaker credit tends to perform well when stocks go up

484
00:25:35,480 --> 00:25:38,240
Speaker 4: fifteen percent a year. But again, you know that's where

485
00:25:38,280 --> 00:25:41,880
Speaker 4: we are today. I hear all the discussion about God,

486
00:25:41,920 --> 00:25:44,199
Speaker 4: you know, underwriting's worse than the public side versus the

487
00:25:44,200 --> 00:25:47,879
Speaker 4: private side. The reality is, when you've grown this much,

488
00:25:48,520 --> 00:25:52,119
Speaker 4: when you've lent so much money to weaker quality borrowers,

489
00:25:52,640 --> 00:25:56,080
Speaker 4: when covenants have weakened, when spreads are tight, when equities

490
00:25:56,080 --> 00:25:58,800
Speaker 4: have gone up consistently as much as they have, you're

491
00:25:58,800 --> 00:26:01,679
Speaker 4: going to have challenges in these markets. So when we

492
00:26:01,760 --> 00:26:04,760
Speaker 4: think about credit, we look at it under sort of

493
00:26:04,840 --> 00:26:10,679
Speaker 4: two continuums. One liquidity. Certain assets are completely illiquid. The

494
00:26:10,720 --> 00:26:13,080
Speaker 4: only decision you get to make is the purchase decision,

495
00:26:13,200 --> 00:26:15,679
Speaker 4: so you better be right. And then at the other

496
00:26:15,760 --> 00:26:18,400
Speaker 4: end of the extreme, you have very very liquid assets

497
00:26:18,480 --> 00:26:20,840
Speaker 4: where you can change your mind on a regular basis.

498
00:26:21,080 --> 00:26:23,879
Speaker 4: And then you have economic sensitivity. You have assets that

499
00:26:23,920 --> 00:26:26,800
Speaker 4: are very insensitive to the economy, that are very very

500
00:26:26,840 --> 00:26:29,680
Speaker 4: high quality. Then at the other extreme, you have assets

501
00:26:29,760 --> 00:26:33,440
Speaker 4: with a tremendous amount of economic sensitivity, a tremendous amount

502
00:26:33,440 --> 00:26:39,560
Speaker 4: of sensitivity to AI related disruption, other forms of economic weakness,

503
00:26:39,720 --> 00:26:42,400
Speaker 4: an anticipated competition, and you just want to make sure

504
00:26:42,440 --> 00:26:45,040
Speaker 4: you get paid enough. And with stocks near all time highs,

505
00:26:45,080 --> 00:26:48,600
Speaker 4: with spreads tight, with covenants weak, they are going to

506
00:26:48,640 --> 00:26:51,159
Speaker 4: be problems. And I think as an investor, you just

507
00:26:51,200 --> 00:26:53,359
Speaker 4: need to acknowledge that you're not getting paid what you

508
00:26:53,520 --> 00:26:56,480
Speaker 4: got to take that risk five or ten years ago,

509
00:26:57,080 --> 00:26:59,199
Speaker 4: and you just want to be defensive. You want to

510
00:26:59,240 --> 00:27:03,080
Speaker 4: be skeptical, But it's not so much private versus public.

511
00:27:03,520 --> 00:27:05,960
Speaker 4: I think it's just thoughtful underwriting and just understanding that

512
00:27:06,000 --> 00:27:09,119
Speaker 4: we're at a time where, given the strong historical performance,

513
00:27:09,520 --> 00:27:12,040
Speaker 4: given the fact that we haven't had a sustained period

514
00:27:12,040 --> 00:27:15,560
Speaker 4: of economics slowing for a long time, some complacency has

515
00:27:15,600 --> 00:27:19,200
Speaker 4: worked their way into these higher risk areas.

516
00:27:18,800 --> 00:27:19,520
Speaker 5: Of the market.

517
00:27:20,480 --> 00:27:24,040
Speaker 3: Well, talk a little bit more about competition in private credit,

518
00:27:24,119 --> 00:27:27,960
Speaker 3: because I imagine it's good to be PIMCO when it comes

519
00:27:27,960 --> 00:27:32,160
Speaker 3: to sourcing deals and maybe negotiating the terms. But does

520
00:27:32,200 --> 00:27:35,840
Speaker 3: even someone like you, a truly big bond manager have

521
00:27:35,960 --> 00:27:39,760
Speaker 3: to deal with competitive pressures where if you don't agree

522
00:27:39,800 --> 00:27:42,280
Speaker 3: to one bond term, someone else will swoop in and

523
00:27:42,320 --> 00:27:44,199
Speaker 3: agree to it and take it away from you.

524
00:27:44,480 --> 00:27:45,040
Speaker 5: Absolutely.

525
00:27:45,080 --> 00:27:47,399
Speaker 4: And again, I think the other point about public and

526
00:27:47,440 --> 00:27:50,760
Speaker 4: private markets is that they're well integrated. You know, we

527
00:27:50,760 --> 00:27:52,840
Speaker 4: could talk about convergence, you know a bit a bit later,

528
00:27:52,960 --> 00:27:54,119
Speaker 4: have have some views there.

529
00:27:54,160 --> 00:27:55,359
Speaker 5: But you know, when an.

530
00:27:55,280 --> 00:27:58,240
Speaker 4: Issuer looks at their options, they're going to test the

531
00:27:58,240 --> 00:28:02,080
Speaker 4: public option, they'll test the private option. And there is

532
00:28:02,119 --> 00:28:05,080
Speaker 4: a lot of competition, a lot of competition for market share.

533
00:28:05,160 --> 00:28:06,919
Speaker 4: When you look at a lot of the managers, particularly

534
00:28:06,960 --> 00:28:10,800
Speaker 4: in the private credit space, they announce very very aggressive

535
00:28:10,920 --> 00:28:14,439
Speaker 4: growth assumptions. You know, as an investor sometimes you know,

536
00:28:14,840 --> 00:28:17,479
Speaker 4: I wish in certain quarters people would talk about, you know,

537
00:28:17,520 --> 00:28:19,600
Speaker 4: if we can find value for the end investor, we

538
00:28:19,640 --> 00:28:22,200
Speaker 4: will grow this much. All too often, you know, after

539
00:28:22,240 --> 00:28:24,919
Speaker 4: a pretty bullish environment for credit, it's was simply going

540
00:28:24,960 --> 00:28:28,000
Speaker 4: to grow a lot. So you know, we do see

541
00:28:28,280 --> 00:28:32,840
Speaker 4: time and time again situations where you start the underwriting process,

542
00:28:33,400 --> 00:28:35,680
Speaker 4: you get down to the point where it's time to

543
00:28:35,720 --> 00:28:38,400
Speaker 4: get into a final round and you don't get the

544
00:28:38,520 --> 00:28:42,560
Speaker 4: terms that we feel we need as extenders of credit

545
00:28:42,680 --> 00:28:46,600
Speaker 4: in this marketplace. And that's just again symptomatic of the

546
00:28:46,640 --> 00:28:49,160
Speaker 4: fact that there's a lot of demand for these assets

547
00:28:49,440 --> 00:28:52,280
Speaker 4: and there's a lot of demand relative to the supply

548
00:28:52,520 --> 00:28:55,280
Speaker 4: across many segments of the market. And that's true not

549
00:28:55,320 --> 00:28:58,200
Speaker 4: only of below investment grade risk, but it's very very

550
00:28:58,200 --> 00:29:01,720
Speaker 4: true of certain transactions with an investment grade rating, at

551
00:29:01,800 --> 00:29:05,920
Speaker 4: least from a rating agency. So you know, given tight spreads,

552
00:29:05,960 --> 00:29:08,760
Speaker 4: given the competition, you just have to say no. And

553
00:29:09,080 --> 00:29:12,240
Speaker 4: I'll go back to my earlier point. What's so exciting

554
00:29:12,240 --> 00:29:15,240
Speaker 4: about this market today is that you do not need

555
00:29:15,280 --> 00:29:19,640
Speaker 4: to take on aggressively underwritten credit to generate return the

556
00:29:19,720 --> 00:29:23,080
Speaker 4: high quality area of the market, especially if you expand globally.

557
00:29:23,160 --> 00:29:26,160
Speaker 4: If you take advantage of liquidity, which typically means flexibility

558
00:29:26,160 --> 00:29:29,480
Speaker 4: for end investors, you can have a high quality portfolio

559
00:29:29,520 --> 00:29:32,400
Speaker 4: where you don't have to sacrifice return. Very different than

560
00:29:32,400 --> 00:29:35,080
Speaker 4: where we were ten years ago, but again pretty exciting.

