Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, we are
Speaker 2: here on the West Coast right now. We're in Newport Beach.
Speaker 2: It's so nice.
Speaker 3: I love it done here so much. Look, this is
Speaker 3: what probably might be tied anyway. I yes, I will
Speaker 3: look for any excuse to come down to this part
Speaker 3: of the country.
Speaker 2: We can just listen to Joe wax lyrical about California.
Speaker 2: But we are here for work. Yes, in theory, we're
Speaker 2: here for the future Proof Conference, which I think, honestly,
Speaker 2: all financial conferences should be like this. They should all
Speaker 2: take place on a beach with food trucks and we
Speaker 2: should just hang out outside and talk to each other
Speaker 2: about markets.
Speaker 3: Sounds good, But we're not on the beach right now.
Speaker 2: No, we are not. We are actually, well, let me
Speaker 2: just say no trip to the West Coast would be
Speaker 2: complete in terms of an A Blots episode without hitting
Speaker 2: up PIMCO stopping.
Speaker 3: That's right, the icon of Southern California investing in market.
Speaker 2: And what a great time to be doing it. Because
Speaker 2: of course we're recording this on Monday, and on Wednesday
Speaker 2: we have the big FED decision.
Speaker 3: That's right, it's a huge the almost virtually locked that
Speaker 3: we're going to see the start of the raid cut cycle.
Speaker 3: But there's still a lot of debate about twenty five
Speaker 3: or fifty, what they signal for the rest of the year.
Speaker 3: How significant is it whether they choose one or the other.
Speaker 3: Definitely one of the most exciting anticipated ones in years,
Speaker 3: and as of the time that we're recording this on
Speaker 3: Monday morning, there is still significant ambiguity. And who knows,
Speaker 3: by the time you're listening to this, maybe there will
Speaker 3: be some leak in the media everyone will have settled
Speaker 3: on fifty or twenty five or something. But at least
Speaker 3: as of right now, we don't really know what's going
Speaker 3: to happen.
Speaker 2: You mentioned ambiguity, and this is really the remarkable thing
Speaker 2: about this moment in time, which is everyone figures they're
Speaker 2: going to cut, but we don't know twenty five or
Speaker 2: fifty bibs. And the crazy thing is, if you look
Speaker 2: at the swaps market right now, we're basically evenly split.
Speaker 4: Ye.
Speaker 3: Yeah, true excitement.
Speaker 2: Yes, all right, So without further ado, I'm just going
Speaker 2: to emphasize we do, in fact have the perfect guest
Speaker 2: to be talking about all of this. We're going to
Speaker 2: be speaking with Dan Ivison. He is, of course, the
Speaker 2: PIMCO Group CIO and a managing director here in Newport. Dan,
Speaker 2: thank you so much for coming back on all thoughts.
Speaker 4: Thanks. It's really exciting to do this and do it
Speaker 4: in person this time. Yeah.
Speaker 2: Absolutely, and perfect timing really, So I'm just going to
Speaker 2: jump into the big question, the big question, twenty five
Speaker 2: or fifty what will it be?
Speaker 4: Sure, let me real fast. I don't think will matter
Speaker 4: that much unless you're betting on that front end contract,
Speaker 4: and we think it's going to be a close call.
Speaker 4: The guest, based on the news flow this weekend, is
Speaker 4: they may actually go fifty. But I think the key
Speaker 4: point will be that this will either be a very
Speaker 4: dubvish twenty five basis point cut or more balanced fifty
Speaker 4: basis point cut. We think the FED wants to get
Speaker 4: rates down. They believe they're in restrictive territory, and I
Speaker 4: think the key point is this is the beginning of
Speaker 4: a cutting cycle, and we haven't had one in quite
Speaker 4: some time.
Speaker 3: I've heard people say that if they go twenty five,
Speaker 3: that they could do it in a duvish way and
Speaker 3: perhaps signal via the dots that there will be more
Speaker 3: aggressive rate cuts through the rest of the year to
Speaker 3: balance that out, and that the question then would arise, Well,
Speaker 3: if you're already saying that, why not just go fifty?
Speaker 3: Just from your perspective, you know, how does the FED
Speaker 3: think through this question? Maybe it doesn't matter that much,
Speaker 3: and you know, on the long sweep of history, maybe
Speaker 3: it doesn't. But how do you think the FED is
Speaker 3: thinking through these options?
Speaker 4: Yeah? Well, I think the first point to note is
Speaker 4: that the market's already done a lot of work for
Speaker 4: the Fed. You've seen the price You have some pretty
Speaker 4: significant cuts going into your end. In fact, we now
Speaker 4: have well over one hundred basis points that cuts priced
Speaker 4: in in another one hundred and twenty five to one
Speaker 4: hundred and fifty, you know, the following year. So you know,
Speaker 4: a combination of the data and some statements by FED
Speaker 4: officials thus far has already eased conditions. And I think
Speaker 4: what the FED is concerned with is the fact that
Speaker 4: inflation isn't yet at target. We've made some progress, but
Speaker 4: every time they speak in a dubvish tone, you see
Speaker 4: stocks do pretty well and credit spreads are near very
Speaker 4: very tight levels or near the tights of this cycle.
Speaker 4: So there'll be walking a tightrope a bit and trying
Speaker 4: to ease conditions without easing too much, without letting the
Speaker 4: markets get ahead of them, and without letting some of
Speaker 4: these positive wealth effects, you know, potentially drive inflation higher
Speaker 4: and again through the combination of action signaling via the
Speaker 4: dots and the tone at the press conference in future
Speaker 4: correspondence with markets, they likely have enough tools at their
Speaker 4: disposal where even if they get something wrong in a
Speaker 4: narrow sense, that they can course correct and get the
Speaker 4: market back on track as necessary.
Speaker 2: You mentioned tone of the meeting, and one of the
Speaker 2: arguments that has come up recently is this idea of, well,
Speaker 2: maybe they don't do fifty bits because they don't want
Speaker 2: to make everyone really worried that the economy is significantly
Speaker 2: slowing down. Do you worry about like that side of
Speaker 2: the messaging at all? Is there the possibility that they
Speaker 2: go fifty and everyone's like, oh, it's worse than we thought.
Speaker 4: It's possible. I think the other mistake, though, or concerned
Speaker 4: I should say, is that by going fifty, the market
Speaker 4: gets further in front of them in terms of expectations
Speaker 4: for even more aggressive policy. So I think both risks
Speaker 4: are there. Again, I think perhaps some of these concerns
Speaker 4: about the FED being behind the curve or you know,
Speaker 4: you know, to in front of the curve relative to
Speaker 4: where inflation is, I think they're interesting soundbites. But I
Speaker 4: and we do think that the FED has enough tools
Speaker 4: to be able to navigate the next several months. I
Speaker 4: think the key for markets, though, is to really really
Speaker 4: listen to what the FED is saying. They are going
Speaker 4: to be looking at the data. Therefore, us market participants,
Speaker 4: we want to focus on the data. The data is
Speaker 4: ultimately going to be driving these outcomes, and I think
Speaker 4: it's a really interesting period for markets, given that the
Speaker 4: data has been volatile, and we think it will likely
Speaker 4: contigue to be quite volatile, creating ongoing uncertainty.
