WEBVTT - Pimco CIO Dan Ivascyn on the Biggest Fed Decision in Years 0:00:02.759 --> 0:00:16.759 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.920 --> 0:00:22.080 Hello and welcome to another episode of the Odd Lots podcast. 0:00:22.120 --> 0:00:25.120 I'm Tracy Alloway and I'm Joe Wisenthal. Joe, we are 0:00:25.160 --> 0:00:27.880 here on the West Coast right now. We're in Newport Beach. 0:00:27.960 --> 0:00:28.760 It's so nice. 0:00:28.800 --> 0:00:31.320 I love it done here so much. Look, this is 0:00:31.360 --> 0:00:35.400 what probably might be tied anyway. I yes, I will 0:00:35.440 --> 0:00:37.319 look for any excuse to come down to this part 0:00:37.320 --> 0:00:37.839 of the country. 0:00:37.880 --> 0:00:41.400 We can just listen to Joe wax lyrical about California. 0:00:41.560 --> 0:00:44.320 But we are here for work. Yes, in theory, we're 0:00:44.320 --> 0:00:47.599 here for the future Proof Conference, which I think, honestly, 0:00:47.640 --> 0:00:50.040 all financial conferences should be like this. They should all 0:00:50.120 --> 0:00:52.400 take place on a beach with food trucks and we 0:00:52.400 --> 0:00:54.760 should just hang out outside and talk to each other 0:00:54.840 --> 0:00:55.600 about markets. 0:00:55.760 --> 0:00:57.440 Sounds good, But we're not on the beach right now. 0:00:57.680 --> 0:00:59.840 No, we are not. We are actually, well, let me 0:00:59.920 --> 0:01:02.520 just say no trip to the West Coast would be 0:01:02.560 --> 0:01:06.360 complete in terms of an A Blots episode without hitting 0:01:06.440 --> 0:01:07.919 up PIMCO stopping. 0:01:07.920 --> 0:01:12.760 That's right, the icon of Southern California investing in market. 0:01:12.680 --> 0:01:14.640 And what a great time to be doing it. Because 0:01:14.680 --> 0:01:18.960 of course we're recording this on Monday, and on Wednesday 0:01:19.120 --> 0:01:20.880 we have the big FED decision. 0:01:21.160 --> 0:01:25.000 That's right, it's a huge the almost virtually locked that 0:01:25.000 --> 0:01:27.080 we're going to see the start of the raid cut cycle. 0:01:27.440 --> 0:01:29.360 But there's still a lot of debate about twenty five 0:01:29.440 --> 0:01:31.399 or fifty, what they signal for the rest of the year. 0:01:31.480 --> 0:01:34.480 How significant is it whether they choose one or the other. 0:01:34.959 --> 0:01:38.920 Definitely one of the most exciting anticipated ones in years, 0:01:39.120 --> 0:01:41.240 and as of the time that we're recording this on 0:01:41.319 --> 0:01:44.720 Monday morning, there is still significant ambiguity. And who knows, 0:01:44.760 --> 0:01:47.200 by the time you're listening to this, maybe there will 0:01:47.240 --> 0:01:49.720 be some leak in the media everyone will have settled 0:01:49.720 --> 0:01:52.120 on fifty or twenty five or something. But at least 0:01:52.160 --> 0:01:54.400 as of right now, we don't really know what's going 0:01:54.440 --> 0:01:54.800 to happen. 0:01:54.920 --> 0:01:57.680 You mentioned ambiguity, and this is really the remarkable thing 0:01:57.760 --> 0:02:00.600 about this moment in time, which is everyone figures they're 0:02:00.600 --> 0:02:02.960 going to cut, but we don't know twenty five or 0:02:03.040 --> 0:02:05.560 fifty bibs. And the crazy thing is, if you look 0:02:05.560 --> 0:02:08.280 at the swaps market right now, we're basically evenly split. 0:02:08.560 --> 0:02:08.640 Ye. 0:02:08.880 --> 0:02:09.880 Yeah, true excitement. 0:02:10.120 --> 0:02:12.960 Yes, all right, So without further ado, I'm just going 0:02:12.960 --> 0:02:15.280 to emphasize we do, in fact have the perfect guest 0:02:15.440 --> 0:02:17.400 to be talking about all of this. We're going to 0:02:17.400 --> 0:02:19.840 be speaking with Dan Ivison. He is, of course, the 0:02:19.919 --> 0:02:24.480 PIMCO Group CIO and a managing director here in Newport. Dan, 0:02:24.560 --> 0:02:26.720 thank you so much for coming back on all thoughts. 0:02:26.919 --> 0:02:29.359 Thanks. It's really exciting to do this and do it 0:02:29.400 --> 0:02:30.560 in person this time. Yeah. 0:02:30.600 --> 0:02:33.519 Absolutely, and perfect timing really, So I'm just going to 0:02:33.600 --> 0:02:36.359 jump into the big question, the big question, twenty five 0:02:36.440 --> 0:02:37.600 or fifty what will it be? 0:02:37.680 --> 0:02:40.079 Sure, let me real fast. I don't think will matter 0:02:40.080 --> 0:02:42.600 that much unless you're betting on that front end contract, 0:02:42.840 --> 0:02:44.280 and we think it's going to be a close call. 0:02:45.480 --> 0:02:47.760 The guest, based on the news flow this weekend, is 0:02:47.800 --> 0:02:50.359 they may actually go fifty. But I think the key 0:02:50.400 --> 0:02:53.040 point will be that this will either be a very 0:02:53.080 --> 0:02:56.680 dubvish twenty five basis point cut or more balanced fifty 0:02:56.720 --> 0:02:59.040 basis point cut. We think the FED wants to get 0:02:59.160 --> 0:03:02.280 rates down. They believe they're in restrictive territory, and I 0:03:02.320 --> 0:03:04.720 think the key point is this is the beginning of 0:03:04.760 --> 0:03:06.960 a cutting cycle, and we haven't had one in quite 0:03:06.960 --> 0:03:07.400 some time. 0:03:07.560 --> 0:03:10.919 I've heard people say that if they go twenty five, 0:03:11.080 --> 0:03:13.480 that they could do it in a duvish way and 0:03:13.600 --> 0:03:16.120 perhaps signal via the dots that there will be more 0:03:16.600 --> 0:03:18.880 aggressive rate cuts through the rest of the year to 0:03:18.960 --> 0:03:21.960 balance that out, and that the question then would arise, Well, 0:03:22.040 --> 0:03:25.239 if you're already saying that, why not just go fifty? 0:03:25.800 --> 0:03:28.919 Just from your perspective, you know, how does the FED 0:03:29.160 --> 0:03:31.680 think through this question? Maybe it doesn't matter that much, 0:03:31.720 --> 0:03:33.760 and you know, on the long sweep of history, maybe 0:03:33.760 --> 0:03:35.760 it doesn't. But how do you think the FED is 0:03:35.800 --> 0:03:37.080 thinking through these options? 0:03:37.200 --> 0:03:39.520 Yeah? Well, I think the first point to note is 0:03:39.520 --> 0:03:41.160 that the market's already done a lot of work for 0:03:41.400 --> 0:03:44.320 the Fed. You've seen the price You have some pretty 0:03:44.320 --> 0:03:46.800 significant cuts going into your end. In fact, we now 0:03:46.800 --> 0:03:48.920 have well over one hundred basis points that cuts priced 0:03:48.920 --> 0:03:51.520 in in another one hundred and twenty five to one 0:03:51.560 --> 0:03:54.960 hundred and fifty, you know, the following year. So you know, 0:03:54.960 --> 0:03:57.720 a combination of the data and some statements by FED 0:03:57.720 --> 0:04:01.000 officials thus far has already eased conditions. And I think 0:04:01.040 --> 0:04:03.240 what the FED is concerned with is the fact that 0:04:03.280 --> 0:04:07.160 inflation isn't yet at target. We've made some progress, but 0:04:07.280 --> 0:04:10.480 every time they speak in a dubvish tone, you see 0:04:10.480 --> 0:04:13.800 stocks do pretty well and credit spreads are near very 0:04:13.880 --> 0:04:16.080 very tight levels or near the tights of this cycle. 0:04:16.200 --> 0:04:19.279 So there'll be walking a tightrope a bit and trying 0:04:19.360 --> 0:04:22.919 to ease conditions without easing too much, without letting the 0:04:22.920 --> 0:04:25.839 markets get ahead of them, and without letting some of 0:04:25.880 --> 0:04:29.480 these positive wealth effects, you know, potentially drive inflation higher 0:04:29.600 --> 0:04:33.520 and again through the combination of action signaling via the 0:04:33.520 --> 0:04:37.040 dots and the tone at the press conference in future 0:04:37.200 --> 0:04:40.240 correspondence with markets, they likely have enough tools at their 0:04:40.279 --> 0:04:42.520 disposal where even if they get something wrong in a 0:04:42.560 --> 0:04:44.520 narrow sense, that they can course correct and get the 0:04:44.560 --> 0:04:46.520 market back on track as necessary. 0:04:46.960 --> 0:04:49.240 You mentioned tone of the meeting, and one of the 0:04:49.360 --> 0:04:52.960 arguments that has come up recently is this idea of, well, 0:04:53.000 --> 0:04:55.599 maybe they don't do fifty bits because they don't want 0:04:55.600 --> 0:04:59.240 to make everyone really worried that the economy is significantly 0:04:59.560 --> 0:05:02.560 slowing down. Do you worry about like that side of 0:05:02.600 --> 0:05:05.280 the messaging at all? Is there the possibility that they 0:05:05.279 --> 0:05:08.400 go fifty and everyone's like, oh, it's worse than we thought. 