561
00:29:35,120 --> 00:29:38,120
Speaker 4: Now we can go up in quality without again giving

562
00:29:38,200 --> 00:29:42,160
Speaker 4: up return and in some cases ironically picking up expected return.

563
00:29:58,240 --> 00:30:00,479
Speaker 2: I want to go back to something you said, and

564
00:30:00,520 --> 00:30:03,240
Speaker 2: I didn't quite get it, but I think it's important,

565
00:30:03,240 --> 00:30:05,440
Speaker 2: and of course it's very interesting to our audience. You're

566
00:30:05,480 --> 00:30:07,480
Speaker 2: talking about the AI financing, and I think you said

567
00:30:07,480 --> 00:30:11,080
Speaker 2: something contingent, makehold guarantees. I don't tell us about these

568
00:30:11,080 --> 00:30:14,680
Speaker 2: financing as you see them. And what is the history,

569
00:30:15,120 --> 00:30:18,760
Speaker 2: How novel are they relative to past financings, or how

570
00:30:18,840 --> 00:30:21,160
Speaker 2: much is it that these are structures that were very

571
00:30:21,200 --> 00:30:24,720
Speaker 2: much in place for something else are now being reproposed

572
00:30:24,800 --> 00:30:26,080
Speaker 2: into this new exciting area.

573
00:30:26,800 --> 00:30:30,880
Speaker 4: Yeah, I'll start with what's new, which is lending to

574
00:30:31,040 --> 00:30:34,880
Speaker 4: support the growth and AI and related infrastructure.

575
00:30:35,160 --> 00:30:35,360
Speaker 5: There.

576
00:30:35,400 --> 00:30:38,959
Speaker 4: You're talking about several trillion dollars of investment need. So

577
00:30:39,560 --> 00:30:42,320
Speaker 4: that's what's new, But you know what's not so new

578
00:30:42,400 --> 00:30:46,000
Speaker 4: is this idea that companies would like to keep a

579
00:30:46,040 --> 00:30:49,120
Speaker 4: good portion of their debt off their balance sheet or

580
00:30:49,120 --> 00:30:53,720
Speaker 4: come up with structures that limit their overall financial liability

581
00:30:53,800 --> 00:30:57,720
Speaker 4: or give them some flexibility to manage that liability over time,

582
00:30:58,280 --> 00:31:01,440
Speaker 4: and as an end investor to lend to those companies.

583
00:31:01,960 --> 00:31:05,800
Speaker 4: You know, it's important to acknowledge that lenning against tech firms,

584
00:31:05,920 --> 00:31:09,959
Speaker 4: lenning against AI infrastructure, lenning against AI chips is risky.

585
00:31:10,160 --> 00:31:12,200
Speaker 4: That could be a real good investment if you own

586
00:31:12,200 --> 00:31:14,680
Speaker 4: the equity, may not be a great investment if you

587
00:31:14,680 --> 00:31:16,640
Speaker 4: own the bonds, where at most you get your coupon

588
00:31:16,760 --> 00:31:18,480
Speaker 4: and you hope to get par back at the end

589
00:31:18,520 --> 00:31:20,920
Speaker 4: of the day. So a lot of the underwriting of

590
00:31:20,960 --> 00:31:23,320
Speaker 4: these transactions, and there have been a lot and we

591
00:31:23,360 --> 00:31:25,920
Speaker 4: expect a lot more to come over the course of

592
00:31:25,960 --> 00:31:29,200
Speaker 4: the next few years, is to understand the form of

593
00:31:29,240 --> 00:31:33,320
Speaker 4: that guarantee and understand the entity that's providing that guarantee,

594
00:31:33,320 --> 00:31:36,120
Speaker 4: whether it's in the form of lease payments or other

595
00:31:36,160 --> 00:31:40,520
Speaker 4: type of makehold type arrangements. And these types of structures

596
00:31:40,720 --> 00:31:44,240
Speaker 4: are what have been around for many, many years. You know,

597
00:31:44,280 --> 00:31:46,440
Speaker 4: back in the mid in late nineteen nineties. You know

598
00:31:46,640 --> 00:31:49,440
Speaker 4: a lot of times these would be done by Wall

599
00:31:49,440 --> 00:31:53,240
Speaker 4: Street financial institutions, sometimes across a segment of their business

600
00:31:53,240 --> 00:31:56,960
Speaker 4: where they would use a corporate guarantee to arbitrage a

601
00:31:57,040 --> 00:32:00,440
Speaker 4: bit of the radio agency frameworks. At other time times

602
00:32:00,520 --> 00:32:05,880
Speaker 4: these deals were backed by large ships, equipment, other areas

603
00:32:05,880 --> 00:32:08,960
Speaker 4: of the market. So it was the same type of analysis,

604
00:32:09,000 --> 00:32:11,920
Speaker 4: the same type of underwriting checklist, which involves a lot

605
00:32:11,920 --> 00:32:15,640
Speaker 4: of lawyers to ensure that you understand the guarantee how

606
00:32:15,680 --> 00:32:18,040
Speaker 4: you have to realize on that guarantee, and that's not

607
00:32:18,120 --> 00:32:18,959
Speaker 4: so different today.

608
00:32:19,160 --> 00:32:22,280
Speaker 2: And just to be clear, the guarantee we're talking about

609
00:32:22,320 --> 00:32:27,520
Speaker 2: here is okay, here is a hypothetical SPV that owns

610
00:32:27,520 --> 00:32:30,560
Speaker 2: a data center and it borrows money and finances, et cetera.

611
00:32:30,840 --> 00:32:34,120
Speaker 2: And the guarantee question is how much will the tenant

612
00:32:34,160 --> 00:32:36,040
Speaker 2: of that data center, which didn't want to have all

613
00:32:36,040 --> 00:32:38,480
Speaker 2: that DEBTA on their books, maybe like a Facebook or

614
00:32:38,480 --> 00:32:41,600
Speaker 2: one of the hyperscalers, how much are they actually committed

615
00:32:42,040 --> 00:32:45,320
Speaker 2: to being a tenant for the long term They're basically

616
00:32:45,320 --> 00:32:46,800
Speaker 2: that's what we're talking about.

617
00:32:46,760 --> 00:32:50,320
Speaker 4: Absolutely correct. And why it matters here is you're typically

618
00:32:50,360 --> 00:32:55,320
Speaker 4: talking about investment grade rated counterparties on these transactions where

619
00:32:55,880 --> 00:32:59,680
Speaker 4: the infrastructure itself, the assets that are partially backing the

620
00:32:59,800 --> 00:33:02,920
Speaker 4: d a lot of stablone basis would achieve a very

621
00:33:03,000 --> 00:33:05,880
Speaker 4: very low rating. So how do you create a structure

622
00:33:05,920 --> 00:33:10,120
Speaker 4: where you improve the credit quality while meeting the needs

623
00:33:10,200 --> 00:33:13,479
Speaker 4: of those that are looking to borrow within this market.

624
00:33:13,640 --> 00:33:16,080
Speaker 4: So again, the whole key is to make sure that

625
00:33:16,680 --> 00:33:20,320
Speaker 4: something that the radio agencies may assign investment grade rating too,

626
00:33:20,600 --> 00:33:24,520
Speaker 4: is in fact investment grade from a fundamental credit quality perspective.

627
00:33:24,560 --> 00:33:26,880
Speaker 4: And I think that's another theme. You know, in talking

628
00:33:26,880 --> 00:33:30,960
Speaker 4: about private credit, you know there are more economically sensitive,

629
00:33:31,080 --> 00:33:34,240
Speaker 4: lower quality loans, and then there's been a lot of

630
00:33:34,240 --> 00:33:37,160
Speaker 4: growth on the investment grade side. It is very, very

631
00:33:37,200 --> 00:33:40,040
Speaker 4: dangerous to assume something has an investment grade rating just

632
00:33:40,080 --> 00:33:43,080
Speaker 4: because of the rating agencies assign a rating to it.