Speaker 3: So setting aside whether they do twenty five or fifty
Speaker 3: this week, the other big question is sort of, I
Speaker 3: guess maybe more medium term or long term, but has
Speaker 3: the neutral rate of the long term neutral rate of
Speaker 3: interest gone up since pre COVID And there continues to
Speaker 3: be a lot of discussion about this. No one really knows.
Speaker 3: Do you think there's been some sort of structural change
Speaker 3: in the economy over I guess basically the last four
Speaker 3: and a half to five years now such that the
Speaker 3: neutral rate of interest is higher, and what has changed if.
Speaker 4: So, so we think it maybe a bit higher. But
Speaker 4: if you look back through economic history, these neutral policy
Speaker 4: rates of this concept of our star is important, but
Speaker 4: it doesn't tend to move that quickly. And I think
Speaker 4: a lot of the research, including our own and we
Speaker 4: dusted off a lot of older research and updated these
Speaker 4: studies this summer, suggests that, yeah, our star may be
Speaker 4: a bit higher with this massive uncertainty around this type
Speaker 4: of research. So again, I think the bottom line, as
Speaker 4: you said, is we don't know for sure. We suspect
Speaker 4: it's a little bit higher, not as high as some
Speaker 4: more bearish folks out there think it may be. And
Speaker 4: the reasons for that higher debt levels, the need for
Speaker 4: significantly more physical infrastructure investment, this cycle less globalization, the
Speaker 4: desire for supply chain resiliency, we think are just a
Speaker 4: few factors contributing to the likelihood that our stars higher.
Speaker 3: But just the implication though, if it's only modestly higher,
Speaker 3: is at least from here. Again, setting aside what they
Speaker 3: do this week, that there is a substantial room for
Speaker 3: them to cut, and you'd expect their deep cuts from here.
Speaker 4: That's correct, And you know our thought process is, you know,
Speaker 4: maybe our stars half a percent higher, not on the
Speaker 4: order of one one and a half percent higher. So
Speaker 4: the bottom line is relative to a concept of neutral.
Speaker 4: Even if neutral is closer to a three percent nominal
Speaker 4: funds rate or even a little bit higher, gives them
Speaker 4: a lot of room to get policy back to what
Speaker 4: they perceive to be neutral. And again, with any cycle,
Speaker 4: you can have overshooting to the downside too from a
Speaker 4: growth and inflation perspective, So there's always a chance that
Speaker 4: into a weaker economy than they and we currently intoipate
Speaker 4: that they have room to shift into accommodative territory as well.
Speaker 2: What's your sense of financial conditions right now? Because you
Speaker 2: have great insight into the market. You buy mortgage bonds,
Speaker 2: you buy credit, you buy treasuries. Obviously, what are you
Speaker 2: seeing in terms of the market right now? I'm thinking
Speaker 2: particularly of credit spreads. Those are still near cycle lows basically.
Speaker 4: Yeah, so that in aggregate conditions still appear to be
Speaker 4: quite loose. When you look at stock markets near all
Speaker 4: time highs, credit spreads very very tight. From a very
Speaker 4: very high level macro sense, there's still a lot of
Speaker 4: liquidity in the system, a lot of confidence, a lot
Speaker 4: of momentum, positive momentum, and risk aset spreads are quite tight.
Speaker 4: But we know that looking at aggregate measures can be misleading.
Speaker 4: If you're a lower income consumer that doesn't own a
Speaker 4: home where we know us households have a lot of
Speaker 4: equity trapped in their property or in their primary residence. There,
Speaker 4: we are beginning to see signs of weakness. Most of
Speaker 4: the debt that those households have encouraged voating rate in nature,
Speaker 4: and they're feeling a lot of pressure. You look at
Speaker 4: the floating rate credit markets, some of the lending that's
Speaker 4: occurred to some weaker quality borrowers, to commercial real estate sector.
Speaker 4: You're seeing signs of stress there that are probably not
Speaker 4: as evident, you know, out there in the marketplace as
Speaker 4: they should be. So there are sectors of the market
Speaker 4: that we're beginning to see deteriorate. We think that's what's
Speaker 4: on the mind of the Federal Reserve that, alongside some
Speaker 4: of the more recent broad labor market weakness all suggests
Speaker 4: that the FED from an insurance or a risk management perspective,
Speaker 4: you know, should likely begin to get rates lower and
Speaker 4: then again carefully look at the data to just make
Speaker 4: sure and to calibrate to prevent a reacceleration of inflation
Speaker 4: into even looser financial conditions.
Speaker 3: If it's the case that our star is just a
Speaker 3: little bit higher than what it used to be, and
Speaker 3: if perhaps some in the market are overestimating how much
Speaker 3: it's risen, what areas of the market specifically are either
Speaker 3: mispriced or are the most attractive under your assumptions.
Speaker 4: Well, good old fashioned high quality bonds would benefit to
Speaker 4: the extent that.
Speaker 3: We're talking high quality corporate bonds here.
Speaker 4: High quality you know, really any type of high quality bond.
Speaker 4: And what's nice about high quality bond market is that
Speaker 4: if you have a multi year time horizon, the analysis
Speaker 4: isn't that complicated. You typically earn your yield, and then
Speaker 4: any type of incremental return you can get through thoughtful
Speaker 4: acid allocation or alpha generation is incremental return that you'll receive.
Speaker 4: To the extent that policy rates or neutral rates look
Speaker 4: very similar to where we were pre COVID, that creates
Speaker 4: room not only to realize upon very very attractive real
Speaker 4: and nominally yields, but for the prospects for price appreciation
Speaker 4: as well. And I think related to that point is
Speaker 4: that fixed income has historically done real well when bad
Speaker 4: things were happening elsewhere within your portfolio, when economic growth
Speaker 4: has been weak. Really, the twenty two experience, in this
Speaker 4: inflationary experience, has been the exception to the rule. And
Speaker 4: we do think there's a good chance, you know, regardless
Speaker 4: of whether neutral policy rates are a little bit higher
Speaker 4: than they were pre COVID, that we're getting back into
Speaker 4: that type of paradigm where fixed income not only has
Speaker 4: an attractive yield, but it will have defensive, diversefyed characteristics. Finally,
Speaker 4: and again that takes some convincing for investors, given the
Speaker 4: battle wounds we all suffer during the twenty two experience.