0:05:08.720 --> 0:05:11.800 It's possible. I think the other mistake, though, or concerned 0:05:11.839 --> 0:05:14.880 I should say, is that by going fifty, the market 0:05:14.880 --> 0:05:17.680 gets further in front of them in terms of expectations 0:05:17.680 --> 0:05:20.960 for even more aggressive policy. So I think both risks 0:05:21.080 --> 0:05:24.520 are there. Again, I think perhaps some of these concerns 0:05:24.560 --> 0:05:26.720 about the FED being behind the curve or you know, 0:05:26.880 --> 0:05:28.560 you know, to in front of the curve relative to 0:05:28.600 --> 0:05:32.040 where inflation is, I think they're interesting soundbites. But I 0:05:32.480 --> 0:05:34.440 and we do think that the FED has enough tools 0:05:34.480 --> 0:05:37.520 to be able to navigate the next several months. I 0:05:37.520 --> 0:05:39.720 think the key for markets, though, is to really really 0:05:39.720 --> 0:05:41.680 listen to what the FED is saying. They are going 0:05:41.720 --> 0:05:44.440 to be looking at the data. Therefore, us market participants, 0:05:44.600 --> 0:05:47.120 we want to focus on the data. The data is 0:05:47.160 --> 0:05:49.480 ultimately going to be driving these outcomes, and I think 0:05:49.480 --> 0:05:51.839 it's a really interesting period for markets, given that the 0:05:51.920 --> 0:05:55.200 data has been volatile, and we think it will likely 0:05:55.200 --> 0:05:57.880 contigue to be quite volatile, creating ongoing uncertainty. 0:05:58.080 --> 0:06:01.320 So setting aside whether they do twenty five or fifty 0:06:01.520 --> 0:06:03.760 this week, the other big question is sort of, I 0:06:03.839 --> 0:06:07.360 guess maybe more medium term or long term, but has 0:06:07.480 --> 0:06:09.960 the neutral rate of the long term neutral rate of 0:06:10.040 --> 0:06:14.159 interest gone up since pre COVID And there continues to 0:06:14.160 --> 0:06:16.600 be a lot of discussion about this. No one really knows. 0:06:17.040 --> 0:06:19.800 Do you think there's been some sort of structural change 0:06:19.880 --> 0:06:22.480 in the economy over I guess basically the last four 0:06:22.480 --> 0:06:24.640 and a half to five years now such that the 0:06:24.720 --> 0:06:28.480 neutral rate of interest is higher, and what has changed if. 0:06:28.360 --> 0:06:30.960 So, so we think it maybe a bit higher. But 0:06:31.040 --> 0:06:34.520 if you look back through economic history, these neutral policy 0:06:34.600 --> 0:06:37.640 rates of this concept of our star is important, but 0:06:38.080 --> 0:06:40.560 it doesn't tend to move that quickly. And I think 0:06:40.600 --> 0:06:42.600 a lot of the research, including our own and we 0:06:42.720 --> 0:06:45.240 dusted off a lot of older research and updated these 0:06:45.240 --> 0:06:49.120 studies this summer, suggests that, yeah, our star may be 0:06:49.200 --> 0:06:52.760 a bit higher with this massive uncertainty around this type 0:06:52.760 --> 0:06:55.160 of research. So again, I think the bottom line, as 0:06:55.200 --> 0:06:58.240 you said, is we don't know for sure. We suspect 0:06:58.360 --> 0:07:01.200 it's a little bit higher, not as high as some 0:07:01.360 --> 0:07:04.200 more bearish folks out there think it may be. And 0:07:04.240 --> 0:07:06.839 the reasons for that higher debt levels, the need for 0:07:07.000 --> 0:07:12.800 significantly more physical infrastructure investment, this cycle less globalization, the 0:07:12.880 --> 0:07:16.480 desire for supply chain resiliency, we think are just a 0:07:16.520 --> 0:07:19.880 few factors contributing to the likelihood that our stars higher. 0:07:20.080 --> 0:07:23.400 But just the implication though, if it's only modestly higher, 0:07:23.560 --> 0:07:25.840 is at least from here. Again, setting aside what they 0:07:25.840 --> 0:07:27.840 do this week, that there is a substantial room for 0:07:27.880 --> 0:07:30.360 them to cut, and you'd expect their deep cuts from here. 0:07:30.640 --> 0:07:32.840 That's correct, And you know our thought process is, you know, 0:07:32.920 --> 0:07:35.760 maybe our stars half a percent higher, not on the 0:07:35.840 --> 0:07:37.800 order of one one and a half percent higher. So 0:07:38.000 --> 0:07:41.480 the bottom line is relative to a concept of neutral. 0:07:41.520 --> 0:07:43.840 Even if neutral is closer to a three percent nominal 0:07:43.880 --> 0:07:46.480 funds rate or even a little bit higher, gives them 0:07:46.480 --> 0:07:48.880 a lot of room to get policy back to what 0:07:48.920 --> 0:07:51.440 they perceive to be neutral. And again, with any cycle, 0:07:51.640 --> 0:07:53.760 you can have overshooting to the downside too from a 0:07:53.800 --> 0:07:56.800 growth and inflation perspective, So there's always a chance that 0:07:56.960 --> 0:08:00.400 into a weaker economy than they and we currently intoipate 0:08:00.440 --> 0:08:04.040 that they have room to shift into accommodative territory as well. 0:08:04.760 --> 0:08:08.240 What's your sense of financial conditions right now? Because you 0:08:08.320 --> 0:08:11.600 have great insight into the market. You buy mortgage bonds, 0:08:11.680 --> 0:08:15.120 you buy credit, you buy treasuries. Obviously, what are you 0:08:15.200 --> 0:08:18.120 seeing in terms of the market right now? I'm thinking 0:08:18.160 --> 0:08:23.040 particularly of credit spreads. Those are still near cycle lows basically. 0:08:22.800 --> 0:08:26.160 Yeah, so that in aggregate conditions still appear to be 0:08:26.280 --> 0:08:29.040 quite loose. When you look at stock markets near all 0:08:29.080 --> 0:08:32.480 time highs, credit spreads very very tight. From a very 0:08:32.520 --> 0:08:34.719 very high level macro sense, there's still a lot of 0:08:34.760 --> 0:08:37.080 liquidity in the system, a lot of confidence, a lot 0:08:37.080 --> 0:08:41.840 of momentum, positive momentum, and risk aset spreads are quite tight. 0:08:42.120 --> 0:08:45.360 But we know that looking at aggregate measures can be misleading. 0:08:45.880 --> 0:08:48.679 If you're a lower income consumer that doesn't own a 0:08:48.720 --> 0:08:51.440 home where we know us households have a lot of 0:08:51.440 --> 0:08:55.040 equity trapped in their property or in their primary residence. There, 0:08:55.080 --> 0:08:57.680 we are beginning to see signs of weakness. Most of 0:08:57.720 --> 0:09:00.920 the debt that those households have encouraged voating rate in nature, 0:09:01.040 --> 0:09:03.240 and they're feeling a lot of pressure. You look at 0:09:03.280 --> 0:09:06.520 the floating rate credit markets, some of the lending that's 0:09:06.520 --> 0:09:10.560 occurred to some weaker quality borrowers, to commercial real estate sector. 0:09:11.120 --> 0:09:14.040 You're seeing signs of stress there that are probably not 0:09:14.280 --> 0:09:16.360 as evident, you know, out there in the marketplace as 0:09:16.360 --> 0:09:18.760 they should be. So there are sectors of the market 0:09:18.760 --> 0:09:21.680 that we're beginning to see deteriorate. We think that's what's 0:09:21.679 --> 0:09:24.480 on the mind of the Federal Reserve that, alongside some 0:09:24.559 --> 0:09:28.320 of the more recent broad labor market weakness all suggests 0:09:28.360 --> 0:09:31.640 that the FED from an insurance or a risk management perspective, 0:09:31.880 --> 0:09:35.080 you know, should likely begin to get rates lower and 0:09:35.120 --> 0:09:37.280 then again carefully look at the data to just make 0:09:37.320 --> 0:09:41.400 sure and to calibrate to prevent a reacceleration of inflation 0:09:41.559 --> 0:09:44.040 into even looser financial conditions. 0:09:44.480 --> 0:09:47.680 If it's the case that our star is just a 0:09:47.679 --> 0:09:49.720 little bit higher than what it used to be, and 0:09:49.760 --> 0:09:54.080 if perhaps some in the market are overestimating how much 0:09:54.120 --> 0:09:58.320 it's risen, what areas of the market specifically are either 0:09:58.400 --> 0:10:03.000 mispriced or are the most attractive under your assumptions. 0:10:02.480 --> 0:10:05.800 Well, good old fashioned high quality bonds would benefit to 0:10:05.840 --> 0:10:06.800 the extent that. 0:10:06.840 --> 0:10:08.679 We're talking high quality corporate bonds here. 0:10:08.720 --> 0:10:11.000 High quality you know, really any type of high quality bond. 0:10:11.040 --> 0:10:13.360 And what's nice about high quality bond market is that 0:10:13.440 --> 0:10:16.720 if you have a multi year time horizon, the analysis 0:10:16.720 --> 0:10:19.679 isn't that complicated. You typically earn your yield, and then 0:10:19.679 --> 0:10:22.640 any type of incremental return you can get through thoughtful 0:10:22.640 --> 0:10:27.440 acid allocation or alpha generation is incremental return that you'll receive. 0:10:28.040 --> 0:10:31.640 To the extent that policy rates or neutral rates look 0:10:31.880 --> 0:10:34.880 very similar to where we were pre COVID, that creates 0:10:34.960 --> 0:10:38.400 room not only to realize upon very very attractive real 0:10:38.440 --> 0:10:41.920 and nominally yields, but for the prospects for price appreciation 0:10:42.040 --> 0:10:44.880 as well. And I think related to that point is 0:10:44.920 --> 0:10:48.600 that fixed income has historically done real well when bad 0:10:48.640 --> 0:10:52.360 things were happening elsewhere within your portfolio, when economic growth 0:10:52.400 --> 0:10:55.280 has been weak. Really, the twenty two experience, in this 0:10:55.360 --> 0:10:58.040 inflationary experience, has been the exception to the rule. And 0:10:58.120 --> 0:11:00.000 we do think there's a good chance, you know, regardless 0:11:00.040 --> 0:11:02.800 of whether neutral policy rates are a little bit higher 0:11:02.800 --> 0:11:05.360 than they were pre COVID, that we're getting back into 0:11:05.400 --> 0:11:08.120 that type of paradigm where fixed income not only has 0:11:08.160 --> 0:11:12.240 an attractive yield, but it will have defensive, diversefyed characteristics. Finally, 0:11:12.480 --> 0:11:16.080 and again that takes some convincing for investors, given the 0:11:16.080 --> 0:11:18.640 battle wounds we all suffer during the twenty two experience. 