WEBVTT - PIMCO CEO Manny Roman Talks US Debt Levels

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>We want to bring in the head of the world's

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<v Speaker 2>biggest active bond manager, PIMCO. They began making earlier this

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<v Speaker 2>year making a case for actually owning treasuries in that

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<v Speaker 2>five to ten years zone as it's all get this

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<v Speaker 2>unpredictable US policy, furnishing the appeal of high quality bonds

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<v Speaker 2>at least compared when it's to equities as well as

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<v Speaker 2>the corporate debt, and so far that bet is paid off.

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<v Speaker 2>You see that in the returns in the bond market

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<v Speaker 2>relative to equities. For a closer view of that market

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<v Speaker 2>and the signals it may be sending, please say that.

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<v Speaker 2>Manny Roman joins us right now, CEO of PIMCO. Great

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<v Speaker 2>to have you, Mannie.

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<v Speaker 3>Thank you for having me.

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<v Speaker 2>Market disruptions. Market perceptions have changed a lot, really in

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<v Speaker 2>the last four months, because I felt like in January,

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<v Speaker 2>coming into this year, people were relatively optimistic.

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<v Speaker 3>That's correct.

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<v Speaker 1>I think I think people had made the assumption that

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<v Speaker 1>they'd be a very quick resolution to the tariff question.

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<v Speaker 1>And the reality is there's a lot we don't know,

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<v Speaker 1>but tariff are going to.

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<v Speaker 3>Be high, and.

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<v Speaker 1>That we're going to have to deal with it for

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<v Speaker 1>a long time, and that will need to readdress that

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<v Speaker 1>thinking both in terms of economic growth but also inflation.

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<v Speaker 3>And I think that's the real question we have to

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<v Speaker 3>deal with.

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<v Speaker 2>Can you make that change now, meaning like when you

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<v Speaker 2>have to factor in what economic growth will be, what

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<v Speaker 2>the impact of tariffs will be, even though we don't know,

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<v Speaker 2>how do you make that pivot now?

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<v Speaker 3>I think you do scenario analysis.

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<v Speaker 1>The big three trading partners are China and Mexico Canada,

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<v Speaker 1>so you basically run simulation and say, if this happened,

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<v Speaker 1>then this will be GDP, If this happened, this will

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<v Speaker 1>be inflation, and acknowledge that we don't know what the

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<v Speaker 1>end game is going to be, and the only thing

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<v Speaker 1>we can reasonably say is the overwhelming likelihood is you

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<v Speaker 1>will have high tariff for of course.

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<v Speaker 3>Future and we'll have to deal with this Mannie.

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<v Speaker 4>Once we know what the terms are, just some of

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<v Speaker 4>the uncertainty go away and things settle down. But it's

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<v Speaker 4>structurally a different financial dynamic potentially depending on how high

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<v Speaker 4>those tariffs are.

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<v Speaker 1>I think that's right, but I think a number of

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<v Speaker 1>company we'll have to re engineer the supply chain and

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<v Speaker 1>optimize the production costs and the trendsfer pricing based on

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<v Speaker 1>what the tariff will be. And I think that changing

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<v Speaker 1>supply chain may not be as easy as what you

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<v Speaker 1>make it to be. For us, we look at a

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<v Speaker 1>set of macro parameters and optimize our portfolio and decide

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<v Speaker 1>what we think is attractive in terms of asset and

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<v Speaker 1>buy them at the best possible price.

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<v Speaker 3>So what does that mean for investors?

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<v Speaker 4>Do they just kind of stay put waiting for everything

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<v Speaker 4>to settle, or are they starting to make those bets

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<v Speaker 4>assuming it is going to be very different? Tell us

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<v Speaker 4>a little about what you are seeing in terms of

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<v Speaker 4>flow the time.

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<v Speaker 1>I think you've seen enormous volatility in the equity market,

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<v Speaker 1>right and somehow I would say with surprise that the

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<v Speaker 1>equity market has bounced back to the Liberation Day level.

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<v Speaker 3>But you've seen clearly a move to cash.

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<v Speaker 1>All world, which is the bond world, has been pretty

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<v Speaker 1>much unaffected. And my partner Dan Iverson has to say,

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<v Speaker 1>where you look at the year on a portfolio of bonds,

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<v Speaker 1>say six percent, six and a half percent, it's a

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<v Speaker 1>very good predictor of what your return will be over

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<v Speaker 1>the next five years.