Speaker 2: You mentioned the idea of fixed income sort of coming back.
Speaker 2: How are you looking at pricing on the short end
Speaker 2: at the moment, because, as you said, one of the
Speaker 2: risks is that the market kind of gets ahead of
Speaker 2: itself right now in pricing in rate cuts, and some
Speaker 2: people look at those shorter term maturities right now and
Speaker 2: think like well, maybe it is a little bit overdone.
Speaker 4: Yeah, So again, if you have a three to five
Speaker 4: year time horizon, this is really noise. Lock in some
Speaker 4: of these attractive high nominal or real yields and then
Speaker 4: benefit from some of the most attractive income that we've
Speaker 4: been able to generate in a very very long time.
Speaker 4: From a tactical perspective, though, it's been very very target rich,
Speaker 4: and in looking at the yield curve today, we do
Speaker 4: think that the market's maybe getting a little bit ahead
Speaker 4: of themselves in terms of near term cuts. Yeah, we've
Speaker 4: had some employment weakness, but then we had a CPI
Speaker 4: number recently that surprised a bit to the upside. Earlier
Speaker 4: this year data surprised in a more concerning fashion. So
Speaker 4: we think that, you know, over the course of the
Speaker 4: next few months, there are some risks of reaccelerating inflation,
Speaker 4: which may lead to less cuts that are priced to
Speaker 4: the market. So what we're doing currently is reducing some
Speaker 4: of our exposure to the very very front end of
Speaker 4: the yeal curve, and I'm talking about one or two
Speaker 4: year type maturities. Then our favorite part to invest in,
Speaker 4: behalf of our clients is really in the intermediate part
Speaker 4: of the curve in those five year type maturities where
Speaker 4: you look at the market today and where you have
Speaker 4: a terminal federal funds rate assumption in the market today
Speaker 4: somewhere close to three percent. We think that's reasonable. That
Speaker 4: would be consistent of higher neutral rates relative to where
Speaker 4: we were pre COVID and allow for some price appreciation
Speaker 4: if we were to get into a more challenging macro environment.
Speaker 4: So a lot of activity, you know, within the US market,
Speaker 4: across market, it's a lot of volatility in the front
Speaker 4: end of the curve, and right now we have been
Speaker 4: taking a little bit of risk off thinking that you know,
Speaker 4: perhaps you know, over the next few months, people are
Speaker 4: a little bit optimistic about the FED being able to
Speaker 4: get raised out as quickly as people or at least
Speaker 4: some people anticipate.
Speaker 2: Can I ask a process question? These are actually my
Speaker 2: favorite questions. But you manage the I think it's one
Speaker 2: hundred and fifty eight billion dollars Pimco Income Fund, and
Speaker 2: I guess the mandate is preserve capital while generating income,
Speaker 2: which gives you the full suite of fixed income basically
Speaker 2: to look over. You could buy you know, longer maturity treasuries,
Speaker 2: all types of corporate bonds, mortgage backed securities. Obviously, how
Speaker 2: do these decisions land on your desk? Like when you're
Speaker 2: making these investment decisions, like what is the optionality that
Speaker 2: is actually presented to you? And then just to connect
Speaker 2: it back to the FED, you know, on Wednesday, FED
Speaker 2: decision comes out. What does your day to day look
Speaker 2: like on a day like that, how quickly are you
Speaker 2: cutting positioning and what are the options available to you?
Speaker 4: Sure, you know, we take a long term orientation, So
Speaker 4: a lot of what we do is about process looking
Speaker 4: for repeatable sources of alpha or return relative to passive
Speaker 4: alternatives based on market inefficiencies, market frictions, looking to leverage
Speaker 4: that flexibility that we're afforded in a strategy like the
Speaker 4: income fund. So in that sense, it's very process driven
Speaker 4: and it doesn't relate to a view on the FED
Speaker 4: or a view on the directionality of interest rates, and
Speaker 4: that tends to be a good portion of the incremental
Speaker 4: return that we generate. In addition to that, as you know,
Speaker 4: Pimpco's always had a very structured investment process. We get
Speaker 4: together and we talk about three to five year themes
Speaker 4: impacting markets. Every summer on a quarterly basis, and we
Speaker 4: just finished this process last week. We get together talking
Speaker 4: about the outlook for markets across the twelve to eighteen
Speaker 4: month period, and then we have the investment committee. So
Speaker 4: i'd categorized portfolio construction as you know, targeting a lot
Speaker 4: of low hanging fruit tied to market frictions and inefficiencies,
Speaker 4: and then the overlay of tactical, more macro oriented themes
Speaker 4: as well, and those will be done through a committee process.
Speaker 4: And then when you have a volatility event like the
Speaker 4: FED or a major data release, we stand poised to react.
Speaker 4: So you know, on a day where the data may
Speaker 4: be surprising the market, where there may be some overshooting,
Speaker 4: we have orders in. It could come directly from myself
Speaker 4: or other teammates on the strategy. Perhaps we're coordinating across
Speaker 4: multiple strategies as well. But over a full cycle, those
Speaker 4: types of short term tactical moves got a lot of
Speaker 4: the press, probably why I'm not as popular on CNBC.
Speaker 4: You know, when you talk about process long term orientation,
Speaker 4: it's less fun, but it really is about a lot
Speaker 4: of process then standing by to take advantage of overshooting
Speaker 4: markets when they really present themselves.
Speaker 3: I'm going to ask an even more specific I guess
Speaker 3: process type of question, but literally on FED day, what
Speaker 3: are you doing? Do you have the TV on and
Speaker 3: you're like chatting with people? I being like, what is
Speaker 3: like your process of you know, what is the process
Speaker 3: of consuming and digesting and hashing out the views look
Speaker 3: like from Well, I guess you're on West Coast time
Speaker 3: and that blows my mind. So I guess the decision
Speaker 3: comes out at eleven? Well, what are you doing? What
Speaker 3: do you What can we if I close my eyes,
Speaker 3: what can I imagine is going on in your offices
Speaker 3: at that time?
Speaker 4: Well, I remind my colleagues, and you know, as you
Speaker 4: talk to others over time, they'll they'll mention this. I
Speaker 4: remind people it's less important than people think it is.
Speaker 3: I know, we know, but we still I'm glued to it,
Speaker 3: even though I know in the end the heat death
Speaker 3: of the universe means none if it's important, but like
Speaker 3: what you know, like, what are you doing?
Speaker 4: But here's we do and we do it, you know,
Speaker 4: pretty much every time we make sure we're around for
Speaker 4: the FED announcement, usually in our trading seats, okay, nearly
Speaker 4: regardless of what other activity are going on. That day,
Speaker 4: we immediately read the release. We have some type of wordsmithing,
Speaker 4: you know, more quant type analysis or you know, of
Speaker 4: the actual words where we get a you know, DubVision,
Speaker 4: a hawkish score just based on the readout relative to
Speaker 4: prior readouts, and then we all listen to the press conference.