0:11:19.480 --> 0:11:23.079 You mentioned the idea of fixed income sort of coming back. 0:11:23.520 --> 0:11:25.839 How are you looking at pricing on the short end 0:11:25.960 --> 0:11:27.520 at the moment, because, as you said, one of the 0:11:27.600 --> 0:11:29.800 risks is that the market kind of gets ahead of 0:11:29.840 --> 0:11:32.680 itself right now in pricing in rate cuts, and some 0:11:32.760 --> 0:11:35.760 people look at those shorter term maturities right now and 0:11:35.800 --> 0:11:38.200 think like well, maybe it is a little bit overdone. 0:11:38.480 --> 0:11:40.280 Yeah, So again, if you have a three to five 0:11:40.360 --> 0:11:43.800 year time horizon, this is really noise. Lock in some 0:11:43.840 --> 0:11:46.800 of these attractive high nominal or real yields and then 0:11:46.840 --> 0:11:48.959 benefit from some of the most attractive income that we've 0:11:48.960 --> 0:11:50.880 been able to generate in a very very long time. 0:11:51.280 --> 0:11:54.640 From a tactical perspective, though, it's been very very target rich, 0:11:54.800 --> 0:11:57.440 and in looking at the yield curve today, we do 0:11:57.520 --> 0:11:59.400 think that the market's maybe getting a little bit ahead 0:11:59.400 --> 0:12:01.959 of themselves in terms of near term cuts. Yeah, we've 0:12:02.000 --> 0:12:04.120 had some employment weakness, but then we had a CPI 0:12:04.280 --> 0:12:07.720 number recently that surprised a bit to the upside. Earlier 0:12:07.720 --> 0:12:11.200 this year data surprised in a more concerning fashion. So 0:12:11.280 --> 0:12:12.760 we think that, you know, over the course of the 0:12:12.840 --> 0:12:16.560 next few months, there are some risks of reaccelerating inflation, 0:12:16.880 --> 0:12:19.559 which may lead to less cuts that are priced to 0:12:19.640 --> 0:12:23.200 the market. So what we're doing currently is reducing some 0:12:23.280 --> 0:12:25.240 of our exposure to the very very front end of 0:12:25.280 --> 0:12:27.280 the yeal curve, and I'm talking about one or two 0:12:27.360 --> 0:12:30.840 year type maturities. Then our favorite part to invest in, 0:12:31.200 --> 0:12:33.920 behalf of our clients is really in the intermediate part 0:12:33.960 --> 0:12:37.280 of the curve in those five year type maturities where 0:12:37.320 --> 0:12:39.719 you look at the market today and where you have 0:12:39.760 --> 0:12:42.760 a terminal federal funds rate assumption in the market today 0:12:42.920 --> 0:12:46.120 somewhere close to three percent. We think that's reasonable. That 0:12:46.160 --> 0:12:49.800 would be consistent of higher neutral rates relative to where 0:12:49.800 --> 0:12:53.240 we were pre COVID and allow for some price appreciation 0:12:53.280 --> 0:12:55.680 if we were to get into a more challenging macro environment. 0:12:55.920 --> 0:12:59.000 So a lot of activity, you know, within the US market, 0:12:59.080 --> 0:13:02.280 across market, it's a lot of volatility in the front 0:13:02.320 --> 0:13:03.960 end of the curve, and right now we have been 0:13:03.960 --> 0:13:06.560 taking a little bit of risk off thinking that you know, 0:13:06.640 --> 0:13:08.800 perhaps you know, over the next few months, people are 0:13:08.800 --> 0:13:10.800 a little bit optimistic about the FED being able to 0:13:10.800 --> 0:13:13.000 get raised out as quickly as people or at least 0:13:13.000 --> 0:13:14.000 some people anticipate. 0:13:29.640 --> 0:13:32.320 Can I ask a process question? These are actually my 0:13:32.559 --> 0:13:35.360 favorite questions. But you manage the I think it's one 0:13:35.440 --> 0:13:38.480 hundred and fifty eight billion dollars Pimco Income Fund, and 0:13:38.559 --> 0:13:41.840 I guess the mandate is preserve capital while generating income, 0:13:42.080 --> 0:13:45.480 which gives you the full suite of fixed income basically 0:13:45.600 --> 0:13:48.760 to look over. You could buy you know, longer maturity treasuries, 0:13:49.200 --> 0:13:54.880 all types of corporate bonds, mortgage backed securities. Obviously, how 0:13:54.920 --> 0:14:00.000 do these decisions land on your desk? Like when you're 0:14:00.040 --> 0:14:03.480 making these investment decisions, like what is the optionality that 0:14:03.559 --> 0:14:06.280 is actually presented to you? And then just to connect 0:14:06.280 --> 0:14:08.360 it back to the FED, you know, on Wednesday, FED 0:14:08.400 --> 0:14:11.600 decision comes out. What does your day to day look 0:14:11.720 --> 0:14:14.480 like on a day like that, how quickly are you 0:14:14.520 --> 0:14:17.080 cutting positioning and what are the options available to you? 0:14:17.559 --> 0:14:20.160 Sure, you know, we take a long term orientation, So 0:14:20.200 --> 0:14:23.160 a lot of what we do is about process looking 0:14:23.280 --> 0:14:26.800 for repeatable sources of alpha or return relative to passive 0:14:26.800 --> 0:14:32.240 alternatives based on market inefficiencies, market frictions, looking to leverage 0:14:32.240 --> 0:14:34.720 that flexibility that we're afforded in a strategy like the 0:14:34.720 --> 0:14:37.880 income fund. So in that sense, it's very process driven 0:14:37.920 --> 0:14:39.720 and it doesn't relate to a view on the FED 0:14:39.840 --> 0:14:42.640 or a view on the directionality of interest rates, and 0:14:42.720 --> 0:14:45.400 that tends to be a good portion of the incremental 0:14:45.400 --> 0:14:48.080 return that we generate. In addition to that, as you know, 0:14:48.160 --> 0:14:51.720 Pimpco's always had a very structured investment process. We get 0:14:51.760 --> 0:14:53.840 together and we talk about three to five year themes 0:14:54.000 --> 0:14:57.200 impacting markets. Every summer on a quarterly basis, and we 0:14:57.280 --> 0:15:00.320 just finished this process last week. We get together talking 0:15:00.320 --> 0:15:02.520 about the outlook for markets across the twelve to eighteen 0:15:02.520 --> 0:15:05.160 month period, and then we have the investment committee. So 0:15:05.200 --> 0:15:09.160 i'd categorized portfolio construction as you know, targeting a lot 0:15:09.200 --> 0:15:13.240 of low hanging fruit tied to market frictions and inefficiencies, 0:15:13.920 --> 0:15:17.880 and then the overlay of tactical, more macro oriented themes 0:15:18.040 --> 0:15:21.400 as well, and those will be done through a committee process. 0:15:21.440 --> 0:15:23.520 And then when you have a volatility event like the 0:15:23.520 --> 0:15:27.400 FED or a major data release, we stand poised to react. 0:15:27.480 --> 0:15:29.800 So you know, on a day where the data may 0:15:29.880 --> 0:15:32.760 be surprising the market, where there may be some overshooting, 0:15:32.960 --> 0:15:35.320 we have orders in. It could come directly from myself 0:15:35.400 --> 0:15:38.560 or other teammates on the strategy. Perhaps we're coordinating across 0:15:38.640 --> 0:15:42.800 multiple strategies as well. But over a full cycle, those 0:15:42.840 --> 0:15:45.120 types of short term tactical moves got a lot of 0:15:45.120 --> 0:15:48.160 the press, probably why I'm not as popular on CNBC. 0:15:48.920 --> 0:15:51.440 You know, when you talk about process long term orientation, 0:15:51.520 --> 0:15:54.160 it's less fun, but it really is about a lot 0:15:54.160 --> 0:15:56.960 of process then standing by to take advantage of overshooting 0:15:57.120 --> 0:15:58.600 markets when they really present themselves. 0:15:58.760 --> 0:16:02.560 I'm going to ask an even more specific I guess 0:16:02.680 --> 0:16:06.920 process type of question, but literally on FED day, what 0:16:06.960 --> 0:16:08.760 are you doing? Do you have the TV on and 0:16:08.800 --> 0:16:11.680 you're like chatting with people? I being like, what is 0:16:11.720 --> 0:16:14.120 like your process of you know, what is the process 0:16:14.120 --> 0:16:18.600 of consuming and digesting and hashing out the views look 0:16:18.760 --> 0:16:21.520 like from Well, I guess you're on West Coast time 0:16:21.560 --> 0:16:24.040 and that blows my mind. So I guess the decision 0:16:24.080 --> 0:16:26.600 comes out at eleven? Well, what are you doing? What 0:16:26.640 --> 0:16:28.360 do you What can we if I close my eyes, 0:16:28.360 --> 0:16:30.360 what can I imagine is going on in your offices 0:16:30.400 --> 0:16:30.880 at that time? 0:16:31.160 --> 0:16:33.720 Well, I remind my colleagues, and you know, as you 0:16:33.800 --> 0:16:36.560 talk to others over time, they'll they'll mention this. I 0:16:36.840 --> 0:16:38.880 remind people it's less important than people think it is. 0:16:39.200 --> 0:16:43.280 I know, we know, but we still I'm glued to it, 0:16:43.320 --> 0:16:45.640 even though I know in the end the heat death 0:16:45.640 --> 0:16:47.880 of the universe means none if it's important, but like 0:16:47.920 --> 0:16:49.440 what you know, like, what are you doing? 