WEBVTT - PIMCO’s Richard Clarida Talks AI, US Economy 0:00:02.520 --> 0:00:08.799 Bloomberg Audio Studios, podcasts, radio news. Between everything going on 0:00:08.880 --> 0:00:12.840 with AI, the big IPO with SpaceX, raising rates over 0:00:12.880 --> 0:00:15.280 at the ECB, and a lot of concerns about geopolitics. 0:00:15.320 --> 0:00:17.800 Who better to kick the show off with than Richard Clara, 0:00:18.160 --> 0:00:21.160 Managing director and Global Economic Advisor at PIMCO and former 0:00:21.239 --> 0:00:24.120 vice chair over at the Federal Reserve Board of Governors, 0:00:24.200 --> 0:00:24.960 Rich Grick, to have you. 0:00:24.920 --> 0:00:26.680 Here, Glad to be with you again, Romaine. 0:00:26.800 --> 0:00:28.800 I do want to take a moment to talk about 0:00:28.840 --> 0:00:31.240 the report that you and Dan Ivison and others put 0:00:31.280 --> 0:00:34.519 out yesterday, your annual Secular Outlook, And there are a 0:00:34.520 --> 0:00:37.040 lot of themes in there, but obviously one big thing 0:00:37.120 --> 0:00:39.600 that you couldn't ignore was AI. And you kind of 0:00:39.600 --> 0:00:43.840 described it as a potential disinflationary force because of increased protivity, 0:00:44.040 --> 0:00:47.240 maybe wage compression, but also presenting a certain degree of 0:00:47.280 --> 0:00:50.199 financing risk as well. Kind of square that circle for us. 0:00:50.320 --> 0:00:53.000 Well, you know, Romain, AI's gone from really being a 0:00:53.040 --> 0:00:56.480 wildcard what if to a major driver of economy and 0:00:56.520 --> 0:00:58.120 markets the next five years. 0:00:58.200 --> 0:00:59.319 Right now we're seeing it in. 0:00:59.320 --> 0:01:02.240 This Campex boom we talked about, not just in the US, 0:01:02.280 --> 0:01:06.399 but really a global capex cycle, including defense and potentially 0:01:06.480 --> 0:01:10.240 energy security, but also at the marginal A lot of 0:01:10.240 --> 0:01:12.800 this AI is being financed in the credit markets and 0:01:12.840 --> 0:01:13.959 in the bond markets. 0:01:13.959 --> 0:01:15.600 You know, PIMCO has been active in that. 0:01:15.640 --> 0:01:19.720 And certain select deals, and so, you know, like it 0:01:20.319 --> 0:01:22.600 or dislike it, investors are going to need to factor 0:01:22.640 --> 0:01:25.160 in AI and all of their calculations going forward. 0:01:25.319 --> 0:01:27.240 One thing I thought was interesting there, and you talk 0:01:27.280 --> 0:01:29.640 about the capex boom obviously not just an AI, but 0:01:29.720 --> 0:01:32.080 you also mentioned defense in a few other areas. But 0:01:32.200 --> 0:01:33.840 I mean, you've been doing this a long time. There 0:01:33.880 --> 0:01:37.040 was a criticism for years, decades really that there wasn't 0:01:37.120 --> 0:01:39.360 enough capex spending coming, not of course for America, that 0:01:39.400 --> 0:01:40.959 they were taking their cash and just having them for 0:01:41.000 --> 0:01:43.480 buybacks and things like that. And now we're finally getting 0:01:43.480 --> 0:01:45.399 it and everyone's ringing their hands over it. So I 0:01:45.440 --> 0:01:47.520 know there's got to be a balance. But when you 0:01:47.560 --> 0:01:50.080 think about the potential for an increase in productivity, something 0:01:50.120 --> 0:01:52.360 that's been relatively absent, at least in any kind of 0:01:52.360 --> 0:01:55.600 headline numbers for years and decades, are you kind of 0:01:55.600 --> 0:01:57.800 excited that maybe we'll finally hear Oh. 0:01:57.720 --> 0:01:59.920 Yeah, certainly, I want to be very clear. 