Speaker 4: As soon as the press conference ends, we run into
Speaker 4: the investment committee room. We typically have our advisor Ben
Speaker 4: Bernanke there. Of course we have the recent advice.
Speaker 2: That's useful, it's good, good, good to have been around in.
Speaker 4: Of course Rich Clariater rejoined us a recent vice chair
Speaker 4: as well, so you know, ritual join as well as
Speaker 4: our various FED watchers and other macro thinkers, and we
Speaker 4: go around the table talk about the outlook or talk
Speaker 4: about the conclusion of the press conference, any other data
Speaker 4: that was released. And then we conclude with the question
Speaker 4: as to whether anyone did anything in response to the
Speaker 4: FED number, should we change portfolio positioning? As Bill Gross
Speaker 4: used to remind us, you can't trade a FED call
Speaker 4: in the market, per se. I guess you could trade
Speaker 4: FED fund's futures, but it's always important to take you know,
Speaker 4: whatever type of macro release there is, or a decision
Speaker 4: that's made and translated pretty quickly into an investment decision.
Speaker 4: Sometimes we trade a little bit, sometimes we don't trade
Speaker 4: it all. Occasionally we'll trade a lot based on that information,
Speaker 4: and we always leave with a roadmap on what we're
Speaker 4: going to do, you know, during the remaining trading day
Speaker 4: on that particular FED release day, and then put together
Speaker 4: a game plan if necessary, for future trading sessions as well.
Speaker 3: Jersey, I just got to say, if they had a
Speaker 3: microphone in that room, would be the greatest macro podcast
Speaker 3: in the history of podcasts. I really would love to
Speaker 3: hear that.
Speaker 2: If you ever decide to do that, Dan, let us
Speaker 2: know and we will gladly record a fly on the
Speaker 2: Wall episode of All Lots at your Investment Committee. Okay,
Speaker 2: but since we can't really do that, but we're talking
Speaker 2: about FOMC day. What about early August when we had
Speaker 2: the big market sell off. What was that time period
Speaker 2: like for you, because I imagine on the one hand
Speaker 2: it was sort of knuckle clenching for a lot of
Speaker 2: market participants, but on the other hand, a lot of
Speaker 2: people talked about the opportunity to come in and buy
Speaker 2: stuff that was briefly on sale.
Speaker 4: Yeah, so overnight in Japan we did some trading. Most
Speaker 4: of the flow was really in the volatility markets and
Speaker 4: in the equity markets, so it was a little bit
Speaker 4: less of an event within fixed income, but there was
Speaker 4: a chance to take advantage of some local overshooting that
Speaker 4: occurred in the Japanese market. Then even earlier in the day,
Speaker 4: US time some ability to trade global fixed income markets
Speaker 4: and take advantage of some overshooting there. But again, given
Speaker 4: the size of the move, a lot of time spent
Speaker 4: that day just talking about potential implications for overall markets,
Speaker 4: positioning questions around Japan. Maybe we were missing something in
Speaker 4: terms of embedded leverage over in that market. And then again,
Speaker 4: of course things settled down relatively quickly. Another important point
Speaker 4: regarding that event again is that you had a situation
Speaker 4: where you have a little bit of weakness in the
Speaker 4: labor market data, a little bit of a surprise in
Speaker 4: the Japanese market from a policy perspective, and pretty big moves,
Speaker 4: and this time these moves coincided with a big rally
Speaker 4: in the front of the bond market. So again a
Speaker 4: reminder that we're getting to a point now from a
Speaker 4: valuation perspective, and where we are in the macro cycle
Speaker 4: that fixed income may exhibit these types of insurance type
Speaker 4: characteristics once again. And then the second point, probably the
Speaker 4: most important point, is that when markets are expensive, it
Speaker 4: takes less negative surprise to create bigger moves. And this
Speaker 4: is the world we're living in today. Equity valuations are stretched,
Speaker 4: there's a lot of reliance on central banks to engineer
Speaker 4: positive economic and financial market outcomes. Credit spreads are tight,
Speaker 4: and anytime you have this type of dynamic, you just
Speaker 4: have to be prepared for bouts of volatility, boats of overshooting.
Speaker 4: And as an active asset manager, that's where we can
Speaker 4: shine by having the flexibility necessary to be buying when
Speaker 4: other people are selling somewhat indiscriminately and not getting caught
Speaker 4: up into forced sales activity ourselves.
Speaker 3: I'm glad you brought it back around to this sort
Speaker 3: of hedging insurance role that fixed income can play in
Speaker 3: times like this, because so looking back over the last
Speaker 3: several years, you know, one of the things that really
Speaker 3: struck me from like basically the financial crisis to COVID
Speaker 3: was just this beautiful relationship of stocks and bonds from
Speaker 3: the investor perspective, because you're getting paid by your bomb
Speaker 3: holdings stocks were going up, and then the moment you
Speaker 3: had some stock weakness, the capital appreciated it, just like
Speaker 3: this beautiful line that went up when you combined the two.
Speaker 3: And then, as you mentioned, twenty twenty one and twenty two,
Speaker 3: like that broke down obviously, and bonds didn't provide that
Speaker 3: same ballast that went up every time when stocks went down.
Speaker 3: I'm curious if you've seen a change from a business
Speaker 3: perspective and a distribution perspective over the last few years
Speaker 3: where you've had to go back out and convince clients
Speaker 3: of the role for bonds in the portfolio and remake
Speaker 3: that pitch to them, and whether there is sort of
Speaker 3: a persistent maybe something that will last while skeptisid, Okay,
Speaker 3: you don't get the same insurance effect. Meanwhile, yes, you
Speaker 3: get coupon payment. But when you look at the insane
Speaker 3: returns that people are getting in tech doocs, you're like, well,
Speaker 3: it's this little five percent return getting for me. And
Speaker 3: so I'm curious whether the sales pitch or the client
Speaker 3: pitch has changed it all over time because of the experience.
Speaker 4: Of the last few years, it has Now we focus
Speaker 4: on value versus passive alternatives. So our pitches, you know,
Speaker 4: invest with PIMCO, We're going to provide you with a
Speaker 4: better experience relative to what you can get in passive
Speaker 4: portfolio alternatives. So we think over time, if we can
Speaker 4: do that, clients will come. And it was hard coming
Speaker 4: out of the GFC when interest rates were near zero,
Speaker 4: where policy rates were at zero or below zero for
Speaker 4: many many years. It really plated the seeds for major
Speaker 4: change within the fixed income industry. And then you had
Speaker 4: the inflation, and then you had the very violent sell
Speaker 4: off in twenty twenty two where not only did bonds
Speaker 4: not ensure much of anything, they themselves went down a lot.