633
00:33:43,080 --> 00:33:45,920
Speaker 4: It's critically important that you do your own credit work. Today,

634
00:33:45,960 --> 00:33:48,640
Speaker 4: all too frequently you will have an investment grade rating

635
00:33:48,680 --> 00:33:51,800
Speaker 4: from one entity. And again, market participants for years have

636
00:33:51,840 --> 00:33:54,160
Speaker 4: always joked, if you can only find one investment grade rating,

637
00:33:54,200 --> 00:33:56,920
Speaker 4: it's pretty fair to assume everyone else's below investment grade.

638
00:33:57,040 --> 00:33:59,400
Speaker 4: So the bottom line is that there's been a lot

639
00:33:59,440 --> 00:34:04,680
Speaker 4: of aggress of underwriting going on, even with instruments that

640
00:34:04,880 --> 00:34:07,479
Speaker 4: carry an investment grade rating at least from one entity.

641
00:34:07,880 --> 00:34:10,839
Speaker 4: And again when spreads are tight, when documentation is relatively weak,

642
00:34:10,880 --> 00:34:13,120
Speaker 4: it's just critically important that you do your own fundamental

643
00:34:13,160 --> 00:34:15,799
Speaker 4: credit work. I do think Pimpco has some advantages in

644
00:34:15,840 --> 00:34:19,279
Speaker 4: that area, both in terms of experience and resources, but

645
00:34:19,360 --> 00:34:21,920
Speaker 4: it's super important because you're not always getting the terms

646
00:34:21,920 --> 00:34:24,320
Speaker 4: that you want. When you do, you can unlock tremendous

647
00:34:24,400 --> 00:34:27,200
Speaker 4: value for your clients. But this is an environment where

648
00:34:27,280 --> 00:34:29,880
Speaker 4: we have to be really really selective as a bond

649
00:34:29,920 --> 00:34:30,840
Speaker 4: investor at least.

650
00:34:31,160 --> 00:34:34,560
Speaker 3: Yeah, when I think back to the twenty fifteen environment,

651
00:34:34,600 --> 00:34:36,799
Speaker 3: I remember a lot of people were writing stories about

652
00:34:36,840 --> 00:34:40,000
Speaker 3: the triple B bubble in investment grade. So Triple B

653
00:34:40,120 --> 00:34:42,960
Speaker 3: is the lowest tier of investment grade and that had

654
00:34:43,000 --> 00:34:48,360
Speaker 3: been absolutely exploding post financial crisis, and everyone expect not everyone,

655
00:34:48,480 --> 00:34:51,000
Speaker 3: A lot of people expected that to end in tiers,

656
00:34:51,120 --> 00:34:55,040
Speaker 3: and instead it ended with all those like Triple b's

657
00:34:55,120 --> 00:34:58,000
Speaker 3: getting upgraded and a lot of junk getting upgraded as well,

658
00:34:58,000 --> 00:34:59,759
Speaker 3: and having a bunch of rising stars, which I don't

659
00:34:59,760 --> 00:35:03,839
Speaker 3: think a lot of people were necessarily expecting, but talk

660
00:35:03,880 --> 00:35:07,960
Speaker 3: a little bit more about the rating agencies. What are

661
00:35:08,040 --> 00:35:11,840
Speaker 3: the pressures that you think are perhaps driving them to

662
00:35:12,840 --> 00:35:16,480
Speaker 3: rate some of these structures higher than they otherwise might be.

663
00:35:17,520 --> 00:35:20,600
Speaker 4: Well, again, there are multiple radio agencies that have different

664
00:35:20,600 --> 00:35:24,439
Speaker 4: philosophies to how they arrive at a rating, and there's

665
00:35:24,480 --> 00:35:27,759
Speaker 4: going to be understandable disagreement, you know, within markets. But

666
00:35:28,000 --> 00:35:30,080
Speaker 4: issuers are quite shrewd. You know, they're going to go

667
00:35:30,200 --> 00:35:33,719
Speaker 4: to where they get the most favorable ratings treatment. This

668
00:35:33,760 --> 00:35:36,080
Speaker 4: has always been the case, and I think the important

669
00:35:36,120 --> 00:35:38,840
Speaker 4: point to notice that when stocks are going up fifteen

670
00:35:38,840 --> 00:35:41,880
Speaker 4: percent a year, when the economy is growing, when you

671
00:35:41,880 --> 00:35:45,280
Speaker 4: don't have a sustained period of economic weakness, even poorly

672
00:35:45,360 --> 00:35:49,320
Speaker 4: underwritten credit will mature. We experience that in an extreme sense,

673
00:35:49,400 --> 00:35:52,480
Speaker 4: you know, during the two thousands. What we try to do,

674
00:35:52,600 --> 00:35:58,279
Speaker 4: is active investors is to underwrite two weaker economic environments,

675
00:35:58,520 --> 00:36:02,319
Speaker 4: environments where you know those underlying entities or the infrastructure

676
00:36:02,520 --> 00:36:04,680
Speaker 4: you know that you that you're lending against go into

677
00:36:04,719 --> 00:36:07,520
Speaker 4: a period of weakness. And I think that's where you know,

678
00:36:07,680 --> 00:36:11,320
Speaker 4: good fundamental credit work in this type of environment that

679
00:36:11,360 --> 00:36:14,960
Speaker 4: we're in today that's very much driven by rating arbitrage.

680
00:36:15,040 --> 00:36:17,319
Speaker 4: You know, seeking out investment grade ratings, you know, for

681
00:36:17,360 --> 00:36:20,480
Speaker 4: an insurance balance sheet or reinsurance balance sheet as an example.

682
00:36:21,000 --> 00:36:26,560
Speaker 4: You can lead at times to aggressive decisions. So I

683
00:36:26,640 --> 00:36:27,960
Speaker 4: think it's just a nature of the fact that you

684
00:36:28,000 --> 00:36:31,560
Speaker 4: have multiple agencies and some will be more optimistic in

685
00:36:31,600 --> 00:36:32,920
Speaker 4: certain areas than others.

686
00:36:32,960 --> 00:36:33,880
Speaker 5: But that's great.

687
00:36:33,920 --> 00:36:36,000
Speaker 4: You know, if we didn't have those sources of disagreement,

688
00:36:36,000 --> 00:36:39,360
Speaker 4: that wouldn't be opportunities to generate incremental return, you know,

689
00:36:39,440 --> 00:36:40,799
Speaker 4: versus passive alternatives.

690
00:36:41,600 --> 00:36:45,000
Speaker 2: While we're here on credit. Actually, you know, there's probably

691
00:36:45,000 --> 00:36:47,120
Speaker 2: about a month ago or a month and a half ago,

692
00:36:47,360 --> 00:36:50,720
Speaker 2: that's when we were getting all those headlines about tree color.

693
00:36:51,239 --> 00:36:53,920
Speaker 2: And that was when Jamie Diamond made the sort of

694
00:36:53,960 --> 00:36:57,960
Speaker 2: famous crickets thing. I was getting real corea cockroaches.

695
00:36:58,040 --> 00:37:00,799
Speaker 3: I hate cockroaches and I like crickets, So I want

696
00:37:00,840 --> 00:37:01,439
Speaker 3: to make that clear.

697
00:37:01,520 --> 00:37:04,719
Speaker 2: Crickets are lovely. Yeah, right, I should not associate them

698
00:37:04,800 --> 00:37:07,560
Speaker 2: with credit blow ups. That's completely unfair to crickets. It's

699
00:37:07,600 --> 00:37:10,200
Speaker 2: fair to cockroaches. Jamie Diamond made those cocker I was

700
00:37:10,200 --> 00:37:12,120
Speaker 2: getting worried. I saw all these heads like going another

701
00:37:12,160 --> 00:37:14,120
Speaker 2: antity took a hit on this another entity. I was

702
00:37:14,120 --> 00:37:16,000
Speaker 2: like oh, this is very familiar. I don't like I

703
00:37:16,040 --> 00:37:18,840
Speaker 2: don't like how many times the same company appears in

704
00:37:18,920 --> 00:37:21,960
Speaker 2: the headlines. But we haven't gotten that much actually since then.

705
00:37:22,120 --> 00:37:24,319
Speaker 2: It's not like there have been five more of those.

706
00:37:24,640 --> 00:37:27,320
Speaker 2: I'm just sort of curing is setting aside some of

707
00:37:27,360 --> 00:37:29,840
Speaker 2: the data center, the sexy private credit stuff that everyone's

708
00:37:29,840 --> 00:37:32,399
Speaker 2: focused on. Do you do you think over the last

709
00:37:32,440 --> 00:37:36,640
Speaker 2: several years, was there some systematically bad underwriting going on,

710
00:37:36,760 --> 00:37:39,400
Speaker 2: especially over the last few years, or were there isolated

711
00:37:39,440 --> 00:37:42,160
Speaker 2: cockroaches the first cockroach before they had a chance to

712
00:37:42,440 --> 00:37:45,560
Speaker 2: lay eggs and make babies, the lonely cockroaches.