0:16:49.480 --> 0:16:51.160 But here's we do and we do it, you know, 0:16:51.200 --> 0:16:54.080 pretty much every time we make sure we're around for 0:16:54.200 --> 0:16:58.000 the FED announcement, usually in our trading seats, okay, nearly 0:16:58.640 --> 0:17:01.760 regardless of what other activity are going on. That day, 0:17:02.440 --> 0:17:06.760 we immediately read the release. We have some type of wordsmithing, 0:17:07.080 --> 0:17:09.240 you know, more quant type analysis or you know, of 0:17:09.280 --> 0:17:11.240 the actual words where we get a you know, DubVision, 0:17:11.240 --> 0:17:14.080 a hawkish score just based on the readout relative to 0:17:14.800 --> 0:17:18.119 prior readouts, and then we all listen to the press conference. 0:17:18.600 --> 0:17:20.720 As soon as the press conference ends, we run into 0:17:20.720 --> 0:17:23.720 the investment committee room. We typically have our advisor Ben 0:17:23.760 --> 0:17:25.800 Bernanke there. Of course we have the recent advice. 0:17:26.320 --> 0:17:33.359 That's useful, it's good, good, good to have been around in. 0:17:33.480 --> 0:17:36.200 Of course Rich Clariater rejoined us a recent vice chair 0:17:36.240 --> 0:17:38.399 as well, so you know, ritual join as well as 0:17:38.440 --> 0:17:41.840 our various FED watchers and other macro thinkers, and we 0:17:41.960 --> 0:17:44.840 go around the table talk about the outlook or talk 0:17:44.880 --> 0:17:47.920 about the conclusion of the press conference, any other data 0:17:48.000 --> 0:17:51.240 that was released. And then we conclude with the question 0:17:51.400 --> 0:17:53.639 as to whether anyone did anything in response to the 0:17:53.640 --> 0:17:58.440 FED number, should we change portfolio positioning? As Bill Gross 0:17:58.520 --> 0:18:00.960 used to remind us, you can't trade a FED call 0:18:01.119 --> 0:18:03.280 in the market, per se. I guess you could trade 0:18:03.480 --> 0:18:06.480 FED fund's futures, but it's always important to take you know, 0:18:06.520 --> 0:18:08.800 whatever type of macro release there is, or a decision 0:18:08.840 --> 0:18:12.000 that's made and translated pretty quickly into an investment decision. 0:18:12.520 --> 0:18:14.720 Sometimes we trade a little bit, sometimes we don't trade 0:18:14.720 --> 0:18:17.720 it all. Occasionally we'll trade a lot based on that information, 0:18:17.840 --> 0:18:19.840 and we always leave with a roadmap on what we're 0:18:19.840 --> 0:18:22.760 going to do, you know, during the remaining trading day 0:18:23.080 --> 0:18:26.359 on that particular FED release day, and then put together 0:18:26.359 --> 0:18:29.120 a game plan if necessary, for future trading sessions as well. 0:18:29.200 --> 0:18:30.800 Jersey, I just got to say, if they had a 0:18:30.840 --> 0:18:33.840 microphone in that room, would be the greatest macro podcast 0:18:33.960 --> 0:18:37.040 in the history of podcasts. I really would love to 0:18:37.040 --> 0:18:37.400 hear that. 0:18:37.520 --> 0:18:40.399 If you ever decide to do that, Dan, let us 0:18:40.520 --> 0:18:43.320 know and we will gladly record a fly on the 0:18:43.400 --> 0:18:46.639 Wall episode of All Lots at your Investment Committee. Okay, 0:18:46.640 --> 0:18:49.520 but since we can't really do that, but we're talking 0:18:49.560 --> 0:18:52.560 about FOMC day. What about early August when we had 0:18:52.600 --> 0:18:55.760 the big market sell off. What was that time period 0:18:56.119 --> 0:18:57.960 like for you, because I imagine on the one hand 0:18:58.640 --> 0:19:00.920 it was sort of knuckle clenching for a lot of 0:19:00.960 --> 0:19:03.520 market participants, but on the other hand, a lot of 0:19:03.560 --> 0:19:06.160 people talked about the opportunity to come in and buy 0:19:06.240 --> 0:19:08.400 stuff that was briefly on sale. 0:19:08.680 --> 0:19:12.199 Yeah, so overnight in Japan we did some trading. Most 0:19:12.280 --> 0:19:15.439 of the flow was really in the volatility markets and 0:19:15.440 --> 0:19:17.560 in the equity markets, so it was a little bit 0:19:17.680 --> 0:19:20.680 less of an event within fixed income, but there was 0:19:20.720 --> 0:19:23.119 a chance to take advantage of some local overshooting that 0:19:23.119 --> 0:19:26.880 occurred in the Japanese market. Then even earlier in the day, 0:19:27.400 --> 0:19:31.200 US time some ability to trade global fixed income markets 0:19:31.240 --> 0:19:35.000 and take advantage of some overshooting there. But again, given 0:19:35.080 --> 0:19:37.840 the size of the move, a lot of time spent 0:19:37.920 --> 0:19:41.880 that day just talking about potential implications for overall markets, 0:19:42.080 --> 0:19:46.000 positioning questions around Japan. Maybe we were missing something in 0:19:46.119 --> 0:19:49.120 terms of embedded leverage over in that market. And then again, 0:19:49.160 --> 0:19:53.560 of course things settled down relatively quickly. Another important point 0:19:53.640 --> 0:19:56.159 regarding that event again is that you had a situation 0:19:56.280 --> 0:19:59.399 where you have a little bit of weakness in the 0:19:59.480 --> 0:20:02.399 labor market data, a little bit of a surprise in 0:20:02.440 --> 0:20:06.679 the Japanese market from a policy perspective, and pretty big moves, 0:20:06.800 --> 0:20:09.320 and this time these moves coincided with a big rally 0:20:09.320 --> 0:20:11.080 in the front of the bond market. So again a 0:20:11.080 --> 0:20:12.879 reminder that we're getting to a point now from a 0:20:12.920 --> 0:20:15.560 valuation perspective, and where we are in the macro cycle 0:20:15.960 --> 0:20:19.440 that fixed income may exhibit these types of insurance type 0:20:19.520 --> 0:20:23.040 characteristics once again. And then the second point, probably the 0:20:23.040 --> 0:20:25.520 most important point, is that when markets are expensive, it 0:20:25.600 --> 0:20:29.080 takes less negative surprise to create bigger moves. And this 0:20:29.160 --> 0:20:32.040 is the world we're living in today. Equity valuations are stretched, 0:20:32.119 --> 0:20:34.680 there's a lot of reliance on central banks to engineer 0:20:34.760 --> 0:20:39.119 positive economic and financial market outcomes. Credit spreads are tight, 0:20:39.280 --> 0:20:41.280 and anytime you have this type of dynamic, you just 0:20:41.320 --> 0:20:45.000 have to be prepared for bouts of volatility, boats of overshooting. 0:20:45.040 --> 0:20:47.639 And as an active asset manager, that's where we can 0:20:47.680 --> 0:20:50.600 shine by having the flexibility necessary to be buying when 0:20:50.640 --> 0:20:54.040 other people are selling somewhat indiscriminately and not getting caught 0:20:54.080 --> 0:20:56.480 up into forced sales activity ourselves. 0:20:56.600 --> 0:20:59.359 I'm glad you brought it back around to this sort 0:20:59.359 --> 0:21:02.840 of hedging insurance role that fixed income can play in 0:21:02.920 --> 0:21:06.520 times like this, because so looking back over the last 0:21:06.520 --> 0:21:08.640 several years, you know, one of the things that really 0:21:08.640 --> 0:21:11.960 struck me from like basically the financial crisis to COVID 0:21:12.520 --> 0:21:15.840 was just this beautiful relationship of stocks and bonds from 0:21:15.840 --> 0:21:19.040 the investor perspective, because you're getting paid by your bomb 0:21:19.080 --> 0:21:21.600 holdings stocks were going up, and then the moment you 0:21:21.600 --> 0:21:24.240 had some stock weakness, the capital appreciated it, just like 0:21:24.280 --> 0:21:27.120 this beautiful line that went up when you combined the two. 0:21:27.200 --> 0:21:30.080 And then, as you mentioned, twenty twenty one and twenty two, 0:21:30.160 --> 0:21:33.800 like that broke down obviously, and bonds didn't provide that 0:21:33.920 --> 0:21:38.320 same ballast that went up every time when stocks went down. 0:21:38.760 --> 0:21:42.400 I'm curious if you've seen a change from a business 0:21:42.400 --> 0:21:46.680 perspective and a distribution perspective over the last few years 0:21:47.040 --> 0:21:50.679 where you've had to go back out and convince clients 0:21:51.080 --> 0:21:54.000 of the role for bonds in the portfolio and remake 0:21:54.119 --> 0:21:56.359 that pitch to them, and whether there is sort of 0:21:56.400 --> 0:22:01.040 a persistent maybe something that will last while skeptisid, Okay, 0:22:01.040 --> 0:22:04.800 you don't get the same insurance effect. Meanwhile, yes, you 0:22:04.840 --> 0:22:07.360 get coupon payment. But when you look at the insane 0:22:07.359 --> 0:22:10.360 returns that people are getting in tech doocs, you're like, well, 0:22:10.359 --> 0:22:13.280 it's this little five percent return getting for me. And 0:22:13.359 --> 0:22:16.359 so I'm curious whether the sales pitch or the client 0:22:16.440 --> 0:22:19.280 pitch has changed it all over time because of the experience. 