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<v Speaker 3>So if you want to own bones you're.

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<v Speaker 1>Gonna make six and a half percent, give or take

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<v Speaker 1>over the next.

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<v Speaker 3>Five years, how are you going to get there? A

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<v Speaker 3>lot of uncertainty, And that's what.

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<v Speaker 2>I'm curious is about the volatility. And I mean you're

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<v Speaker 2>referring to your CIO. I mean I saw an interview

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<v Speaker 2>where you actually talked about how he was really embracing

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<v Speaker 2>that volatility to a certain excent.

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<v Speaker 3>So there's too competent to it.

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<v Speaker 1>What we like about volativity is the fact that it

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<v Speaker 1>will provide investment opportunity and a source of alpha in

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<v Speaker 1>terms of treading different part of the curve, but also

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<v Speaker 1>different products and to move away from the US.

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<v Speaker 3>And find opportunity in other part of the world. So

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<v Speaker 3>you can.

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<v Speaker 1>Always buy US asset, but you can also buy non

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<v Speaker 1>US asset as a way.

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<v Speaker 3>To get duration and hedge them back into dollars.

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<v Speaker 1>So, for example, we like Australian duration Australia as a

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<v Speaker 1>very Robert Academy. We like Australian bonds, but we hedge

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<v Speaker 1>them back in two dollars.

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<v Speaker 3>That's a way to add alpha to the portfolio.

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<v Speaker 2>How complicated is it to do that when there's also

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<v Speaker 2>a ton of volatility in the FC space, and no

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<v Speaker 2>one seems to know where the dollars might be.

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<v Speaker 1>You may wonder what the two thousand people we have

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<v Speaker 1>in you publish doo.

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<v Speaker 3>That's what they do. You know, we could deal with that.

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<v Speaker 3>Just about that, we can deal with that. Listen.

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<v Speaker 4>US Secretary Treasury Scott Besson obviously really kicking off milk

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<v Speaker 4>and on Monday, and he talked about the importance of

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<v Speaker 4>watching the tenure.

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<v Speaker 3>Do you agree in terms of US treasuries.

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<v Speaker 1>The cost of boring is very important? And I think

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<v Speaker 1>I will answer this in twofold one. The US dollar

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<v Speaker 1>as a reserve currency is really important, and the ten

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<v Speaker 1>year bond is in a way the parameter for the

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<v Speaker 1>financial health of the world academy, so it is really important.

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<v Speaker 3>Now, I would say you look at the whole year.

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<v Speaker 1>Cove, you look at the short end, the ten year,

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<v Speaker 1>the thirty year. You think also about credit spread they're

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<v Speaker 1>very tight, and you think about all of this parameter

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<v Speaker 1>and try to assess what's.

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<v Speaker 3>To come and how you're going to deal with it.

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<v Speaker 4>Manny, one thing I'm curious about, and bringing up Secretary person,

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<v Speaker 4>what is the boy that you listen to most trying

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<v Speaker 4>to determine ultimately what happens in the US, especially when

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<v Speaker 4>it comes to its financial system and the importance of

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<v Speaker 4>you know, it's been the place the world safe haven,

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<v Speaker 4>right and it will.

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<v Speaker 1>Remain and it will remain, it will remain as the

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<v Speaker 1>place of safe handy.

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<v Speaker 4>We're so sure why.

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<v Speaker 3>Well, think about it.

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<v Speaker 1>The US dollar is the reserve currency, but it's also

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<v Speaker 1>the most liquid treasury market in the world.

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<v Speaker 3>About an enormous factor. And yes, you know, you can make.

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<v Speaker 1>A reasonable argument that the dollar is slightly expensive and

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<v Speaker 1>that you may want to diversify from the dollar to

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<v Speaker 1>other currency, but it doesn't mean, it does not mean

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<v Speaker 1>that the dollar loses its status. And I think it's

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<v Speaker 1>very important to keep that in mind. There's no other

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<v Speaker 1>reserve currency, there's no other place to move trillions and

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<v Speaker 1>trillions of dollars away from the dollar, and it is

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<v Speaker 1>what it is.