0:02:00.080 --> 0:02:04.240 We think AI is a transformative technology. In fact, if anything, 0:02:04.280 --> 0:02:07.400 we think the productivity benefits in Boom from AI could 0:02:07.440 --> 0:02:08.400 happen sooner than. 0:02:08.320 --> 0:02:10.960 A lot of folks believe. But we're also humble. 0:02:11.000 --> 0:02:12.560 We don't have a crystal ball, and we think there's 0:02:12.560 --> 0:02:15.520 a wide range of outcomes. But let me be clear, 0:02:15.600 --> 0:02:18.600 we think this is how capitalism and financial markets are 0:02:18.600 --> 0:02:22.840 supposed to work. Attractive investment opportunities receive funding, and as 0:02:22.880 --> 0:02:25.679 I said, we've participated in some of those deals as well, 0:02:25.680 --> 0:02:27.600 and I think I expect we'll continue. 0:02:27.840 --> 0:02:30.840 Well, it's interesting, you know how this is all being financed, 0:02:30.840 --> 0:02:32.960 because you're seeing a lot of this coming through in 0:02:33.000 --> 0:02:35.280 the private markets, but it's making a big splash in 0:02:35.320 --> 0:02:38.320 the public markets as well. You think about the hyperscalers 0:02:38.400 --> 0:02:41.320 and some of their plans for borrowing for this year, 0:02:41.360 --> 0:02:43.400 and I wonder, you know how you're viewing that over 0:02:43.880 --> 0:02:45.840 at PIMCO. You know, you think about the world where 0:02:45.880 --> 0:02:48.680 credit spreads are so so tight and the fact that 0:02:48.680 --> 0:02:51.120 we have this influx of supply it hasn't yet really 0:02:51.480 --> 0:02:53.119 made a dent on those spreads. 0:02:53.600 --> 0:02:55.000 Well, there are a couple of things going on. 0:02:55.120 --> 0:02:57.720 First, A lot of the companies that are issuing and 0:02:57.800 --> 0:03:02.400 borrowing are very, very prosperous and profitable companies, and so 0:03:02.560 --> 0:03:05.560 that's a big difference from some of the previous capex 0:03:05.600 --> 0:03:07.960 cycles where we've seen where a lot of borrowing is 0:03:08.240 --> 0:03:10.320 companies that don't have a lot of revenue or cash flow. 0:03:10.360 --> 0:03:12.959 So that's one big difference. But but Katie, you bring 0:03:13.040 --> 0:03:14.079 up an excellent point. 0:03:14.120 --> 0:03:17.240 We do think we're in a world where investors are 0:03:17.280 --> 0:03:19.800 going to need to do their homework or hire firms 0:03:19.840 --> 0:03:21.920 to manage their money that does their homework, because you 0:03:21.960 --> 0:03:23.640 need to look at the details on the deal. 0:03:23.720 --> 0:03:25.280 You need to look at the way the deals. 0:03:25.040 --> 0:03:28.520 Are structured, and the details will matter. You know, we 0:03:28.680 --> 0:03:32.720 believe that if you're going to provide liquidity in public markets, 0:03:32.760 --> 0:03:36.480 you should be paid for providing liquidity in public markets, 0:03:36.480 --> 0:03:38.960 and so we look at each deal on its own 0:03:39.000 --> 0:03:40.520 merits and talk to. 0:03:40.560 --> 0:03:42.840 Us a little bit about you know, how this is 0:03:42.840 --> 0:03:45.520 wrapping into the view that you put out yesterday about 0:03:45.720 --> 0:03:48.560 the credit loss cycle. You sort of think about the 0:03:48.600 --> 0:03:53.480 heavy spending that we're seeing on AI. Obviously there's going 0:03:53.520 --> 0:03:56.119 to be certain companies that come in a big way 0:03:56.160 --> 0:03:58.080 and you know, really try to spend there that maybe 0:03:58.200 --> 0:04:00.800 don't have the fundamentals to all back on on the 0:04:00.800 --> 0:04:03.920 way the Magnificent seven does, and I was hoping that 0:04:03.960 --> 0:04:05.600 you could sort of thread that needle for us. 0:04:05.760 --> 0:04:08.560 Well, there are a couple things that we highlight in 0:04:08.600 --> 0:04:11.920 the essay that I'd like to bring forward. The first 0:04:12.200 --> 0:04:15.400 is that a lot of the incremental growth in lending 0:04:15.400 --> 0:04:18.839 in the last dozen or fifteen years has been in 0:04:18.880 --> 0:04:21.919 a particular segment of the private credit markets, in particular 0:04:22.640 --> 0:04:25.440 direct lending to middle market companies. 