0:22:18.880 --> 0:22:21.320 Of the last few years, it has Now we focus 0:22:21.359 --> 0:22:24.639 on value versus passive alternatives. So our pitches, you know, 0:22:24.680 --> 0:22:26.359 invest with PIMCO, We're going to provide you with a 0:22:26.400 --> 0:22:30.240 better experience relative to what you can get in passive 0:22:30.280 --> 0:22:32.560 portfolio alternatives. So we think over time, if we can 0:22:32.640 --> 0:22:35.560 do that, clients will come. And it was hard coming 0:22:35.560 --> 0:22:37.960 out of the GFC when interest rates were near zero, 0:22:38.040 --> 0:22:40.800 where policy rates were at zero or below zero for 0:22:40.880 --> 0:22:44.720 many many years. It really plated the seeds for major 0:22:44.880 --> 0:22:48.200 change within the fixed income industry. And then you had 0:22:48.200 --> 0:22:50.520 the inflation, and then you had the very violent sell 0:22:50.560 --> 0:22:53.119 off in twenty twenty two where not only did bonds 0:22:53.160 --> 0:22:56.000 not ensure much of anything, they themselves went down a lot. 0:22:56.160 --> 0:22:56.360 Yeah. 0:22:56.720 --> 0:22:59.400 Yeah, the mark to market on those were insane at 0:22:59.400 --> 0:23:01.479 the time. I remember doing a headline that was like 0:23:01.880 --> 0:23:05.200 this was for corporate bonds, but it was like demonstrational 0:23:05.280 --> 0:23:09.240 portfolio of IG bonds and it was down like thirty percent. 0:23:09.400 --> 0:23:12.000 At that period, anyone holding fixed income, especially as a 0:23:12.040 --> 0:23:14.440 retirement option, would have been massively hit. 0:23:14.880 --> 0:23:17.600 Absolutely correct, and in some sense it was a prerequisite 0:23:17.680 --> 0:23:20.760 to get value back in fixed income markets. But if 0:23:20.760 --> 0:23:24.119 you go back several years, because rates were near zero 0:23:24.480 --> 0:23:28.720 or outright negative in major parts of the developed world, 0:23:28.960 --> 0:23:31.600 people were forced to look for alternatives. What you've seen 0:23:32.040 --> 0:23:35.800 over that period is massive growth in floating rate lower 0:23:35.880 --> 0:23:39.360 quality corporate credit. That's very unusual when you go back 0:23:39.400 --> 0:23:43.399 several decades, and historically floating rate lower quality corporate credit 0:23:43.760 --> 0:23:46.920 is quite dangerous because when you have an economic shock, 0:23:47.320 --> 0:23:50.840 short rates go down, that floating rate lower quality credit, 0:23:51.520 --> 0:23:54.399 just as it becomes more risky, sees its yield drop 0:23:54.480 --> 0:23:58.359 and drop quite considerably, especially if policy rates or neutral 0:23:58.400 --> 0:24:00.320 rates are as low as some people get it, they've. 0:24:00.200 --> 0:24:02.280 Paid less and the odds of default are going. 0:24:02.280 --> 0:24:04.280 That's correct, and we have a dynamic now where you've 0:24:04.280 --> 0:24:07.040 seen the lower quality floating rate credit markets grow in 0:24:07.040 --> 0:24:10.199 the order of a couple trillion dollars in size, and 0:24:10.240 --> 0:24:12.440 that was due to the fact that it was really 0:24:12.480 --> 0:24:14.960 the only game in town. There was no real attractive 0:24:15.000 --> 0:24:18.159 yield a high quality markets. Today there is What we 0:24:18.240 --> 0:24:20.480 know is coming up, most likely in a few days, 0:24:20.560 --> 0:24:22.600 is that these short rates are going to begin to 0:24:22.640 --> 0:24:25.880 go down again. So you have a really really interesting 0:24:25.960 --> 0:24:29.000 dynamic in the market where people rushed into these floating 0:24:29.040 --> 0:24:32.199 rate sectors and segments of the market. Their yields are 0:24:32.200 --> 0:24:34.199 going down. You don't have the ability to lock in 0:24:34.200 --> 0:24:36.840 those longer real rates. So yeah, we do think this 0:24:36.880 --> 0:24:39.760 could be a meaningful turning point. And I think again, 0:24:39.800 --> 0:24:42.159 and looking at fixed income from the standpoint of a 0:24:42.200 --> 0:24:45.679 thirty forty to fifty year time horizon, it's really been 0:24:45.720 --> 0:24:48.000 the exception of the rule of the last several years 0:24:48.080 --> 0:24:50.960 where you've had this dynamic in play, where duration was 0:24:50.960 --> 0:24:53.479 a really, really bad thing and where you really needed 0:24:53.480 --> 0:24:57.000 to perhaps reach a little bit to maintain an attractive 0:24:57.000 --> 0:24:59.880 income in some of the more economically sensitive or risk 0:25:00.119 --> 0:25:02.000 areas of the bond market. Now, if you have a 0:25:02.000 --> 0:25:06.479 hard landing, this dynamic can turn quite quickly back towards 0:25:06.480 --> 0:25:09.200 the old days. If you have a softer landing scenario, 0:25:09.280 --> 0:25:11.800 this dynamic will play out much more slowly, but it 0:25:11.840 --> 0:25:14.240 does create what could be the next wave of interest 0:25:14.400 --> 0:25:18.359 into fixed rate longer maturities within the fixed income market. 0:25:33.760 --> 0:25:37.000 Okay, so, speaking of credit and floating rate loans, do 0:25:37.040 --> 0:25:40.200 you feel pressure or competition at all? From I guess 0:25:40.560 --> 0:25:44.679 the proverbial growth of private credit, the booming private credit 0:25:44.760 --> 0:25:47.399 market is that something that either makes it harder for 0:25:47.440 --> 0:25:51.280 you guys to secure paper or maybe makes the yield 0:25:51.480 --> 0:25:54.080 on that paper a little bit lower. What does that mean? 0:25:54.119 --> 0:25:54.760 For your business. 0:25:55.119 --> 0:25:58.520 From an investment perspective, it's actually a really good thing, 0:25:58.760 --> 0:26:00.480 and in fact, even some of the growth of the 0:26:00.480 --> 0:26:03.280 ETF market has been positive. A lot of these rules 0:26:03.320 --> 0:26:06.240 based strategies we see in the ETF space. The daily 0:26:06.280 --> 0:26:10.679 disclosure of activity within the ETFs has created frictions in 0:26:10.760 --> 0:26:13.440 certain more complex areas of the market that have led 0:26:13.480 --> 0:26:17.280 to the ability to more easily generate active alpha within 0:26:17.320 --> 0:26:20.720 our strategies. On the private credit side, it's a bit 0:26:20.720 --> 0:26:24.400 more nuanced. We are seeing more risk get transferred into 0:26:24.440 --> 0:26:27.920 private markets, which ironically has made the traditional high yield 0:26:27.960 --> 0:26:30.760 markets much more robust. I can't tell you how many 0:26:30.760 --> 0:26:33.719 times we look at credits within the high yield corporate 0:26:33.760 --> 0:26:36.800 bond space we say, look, we're looking at these financials. 0:26:36.920 --> 0:26:40.400 Maturity is coming up. This company cannot afford to pay 0:26:40.720 --> 0:26:43.640 this coupon rate to refi their debt, only to find 0:26:43.640 --> 0:26:45.960 out a private credit manager has taken them out with 0:26:46.000 --> 0:26:48.720 a pick deal. So instead of having to pay the 0:26:48.760 --> 0:26:51.240 full coupon interest, currently they have the option in the 0:26:51.280 --> 0:26:55.439 private credit markets to get a more aggressively structured transaction. 0:26:56.200 --> 0:26:59.000 We've seen this dynamic off and on throughout my time 0:26:59.080 --> 0:27:02.040 within the industry. And again it is leading to some 0:27:02.240 --> 0:27:07.280 friction in markets some opportunity as well. So yes, if 0:27:07.359 --> 0:27:09.920 more and more risk gets transferred to the private markets 0:27:09.920 --> 0:27:12.600 over time, it will lead to a reduced opportunity set. 0:27:12.920 --> 0:27:15.720 But from an active investment management perspective, those types of 0:27:15.800 --> 0:27:19.520 frictions actually create opportunities to generate alpha versus passive alternatives. 0:27:19.680 --> 0:27:23.800 This is interesting. I just want to clarify. So from 0:27:23.800 --> 0:27:28.520 an abstract level, I certainly understand how market frictions are 0:27:28.560 --> 0:27:32.560 what create miss pricing and therefore the opportunity to generate alpha. 0:27:32.600 --> 0:27:36.240 But when you talk about the private credit space creating 0:27:36.280 --> 0:27:39.520 these frictions, can you just sort of clarify that a 0:27:39.560 --> 0:27:41.919 little bit more like what that looks like or method 0:27:41.920 --> 0:27:43.080 out for Yes. 0:27:43.480 --> 0:27:45.919 So again, in looking at first of all, some of 0:27:45.960 --> 0:27:48.679 the lower quality areas of the market, a lot of 0:27:48.720 --> 0:27:54.160 these pretty significant flows have impacted technicals across the credit 0:27:54.240 --> 0:27:58.240 sector more broadly. So analyze and understanding the type of 0:27:58.280 --> 0:28:00.879 risk transfer going on in the private markets can really 0:28:00.880 --> 0:28:05.080 improve your ability to generate return make good credit decisions 0:28:05.320 --> 0:28:08.440 within the traditional high yield or even the bank loan universe. 0:28:09.200 --> 0:28:12.119 I think that another big dynamic in private credit today 0:28:12.440 --> 0:28:16.080 relates to a lot of flows within two insurance platforms. 