713
00:37:45,640 --> 00:37:46,000
Speaker 5: Yeah?

714
00:37:46,080 --> 00:37:49,760
Speaker 4: Yeah, So look again, because there's been so much growth

715
00:37:49,920 --> 00:37:54,160
Speaker 4: in lending to lower quality companies, and again, the last

716
00:37:54,160 --> 00:37:58,359
Speaker 4: major cycle was lending to lower quality households. Yeah right,

717
00:37:58,640 --> 00:38:02,399
Speaker 4: you know, there's going to be areas of excess, and

718
00:38:02,560 --> 00:38:05,480
Speaker 4: I think people are focused on these areas.

719
00:38:05,680 --> 00:38:07,440
Speaker 5: But again, when you look at.

720
00:38:07,239 --> 00:38:12,359
Speaker 4: The cumulative delinquencies and losses, yes they've increased a bit

721
00:38:12,400 --> 00:38:15,799
Speaker 4: over the last few years, but these situations have been

722
00:38:16,000 --> 00:38:20,239
Speaker 4: relatively isolated. But again, anytime you've had this much credit expansion,

723
00:38:20,880 --> 00:38:23,520
Speaker 4: you're going to have challenges, and these challenges are happening

724
00:38:23,680 --> 00:38:26,680
Speaker 4: in a relatively strong economy, so we don't think this

725
00:38:26,719 --> 00:38:29,359
Speaker 4: will be a catastrophe. The word I've used is that

726
00:38:29,360 --> 00:38:32,120
Speaker 4: there's likely going to be disappointment in certain areas of

727
00:38:32,120 --> 00:38:35,040
Speaker 4: the credit markets that have performed exceptionally well over the

728
00:38:35,120 --> 00:38:38,680
Speaker 4: last ten to fifteen years. But that shouldn't be viewed

729
00:38:38,680 --> 00:38:42,200
Speaker 4: as an overly controversial statement. That's how markets work. You know,

730
00:38:42,280 --> 00:38:45,399
Speaker 4: credit was very cheap ten or fifteen years ago, high

731
00:38:45,480 --> 00:38:48,400
Speaker 4: quality bonds were very very expensive. Today, credit spreads are

732
00:38:48,440 --> 00:38:51,200
Speaker 4: near all time tights, equities are near all time highs,

733
00:38:51,760 --> 00:38:55,760
Speaker 4: and valuate high quality bonds looks reasonable relative to their history.

734
00:38:56,040 --> 00:38:58,759
Speaker 4: So you know, starting valuations tend to be pretty big

735
00:38:58,880 --> 00:39:02,440
Speaker 4: drivers of future turns. If the economy continues to grow,

736
00:39:02,440 --> 00:39:05,040
Speaker 4: if stocks keep going up fifteen percent a year, yes,

737
00:39:05,160 --> 00:39:08,640
Speaker 4: these will be relatively isolated situations, but if you get

738
00:39:08,640 --> 00:39:12,040
Speaker 4: into a period of economic weakness, losses will go up

739
00:39:12,080 --> 00:39:15,560
Speaker 4: and they'll likely be some disappointment. I think that's the

740
00:39:15,560 --> 00:39:17,200
Speaker 4: best way to categorize it. And then I think the

741
00:39:17,239 --> 00:39:20,200
Speaker 4: second important point when you look at markets in a

742
00:39:20,239 --> 00:39:23,719
Speaker 4: longer term historical context, is that regulators hate bailing out

743
00:39:23,760 --> 00:39:27,640
Speaker 4: the same sectors twice back during the GFC, it was

744
00:39:27,760 --> 00:39:30,640
Speaker 4: lending to the consumer. It was excessive lending from the

745
00:39:30,680 --> 00:39:33,560
Speaker 4: banks that caused all of the problems, almost took down

746
00:39:33,600 --> 00:39:37,600
Speaker 4: the financial system, and not surprisingly, the regulations towards the

747
00:39:37,640 --> 00:39:41,719
Speaker 4: banks and towards consumer lending was massive. And today when

748
00:39:41,760 --> 00:39:44,720
Speaker 4: you look at the world, the household balance sheets, certainly

749
00:39:44,719 --> 00:39:49,520
Speaker 4: middle income and above cohort groups hasn't been stronger this strong,

750
00:39:49,520 --> 00:39:53,400
Speaker 4: and several decades there's record amounts of borrower equity in

751
00:39:53,480 --> 00:39:56,680
Speaker 4: these areas of the market have been very, very strong.

752
00:39:56,840 --> 00:40:01,000
Speaker 4: From an underwriting perspective, the areas that escape the scrutiny

753
00:40:01,000 --> 00:40:02,640
Speaker 4: of the last time, you know, a lot of lending

754
00:40:02,640 --> 00:40:05,920
Speaker 4: to non financial corporates, a lot of this mid market

755
00:40:05,960 --> 00:40:09,480
Speaker 4: private lending that came out of that period relatively unscathed

756
00:40:09,520 --> 00:40:12,880
Speaker 4: from a regulatory perspective, has grown a lot. So I

757
00:40:12,920 --> 00:40:15,560
Speaker 4: think a lot of this just relates to longer term cycles.

758
00:40:15,719 --> 00:40:18,360
Speaker 4: PIPCO is talking in a much different way back in

759
00:40:18,360 --> 00:40:20,359
Speaker 4: two thousand and five, in two thousand and six, where

760
00:40:20,360 --> 00:40:23,080
Speaker 4: we were screaming from the rooftop saying that you know,

761
00:40:23,120 --> 00:40:25,560
Speaker 4: what was going on was so irrational that there were

762
00:40:25,719 --> 00:40:28,960
Speaker 4: major problems ahead. That's not where we are and That's

763
00:40:29,000 --> 00:40:32,359
Speaker 4: why I sometimes sound a bit more negative than we are.

764
00:40:32,600 --> 00:40:35,200
Speaker 4: I think that the idea of disappointment is the way

765
00:40:35,200 --> 00:40:37,680
Speaker 4: people should think about some of these areas of the

766
00:40:37,719 --> 00:40:39,600
Speaker 4: credit markets. And the good news is you don't have

767
00:40:39,640 --> 00:40:42,840
Speaker 4: to accept disappointment. You can simply accept the fact that

768
00:40:42,880 --> 00:40:45,279
Speaker 4: you had a great performance run and that by going

769
00:40:45,360 --> 00:40:48,480
Speaker 4: up in quality, expanding into a global opportunity set that

770
00:40:48,560 --> 00:40:51,879
Speaker 4: hasn't been sufficiently embraced just yet, perhaps voting a little

771
00:40:51,920 --> 00:40:55,080
Speaker 4: bit of non dollar exposure gets you in the same

772
00:40:55,160 --> 00:40:58,759
Speaker 4: place with much more resiliency, much more downside protection, and

773
00:40:59,320 --> 00:41:02,040
Speaker 4: a lot more liquidity or flexibility to change your mind

774
00:41:03,080 --> 00:41:04,120
Speaker 4: in the future as well.

775
00:41:04,920 --> 00:41:07,640
Speaker 3: Since you brought up household balance sheets, can you talk

776
00:41:07,640 --> 00:41:11,240
Speaker 3: to us a little bit about your housing outlook, because

777
00:41:11,640 --> 00:41:15,240
Speaker 3: I believe PIMCO has been pretty bullish on mortgages recently,

778
00:41:15,480 --> 00:41:17,720
Speaker 3: but at the same time we've seen a slight slow

779
00:41:17,760 --> 00:41:21,000
Speaker 3: down in the housing market. But then again, we still

780
00:41:21,000 --> 00:41:26,080
Speaker 3: have long term structural tailwinds, such as a massive undersupply

781
00:41:26,560 --> 00:41:29,239
Speaker 3: of homes in the US. Where do you see that

782
00:41:29,440 --> 00:41:32,440
Speaker 3: going in the coming years, particularly, you know, if we

783
00:41:32,440 --> 00:41:35,520
Speaker 3: were to see inflationary pressures start to pick up and

784
00:41:35,560 --> 00:41:38,000
Speaker 3: those longer end yields start to rise.