Speaker 3: Yeah.
Speaker 2: Yeah, the mark to market on those were insane at
Speaker 2: the time. I remember doing a headline that was like
Speaker 2: this was for corporate bonds, but it was like demonstrational
Speaker 2: portfolio of IG bonds and it was down like thirty percent.
Speaker 2: At that period, anyone holding fixed income, especially as a
Speaker 2: retirement option, would have been massively hit.
Speaker 4: Absolutely correct, and in some sense it was a prerequisite
Speaker 4: to get value back in fixed income markets. But if
Speaker 4: you go back several years, because rates were near zero
Speaker 4: or outright negative in major parts of the developed world,
Speaker 4: people were forced to look for alternatives. What you've seen
Speaker 4: over that period is massive growth in floating rate lower
Speaker 4: quality corporate credit. That's very unusual when you go back
Speaker 4: several decades, and historically floating rate lower quality corporate credit
Speaker 4: is quite dangerous because when you have an economic shock,
Speaker 4: short rates go down, that floating rate lower quality credit,
Speaker 4: just as it becomes more risky, sees its yield drop
Speaker 4: and drop quite considerably, especially if policy rates or neutral
Speaker 4: rates are as low as some people get it, they've.
Speaker 3: Paid less and the odds of default are going.
Speaker 4: That's correct, and we have a dynamic now where you've
Speaker 4: seen the lower quality floating rate credit markets grow in
Speaker 4: the order of a couple trillion dollars in size, and
Speaker 4: that was due to the fact that it was really
Speaker 4: the only game in town. There was no real attractive
Speaker 4: yield a high quality markets. Today there is What we
Speaker 4: know is coming up, most likely in a few days,
Speaker 4: is that these short rates are going to begin to
Speaker 4: go down again. So you have a really really interesting
Speaker 4: dynamic in the market where people rushed into these floating
Speaker 4: rate sectors and segments of the market. Their yields are
Speaker 4: going down. You don't have the ability to lock in
Speaker 4: those longer real rates. So yeah, we do think this
Speaker 4: could be a meaningful turning point. And I think again,
Speaker 4: and looking at fixed income from the standpoint of a
Speaker 4: thirty forty to fifty year time horizon, it's really been
Speaker 4: the exception of the rule of the last several years
Speaker 4: where you've had this dynamic in play, where duration was
Speaker 4: a really, really bad thing and where you really needed
Speaker 4: to perhaps reach a little bit to maintain an attractive
Speaker 4: income in some of the more economically sensitive or risk
Speaker 4: areas of the bond market. Now, if you have a
Speaker 4: hard landing, this dynamic can turn quite quickly back towards
Speaker 4: the old days. If you have a softer landing scenario,
Speaker 4: this dynamic will play out much more slowly, but it
Speaker 4: does create what could be the next wave of interest
Speaker 4: into fixed rate longer maturities within the fixed income market.
Speaker 2: Okay, so, speaking of credit and floating rate loans, do
Speaker 2: you feel pressure or competition at all? From I guess
Speaker 2: the proverbial growth of private credit, the booming private credit
Speaker 2: market is that something that either makes it harder for
Speaker 2: you guys to secure paper or maybe makes the yield
Speaker 2: on that paper a little bit lower. What does that mean?
Speaker 2: For your business.
Speaker 4: From an investment perspective, it's actually a really good thing,
Speaker 4: and in fact, even some of the growth of the
Speaker 4: ETF market has been positive. A lot of these rules
Speaker 4: based strategies we see in the ETF space. The daily
Speaker 4: disclosure of activity within the ETFs has created frictions in
Speaker 4: certain more complex areas of the market that have led
Speaker 4: to the ability to more easily generate active alpha within
Speaker 4: our strategies. On the private credit side, it's a bit
Speaker 4: more nuanced. We are seeing more risk get transferred into
Speaker 4: private markets, which ironically has made the traditional high yield
Speaker 4: markets much more robust. I can't tell you how many
Speaker 4: times we look at credits within the high yield corporate
Speaker 4: bond space we say, look, we're looking at these financials.
Speaker 4: Maturity is coming up. This company cannot afford to pay
Speaker 4: this coupon rate to refi their debt, only to find
Speaker 4: out a private credit manager has taken them out with
Speaker 4: a pick deal. So instead of having to pay the
Speaker 4: full coupon interest, currently they have the option in the
Speaker 4: private credit markets to get a more aggressively structured transaction.
Speaker 4: We've seen this dynamic off and on throughout my time
Speaker 4: within the industry. And again it is leading to some
Speaker 4: friction in markets some opportunity as well. So yes, if
Speaker 4: more and more risk gets transferred to the private markets
Speaker 4: over time, it will lead to a reduced opportunity set.
Speaker 4: But from an active investment management perspective, those types of
Speaker 4: frictions actually create opportunities to generate alpha versus passive alternatives.
Speaker 3: This is interesting. I just want to clarify. So from
Speaker 3: an abstract level, I certainly understand how market frictions are
Speaker 3: what create miss pricing and therefore the opportunity to generate alpha.
Speaker 3: But when you talk about the private credit space creating
Speaker 3: these frictions, can you just sort of clarify that a
Speaker 3: little bit more like what that looks like or method
Speaker 3: out for Yes.
Speaker 4: So again, in looking at first of all, some of
Speaker 4: the lower quality areas of the market, a lot of
Speaker 4: these pretty significant flows have impacted technicals across the credit
Speaker 4: sector more broadly. So analyze and understanding the type of
Speaker 4: risk transfer going on in the private markets can really
Speaker 4: improve your ability to generate return make good credit decisions
Speaker 4: within the traditional high yield or even the bank loan universe.
Speaker 4: I think that another big dynamic in private credit today
Speaker 4: relates to a lot of flows within two insurance platforms.
Speaker 4: Insurance companies are regulated identities. They're mostly regulated based on rating,
Speaker 4: And this feels a little bit similar to even the
Speaker 4: years leading up to the global financial crisis, where there's
Speaker 4: increasing influence from radio agencies. Now, radio agencies try their
Speaker 4: best to rate risk and assess risk, but there's increasingly
Speaker 4: a gap between the type of structures necessary to put
Speaker 4: into certain vehicles that are sourced in demand for private
Speaker 4: credit relative to our own views on the inherent credit
Speaker 4: quality of those particular instruments. And the fact that you're
Speaker 4: back now, even over the last few years, to so
Speaker 4: much capital optimization going on across these platforms that there
Speaker 4: is opportunity to do your own work, compare that work
Speaker 4: to ratings out there across both the public and the
Speaker 4: private credit space, and be able to make really, really
Speaker 4: good relative decisions versus those entities, those big players and
Speaker 4: growing players in the market that need a rating, that
Speaker 4: they need some type of structuring in order to optimize
Speaker 4: capital under a evolving regulatory framework. So those are the
Speaker 4: type of frictions that we talked about earlier that are
Speaker 4: good to have around, yeah, because it does allow you
Speaker 4: to generate return in mandates that are less herently constrained
Speaker 4: in that regard.