0:28:16.520 --> 0:28:20.399 Insurance companies are regulated identities. They're mostly regulated based on rating, 0:28:20.720 --> 0:28:22.399 And this feels a little bit similar to even the 0:28:22.440 --> 0:28:26.280 years leading up to the global financial crisis, where there's 0:28:26.640 --> 0:28:30.040 increasing influence from radio agencies. Now, radio agencies try their 0:28:30.080 --> 0:28:33.560 best to rate risk and assess risk, but there's increasingly 0:28:33.560 --> 0:28:37.560 a gap between the type of structures necessary to put 0:28:37.560 --> 0:28:40.880 into certain vehicles that are sourced in demand for private 0:28:40.920 --> 0:28:44.360 credit relative to our own views on the inherent credit 0:28:44.480 --> 0:28:47.680 quality of those particular instruments. And the fact that you're 0:28:47.720 --> 0:28:50.640 back now, even over the last few years, to so 0:28:50.880 --> 0:28:55.480 much capital optimization going on across these platforms that there 0:28:55.520 --> 0:28:58.280 is opportunity to do your own work, compare that work 0:28:58.440 --> 0:29:01.760 to ratings out there across both the public and the 0:29:01.760 --> 0:29:04.360 private credit space, and be able to make really, really 0:29:04.400 --> 0:29:08.600 good relative decisions versus those entities, those big players and 0:29:08.640 --> 0:29:11.720 growing players in the market that need a rating, that 0:29:11.880 --> 0:29:15.200 they need some type of structuring in order to optimize 0:29:15.200 --> 0:29:18.760 capital under a evolving regulatory framework. So those are the 0:29:18.760 --> 0:29:21.440 type of frictions that we talked about earlier that are 0:29:21.440 --> 0:29:23.400 good to have around, yeah, because it does allow you 0:29:23.480 --> 0:29:27.800 to generate return in mandates that are less herently constrained 0:29:27.800 --> 0:29:28.440 in that regard. 0:29:28.880 --> 0:29:32.560 Since you mentioned regulatory framework, how closely are you following 0:29:32.680 --> 0:29:36.479 something like the BASL endgame proposals, because this is the 0:29:36.520 --> 0:29:39.840 forgotten event risk of this week is also we're supposed 0:29:39.880 --> 0:29:44.440 to get the unveiled BASL endgame suggestions or proposal, and 0:29:44.480 --> 0:29:48.000 those include a lot of potentially new guidance for how 0:29:48.200 --> 0:29:51.760 banks hold things like mbs and treasuries and mark to 0:29:51.800 --> 0:29:53.200 market losses on things like that. 0:29:53.400 --> 0:29:56.160 Yeah, so we follow what's going on with BASL rules. 0:29:56.200 --> 0:29:59.400 There's also a lot of work being done across various 0:29:59.560 --> 0:30:02.680 insurance regulators, even a lot of work going on, you know, 0:30:02.720 --> 0:30:07.000 across the regulatory regimes that impact various mutual funds and 0:30:07.120 --> 0:30:09.560 other positions here in the US and over in Europe. 0:30:09.760 --> 0:30:12.120 So these are going to be important again from the 0:30:12.120 --> 0:30:15.240 standpoint of good, well functioning markets. You know, we think 0:30:15.280 --> 0:30:17.800 that a lot of these regulatory regimes should be looked at. 0:30:17.960 --> 0:30:20.320 We think that a lot of the regulation that got 0:30:20.320 --> 0:30:23.160 put in place post global financial crisis turned out to 0:30:23.200 --> 0:30:27.120 be perhaps a bit backward looking, bit aggressive. But all 0:30:27.160 --> 0:30:29.560 these types of regulations create these types of frictions that 0:30:29.560 --> 0:30:31.720 we look to exploit again in some of our more 0:30:31.760 --> 0:30:35.440 flexible active strategies. So they're going to impact what banks 0:30:35.440 --> 0:30:37.560 can do, what risk needs to get laid off. And 0:30:37.720 --> 0:30:40.600 we've seen increased activity even there too with these various 0:30:40.640 --> 0:30:45.320 SRT transactions and other aggressive transactions on the capital optimization side. 0:30:45.360 --> 0:30:49.000 But again, all this may not be so good for 0:30:49.280 --> 0:30:53.520 financial market efficiency, but these types of activities are very, 0:30:53.600 --> 0:30:56.080 very good from an active asset management perspective in order 0:30:56.120 --> 0:30:57.960 to come in and take advantage of these frictions for 0:30:58.000 --> 0:30:58.760 the end investor. 0:30:59.120 --> 0:31:01.640 Are you involved at all and synthetic risk transfers? Is 0:31:01.680 --> 0:31:02.880 that something of interest to you? 0:31:03.120 --> 0:31:06.240 We are. In fact, I was a trader of this 0:31:06.320 --> 0:31:08.680 space back when I first joined Pimpco, you know, back 0:31:08.720 --> 0:31:10.440 in the late nineteen nineties, and we have a lot 0:31:10.480 --> 0:31:11.120 of folks here. 0:31:11.000 --> 0:31:13.160 That have looked at, oh, this is like old school 0:31:13.400 --> 0:31:15.880 SRT if you're talking about the nineteen nineties. 0:31:15.560 --> 0:31:18.400 It is, and SRTs are similar in many respects. It's 0:31:18.440 --> 0:31:20.920 a different flavor, you know, each time, and it's an 0:31:20.920 --> 0:31:25.240 interesting segment of the market. There's simple deals to some degree, 0:31:25.520 --> 0:31:27.360 but then there's a lot of complexity in terms of 0:31:27.440 --> 0:31:32.120 understanding waterfalls, how losses are allocated, you know the documentation details. 0:31:32.120 --> 0:31:33.640 So they tend to be popular in the sense that 0:31:33.680 --> 0:31:35.400 you look at it the risk and you say, hey, 0:31:35.440 --> 0:31:37.520 look at I can get a very very attractive coupon 0:31:37.960 --> 0:31:40.320 if I avoid losses up to this point, you know 0:31:40.320 --> 0:31:43.560 I'll have a good investment outcome. But again, a lot 0:31:43.600 --> 0:31:46.400 of inherent complexity. So we've been involved for a long time. 0:31:46.560 --> 0:31:49.440 We've done a few deals recently. We think it's an 0:31:49.440 --> 0:31:51.720 interesting area of the market. But it's an area of 0:31:51.720 --> 0:31:54.240 the market where back a year and a half or 0:31:54.320 --> 0:31:56.240 so ago, when the regional banks were going through a 0:31:56.240 --> 0:31:59.560 lot of challenges, there was really good value for the 0:31:59.640 --> 0:32:03.720 end in ester sourcing that risk. Today, with all of 0:32:03.800 --> 0:32:07.600 the money chasing some of these opportunities, some folks apparently 0:32:07.960 --> 0:32:10.560 or appearing to compete based on market share as opposed 0:32:10.600 --> 0:32:14.240 to prudent underwriting, there's times where some of these SRT 0:32:14.280 --> 0:32:16.920 deals are getting done and getting done at levels quite 0:32:16.960 --> 0:32:19.680 advantageous to the banks that are selling that risk. And 0:32:20.080 --> 0:32:23.000 not surprisingly, when you have that dynamic in play, you're 0:32:23.000 --> 0:32:25.120 going to see more and more of these transactions. So 0:32:25.280 --> 0:32:29.120 it requires a lot of nuance and some good value there. 0:32:29.160 --> 0:32:32.720 But there's pockets of froth even in that SRT market today. 0:32:32.920 --> 0:32:35.320 That's interesting, by the way, listeners, if you're just tuning in. 0:32:35.720 --> 0:32:38.280 Tracy and I did an episode with Michael Shemy several 0:32:38.360 --> 0:32:41.320 weeks ago all about how SRTs work, So a good 0:32:41.880 --> 0:32:44.280 permore to go back to and check that out. I 0:32:44.280 --> 0:32:46.560 want to go back to the macro for a minute 0:32:46.600 --> 0:32:49.760 and sort of where we started and thinking about where 0:32:49.760 --> 0:32:52.640 we're going over the next several years and or in 0:32:52.640 --> 0:32:57.840 an era of very high deficits historically you mentioned, you know, 0:32:57.920 --> 0:33:01.520 there's talk about all this like friend shoring talk and 0:33:01.560 --> 0:33:06.600 reorientation of supply chains. That's costly. Geopolitical tensions have risen. 0:33:06.960 --> 0:33:10.840 That's going to be costly on multiple fronts if it persists. 0:33:11.080 --> 0:33:14.800 In politics changes you know, obviously there was a sort 0:33:14.840 --> 0:33:18.080 of more comfort with fiscal expansion and things like that, 0:33:18.160 --> 0:33:19.560 and you know, in a way that we might not 0:33:19.600 --> 0:33:22.719 have expected years ago, all these things like you know, 0:33:22.760 --> 0:33:25.680 looking out a few years, how are you thinking about 0:33:25.920 --> 0:33:28.120 these changes that are coming or these risks and how 0:33:28.120 --> 0:33:30.200 they're going to change the flavor of markets over time. 0:33:30.280 --> 0:33:32.920 Yes, a few points. One interesting that we had a 0:33:32.960 --> 0:33:35.640 pretty extensive discussion today. We didn't talk about inflation too much. 0:33:35.800 --> 0:33:42.000 Yeah, that's yesterday's news. No, not sure, we probably should. 0:33:42.120 --> 0:33:44.240 But yeah, but I bring that up all you because 0:33:44.240 --> 0:33:46.480 we do think to answer your question, you know, over 0:33:46.520 --> 0:33:49.040 the next several years, even though inflation may come down 0:33:49.080 --> 0:33:52.280 from a cyclical perspective, it's likely here to stay at least. 0:33:52.280 --> 0:33:54.160 Then, why do you think that we've only seen such 0:33:54.160 --> 0:33:58.640 a modest increase in the neutral rate if inflation here 0:33:58.880 --> 0:34:01.720 is now going to be sort of like structurally at 0:34:01.840 --> 0:34:02.960 least somewhat higher. 