785
00:41:38,760 --> 00:41:42,200
Speaker 4: Yeah, so we are very bullish on housing related investments

786
00:41:42,440 --> 00:41:45,080
Speaker 4: in the United States as well as in other areas

787
00:41:45,280 --> 00:41:49,680
Speaker 4: around the world. Agency guaranteed mortgages still traded very widespreads

788
00:41:49,840 --> 00:41:53,160
Speaker 4: relative to corporates. Even in an absolute sense. We think

789
00:41:53,200 --> 00:41:55,400
Speaker 4: it's a very high quality, liquid area of the market

790
00:41:55,560 --> 00:41:58,200
Speaker 4: that again makes a lot of sense to own a

791
00:41:58,320 --> 00:42:02,400
Speaker 4: cross a variety of different mandates. We also like lending

792
00:42:02,680 --> 00:42:06,840
Speaker 4: in the non guaranteed area against the house simply because

793
00:42:06,960 --> 00:42:08,760
Speaker 4: borrowers have record amounts of equity.

794
00:42:08,920 --> 00:42:11,719
Speaker 3: So when you lend its collateral. Yeah, that's what it

795
00:42:11,760 --> 00:42:13,320
Speaker 3: sounds like. You love collateral.

796
00:42:13,600 --> 00:42:17,680
Speaker 4: Yeah, we like good documentation and good, good, good collateral.

797
00:42:17,840 --> 00:42:20,719
Speaker 4: You know, at least all else equal. But you know,

798
00:42:20,760 --> 00:42:23,960
Speaker 4: it's not a major bet on the directionality of homes.

799
00:42:24,000 --> 00:42:28,840
Speaker 4: When you're lending against a household that has seventy percentage

800
00:42:28,880 --> 00:42:32,080
Speaker 4: points of of borrow equity, your home can go down

801
00:42:32,160 --> 00:42:35,359
Speaker 4: quite a bit and you're very well protected. That same

802
00:42:35,440 --> 00:42:38,920
Speaker 4: dynamic exists you know, over the UK, across Europe, you know,

803
00:42:39,000 --> 00:42:41,440
Speaker 4: and even in other parts of the world. So you know,

804
00:42:41,520 --> 00:42:44,560
Speaker 4: again regulators don't like building out the same sectors twice

805
00:42:44,680 --> 00:42:48,440
Speaker 4: that's pretty good acid allocation advice. It's quite straightforward. But also,

806
00:42:48,600 --> 00:42:52,960
Speaker 4: you know, you have much better fundamentals across households. But

807
00:42:53,000 --> 00:42:56,840
Speaker 4: to your specific question around housing, it's a tough situation.

808
00:42:57,040 --> 00:42:59,960
Speaker 4: We do think that homes are going to remain elevation

809
00:43:00,280 --> 00:43:03,560
Speaker 4: from a valuation perspective, and affordability is going to remain

810
00:43:03,680 --> 00:43:06,480
Speaker 4: quite constrained because there's no easy answer. You know, you

811
00:43:06,520 --> 00:43:08,920
Speaker 4: bring the mortgage rate down, the home price goes up.

812
00:43:09,440 --> 00:43:12,399
Speaker 4: You know, affordability doesn't change in a meaningful sense. What

813
00:43:12,480 --> 00:43:15,279
Speaker 4: we really need in this country and other parts of

814
00:43:15,320 --> 00:43:18,520
Speaker 4: the world are more homes, more housing units. And again

815
00:43:18,640 --> 00:43:22,000
Speaker 4: because of a lot of the post global financial crisis regulation,

816
00:43:22,560 --> 00:43:25,399
Speaker 4: it's been real hard to build new homes. So our

817
00:43:25,440 --> 00:43:27,680
Speaker 4: base case view is that home price is going to

818
00:43:27,680 --> 00:43:30,400
Speaker 4: moderate here on a national level. You could see, at

819
00:43:30,480 --> 00:43:34,120
Speaker 4: least in real terms, you know, some steady declines over

820
00:43:34,120 --> 00:43:37,600
Speaker 4: the course of the next several years in certain markets

821
00:43:37,840 --> 00:43:40,799
Speaker 4: that are a bit overextended, you know, a bit more volatility.

822
00:43:41,160 --> 00:43:43,360
Speaker 4: But we do think that you know, home price is

823
00:43:43,440 --> 00:43:47,080
Speaker 4: going to remain elevated from a historical perspective, just because

824
00:43:47,080 --> 00:43:49,360
Speaker 4: of the fact that people have locked in very, very

825
00:43:49,400 --> 00:43:52,319
Speaker 4: low mortgage rates thirty years, you know, not just five

826
00:43:52,400 --> 00:43:54,239
Speaker 4: or ten years. You know which which we're you know,

827
00:43:54,360 --> 00:43:58,759
Speaker 4: mortgage durations, you know, popular pre GFC. So you know

828
00:43:58,800 --> 00:44:00,719
Speaker 4: you're not going to see you know, two much turnover.

829
00:44:01,080 --> 00:44:04,120
Speaker 4: And unfortunately that means that homes for you know a

830
00:44:04,160 --> 00:44:07,040
Speaker 4: lot of younger Americans are going to remain out of reach.

831
00:44:07,280 --> 00:44:10,440
Speaker 4: But but again, maybe some incremental benefit, maybe you know,

832
00:44:10,480 --> 00:44:13,759
Speaker 4: this administration get mortgage rates down a bit through some

833
00:44:13,880 --> 00:44:16,680
Speaker 4: creative policy the next couple of years. By the way,

834
00:44:16,719 --> 00:44:20,560
Speaker 4: we'd like that given pimco's current positioning. But again without

835
00:44:20,600 --> 00:44:23,160
Speaker 4: without building new homes which are going to take you know, many,

836
00:44:23,200 --> 00:44:25,920
Speaker 4: many years. You know, there's no easy solution.

837
00:44:26,200 --> 00:44:28,319
Speaker 2: I want to go back. You mentioned this idea, there's

838
00:44:28,440 --> 00:44:32,600
Speaker 2: there's an optimal amount of fiscal profligacy from the perspective

839
00:44:32,840 --> 00:44:34,919
Speaker 2: of the bond investor. Maybe you want them to push

840
00:44:34,960 --> 00:44:36,279
Speaker 2: it a little bit because then you get paid a

841
00:44:36,280 --> 00:44:38,200
Speaker 2: little bit for taking it on. But obviously you don't

842
00:44:38,200 --> 00:44:40,399
Speaker 2: want them to push so forth where you get some

843
00:44:40,560 --> 00:44:43,640
Speaker 2: fiscal dominance spiral leading to higher and high inflation. You

844
00:44:43,680 --> 00:44:45,960
Speaker 2: want to find that sweet spot, you know, I mentioned

845
00:44:45,960 --> 00:44:48,560
Speaker 2: we're talking a little bit about politics, earlier about whether

846
00:44:49,440 --> 00:44:52,640
Speaker 2: independent central bank can be sustained. But when you look abroad,

847
00:44:53,440 --> 00:44:55,360
Speaker 2: you know, it seems like in a lot of pretty

848
00:44:55,440 --> 00:44:57,920
Speaker 2: major current we're not the only country that's having political

849
00:44:58,000 --> 00:45:02,360
Speaker 2: volatility these days. We're concerned about the approach that the

850
00:45:02,400 --> 00:45:04,520
Speaker 2: new Japanese PM is going to take it. So we

851
00:45:04,560 --> 00:45:08,239
Speaker 2: know that rates are higher in Japan. France, very indebted country.

852
00:45:08,680 --> 00:45:10,879
Speaker 2: They seem to have like a new government every two weeks.

853
00:45:10,880 --> 00:45:12,880
Speaker 2: I like lose track of all the times their government

854
00:45:12,960 --> 00:45:17,600
Speaker 2: collapses and so forth. The UK, very indebted country. The

855
00:45:17,719 --> 00:45:21,080
Speaker 2: moment anyone takes office, their approval ratings plunge to negative

856
00:45:21,120 --> 00:45:23,600
Speaker 2: thirty or whatever. There's a lot going on on the

857
00:45:23,600 --> 00:45:26,640
Speaker 2: political front, and that sort of determines whether countries are

858
00:45:26,680 --> 00:45:30,080
Speaker 2: even it's even possible to run what might be more

859
00:45:30,120 --> 00:45:33,680
Speaker 2: responsible fiscal policies. Is that something that I don't know

860
00:45:33,800 --> 00:45:35,320
Speaker 2: keeps you up at night, is the right term, But

861
00:45:35,760 --> 00:45:38,000
Speaker 2: is that something that's a big part of your work

862
00:45:38,280 --> 00:45:41,839
Speaker 2: is trying to understand, especially when you think abroad, understand

863
00:45:41,880 --> 00:45:44,280
Speaker 2: the political dynamics and all these countries that are happening

864
00:45:44,320 --> 00:45:44,680
Speaker 2: right now.