Speaker 2: Since you mentioned regulatory framework, how closely are you following
Speaker 2: something like the BASL endgame proposals, because this is the
Speaker 2: forgotten event risk of this week is also we're supposed
Speaker 2: to get the unveiled BASL endgame suggestions or proposal, and
Speaker 2: those include a lot of potentially new guidance for how
Speaker 2: banks hold things like mbs and treasuries and mark to
Speaker 2: market losses on things like that.
Speaker 4: Yeah, so we follow what's going on with BASL rules.
Speaker 4: There's also a lot of work being done across various
Speaker 4: insurance regulators, even a lot of work going on, you know,
Speaker 4: across the regulatory regimes that impact various mutual funds and
Speaker 4: other positions here in the US and over in Europe.
Speaker 4: So these are going to be important again from the
Speaker 4: standpoint of good, well functioning markets. You know, we think
Speaker 4: that a lot of these regulatory regimes should be looked at.
Speaker 4: We think that a lot of the regulation that got
Speaker 4: put in place post global financial crisis turned out to
Speaker 4: be perhaps a bit backward looking, bit aggressive. But all
Speaker 4: these types of regulations create these types of frictions that
Speaker 4: we look to exploit again in some of our more
Speaker 4: flexible active strategies. So they're going to impact what banks
Speaker 4: can do, what risk needs to get laid off. And
Speaker 4: we've seen increased activity even there too with these various
Speaker 4: SRT transactions and other aggressive transactions on the capital optimization side.
Speaker 4: But again, all this may not be so good for
Speaker 4: financial market efficiency, but these types of activities are very,
Speaker 4: very good from an active asset management perspective in order
Speaker 4: to come in and take advantage of these frictions for
Speaker 4: the end investor.
Speaker 2: Are you involved at all and synthetic risk transfers? Is
Speaker 2: that something of interest to you?
Speaker 4: We are. In fact, I was a trader of this
Speaker 4: space back when I first joined Pimpco, you know, back
Speaker 4: in the late nineteen nineties, and we have a lot
Speaker 4: of folks here.
Speaker 2: That have looked at, oh, this is like old school
Speaker 2: SRT if you're talking about the nineteen nineties.
Speaker 4: It is, and SRTs are similar in many respects. It's
Speaker 4: a different flavor, you know, each time, and it's an
Speaker 4: interesting segment of the market. There's simple deals to some degree,
Speaker 4: but then there's a lot of complexity in terms of
Speaker 4: understanding waterfalls, how losses are allocated, you know the documentation details.
Speaker 4: So they tend to be popular in the sense that
Speaker 4: you look at it the risk and you say, hey,
Speaker 4: look at I can get a very very attractive coupon
Speaker 4: if I avoid losses up to this point, you know
Speaker 4: I'll have a good investment outcome. But again, a lot
Speaker 4: of inherent complexity. So we've been involved for a long time.
Speaker 4: We've done a few deals recently. We think it's an
Speaker 4: interesting area of the market. But it's an area of
Speaker 4: the market where back a year and a half or
Speaker 4: so ago, when the regional banks were going through a
Speaker 4: lot of challenges, there was really good value for the
Speaker 4: end in ester sourcing that risk. Today, with all of
Speaker 4: the money chasing some of these opportunities, some folks apparently
Speaker 4: or appearing to compete based on market share as opposed
Speaker 4: to prudent underwriting, there's times where some of these SRT
Speaker 4: deals are getting done and getting done at levels quite
Speaker 4: advantageous to the banks that are selling that risk. And
Speaker 4: not surprisingly, when you have that dynamic in play, you're
Speaker 4: going to see more and more of these transactions. So
Speaker 4: it requires a lot of nuance and some good value there.
Speaker 4: But there's pockets of froth even in that SRT market today.
Speaker 3: That's interesting, by the way, listeners, if you're just tuning in.
Speaker 3: Tracy and I did an episode with Michael Shemy several
Speaker 3: weeks ago all about how SRTs work, So a good
Speaker 3: permore to go back to and check that out. I
Speaker 3: want to go back to the macro for a minute
Speaker 3: and sort of where we started and thinking about where
Speaker 3: we're going over the next several years and or in
Speaker 3: an era of very high deficits historically you mentioned, you know,
Speaker 3: there's talk about all this like friend shoring talk and
Speaker 3: reorientation of supply chains. That's costly. Geopolitical tensions have risen.
Speaker 3: That's going to be costly on multiple fronts if it persists.
Speaker 3: In politics changes you know, obviously there was a sort
Speaker 3: of more comfort with fiscal expansion and things like that,
Speaker 3: and you know, in a way that we might not
Speaker 3: have expected years ago, all these things like you know,
Speaker 3: looking out a few years, how are you thinking about
Speaker 3: these changes that are coming or these risks and how
Speaker 3: they're going to change the flavor of markets over time.
Speaker 4: Yes, a few points. One interesting that we had a
Speaker 4: pretty extensive discussion today. We didn't talk about inflation too much.
Speaker 3: Yeah, that's yesterday's news. No, not sure, we probably should.
Speaker 4: But yeah, but I bring that up all you because
Speaker 4: we do think to answer your question, you know, over
Speaker 4: the next several years, even though inflation may come down
Speaker 4: from a cyclical perspective, it's likely here to stay at least.
Speaker 3: Then, why do you think that we've only seen such
Speaker 3: a modest increase in the neutral rate if inflation here
Speaker 3: is now going to be sort of like structurally at
Speaker 3: least somewhat higher.
Speaker 4: Well, we think inflation may be a little bit higher structurally,
Speaker 4: at least the base case. We think that the risks
Speaker 4: around inflation will likely be more symmetric. So again you
Speaker 4: go back to the GFC. In the years, you know,
Speaker 4: following the GFC, most of the challenge for central banks
Speaker 4: are to get inflation back up towards target.
Speaker 5: Yeah, you kept missing on the downside, and we think,
Speaker 5: you know, you know, over the next several years, for
Speaker 5: the reasons we talked about, inflation risks will be more symmetric,
Speaker 5: which creates opportunities for investors to source inflation protection across portfolios.