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<v Speaker 4>Do you have faith in the Treasury Secretary to do

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<v Speaker 4>the right thing, or at least get the President's here

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<v Speaker 4>on doing the right thing, because he has said some

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<v Speaker 4>things in regards to the Fed the Treasury secretary. Even so,

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<v Speaker 4>I'm just curious, do you have faith?

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<v Speaker 1>I think the wonderful thing about financial markets is that they're.

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<v Speaker 3>Efficient, and so they'll tell them and that the.

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<v Speaker 1>Market reacts to policy, and when the market doesn't like

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<v Speaker 1>either policies or a tweet, the market react in such

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<v Speaker 1>a way that people need to adjust the cost of action.

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<v Speaker 1>The market wants the FED to be independent, and I

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<v Speaker 1>think has voted very strongly about that, and I think.

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<v Speaker 3>That dictates some of the choices and some of.

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<v Speaker 1>The noise around all of this.

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<v Speaker 3>And you know, it's a good thing. Markets are there.

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<v Speaker 1>To reflect, to reflect supply and demand and also reaction

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<v Speaker 1>to event in the world, and we.

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<v Speaker 2>Saw that play out in a big way in April.

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<v Speaker 2>One side of that, though, basically to your comments about

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<v Speaker 2>there kind of this being the most liquid market, this

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<v Speaker 2>is kind of the reserve currency, and that's not going

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<v Speaker 2>to end. Will lessen to a degree because when we

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<v Speaker 2>look at our treasury market and we think about how

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<v Speaker 2>many global investors hold our bonds, all the rumors that

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<v Speaker 2>maybe certain nations might be willing to weaponize their holdings

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<v Speaker 2>if the dispute with the US over trade escalates, does

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<v Speaker 2>that concern you?

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<v Speaker 3>You know, there's no free launch.

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<v Speaker 1>The reason why people own US dollar is because they

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<v Speaker 1>like to own US dollar asset. There is a very

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<v Speaker 1>strong case for American exceptionalism. The fact that the financial

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<v Speaker 1>systems are very liquid and very well run, and that

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<v Speaker 1>if you, for example, a Japanese investor, where it's about

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<v Speaker 1>a trillion dollars of US debt held by Japanese institution,

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<v Speaker 1>it's a good place to be even hedge back in yen.

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<v Speaker 1>And I think that's that's really an important fact to

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<v Speaker 1>remember in terms of the flow of fund and who

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<v Speaker 1>needs to put money aware.

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<v Speaker 2>Is the treasury market healthy right now?

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<v Speaker 3>Totally? You did not.

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<v Speaker 2>You weren't concerned at all about what transpired that first

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<v Speaker 2>week to April, about the potential come up in the

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<v Speaker 2>system or that mismatch between buyers and sellers.

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<v Speaker 3>No.

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<v Speaker 1>We on the contrary, I think we've seen very liquid

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<v Speaker 1>market voice and treasury and in credits, and to be honest, yeah,

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<v Speaker 1>you know, markets have been remarkably well behaved. We had

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<v Speaker 1>a couple of difficult days during COVID before they fed intervened, but.

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<v Speaker 3>It's been very with sailing since.

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<v Speaker 1>And you know, the markets offer plenty of opportunity to

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<v Speaker 1>change your mind. One of the good contribution have been

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<v Speaker 1>ETF where ETF have a low people like us to

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<v Speaker 1>do portfolio, trade, rebalance or book and to use this

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<v Speaker 1>liquidity to move assets around and and I would, I

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<v Speaker 1>would really and fisis this The markets are quite liquid?

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<v Speaker 2>I promise not all my questions are pessimistic, but I

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<v Speaker 2>do have wonder lie with the guard I mean, you

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<v Speaker 2>had a market, they had to deal with the trade

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<v Speaker 2>issues that hasn't been resolved, but they certainly made some

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<v Speaker 2>degree a piece with where we are. There's now a

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<v Speaker 2>big budget battle that's about to take place in Washington,

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<v Speaker 2>and I do wonder as the lead leader of the

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<v Speaker 2>biggest bond company bon investor out there is there concern

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<v Speaker 2>that our fiscal deficit and the potential remedies that are

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<v Speaker 2>being discussed in Congress could exasperate the situation and the

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<v Speaker 2>fixed income market.

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<v Speaker 1>That's the that's the wonder of being the reserve currency.