865
00:45:45,320 --> 00:45:45,840
Speaker 5: Yeah.

866
00:45:45,840 --> 00:45:49,439
Speaker 4: Absolutely, And you know we get together once a year,

867
00:45:49,600 --> 00:45:51,880
Speaker 4: you know, talk about the outlook for economies and markets

868
00:45:51,920 --> 00:45:54,880
Speaker 4: over a five year type timeframe. And you know, one

869
00:45:54,920 --> 00:45:57,000
Speaker 4: of our advisors I think put it well was that,

870
00:45:57,080 --> 00:45:58,680
Speaker 4: you know, we used to live in a world where

871
00:45:59,080 --> 00:46:03,760
Speaker 4: you know, economic outcomes would drive politics. If economies were strong,

872
00:46:04,239 --> 00:46:07,000
Speaker 4: you know, politicians usually ended up in a in a

873
00:46:07,040 --> 00:46:11,080
Speaker 4: good situation. They're they're, they're, they're, they're, they're stay in office.

874
00:46:11,520 --> 00:46:15,520
Speaker 4: Today it feels like it's a bit reversed where political priorities,

875
00:46:15,840 --> 00:46:19,919
Speaker 4: geopolitical tensions are driving economics. And I think you see

876
00:46:19,920 --> 00:46:22,040
Speaker 4: that to a degree with tariff policy, you see it,

877
00:46:22,120 --> 00:46:25,160
Speaker 4: you know, to a degree with with various forms of reassuring.

878
00:46:25,280 --> 00:46:29,080
Speaker 4: You see it in terms of these populist tendencies across markets.

879
00:46:29,280 --> 00:46:32,479
Speaker 4: So they're all very, very important and a lot more

880
00:46:32,520 --> 00:46:34,440
Speaker 4: important than they were in the past. And I think

881
00:46:34,480 --> 00:46:36,480
Speaker 4: it takes a lot of humility from someone like myself

882
00:46:36,600 --> 00:46:38,680
Speaker 4: and others that grew up you know, doing you know,

883
00:46:38,760 --> 00:46:42,560
Speaker 4: discounted cash flow analysis and you know, derivative pricing as

884
00:46:42,560 --> 00:46:46,160
Speaker 4: opposed to understanding the political economy. So you know, we

885
00:46:46,320 --> 00:46:49,960
Speaker 4: think that that's important both from the perspective of gaining

886
00:46:50,000 --> 00:46:54,439
Speaker 4: in edge in markets, but also understanding that sometimes will

887
00:46:54,440 --> 00:46:57,600
Speaker 4: be wrong and when you're running the debt levels that

888
00:46:57,719 --> 00:47:01,840
Speaker 4: countries are running or your deficits in overall debt levels,

889
00:47:02,360 --> 00:47:04,680
Speaker 4: there's going to be some unpredictability. And that's why this

890
00:47:04,800 --> 00:47:08,840
Speaker 4: idea of looking to exploit a global opportunity set prudent

891
00:47:08,880 --> 00:47:12,840
Speaker 4: diversification targeting some countries outside the US that aren't running

892
00:47:12,920 --> 00:47:15,319
Speaker 4: you know, six seven percent deficits, and there are high

893
00:47:15,400 --> 00:47:19,600
Speaker 4: quality countries out there, Australia being an example, Germany being

894
00:47:19,600 --> 00:47:22,000
Speaker 4: another example, even the United Kingdom, although they have a

895
00:47:22,000 --> 00:47:25,000
Speaker 4: lot less policy flexibility than we do, given that there

896
00:47:25,040 --> 00:47:29,600
Speaker 4: were smaller open economy with their own currency offer attractive yields.

897
00:47:29,760 --> 00:47:32,919
Speaker 4: So this is less about picking your favorite country from

898
00:47:32,920 --> 00:47:36,840
Speaker 4: our perspective, it's more looking at take advantage of attractive

899
00:47:36,880 --> 00:47:40,720
Speaker 4: opportunities around the globe, with some tilt towards those countries

900
00:47:40,719 --> 00:47:43,319
Speaker 4: that are balancing their budget and that do have a

901
00:47:43,320 --> 00:47:46,280
Speaker 4: better overall fiscal picture. And we haven't talked about emerging markets,

902
00:47:46,280 --> 00:47:48,640
Speaker 4: but they are. You know a few emerging markets that

903
00:47:49,239 --> 00:47:51,719
Speaker 4: you know, this cycle got ahead of inflation, that have

904
00:47:51,800 --> 00:47:55,760
Speaker 4: been in some sense more fiscally prudent than their developed

905
00:47:55,760 --> 00:47:59,600
Speaker 4: market counterparties, and that have very very high yields even

906
00:47:59,600 --> 00:48:03,640
Speaker 4: ad just for inflation rates. So even some diversification in

907
00:48:03,680 --> 00:48:06,360
Speaker 4: some of the higher quality areas of the emerging markets,

908
00:48:06,920 --> 00:48:10,399
Speaker 4: from our perspective, represents real good value or real good

909
00:48:10,480 --> 00:48:15,239
Speaker 4: sources of diversification in return versus some of these assets

910
00:48:15,320 --> 00:48:17,160
Speaker 4: you know here in the United States that have performed

911
00:48:17,200 --> 00:48:20,960
Speaker 4: real well historically, but where when you look at the

912
00:48:21,080 --> 00:48:23,920
Speaker 4: likelihood for forward performance just just look a little bit

913
00:48:24,000 --> 00:48:24,680
Speaker 4: less interesting.

914
00:48:25,680 --> 00:48:28,919
Speaker 3: Actually, this reminds me thinking back to twenty fifteen. Twenty

915
00:48:29,000 --> 00:48:31,839
Speaker 3: fifteen was actually a big year for PIMCO because it

916
00:48:31,880 --> 00:48:35,359
Speaker 3: was your first full year without Bill Gross, right, who

917
00:48:35,680 --> 00:48:39,759
Speaker 3: left in late twenty fourteen. Can you talk to us

918
00:48:39,800 --> 00:48:43,840
Speaker 3: perhaps how the culture of PIMCO has changed over the

919
00:48:43,880 --> 00:48:46,880
Speaker 3: past ten years, and how you would describe that evolution,

920
00:48:47,000 --> 00:48:49,439
Speaker 3: because I imagine it's been a long time, it must

921
00:48:49,480 --> 00:48:50,759
Speaker 3: have shifted a little bit.

922
00:48:51,480 --> 00:48:51,719
Speaker 5: Yeah.

923
00:48:51,719 --> 00:48:54,160
Speaker 4: Look, well, you know, the way Bill left the firm

924
00:48:54,280 --> 00:48:57,239
Speaker 4: was an ideal, to say the least. But you know,

925
00:48:57,280 --> 00:49:00,319
Speaker 4: Bill left us in an incredibly strong position. You know,

926
00:49:00,360 --> 00:49:02,279
Speaker 4: he created a lot of the frameworks that we still

927
00:49:02,400 --> 00:49:05,879
Speaker 4: use today to make decisions. Bill was a strong personality,

928
00:49:05,880 --> 00:49:09,400
Speaker 4: but he believed in teamwork and believe that investing was

929
00:49:09,600 --> 00:49:12,439
Speaker 4: a team sport, you know, so to speak. So from

930
00:49:12,440 --> 00:49:15,040
Speaker 4: that perspective, there didn't need to be a lot of

931
00:49:15,520 --> 00:49:20,040
Speaker 4: change or certainly not radical change. But over this period,

932
00:49:20,239 --> 00:49:23,160
Speaker 4: you know, markets have become you know, so much more specialized.