Speaker 4: We also think to your point, there's going to be
Speaker 4: more geopolitical uncertainty deficits are high many countries, including the US,
Speaker 4: which jumps out as being a government that can't continue
Speaker 4: to run these types of deficits indefinitely. And we think
Speaker 4: because deficits are high, because market participants generally believe that
Speaker 4: central banks and fiscal agents had something to do with
Speaker 4: inflation this cycle, you're likely to have less policy activism
Speaker 4: on an ongoing basis. So this feels like a market
Speaker 4: the next several years that will have to stand on
Speaker 4: its own merits more than it has in the past,
Speaker 4: less influence from policy makers, more local volatility, less obsynchronized
Speaker 4: growth cycles with the risk of meaningful geopolitical uncertainty.
Speaker 3: Is a lower strike price on the FED put, so
Speaker 3: to speak.
Speaker 4: And probably a lower strike price on the put. But
Speaker 4: the power of the FED may be less than it's
Speaker 4: been in the past because of this very, very challenging
Speaker 4: inflationary situation we're in after the very activist policies during
Speaker 4: the COVID period. So yeah, I think it's premature to
Speaker 4: say that the FED and other policy makers aren't going
Speaker 4: to be there. Yeah, during extreme bouts of volatility. There
Speaker 4: is a question though, from our perspective, as to whether
Speaker 4: they can be as impactful as they've been in the past.
Speaker 4: Again good for active asset management, but there's a risk
Speaker 4: management reminder in there that you got to be a
Speaker 4: little bit more humble about the risks of overshooting, the
Speaker 4: risks of harder landing scenarios, the risk that you know,
Speaker 4: as fixed income investors would have to go with alone,
Speaker 4: so to speak, and not rely on central banks to
Speaker 4: bail out some of the underperforming areas of the market.
Speaker 3: You know, Tracy, it's interesting when we had that volatility
Speaker 3: in early August, none of the FED speakers played ball
Speaker 3: with the talk of like emergency rate cuts. Yeah, like
Speaker 3: you know, because that was in there, and they did
Speaker 3: not and they were very and they didn't they didn't
Speaker 3: really talk about the market volatility and they said, we're
Speaker 3: just going to see the data. Like it was very interesting,
Speaker 3: how like they were cool throughout the whole thing.
Speaker 2: I know it's only six weeks ago, but I've already
Speaker 2: forgotten that whole period. But some people were calling for
Speaker 2: one hundred basis point emergency cut, right, Okay, when I
Speaker 2: think about event risk on the horizon, okay, the return
Speaker 2: of inflation, the hard landing scenario, but also geopolitical risks
Speaker 2: which you just brought up. And if I'm thinking back
Speaker 2: to the idea of bonds as a hedge and I'm
Speaker 2: thinking about US treasuries, it feels like US treasuries aren't
Speaker 2: necessarily a good hedge for a particular flavor of US
Speaker 2: political risk. How do you hedge for that type of volatility.
Speaker 4: Well, one thing that we've done, and it's not just
Speaker 4: related to the election, is to maintain a lot of
Speaker 4: portfolio liquidity. Liquidity means flexibility. Liquidity is a form of
Speaker 4: positive optionality. If you have a volatility event associated with
Speaker 4: our election or some of these other geopolitical risks that
Speaker 4: are out there, markets can overshoot, and I think a
Speaker 4: key theme and generating return for an active asset manager
Speaker 4: is being there to countertrade the market if you do
Speaker 4: have overshooting. And I think that this election set up
Speaker 4: is one where it's a coin flip and uncertainty is
Speaker 4: only increasing going into this election period, So we don't
Speaker 4: yet have conviction in terms of what's going to happen.
Speaker 4: We just want to have a bit more flexibility. That's
Speaker 4: point one. Second point, when you step back and look
Speaker 4: at the likelihood of generating attractive returns in the next
Speaker 4: few years, the US is not the only game in
Speaker 4: town anymore. Rates for negative elsewhere in the world outright negative,
Speaker 4: not even on an inflation adjusted basis, And these marks
Speaker 4: have reawakened, particularly from the standpoint of a US dollar
Speaker 4: denominated investor. So you do have options versus the US,
Speaker 4: the Australian bond market, the UK, both markets out yield
Speaker 4: the United States, opportunities to diversify into other developed markets.
Speaker 4: Even Japan on a hedge basis has some interesting yields
Speaker 4: out in the long end of the yield curve. So
Speaker 4: you know, we have over the course of the last
Speaker 4: several months, have been using the full breadth of the
Speaker 4: PIMCO platform, the flexibility across a lot of our mandates
Speaker 4: to diversify a bit away from the US. And again
Speaker 4: that theme will likely continue where investors to optimize their
Speaker 4: portfolio should look outside the US at both higher quality
Speaker 4: and lower quality markets out there in the world, and
Speaker 4: we do think some diversification away from US higher quality
Speaker 4: interest rate exposure makes a lot of sense at this
Speaker 4: point in the cycle.
Speaker 3: I'm going to ask a really ignorant question, and maybe
Speaker 3: you're just going to say, no, that's not a thing
Speaker 3: that I do you have a capacity to buy a
Speaker 3: Chinese government bonds which have done extremely well, and the
Speaker 3: long end of the curve has come way down there.
Speaker 4: We do, and you know they're give exposure to them.
Speaker 4: We have very little exposure to their market. They got
Speaker 4: you know, yields to get a two percent type zone,
Speaker 4: you know, in the higher quality of the market, but
Speaker 4: an example of less synchronized global boath cycles. Their growth slowing,
Speaker 4: no inflation problem. It in theory is a decent diversifier.
Speaker 4: I think the problem just in the market right now
Speaker 4: is a lot of that's priced into the Chinese market.
Speaker 2: So the last time we spoke to you, I think
Speaker 2: it was August twenty twenty two, something like that, and
Speaker 2: a lot.
Speaker 3: Of turning points, Yeah, we turned it Dan.
Speaker 2: Well, and a lot of the conversation was about the
Speaker 2: potential for a recession, a housing slow down, things like that.
Speaker 2: And of course fast forward to September of twenty twenty
Speaker 2: four and corporate credit has held up phenomenally. Well. I
Speaker 2: take the point about disparities between you know, lesser quality
Speaker 2: and higher quality. The housing market has been pretty robust,
Speaker 2: more than a lot of people would have expected. Thinking
Speaker 2: back over the past couple of years. What have you
Speaker 2: learned from that experience and how do you incorporate it
Speaker 2: into the PIMCO investment strategy.
Speaker 4: Well, this was an exceptionally unique cycle. We had a
Speaker 4: global pandemic none of us had witnessed in our lifetime,
Speaker 4: sudden stop of the economy, massive massive policy response, and
Speaker 4: an inflationary environment that many of us didn't see in
Speaker 4: our actual trading career, the young folks at PIMCO even
Speaker 4: less so. So I think it's just a reminder that
Speaker 4: the unexpected can happen, and it's important again to have
Speaker 4: appropriate humility. From a portfolio construction perspective, think about diversification carefully.