0:34:03.080 --> 0:34:06.240 Well, we think inflation may be a little bit higher structurally, 0:34:06.240 --> 0:34:08.280 at least the base case. We think that the risks 0:34:08.320 --> 0:34:11.200 around inflation will likely be more symmetric. So again you 0:34:11.239 --> 0:34:12.880 go back to the GFC. In the years, you know, 0:34:12.920 --> 0:34:15.759 following the GFC, most of the challenge for central banks 0:34:15.760 --> 0:34:17.960 are to get inflation back up towards target. 0:34:18.040 --> 0:34:19.960 Yeah, you kept missing on the downside, and we think, 0:34:20.000 --> 0:34:22.080 you know, you know, over the next several years, for 0:34:22.120 --> 0:34:25.279 the reasons we talked about, inflation risks will be more symmetric, 0:34:25.320 --> 0:34:30.560 which creates opportunities for investors to source inflation protection across portfolios. 0:34:31.040 --> 0:34:32.920 We also think to your point, there's going to be 0:34:32.920 --> 0:34:37.520 more geopolitical uncertainty deficits are high many countries, including the US, 0:34:37.600 --> 0:34:41.720 which jumps out as being a government that can't continue 0:34:41.760 --> 0:34:45.840 to run these types of deficits indefinitely. And we think 0:34:46.160 --> 0:34:51.239 because deficits are high, because market participants generally believe that 0:34:51.360 --> 0:34:53.719 central banks and fiscal agents had something to do with 0:34:53.800 --> 0:34:57.600 inflation this cycle, you're likely to have less policy activism 0:34:57.640 --> 0:35:00.680 on an ongoing basis. So this feels like a market 0:35:00.719 --> 0:35:02.799 the next several years that will have to stand on 0:35:02.840 --> 0:35:05.240 its own merits more than it has in the past, 0:35:05.920 --> 0:35:11.800 less influence from policy makers, more local volatility, less obsynchronized 0:35:11.920 --> 0:35:16.600 growth cycles with the risk of meaningful geopolitical uncertainty. 0:35:16.640 --> 0:35:18.880 Is a lower strike price on the FED put, so 0:35:18.960 --> 0:35:19.719 to speak. 0:35:19.480 --> 0:35:21.520 And probably a lower strike price on the put. But 0:35:21.840 --> 0:35:25.520 the power of the FED may be less than it's 0:35:25.520 --> 0:35:28.760 been in the past because of this very, very challenging 0:35:28.760 --> 0:35:33.399 inflationary situation we're in after the very activist policies during 0:35:33.440 --> 0:35:36.560 the COVID period. So yeah, I think it's premature to 0:35:36.560 --> 0:35:39.080 say that the FED and other policy makers aren't going 0:35:39.120 --> 0:35:41.960 to be there. Yeah, during extreme bouts of volatility. There 0:35:42.000 --> 0:35:44.279 is a question though, from our perspective, as to whether 0:35:44.320 --> 0:35:47.360 they can be as impactful as they've been in the past. 0:35:47.760 --> 0:35:50.480 Again good for active asset management, but there's a risk 0:35:50.560 --> 0:35:53.200 management reminder in there that you got to be a 0:35:53.200 --> 0:35:56.160 little bit more humble about the risks of overshooting, the 0:35:56.239 --> 0:35:58.880 risks of harder landing scenarios, the risk that you know, 0:35:58.920 --> 0:36:00.960 as fixed income investors would have to go with alone, 0:36:01.160 --> 0:36:04.239 so to speak, and not rely on central banks to 0:36:04.719 --> 0:36:07.400 bail out some of the underperforming areas of the market. 0:36:07.480 --> 0:36:10.360 You know, Tracy, it's interesting when we had that volatility 0:36:10.360 --> 0:36:13.719 in early August, none of the FED speakers played ball 0:36:14.000 --> 0:36:16.680 with the talk of like emergency rate cuts. Yeah, like 0:36:16.719 --> 0:36:18.120 you know, because that was in there, and they did 0:36:18.239 --> 0:36:20.720 not and they were very and they didn't they didn't 0:36:20.840 --> 0:36:23.960 really talk about the market volatility and they said, we're 0:36:24.000 --> 0:36:25.800 just going to see the data. Like it was very interesting, 0:36:25.840 --> 0:36:27.799 how like they were cool throughout the whole thing. 0:36:27.920 --> 0:36:29.920 I know it's only six weeks ago, but I've already 0:36:29.960 --> 0:36:32.520 forgotten that whole period. But some people were calling for 0:36:32.520 --> 0:36:36.080 one hundred basis point emergency cut, right, Okay, when I 0:36:36.120 --> 0:36:39.600 think about event risk on the horizon, okay, the return 0:36:39.640 --> 0:36:44.120 of inflation, the hard landing scenario, but also geopolitical risks 0:36:44.160 --> 0:36:46.719 which you just brought up. And if I'm thinking back 0:36:46.760 --> 0:36:49.920 to the idea of bonds as a hedge and I'm 0:36:49.920 --> 0:36:52.799 thinking about US treasuries, it feels like US treasuries aren't 0:36:52.840 --> 0:36:56.359 necessarily a good hedge for a particular flavor of US 0:36:56.480 --> 0:37:00.719 political risk. How do you hedge for that type of volatility. 0:37:01.160 --> 0:37:03.719 Well, one thing that we've done, and it's not just 0:37:03.760 --> 0:37:06.239 related to the election, is to maintain a lot of 0:37:06.280 --> 0:37:10.400 portfolio liquidity. Liquidity means flexibility. Liquidity is a form of 0:37:10.440 --> 0:37:14.560 positive optionality. If you have a volatility event associated with 0:37:14.600 --> 0:37:17.080 our election or some of these other geopolitical risks that 0:37:17.080 --> 0:37:19.600 are out there, markets can overshoot, and I think a 0:37:19.680 --> 0:37:22.480 key theme and generating return for an active asset manager 0:37:22.560 --> 0:37:25.120 is being there to countertrade the market if you do 0:37:25.239 --> 0:37:28.319 have overshooting. And I think that this election set up 0:37:28.400 --> 0:37:32.239 is one where it's a coin flip and uncertainty is 0:37:32.280 --> 0:37:35.960 only increasing going into this election period, So we don't 0:37:36.040 --> 0:37:38.440 yet have conviction in terms of what's going to happen. 0:37:38.840 --> 0:37:41.000 We just want to have a bit more flexibility. That's 0:37:41.040 --> 0:37:43.480 point one. Second point, when you step back and look 0:37:43.520 --> 0:37:46.839 at the likelihood of generating attractive returns in the next 0:37:46.880 --> 0:37:49.560 few years, the US is not the only game in 0:37:49.600 --> 0:37:52.680 town anymore. Rates for negative elsewhere in the world outright negative, 0:37:52.760 --> 0:37:56.120 not even on an inflation adjusted basis, And these marks 0:37:56.120 --> 0:37:59.280 have reawakened, particularly from the standpoint of a US dollar 0:37:59.320 --> 0:38:03.320 denominated investor. So you do have options versus the US, 0:38:03.920 --> 0:38:07.520 the Australian bond market, the UK, both markets out yield 0:38:07.560 --> 0:38:11.680 the United States, opportunities to diversify into other developed markets. 0:38:11.719 --> 0:38:14.520 Even Japan on a hedge basis has some interesting yields 0:38:14.520 --> 0:38:16.040 out in the long end of the yield curve. So 0:38:16.719 --> 0:38:18.479 you know, we have over the course of the last 0:38:18.480 --> 0:38:21.480 several months, have been using the full breadth of the 0:38:21.520 --> 0:38:24.719 PIMCO platform, the flexibility across a lot of our mandates 0:38:24.719 --> 0:38:27.560 to diversify a bit away from the US. And again 0:38:27.600 --> 0:38:31.359 that theme will likely continue where investors to optimize their 0:38:31.400 --> 0:38:35.840 portfolio should look outside the US at both higher quality 0:38:35.920 --> 0:38:38.520 and lower quality markets out there in the world, and 0:38:38.560 --> 0:38:42.920 we do think some diversification away from US higher quality 0:38:42.920 --> 0:38:45.000 interest rate exposure makes a lot of sense at this 0:38:45.040 --> 0:38:45.800 point in the cycle. 0:38:45.960 --> 0:38:48.960 I'm going to ask a really ignorant question, and maybe 0:38:48.960 --> 0:38:50.960 you're just going to say, no, that's not a thing 0:38:51.000 --> 0:38:53.279 that I do you have a capacity to buy a 0:38:53.360 --> 0:38:56.080 Chinese government bonds which have done extremely well, and the 0:38:56.160 --> 0:38:58.080 long end of the curve has come way down there. 0:38:58.000 --> 0:39:00.000 We do, and you know they're give exposure to them. 0:39:00.400 --> 0:39:02.480 We have very little exposure to their market. They got 0:39:02.520 --> 0:39:05.120 you know, yields to get a two percent type zone, 0:39:05.160 --> 0:39:07.239 you know, in the higher quality of the market, but 0:39:07.320 --> 0:39:10.480 an example of less synchronized global boath cycles. Their growth slowing, 0:39:10.640 --> 0:39:14.480 no inflation problem. It in theory is a decent diversifier. 0:39:14.520 --> 0:39:16.279 I think the problem just in the market right now 0:39:16.360 --> 0:39:18.719 is a lot of that's priced into the Chinese market. 