933
00:49:23,400 --> 00:49:27,680
Speaker 4: Client needs have evolved, you know, over time, the introduction

934
00:49:27,840 --> 00:49:33,319
Speaker 4: of a more sizable private opportunity set has been important. Technology,

935
00:49:33,400 --> 00:49:38,080
Speaker 4: big data, using you know, trading techniques, portfolio trading in

936
00:49:38,520 --> 00:49:41,480
Speaker 4: other automated you know type, you know, trading strategies are

937
00:49:41,480 --> 00:49:44,200
Speaker 4: all critically important. So you know, we're a much more

938
00:49:44,239 --> 00:49:47,200
Speaker 4: specialized firm today, which is a function of again, you know,

939
00:49:47,360 --> 00:49:50,160
Speaker 4: evolving client needs, but also just you know the realities

940
00:49:50,160 --> 00:49:52,760
Speaker 4: of this world that we live in today, where data

941
00:49:52,920 --> 00:49:57,960
Speaker 4: is abundant, much less expensive to access. So from that perspective,

942
00:49:58,000 --> 00:50:01,919
Speaker 4: we've needed to adapt, you know, even more global. So

943
00:50:02,160 --> 00:50:06,720
Speaker 4: you know, we tend to utilize regional committees in regional

944
00:50:07,160 --> 00:50:10,880
Speaker 4: decision making structures, but a lot stayed the same at

945
00:50:10,960 --> 00:50:12,839
Speaker 4: least in terms of mindset, and we try to really

946
00:50:12,920 --> 00:50:15,680
Speaker 4: leverage you know, the history and the experience the firm

947
00:50:15,760 --> 00:50:20,839
Speaker 4: has had managing and navigating through more challenging markets. Twenty

948
00:50:20,920 --> 00:50:23,880
Speaker 4: two is rough, you know, from both stocks and but

949
00:50:24,000 --> 00:50:27,840
Speaker 4: you know, in general, you know, the environment's been reasonably forgiving,

950
00:50:28,000 --> 00:50:31,040
Speaker 4: but you can always get into these you know, tougher periods,

951
00:50:31,040 --> 00:50:33,759
Speaker 4: and again we try to use these structures that you know,

952
00:50:33,840 --> 00:50:36,560
Speaker 4: build put in place and buill deserves.

953
00:50:37,200 --> 00:50:38,279
Speaker 5: Trying to about a credit for.

954
00:50:38,320 --> 00:50:40,560
Speaker 2: It's funny in your last answer there there were like

955
00:50:40,640 --> 00:50:44,440
Speaker 2: five things you said that could merit full follow ups

956
00:50:44,520 --> 00:50:47,920
Speaker 2: or even full follow up episodes, like about changing client

957
00:50:48,040 --> 00:50:51,080
Speaker 2: needs over time, or what happens when the cost of

958
00:50:51,160 --> 00:50:55,160
Speaker 2: data goes from costly to fairly affordable, et cetera. All

959
00:50:55,200 --> 00:50:58,240
Speaker 2: those sort of interesting things. But just my last question,

960
00:50:58,480 --> 00:51:00,960
Speaker 2: and it sort of relates to technology. You know, when

961
00:51:01,000 --> 00:51:04,720
Speaker 2: it comes to AI in investing, we've talked a little

962
00:51:04,760 --> 00:51:07,280
Speaker 2: bit more on the short term like high frequency side

963
00:51:07,400 --> 00:51:09,719
Speaker 2: and the sort of models that they use and the

964
00:51:09,760 --> 00:51:12,720
Speaker 2: signals that they use, and how that sort of relates

965
00:51:12,760 --> 00:51:16,200
Speaker 2: to AI and their application. But for a firm like

966
00:51:16,280 --> 00:51:20,560
Speaker 2: PIMCO and when you're thinking about longer term holding periods

967
00:51:20,680 --> 00:51:23,400
Speaker 2: and you want to have some a good collateral and

968
00:51:23,480 --> 00:51:27,760
Speaker 2: good documentation, et cetera. Currently today, have you found ways

969
00:51:27,840 --> 00:51:31,920
Speaker 2: to apply cutting edge AI technology to the process of

970
00:51:31,960 --> 00:51:33,040
Speaker 2: good security selection.

971
00:51:33,960 --> 00:51:37,239
Speaker 4: We have, and we're finding ways to utilize the technology

972
00:51:37,239 --> 00:51:40,080
Speaker 4: at an accelerating rate. We do some of this and

973
00:51:40,160 --> 00:51:43,840
Speaker 4: some of our you know, more quant focused strategies, you know,

974
00:51:43,880 --> 00:51:47,920
Speaker 4: where we look to use AI to actually drive alpha,

975
00:51:48,200 --> 00:51:52,799
Speaker 4: But just AI as a tool to drive efficiency has

976
00:51:52,920 --> 00:51:58,560
Speaker 4: been will be critically important to managing an investment platform.

977
00:51:59,200 --> 00:52:01,759
Speaker 4: Just the ease in which you can access data that

978
00:52:01,800 --> 00:52:06,000
Speaker 4: you can use AI to help support overall analysis, both

979
00:52:06,040 --> 00:52:09,240
Speaker 4: at the company level, the individual investment level, but even

980
00:52:09,760 --> 00:52:13,279
Speaker 4: coming through economic history and understanding some of these geopolitical

981
00:52:13,400 --> 00:52:16,960
Speaker 4: trends in themes that are hard, at least intuitively to

982
00:52:17,080 --> 00:52:19,680
Speaker 4: grasp are going to be critically important. In fact, before

983
00:52:20,080 --> 00:52:23,279
Speaker 4: our discussion today, spend considerable time with our head of

984
00:52:23,320 --> 00:52:27,600
Speaker 4: technology and our head of implementation talking about various firm

985
00:52:27,600 --> 00:52:29,600
Speaker 4: wide initiatives. And I think the only other point is

986
00:52:30,080 --> 00:52:33,160
Speaker 4: my own use of AI, both at home and at

987
00:52:33,239 --> 00:52:36,040
Speaker 4: the office has gone up almost exponentially over the last

988
00:52:36,160 --> 00:52:38,239
Speaker 4: year or two. And I'm the last person you want

989
00:52:38,280 --> 00:52:41,640
Speaker 4: to rely on to understand this technology. It's the younger

990
00:52:41,640 --> 00:52:44,160
Speaker 4: folks that we hired over the last year that are

991
00:52:44,200 --> 00:52:46,799
Speaker 4: helping us with a lot of this perspective. So this

992
00:52:46,960 --> 00:52:52,480
Speaker 4: is going to be quite disruptive, probably productivity enhancing, you know,

993
00:52:52,520 --> 00:52:54,600
Speaker 4: at the economy wide level, but it's also going to

994
00:52:54,640 --> 00:52:57,600
Speaker 4: lead to considerable disruption, and it's important that we don't

995
00:52:57,600 --> 00:52:59,919
Speaker 4: get disrupted and that we use this technology to drive

996
00:53:00,040 --> 00:53:02,680
Speaker 4: client returns. But you know, it's going to be important

997
00:53:03,080 --> 00:53:05,560
Speaker 4: in so many ways and we're really really embracing it

998
00:53:05,600 --> 00:53:06,840
Speaker 4: here here at Pimco.

999
00:53:07,239 --> 00:53:09,760
Speaker 2: Dan Ivison, thank you so much for coming on odd Laws.

1000
00:53:09,840 --> 00:53:13,320
Speaker 2: That was a fantastic conversation. Really appreciate you taking the time,

1001
00:53:13,840 --> 00:53:15,239
Speaker 2: and we're going to check back in with you in

1002
00:53:15,280 --> 00:53:17,879
Speaker 2: twenty thirty five and see how well you got how

1003
00:53:17,920 --> 00:53:20,320
Speaker 2: well one got paid for taking a little bit of

1004
00:53:20,400 --> 00:53:21,080
Speaker 2: duration here.

1005
00:53:21,280 --> 00:53:23,680
Speaker 4: Great Joe Tracy, thanks again and correct congratulations on the

1006
00:53:24,239 --> 00:53:26,440
Speaker 4: big milestone and so much.

1007
00:53:26,480 --> 00:53:28,640
Speaker 3: We thank you so much. Dad really appreciate it.

1008
00:53:28,840 --> 00:53:43,640
Speaker 2: Thank you guys, Tracy. I thought that was greatly I

1009
00:53:43,680 --> 00:53:46,680
Speaker 2: really enjoyed talking to Dan. Fantastic overview.