0:04:26.000 --> 0:04:28.080 That's probably the area of the credit market. 0:04:27.800 --> 0:04:29.839 That we would highlight as the one in which the 0:04:29.920 --> 0:04:34.240 credit loss cycle has begun already to turn right now, 0:04:34.279 --> 0:04:36.960 you see it not so much in actual losses as 0:04:37.000 --> 0:04:42.200 you do for creative financing, payment and kind and other arrangements. 0:04:42.760 --> 0:04:45.520 But as I said, this is going to be with 0:04:45.600 --> 0:04:47.800 us for the next five or ten years. 0:04:47.839 --> 0:04:49.520 Opportunities will be there. 0:04:50.120 --> 0:04:53.080 But it's also important for investors to do their homework. 0:04:53.800 --> 0:04:56.279 Is this when we start to talk about not only 0:04:56.440 --> 0:05:02.000 the increase in CAPEX spend across industries, this. 0:05:01.960 --> 0:05:02.880 Is a global story. 0:05:03.600 --> 0:05:06.599 Are we going to see better share of this spend 0:05:06.640 --> 0:05:09.800 from say Europe for example, Asia, maybe even some of 0:05:09.800 --> 0:05:11.760 the emerging market nations exactly. 0:05:11.839 --> 0:05:14.720 So when we highlight this in the report, we're talking 0:05:14.800 --> 0:05:17.400 not just about the AI piece, which is really relevant 0:05:17.400 --> 0:05:20.039 in the US and also frankly some Asia countries that 0:05:20.080 --> 0:05:22.880 are going to be big providers of the chips and 0:05:22.960 --> 0:05:27.760 silicon into AI Capex, But in Europe there's a real 0:05:27.760 --> 0:05:31.120 push as we all know too, for really now they 0:05:31.160 --> 0:05:34.400 really need it to increase defense spending, in particular in Germany, 0:05:34.600 --> 0:05:37.839 so Capex there maybe more have more of a defense 0:05:37.880 --> 0:05:40.880 and then also in Europe a big push on continuing 0:05:40.880 --> 0:05:41.919 on the green transition. 0:05:42.360 --> 0:05:45.480 I am curious, and I know you're not picking stocks 0:05:45.560 --> 0:05:46.960 or anything like that, but there's a lot of people 0:05:47.040 --> 0:05:50.480 focus on this spacexipo, not only for the company itself, 0:05:50.480 --> 0:05:52.560 but the idea that it could be a catalyst for 0:05:52.680 --> 0:05:55.720 a much broader investment in not just AI, but the 0:05:55.760 --> 0:05:58.919 space economy. A lot of new areas of the world 0:05:59.279 --> 0:06:02.240 and really beyond the world that haven't been invested in. 0:06:02.400 --> 0:06:04.080 Have you started to kind of factor that into your 0:06:04.120 --> 0:06:07.920 economic forecast about maybe the potential increase and broadening out 0:06:07.920 --> 0:06:10.640 of economic activity around these new technologies. 0:06:10.720 --> 0:06:14.640 Oh oh sure, And again we want to be wary 0:06:14.680 --> 0:06:18.360 of thinking we have false precisions. So I think we're 0:06:18.360 --> 0:06:22.760 more confident in the direction of travel than necessarily in 0:06:22.800 --> 0:06:23.479 the pace and. 0:06:25.240 --> 0:06:26.880 The path to the destination. 0:06:27.080 --> 0:06:30.880 But absolutely, and again I'll defer to your equity experts 0:06:30.920 --> 0:06:33.360 here about how to think about the IPOs this week. 0:06:33.360 --> 0:06:35.839 But they're certainly eye popping numbers. 