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<v Speaker 3>Everything else being equal, you could.

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<v Speaker 1>Run a slightly higher deficit than you would otherwise. And

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<v Speaker 1>I think that, of course, people will look at the

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<v Speaker 1>amount of deficit and you know, it is all the

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<v Speaker 1>willingly likely that.

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<v Speaker 3>The deficit is not going to get reduced.

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<v Speaker 1>But once again, would you rather own very high quality

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<v Speaker 1>asset in the US or.

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<v Speaker 3>Would you rather own bonds? In Southern Europe.

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<v Speaker 1>You can decide which one you would rather own. That's

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<v Speaker 1>the reality. The reality is you need to invest somewhere so.

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<v Speaker 4>You're not worried about it's a lot of debt. It's

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<v Speaker 4>a physical situation. It's been a lot of debt for

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<v Speaker 4>a long time. But now we're at levels we haven't

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<v Speaker 4>seen and so I'm just curious, is there some point?

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<v Speaker 4>It sounds like you're saying, well, where else are you

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<v Speaker 4>going to go?

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<v Speaker 1>Right?

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<v Speaker 4>And it's kind of part of the us being the

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<v Speaker 4>market in the world, So like, should we just accept it?

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<v Speaker 1>No?

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<v Speaker 3>I think I would. I would. I would reply with

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<v Speaker 3>a quote.

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<v Speaker 1>That I heard Janet Yellen gave in a private conversation.

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<v Speaker 1>She said, all we can say is it's not a

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<v Speaker 1>problem until it becomes a problem, and so but but

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<v Speaker 1>it's a deeper it's a deeper meaning maybe that it

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<v Speaker 1>appears like there's a tipping point, which is very hard

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<v Speaker 1>to guess where all of a sudden, either because the

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<v Speaker 1>issue will lose credibility or because the policy.

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<v Speaker 3>Doesn't make sense to market participant. People all of a

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<v Speaker 3>sudden don't want to be the marginal buyer.

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<v Speaker 1>And I think that's the analysis we constantly make in

0:12:24.600 --> 0:12:28.760
<v Speaker 1>terms of what's the right level to clear the market? Man,

0:12:28.880 --> 0:12:29.320
<v Speaker 1>when we.

0:12:29.480 --> 0:12:32.480
<v Speaker 4>Had the disconnect between the equity markets selling off a bunch,

0:12:32.559 --> 0:12:34.520
<v Speaker 4>we saw yield spiking, right, we were trying to make

0:12:34.559 --> 0:12:36.440
<v Speaker 4>sense of it, right, it just didn't seem to come together.

0:12:37.400 --> 0:12:40.599
<v Speaker 4>Are you telling investors watch the bond market equity is

0:12:40.679 --> 0:12:42.360
<v Speaker 4>kind of do like, how do you make sense of

0:12:42.440 --> 0:12:43.040
<v Speaker 4>something like that?

0:12:43.240 --> 0:12:45.400
<v Speaker 1>Well, you could say that it did make sense because

0:12:45.400 --> 0:12:47.760
<v Speaker 1>the market all of a sudden said we're going to

0:12:47.840 --> 0:12:49.280
<v Speaker 1>get in the worst possible situation.

0:12:49.400 --> 0:12:50.840
<v Speaker 3>We're going to get into stackflation.

0:12:51.280 --> 0:12:55.880
<v Speaker 1>Right, and in a case of stackflation, I can remember

0:12:55.920 --> 0:12:59.319
<v Speaker 1>seventy three and seventy four. Now there were real macro

0:12:59.440 --> 0:13:03.440
<v Speaker 1>reason with no shock, but stackflation is a real ugly

0:13:03.480 --> 0:13:06.319
<v Speaker 1>problem because everything goes down and there's no place to

0:13:06.400 --> 0:13:10.000
<v Speaker 1>hide except cash, and even cash because of inflation, you

0:13:10.040 --> 0:13:12.200
<v Speaker 1>lose money. And I think you saw the price of

0:13:12.200 --> 0:13:15.920
<v Speaker 1>gold reacting to this, and so if you use my

0:13:16.000 --> 0:13:19.560
<v Speaker 1>frame of mind, yeah, then I think it sort of

0:13:19.600 --> 0:13:22.719
<v Speaker 1>makes sense. It's not a pretty picture, and I think

0:13:22.720 --> 0:13:24.880
<v Speaker 1>the market corrected pretty quickly, and say, you know what

0:13:25.360 --> 0:13:28.480
<v Speaker 1>stackflation is, by father, not the most likely scenario, but

0:13:28.920 --> 0:13:32.480
<v Speaker 1>the odds of a recession must be slightly of a fifty.