0:39:19.400 --> 0:39:21.279 So the last time we spoke to you, I think 0:39:21.280 --> 0:39:25.000 it was August twenty twenty two, something like that, and 0:39:25.160 --> 0:39:25.560 a lot. 0:39:25.440 --> 0:39:27.759 Of turning points, Yeah, we turned it Dan. 0:39:27.840 --> 0:39:30.080 Well, and a lot of the conversation was about the 0:39:30.080 --> 0:39:34.160 potential for a recession, a housing slow down, things like that. 0:39:34.200 --> 0:39:37.640 And of course fast forward to September of twenty twenty 0:39:37.680 --> 0:39:41.600 four and corporate credit has held up phenomenally. Well. I 0:39:41.719 --> 0:39:45.280 take the point about disparities between you know, lesser quality 0:39:45.280 --> 0:39:49.719 and higher quality. The housing market has been pretty robust, 0:39:49.840 --> 0:39:52.640 more than a lot of people would have expected. Thinking 0:39:52.680 --> 0:39:54.920 back over the past couple of years. What have you 0:39:55.080 --> 0:39:57.719 learned from that experience and how do you incorporate it 0:39:57.840 --> 0:39:59.960 into the PIMCO investment strategy. 0:40:00.400 --> 0:40:03.560 Well, this was an exceptionally unique cycle. We had a 0:40:03.560 --> 0:40:06.600 global pandemic none of us had witnessed in our lifetime, 0:40:06.800 --> 0:40:11.000 sudden stop of the economy, massive massive policy response, and 0:40:11.040 --> 0:40:13.920 an inflationary environment that many of us didn't see in 0:40:13.960 --> 0:40:16.920 our actual trading career, the young folks at PIMCO even 0:40:17.000 --> 0:40:19.359 less so. So I think it's just a reminder that 0:40:19.560 --> 0:40:25.239 the unexpected can happen, and it's important again to have 0:40:25.280 --> 0:40:30.799 appropriate humility. From a portfolio construction perspective, think about diversification carefully. 0:40:31.040 --> 0:40:34.560 Risk management's critically important, not just defensive risk management, but 0:40:34.600 --> 0:40:38.520 having a risk management mindset because you can go through 0:40:38.520 --> 0:40:41.120 these unique periods, and as we talked about earlier, when 0:40:41.560 --> 0:40:45.120 valuations are stretched, it doesn't necessarily take a global pandemic 0:40:45.200 --> 0:40:49.120 type shock to create some challenges and opportunities for the 0:40:49.160 --> 0:40:52.720 firm or the strategy that's well positioned. I think looking 0:40:52.760 --> 0:40:54.840 back on the last few years, a lot of this 0:40:54.920 --> 0:40:59.520 inflation likely will be perceived as being at least temporary 0:40:59.600 --> 0:41:04.880 or do to very very unique COVID supply chain complications 0:41:05.360 --> 0:41:08.560 and this massive fiscal stimulus that occurred. But we got 0:41:08.560 --> 0:41:10.279 a lot to learn, a lot to analyze, and I 0:41:10.280 --> 0:41:13.520 think going forward, plenty of uncertainty as well. So you know, 0:41:13.560 --> 0:41:16.600 we try to be careful about being too overconfident. We 0:41:16.640 --> 0:41:19.000 get the behavioral finance folks always in our ears, reminding 0:41:19.080 --> 0:41:21.200 us that people like myself tend to be prone to 0:41:21.239 --> 0:41:24.760 overconfidence unless we protect our clients from our own natural instincts. 0:41:24.800 --> 0:41:27.799 And again, just trying to learn, continue to read the 0:41:27.800 --> 0:41:31.160 economic history books compared to the current environment. Again, leveraging 0:41:31.200 --> 0:41:33.239 the team. You know, investing is a team sport and 0:41:34.040 --> 0:41:36.960 you don't have to take wildly big macro bets to 0:41:37.040 --> 0:41:40.200 just generate lots of small return across a variety of 0:41:40.280 --> 0:41:42.840 sectors parts of the globe. And again, if you do 0:41:42.880 --> 0:41:45.360 that well, it adds up into a good client experience 0:41:45.400 --> 0:41:46.120 at the end of the day. 0:41:46.400 --> 0:41:48.759 All right, Dan Ivison, I'm so glad we could catch 0:41:48.840 --> 0:41:51.319 up with you in person on the West Coast. Thank 0:41:51.360 --> 0:41:52.800 you so much for coming back on offline. 0:41:52.840 --> 0:41:53.399 Thank you so much. 0:41:53.440 --> 0:41:53.600 Jan. 0:41:53.640 --> 0:41:54.040 That was great. 0:41:54.080 --> 0:42:08.160 Thanks a lot, Listen, Joe, that was fun. 0:42:08.880 --> 0:42:10.960 That was really fun. What a treat to get to 0:42:11.080 --> 0:42:13.720 talk to Dan Ivison right before. 0:42:14.680 --> 0:42:17.479 Also, I was thinking, like, can you imagine being in 0:42:17.520 --> 0:42:20.440 that run with Ben Bernank and Richard Clareda. 0:42:20.680 --> 0:42:23.040 Actually when he said that, I had this like like 0:42:23.080 --> 0:42:24.920 it didn't quite register to me. He's like, oh, you 0:42:24.960 --> 0:42:27.880 have our advisor, Ben BERNANKI and I was it like 0:42:27.920 --> 0:42:31.239 didn't Like, I was like, what does he say? It's like, 0:42:31.360 --> 0:42:33.399 is he like speaking metaphorically? It's like no, But when 0:42:33.400 --> 0:42:38.160 you're PIMCO, you can really to talk to you about 0:42:38.160 --> 0:42:38.920 what just happened. 0:42:39.000 --> 0:42:41.759 Yeah, it must be nice. Okay, well there there's a 0:42:41.800 --> 0:42:44.560 ton to pull out of that conversation. One of the 0:42:44.560 --> 0:42:46.880 things that struck me was very early on, you know, 0:42:46.920 --> 0:42:49.719 he talked about the credit cycle and what's been going 0:42:49.760 --> 0:42:53.120 on there, and I guess the downsides of looking at aggregates, 0:42:53.160 --> 0:42:57.360 which is even when you see credit spreads falling or 0:42:57.400 --> 0:43:02.120 staying very very low in total, it does conceal pockets 0:43:02.360 --> 0:43:06.960 of weakness and pain for like the least quality names 0:43:07.000 --> 0:43:09.960 in there and parts of cre and things like that. 0:43:10.040 --> 0:43:12.480 And I think that is worth remembering as we kind 0:43:12.520 --> 0:43:15.480 of talk about, well, the FEDS cutting rates and we 0:43:15.560 --> 0:43:17.880 haven't had that hard landing scenario that a lot of 0:43:17.880 --> 0:43:21.920 people thought would emerge. There are these pockets of weakness 0:43:21.920 --> 0:43:22.759 out there. 0:43:22.680 --> 0:43:25.200 Totally, which of course has contributed to I just so 0:43:25.200 --> 0:43:27.520 many people are confused about the economy because you can 0:43:27.520 --> 0:43:30.759 sort of point to anything and tell the story you want. 0:43:30.880 --> 0:43:33.480 I also thought it was sort of interesting, and you know, 0:43:33.560 --> 0:43:35.839 I get like there's a lot of logic to it, 0:43:35.880 --> 0:43:38.760 this idea of like, okay, for a couple of years, 0:43:38.760 --> 0:43:41.520 their bonds did not play the role in people's portfolios 0:43:41.560 --> 0:43:43.520 that they might have gotten used to it. I really 0:43:43.560 --> 0:43:46.879 just think like we and by we, I just mean 0:43:46.920 --> 0:43:49.040 like investors, like people who put their money with other 0:43:49.239 --> 0:43:51.600 people or in some form, Like we just said, it's 0:43:51.640 --> 0:43:54.680 so easy in the twenty tens, because like really it 0:43:54.719 --> 0:43:57.320 was just like this beautiful synergy of stocks and bonds, 0:43:57.640 --> 0:44:00.480 various flavors of sixty forty what have you, like, it 0:44:00.520 --> 0:44:03.120 all worked out and you like didn't lose money. And 0:44:03.320 --> 0:44:07.120 twenty twenty two in particular, was like a sharp reminder 0:44:07.160 --> 0:44:09.480 and you like pointed to the stats like no, like 0:44:09.560 --> 0:44:12.319 that paradigm like broke in a really big way. And 0:44:12.400 --> 0:44:14.920 so the question, to my mind is still like okay, 0:44:15.040 --> 0:44:18.080 even if inflation has like come down, we do see 0:44:18.160 --> 0:44:21.719 fixed income providing this sort of insurance hedging role that 0:44:21.800 --> 0:44:24.040 it did. Like, are people going to be like totally 0:44:24.080 --> 0:44:28.000 comfortable allocating that much to fixed income, especially because of 0:44:28.120 --> 0:44:29.480 kind of what we were talking about at the end. 0:44:29.520 --> 0:44:33.720 There there are these different macro dynamics, geopolitical dynamics, political 0:44:33.800 --> 0:44:37.520 dynamics that could change basically how bonds trade. 0:44:37.680 --> 0:44:40.600 One day in the future, we'll tell our children that 0:44:40.719 --> 0:44:44.680 a successful investment portfolio was basically just sixty forty yes, 0:44:44.920 --> 0:44:47.319 and that was it. That's how easy. 0:44:47.360 --> 0:44:49.799 It was. So easy. Now, rightly we didn't know how 0:44:49.800 --> 0:44:51.680 good we had it, but you're right. 0:44:51.760 --> 0:44:55.960 I do think the memories of that, like very dramatic 0:44:56.320 --> 0:44:58.960 mark to market loss, are going to stay with us 0:44:58.960 --> 0:45:01.319 for a while. But yeah, So it was interesting to 0:45:01.360 --> 0:45:03.759 hear Dan talk about this idea of like having to 0:45:03.800 --> 0:45:07.839 go out to clients and repitch bonds as a rush 0:45:08.040 --> 0:45:11.560 right hedging instrument in your portfolio, and I kind of 0:45:11.640 --> 0:45:16.120 I wonder how quickly attitudes will adjust Once again, I 0:45:16.120 --> 0:45:18.560 guess it depends on what happens this week and beyond. 0:45:18.760 --> 0:45:20.520 We will see. All right, shall we leave it there, 0:45:20.640 --> 0:45:21.319 Let's leave it there. 0:45:21.480 --> 0:45:24.239 This has been another episode of the Odd Lots podcast. 0:45:24.320 --> 0:45:27.600 I'm Tracy Alloway. 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