Speaker 4: Risk management's critically important, not just defensive risk management, but
Speaker 4: having a risk management mindset because you can go through
Speaker 4: these unique periods, and as we talked about earlier, when
Speaker 4: valuations are stretched, it doesn't necessarily take a global pandemic
Speaker 4: type shock to create some challenges and opportunities for the
Speaker 4: firm or the strategy that's well positioned. I think looking
Speaker 4: back on the last few years, a lot of this
Speaker 4: inflation likely will be perceived as being at least temporary
Speaker 4: or do to very very unique COVID supply chain complications
Speaker 4: and this massive fiscal stimulus that occurred. But we got
Speaker 4: a lot to learn, a lot to analyze, and I
Speaker 4: think going forward, plenty of uncertainty as well. So you know,
Speaker 4: we try to be careful about being too overconfident. We
Speaker 4: get the behavioral finance folks always in our ears, reminding
Speaker 4: us that people like myself tend to be prone to
Speaker 4: overconfidence unless we protect our clients from our own natural instincts.
Speaker 4: And again, just trying to learn, continue to read the
Speaker 4: economic history books compared to the current environment. Again, leveraging
Speaker 4: the team. You know, investing is a team sport and
Speaker 4: you don't have to take wildly big macro bets to
Speaker 4: just generate lots of small return across a variety of
Speaker 4: sectors parts of the globe. And again, if you do
Speaker 4: that well, it adds up into a good client experience
Speaker 4: at the end of the day.
Speaker 2: All right, Dan Ivison, I'm so glad we could catch
Speaker 2: up with you in person on the West Coast. Thank
Speaker 2: you so much for coming back on offline.
Speaker 3: Thank you so much.
Speaker 4: Jan.
Speaker 3: That was great.
Speaker 2: Thanks a lot, Listen, Joe, that was fun.
Speaker 3: That was really fun. What a treat to get to
Speaker 3: talk to Dan Ivison right before.
Speaker 2: Also, I was thinking, like, can you imagine being in
Speaker 2: that run with Ben Bernank and Richard Clareda.
Speaker 3: Actually when he said that, I had this like like
Speaker 3: it didn't quite register to me. He's like, oh, you
Speaker 3: have our advisor, Ben BERNANKI and I was it like
Speaker 3: didn't Like, I was like, what does he say? It's like,
Speaker 3: is he like speaking metaphorically? It's like no, But when
Speaker 3: you're PIMCO, you can really to talk to you about
Speaker 3: what just happened.
Speaker 2: Yeah, it must be nice. Okay, well there there's a
Speaker 2: ton to pull out of that conversation. One of the
Speaker 2: things that struck me was very early on, you know,
Speaker 2: he talked about the credit cycle and what's been going
Speaker 2: on there, and I guess the downsides of looking at aggregates,
Speaker 2: which is even when you see credit spreads falling or
Speaker 2: staying very very low in total, it does conceal pockets
Speaker 2: of weakness and pain for like the least quality names
Speaker 2: in there and parts of cre and things like that.
Speaker 2: And I think that is worth remembering as we kind
Speaker 2: of talk about, well, the FEDS cutting rates and we
Speaker 2: haven't had that hard landing scenario that a lot of
Speaker 2: people thought would emerge. There are these pockets of weakness
Speaker 2: out there.
Speaker 3: Totally, which of course has contributed to I just so
Speaker 3: many people are confused about the economy because you can
Speaker 3: sort of point to anything and tell the story you want.
Speaker 3: I also thought it was sort of interesting, and you know,
Speaker 3: I get like there's a lot of logic to it,
Speaker 3: this idea of like, okay, for a couple of years,
Speaker 3: their bonds did not play the role in people's portfolios
Speaker 3: that they might have gotten used to it. I really
Speaker 3: just think like we and by we, I just mean
Speaker 3: like investors, like people who put their money with other
Speaker 3: people or in some form, Like we just said, it's
Speaker 3: so easy in the twenty tens, because like really it
Speaker 3: was just like this beautiful synergy of stocks and bonds,
Speaker 3: various flavors of sixty forty what have you, like, it
Speaker 3: all worked out and you like didn't lose money. And
Speaker 3: twenty twenty two in particular, was like a sharp reminder
Speaker 3: and you like pointed to the stats like no, like
Speaker 3: that paradigm like broke in a really big way. And
Speaker 3: so the question, to my mind is still like okay,
Speaker 3: even if inflation has like come down, we do see
Speaker 3: fixed income providing this sort of insurance hedging role that
Speaker 3: it did. Like, are people going to be like totally
Speaker 3: comfortable allocating that much to fixed income, especially because of
Speaker 3: kind of what we were talking about at the end.
Speaker 3: There there are these different macro dynamics, geopolitical dynamics, political
Speaker 3: dynamics that could change basically how bonds trade.
Speaker 2: One day in the future, we'll tell our children that
Speaker 2: a successful investment portfolio was basically just sixty forty yes,
Speaker 2: and that was it. That's how easy.
Speaker 3: It was. So easy. Now, rightly we didn't know how
Speaker 3: good we had it, but you're right.
Speaker 2: I do think the memories of that, like very dramatic
Speaker 2: mark to market loss, are going to stay with us
Speaker 2: for a while. But yeah, So it was interesting to
Speaker 2: hear Dan talk about this idea of like having to
Speaker 2: go out to clients and repitch bonds as a rush
Speaker 2: right hedging instrument in your portfolio, and I kind of
Speaker 2: I wonder how quickly attitudes will adjust Once again, I
Speaker 2: guess it depends on what happens this week and beyond.
Speaker 3: We will see. All right, shall we leave it there,
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me at The Stalwart.
Speaker 3: Follow our producers Kerman Rodriguez at Carman Arman, dash Ol
Speaker 3: Bennett who is out here in Newport Beach with us,
Speaker 3: Calebrooks at Kalebrooks. Thank you to our producer Moses On.
Speaker 3: For more odd Loots content, go to Bloomberg dot com
Speaker 3: slash odd Lots, where have transcripts, a blog and a
Speaker 3: newsletter and you can chut about all of these topics
Speaker 3: twenty four to seven in our discord discord dot gg
Speaker 3: slash odlines.
Speaker 2: And if you enjoy odd Lots, if you like it
Speaker 2: when we talk to very large bond investors on the
Speaker 2: West Coast, then please leave us a positive review on
Speaker 2: your favorite podcast platform. And remember, if you are a
Speaker 2: Bloomberg subscriber, you can listen to all of our episodes
Speaker 2: absolutely ad free. All you need to do is find
Speaker 2: the Bloomberg channel on Apple Podcasts and follow the instructions there.
Speaker 2: Thanks for listening.