0:13:32.640 --> 0:13:34.400
<v Speaker 4>Do you agree stackflation not likely?

0:13:36.480 --> 0:13:40.880
<v Speaker 3>Yes, free, it's not likely. Okay, it's not likely, got it?

0:13:41.360 --> 0:13:46.640
<v Speaker 1>And I think stackflation is the nightmare or for central banker. Yeah,

0:13:46.679 --> 0:13:49.280
<v Speaker 1>and most of them haven't seen it. You know, you

0:13:49.400 --> 0:13:52.560
<v Speaker 1>have to remember that, market participants. There's only one good

0:13:52.559 --> 0:13:56.280
<v Speaker 1>thing about being old is you've seen my market cycle. Yeah,

0:13:56.320 --> 0:14:00.120
<v Speaker 1>and you know, I remember, for example, the night one

0:14:00.160 --> 0:14:02.840
<v Speaker 1>ninety two crisis with the SNL.

0:14:02.920 --> 0:14:04.760
<v Speaker 3>You know, we had the Milken conference.

0:14:05.280 --> 0:14:08.199
<v Speaker 1>You know, people had border a lot of I yelled

0:14:08.240 --> 0:14:10.320
<v Speaker 1>debt and some of it had to sell.

0:14:10.520 --> 0:14:12.440
<v Speaker 3>So you remember that. You try not to make the

0:14:12.480 --> 0:14:13.040
<v Speaker 3>same mistake.

0:14:13.360 --> 0:14:15.880
<v Speaker 1>You remember nineteen ninety eight, you remember two thousand and one,

0:14:15.920 --> 0:14:18.080
<v Speaker 1>in two thousand and two, and of course remember the

0:14:18.080 --> 0:14:19.400
<v Speaker 1>Great Financial Crisis.

0:14:19.600 --> 0:14:21.720
<v Speaker 3>And each crisis is different, but.

0:14:21.800 --> 0:14:24.320
<v Speaker 1>You have a frame of reference where you've seen ups

0:14:24.320 --> 0:14:25.760
<v Speaker 1>and downs in the financial markets.

0:14:26.200 --> 0:14:28.880
<v Speaker 2>I want to talk specifically about your business, and I

0:14:28.880 --> 0:14:31.480
<v Speaker 2>mean you've got a big private business, private credit business

0:14:31.520 --> 0:14:34.480
<v Speaker 2>alongside the public credit business. And we've been talking a

0:14:34.480 --> 0:14:36.760
<v Speaker 2>lot over the last couple of days about how all

0:14:36.800 --> 0:14:39.160
<v Speaker 2>these markets seem to be overlapping. There's sort of this

0:14:39.280 --> 0:14:42.640
<v Speaker 2>Venn diagram between public markets, private markets, credit equity, et cetera.

0:14:43.160 --> 0:14:44.800
<v Speaker 2>Are they in conflict with each other or are they

0:14:44.880 --> 0:14:45.840
<v Speaker 2>complimenting each other.

0:14:46.160 --> 0:14:48.160
<v Speaker 1>I think they complement each other, but they may not

0:14:48.280 --> 0:14:51.520
<v Speaker 1>offer the same value at every point in time. So

0:14:51.720 --> 0:14:55.600
<v Speaker 1>I'll give you a very simple example. There's a reasonable

0:14:55.680 --> 0:14:59.920
<v Speaker 1>case to be made that we have a probability.

0:14:59.240 --> 0:15:04.440
<v Speaker 3>Of a recession slightly above fifty percent. If that's the case,

0:15:05.160 --> 0:15:06.359
<v Speaker 3>you don't want to own.

0:15:07.680 --> 0:15:13.320
<v Speaker 1>Higher credit, and you probably don't want to own derect clending.

0:15:13.720 --> 0:15:18.800
<v Speaker 1>Why because the company all leverage, they are weak single

0:15:18.840 --> 0:15:22.000
<v Speaker 1>B they may or may not be in the industry

0:15:22.040 --> 0:15:22.800
<v Speaker 1>you want to be in.