0:06:35.880 --> 0:06:37.520 Yeah, I mean you can't ignore them, right, I mean, 0:06:37.520 --> 0:06:39.360 not only this, and then maybe we get another trillion 0:06:39.360 --> 0:06:41.040 dollar IPO in a few weeks or months. 0:06:41.400 --> 0:06:44.680 Now, turning it back to the area I know better, macroeconomics. Obviously, 0:06:46.240 --> 0:06:51.480 buoyant equity markets and financing availability for companies also increases 0:06:51.560 --> 0:06:52.120 wealth value. 0:06:52.120 --> 0:06:52.880 There's a wealth. 0:06:52.640 --> 0:06:56.680 Affecting consumption and the economy, and that's an important tailwind 0:06:56.680 --> 0:06:57.480 for the economy. 0:06:57.720 --> 0:07:00.400 Absolutely, well, you know, to brought them back, I mean 0:07:00.440 --> 0:07:02.440 to get to the conversation we were having, O Katie, 0:07:02.440 --> 0:07:02.800 I'm just going. 0:07:02.800 --> 0:07:04.840 To interrupt you just for one second. We are getting 0:07:04.880 --> 0:07:08.480 some breaking news actually right now on SpaceX. The registration 0:07:08.600 --> 0:07:12.600 filing has finally been declared defective as of today, June eleventh, 0:07:12.640 --> 0:07:16.280 and as Bloomberg reporting has been, the document says the 0:07:16.320 --> 0:07:19.400 price will be at one hundred and thirty five dollars 0:07:19.480 --> 0:07:22.040 a share. Obviously, there was a lot of discussion about 0:07:22.080 --> 0:07:24.280 the fact that this was an attritional range that you 0:07:24.320 --> 0:07:26.960 typically see on these roadshows where everyone has to sort 0:07:27.000 --> 0:07:28.920 it out. It was basically, this is what it's going 0:07:28.960 --> 0:07:30.760 to be. Just tell me how much you want and 0:07:31.320 --> 0:07:32.840 be thankful if you get any piece of it. 0:07:32.960 --> 0:07:33.440 Exactly. 0:07:33.560 --> 0:07:37.240 Maybe less surprise here than a traditional IPO, given that 0:07:37.280 --> 0:07:39.520 it seems like this price was very much set at 0:07:39.520 --> 0:07:42.080 one hundred and thirty five dollars and as you said, 0:07:42.120 --> 0:07:44.760 sort of take it or leave it for investors, Rich. 0:07:44.720 --> 0:07:46.440 I do just want to give you one a final statement. 0:07:46.480 --> 0:07:48.160 Then we have to go, and I apologize. I mean 0:07:48.360 --> 0:07:52.240 SpaceX unfortunately impigio to welcome back, but I do just 0:07:52.280 --> 0:07:54.640 want to in all seriouses, let's get your general view 0:07:54.680 --> 0:07:57.480 on this idea of the cost of capital, particularly in 0:07:57.560 --> 0:08:01.000 light of not only this IPO, the borrowing that we've 0:08:01.040 --> 0:08:02.880 seen in the debt markets by a lot of these companies, 0:08:02.960 --> 0:08:04.960 and the idea that at least in Europe, you're in 0:08:04.960 --> 0:08:06.880 a rate hiking cycle. Who knows what happens with the 0:08:06.880 --> 0:08:08.640 FED next week. Yeah, there are a lot of people 0:08:08.720 --> 0:08:10.560 betting we could be on an upcycle here as well. 0:08:10.640 --> 0:08:14.280 Yeah, well, look, the energy shock in the Middle East 0:08:14.360 --> 0:08:17.400 is pushed the ECB and perhaps some other countries to 0:08:17.480 --> 0:08:18.240 hiking rates. 0:08:19.080 --> 0:08:21.160 We don't think that's not our baseline for the FED. 0:08:21.200 --> 0:08:24.320 We think the warshead will be wait and see for 0:08:24.400 --> 0:08:27.040 a while. But importantly, the borrowing that you're talking about 0:08:27.040 --> 0:08:29.880 in credit markets is potentially going to be putting some 0:08:30.000 --> 0:08:33.000 upper pressure on credit spreads that are at very tight 0:08:33.120 --> 0:08:36.280 levels and also probably lead to some important changes in 0:08:36.320 --> 0:08:37.720 some of the private markets as well.