1010
00:53:46,840 --> 00:53:49,120
Speaker 3: Yeah, so a couple of things stood out to me.

1011
00:53:49,239 --> 00:53:52,200
Speaker 3: So number one the idea of no more free lunch

1012
00:53:52,320 --> 00:53:54,759
Speaker 3: and credit, although people have been talking about that for

1013
00:53:54,800 --> 00:53:57,640
Speaker 3: a while now, and obviously with the great environment changing,

1014
00:53:57,719 --> 00:54:00,400
Speaker 3: you can see that argument. The other thing that I

1015
00:54:00,440 --> 00:54:04,560
Speaker 3: really liked was his description of policymakers don't want to

1016
00:54:04,560 --> 00:54:05,720
Speaker 3: bail out the same thing twice.

1017
00:54:05,880 --> 00:54:08,440
Speaker 2: Yeah, that's interesting framework or way to think about it.

1018
00:54:08,560 --> 00:54:08,759
Speaker 5: Yeah.

1019
00:54:08,800 --> 00:54:11,400
Speaker 3: Absolutely, And it kind of reminded me of there's another

1020
00:54:11,480 --> 00:54:15,800
Speaker 3: person in credit who used to tell me a line

1021
00:54:15,920 --> 00:54:19,960
Speaker 3: about how he invests, which is follow the bad guys. Right, So,

1022
00:54:20,200 --> 00:54:22,680
Speaker 3: like the guys that blew up in one part of

1023
00:54:22,719 --> 00:54:26,400
Speaker 3: the market usually, you know, start doing.

1024
00:54:26,200 --> 00:54:29,120
Speaker 2: Something to act, they're going to get their acting. Are

1025
00:54:29,120 --> 00:54:30,480
Speaker 2: you saying they're going to get their act together? Or

1026
00:54:30,480 --> 00:54:32,000
Speaker 2: they're going to do something I'm saying, they.

1027
00:54:31,880 --> 00:54:34,879
Speaker 3: Move to the new thing, and then that blows up.

1028
00:54:35,000 --> 00:54:37,480
Speaker 3: And so if you can just identify the bad guys

1029
00:54:37,600 --> 00:54:41,080
Speaker 3: and just follow their career trajectories, just short everything the

1030
00:54:41,120 --> 00:54:41,759
Speaker 3: bad guys do.

1031
00:54:41,960 --> 00:54:43,359
Speaker 5: I love that. I love that take.

1032
00:54:43,880 --> 00:54:47,000
Speaker 2: You know what was really I had not realized that

1033
00:54:47,160 --> 00:54:50,640
Speaker 2: stat he said about how little you got paid for

1034
00:54:50,800 --> 00:54:54,360
Speaker 2: taking for buying poor credits up until the GFC. Yeah,

1035
00:54:54,400 --> 00:54:57,120
Speaker 2: and then post GFC is just totally flipped that you

1036
00:54:57,239 --> 00:54:59,520
Speaker 2: just got you should just go as far out on

1037
00:54:59,600 --> 00:55:02,279
Speaker 2: the credit at risk curve as you possibly can, and

1038
00:55:02,320 --> 00:55:05,799
Speaker 2: you've just walloped anything safe. And I knew that, I

1039
00:55:05,800 --> 00:55:09,239
Speaker 2: guess on some level, but the extreme of that statistical divergence,

1040
00:55:09,440 --> 00:55:11,919
Speaker 2: but you know, you have to think we had that

1041
00:55:12,200 --> 00:55:14,160
Speaker 2: well it was more than a hiccup in twenty twenty,

1042
00:55:14,360 --> 00:55:17,040
Speaker 2: but we did bounce back very fast from it. So

1043
00:55:17,160 --> 00:55:19,879
Speaker 2: really what we were looking at is, you know, well

1044
00:55:19,880 --> 00:55:23,680
Speaker 2: over fifteen years now of the lines just going up,

1045
00:55:23,719 --> 00:55:26,320
Speaker 2: and you have to think about what are the things

1046
00:55:26,320 --> 00:55:29,320
Speaker 2: that accumulate over that time, or the patterns that accumulate,

1047
00:55:29,400 --> 00:55:32,520
Speaker 2: or the habits, etc. And this idea that there's a

1048
00:55:32,560 --> 00:55:34,560
Speaker 2: lot of safety at the far end of the risk

1049
00:55:34,600 --> 00:55:37,439
Speaker 2: curve and that people don't care and that maybe now

1050
00:55:37,520 --> 00:55:39,880
Speaker 2: some of the perception that there's safety at the far

1051
00:55:40,000 --> 00:55:42,319
Speaker 2: end of the risk curve and how much that's been

1052
00:55:42,840 --> 00:55:44,480
Speaker 2: burnished into people is very interesting.

1053
00:55:44,640 --> 00:55:47,600
Speaker 3: Absolutely. The other thing he said that I thought was

1054
00:55:47,880 --> 00:55:50,319
Speaker 3: very poignant was the idea of you have all these

1055
00:55:50,360 --> 00:55:54,600
Speaker 3: private credit firms starting up right and promising these astonishing

1056
00:55:54,640 --> 00:55:57,520
Speaker 3: returns for investors. And he made the point that, like,

1057
00:55:58,160 --> 00:56:00,160
Speaker 3: you can't just say you're going to make all this

1058
00:56:00,239 --> 00:56:03,560
Speaker 3: money at private credit because like those deals might not

1059
00:56:04,080 --> 00:56:06,560
Speaker 3: be out there and available to you. You have to

1060
00:56:06,600 --> 00:56:09,600
Speaker 3: do it on a risk or value adjusted basis. Yeah,

1061
00:56:09,640 --> 00:56:12,719
Speaker 3: and as I say that, I see a headline in

1062
00:56:12,760 --> 00:56:16,640
Speaker 3: Bloomberg about Capital Group getting into private credit as well.

1063
00:56:16,719 --> 00:56:19,480
Speaker 3: So this is the thing. Like it's a booming market.

1064
00:56:19,520 --> 00:56:22,920
Speaker 3: There are a lot of competitive pressures, both on the

1065
00:56:23,040 --> 00:56:25,799
Speaker 3: lender side and also on the credit rating side, and

1066
00:56:25,840 --> 00:56:29,360
Speaker 3: you can see people really scrambling to get into the

1067
00:56:29,440 --> 00:56:32,440
Speaker 3: market and accumulate as much as they can. And so

1068
00:56:32,960 --> 00:56:36,360
Speaker 3: the temptation, of course is to you know, accept lower terms,

1069
00:56:36,400 --> 00:56:39,520
Speaker 3: accept lower quality totally. All right, shall we leave it there.

1070
00:56:39,560 --> 00:56:40,520
Speaker 2: Let's leave it there, all right.

1071
00:56:40,560 --> 00:56:42,960
Speaker 3: This has been another episode of the Odd Loots podcast.

1072
00:56:43,000 --> 00:56:46,160
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.

1073
00:56:45,800 --> 00:56:47,960
Speaker 2: And I'm Jill Wisenthal. You can follow me at the

1074
00:56:48,000 --> 00:56:51,399
Speaker 2: stall Work. Follow our producers Carmen Rodriguez at Carmen Arman,

1075
00:56:51,480 --> 00:56:54,839
Speaker 2: Dash'll Bennett at Dashbot and kill Brooks at Killbrooks. More

1076
00:56:54,840 --> 00:56:57,479
Speaker 2: Odd Laws content. Go to Bloomberg dot com slash odd

1077
00:56:57,480 --> 00:56:59,920
Speaker 2: Lots with a daily newsletter and all of our episode

1078
00:57:00,360 --> 00:57:02,200
Speaker 2: and you can chat about all of these topics twenty

1079
00:57:02,239 --> 00:57:05,879
Speaker 2: four to seven in our discord discord do gg slash.

1080
00:57:05,600 --> 00:57:08,680
Speaker 3: Outline And if you enjoy all lots, if you're enjoying

1081
00:57:08,680 --> 00:57:11,960
Speaker 3: these anniversary episodes, then please leave us a positive review

1082
00:57:12,000 --> 00:57:15,000
Speaker 3: on your favorite podcast platform. And remember, if you are

1083
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Speaker 3: a Bloomberg subscriber, you can listen to all of our

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Speaker 3: episodes absolutely ad free. All you need to do is

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Speaker 3: find the Bloomberg channel on Apple Podcasts and follow the

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Speaker 3: instructions there. Thanks for listening.