0:15:23.360 --> 0:15:26.360
<v Speaker 3>And so if you have a recession, you'll see losses.

0:15:26.640 --> 0:15:29.720
<v Speaker 1>By the way, losses are normal, it doesn't mean there's

0:15:29.720 --> 0:15:33.280
<v Speaker 1>anything wrong. But when we think of optimizing our portfolio,

0:15:33.280 --> 0:15:38.520
<v Speaker 1>we find better opportunity to invest than the weaker credit

0:15:38.760 --> 0:15:41.320
<v Speaker 1>at this stage of the business cycle.

0:15:41.440 --> 0:15:43.720
<v Speaker 2>And then making those decisions, I mean, you reference just

0:15:43.760 --> 0:15:45.240
<v Speaker 2>a second ago about all the books you have to

0:15:45.280 --> 0:15:47.840
<v Speaker 2>figure out where the dollar is going to go. I

0:15:47.880 --> 0:15:51.360
<v Speaker 2>assume that there's got to be a big technological component

0:15:51.440 --> 0:15:54.240
<v Speaker 2>to that. When you took over back in twenty sixteen,

0:15:54.760 --> 0:15:57.880
<v Speaker 2>you made a big push to add more technology resources

0:15:57.920 --> 0:16:00.600
<v Speaker 2>to what you guys do, and given what's inspired over

0:16:00.600 --> 0:16:03.400
<v Speaker 2>the last few years with AI and the newfound interest

0:16:03.440 --> 0:16:05.600
<v Speaker 2>in that space, I'm wondering how much of that has

0:16:05.640 --> 0:16:09.640
<v Speaker 2>become a component of the analysis and decision making process, A.

0:16:09.680 --> 0:16:11.560
<v Speaker 3>Very large one, And that's a very good question if

0:16:11.600 --> 0:16:13.520
<v Speaker 3>you think about it. You know, what do we want?

0:16:13.640 --> 0:16:17.120
<v Speaker 1>We want great people to work for PIMCO and to

0:16:17.240 --> 0:16:20.120
<v Speaker 1>stay for as long as possible, and then we want

0:16:20.360 --> 0:16:25.840
<v Speaker 1>the best technology and the most innovative quant and marry the.

0:16:25.760 --> 0:16:28.480
<v Speaker 3>Two together and hope that it works.

0:16:29.120 --> 0:16:35.280
<v Speaker 1>And the EI revolution for us is the ability to

0:16:35.480 --> 0:16:40.760
<v Speaker 1>manipulate a lot of data coming from very disparate sources,

0:16:41.520 --> 0:16:46.880
<v Speaker 1>analyze them and get to a tool to help making

0:16:46.920 --> 0:16:51.280
<v Speaker 1>decisions which is incredibly granular. So we are very very

0:16:51.280 --> 0:16:55.760
<v Speaker 1>big player in mortgages. Everyone has a mortgage somewhere. We

0:16:55.880 --> 0:16:59.480
<v Speaker 1>have a totally unique database. And what I mean by

0:16:59.560 --> 0:17:04.400
<v Speaker 1>database is not only numbers, it's picture, its location, it's

0:17:04.440 --> 0:17:08.199
<v Speaker 1>conversation with the mortgage broker. And so you get an

0:17:08.320 --> 0:17:13.520
<v Speaker 1>edge because you have an ability to crunch through an

0:17:13.680 --> 0:17:17.720
<v Speaker 1>enormous amount of data and get to another granular level

0:17:17.760 --> 0:17:20.040
<v Speaker 1>of decision that our.

0:17:20.000 --> 0:17:23.720
<v Speaker 3>Human brain would need a longer to be able to

0:17:23.760 --> 0:17:26.960
<v Speaker 3>do as we go pretty quickly. I'm just going to

0:17:26.960 --> 0:17:27.960
<v Speaker 3>tell you it's very fast.

0:17:28.119 --> 0:17:31.080
<v Speaker 4>He's very very fast, Nanny. I'm so thoughtful, so helpful.

0:17:31.119 --> 0:17:33.120
<v Speaker 4>Thank you so much for asking for our audience. Really

0:17:33.119 --> 0:17:36.399
<v Speaker 4>appreciate it many Reven the Pimco CEO