Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Between everything going on
Speaker 1: with AI, the big IPO with SpaceX, raising rates over
Speaker 1: at the ECB, and a lot of concerns about geopolitics.
Speaker 1: Who better to kick the show off with than Richard Clara,
Speaker 1: Managing director and Global Economic Advisor at PIMCO and former
Speaker 1: vice chair over at the Federal Reserve Board of Governors,
Speaker 1: Rich Grick, to have you.
Speaker 2: Here, Glad to be with you again, Romaine.
Speaker 1: I do want to take a moment to talk about
Speaker 1: the report that you and Dan Ivison and others put
Speaker 1: out yesterday, your annual Secular Outlook, And there are a
Speaker 1: lot of themes in there, but obviously one big thing
Speaker 1: that you couldn't ignore was AI. And you kind of
Speaker 1: described it as a potential disinflationary force because of increased protivity,
Speaker 1: maybe wage compression, but also presenting a certain degree of
Speaker 1: financing risk as well. Kind of square that circle for us.
Speaker 3: Well, you know, Romain, AI's gone from really being a
Speaker 3: wildcard what if to a major driver of economy and
Speaker 3: markets the next five years.
Speaker 2: Right now we're seeing it in.
Speaker 3: This Campex boom we talked about, not just in the US,
Speaker 3: but really a global capex cycle, including defense and potentially
Speaker 3: energy security, but also at the marginal A lot of
Speaker 3: this AI is being financed in the credit markets and
Speaker 3: in the bond markets.
Speaker 2: You know, PIMCO has been active in that.
Speaker 3: And certain select deals, and so, you know, like it
Speaker 3: or dislike it, investors are going to need to factor
Speaker 3: in AI and all of their calculations going forward.
Speaker 1: One thing I thought was interesting there, and you talk
Speaker 1: about the capex boom obviously not just an AI, but
Speaker 1: you also mentioned defense in a few other areas. But
Speaker 1: I mean, you've been doing this a long time. There
Speaker 1: was a criticism for years, decades really that there wasn't
Speaker 1: enough capex spending coming, not of course for America, that
Speaker 1: they were taking their cash and just having them for
Speaker 1: buybacks and things like that. And now we're finally getting
Speaker 1: it and everyone's ringing their hands over it. So I
Speaker 1: know there's got to be a balance. But when you
Speaker 1: think about the potential for an increase in productivity, something
Speaker 1: that's been relatively absent, at least in any kind of
Speaker 1: headline numbers for years and decades, are you kind of
Speaker 1: excited that maybe we'll finally hear Oh.
Speaker 2: Yeah, certainly, I want to be very clear.
Speaker 3: We think AI is a transformative technology. In fact, if anything,
Speaker 3: we think the productivity benefits in Boom from AI could
Speaker 3: happen sooner than.
Speaker 2: A lot of folks believe. But we're also humble.
Speaker 3: We don't have a crystal ball, and we think there's
Speaker 3: a wide range of outcomes. But let me be clear,
Speaker 3: we think this is how capitalism and financial markets are
Speaker 3: supposed to work. Attractive investment opportunities receive funding, and as
Speaker 3: I said, we've participated in some of those deals as well,
Speaker 3: and I think I expect we'll continue.
Speaker 4: Well, it's interesting, you know how this is all being financed,
Speaker 4: because you're seeing a lot of this coming through in
Speaker 4: the private markets, but it's making a big splash in
Speaker 4: the public markets as well. You think about the hyperscalers
Speaker 4: and some of their plans for borrowing for this year,
Speaker 4: and I wonder, you know how you're viewing that over
Speaker 4: at PIMCO. You know, you think about the world where
Speaker 4: credit spreads are so so tight and the fact that
Speaker 4: we have this influx of supply it hasn't yet really
Speaker 4: made a dent on those spreads.
Speaker 2: Well, there are a couple of things going on.
Speaker 3: First, A lot of the companies that are issuing and
Speaker 3: borrowing are very, very prosperous and profitable companies, and so
Speaker 3: that's a big difference from some of the previous capex
Speaker 3: cycles where we've seen where a lot of borrowing is
Speaker 3: companies that don't have a lot of revenue or cash flow.
Speaker 2: So that's one big difference. But but Katie, you bring
Speaker 2: up an excellent point.
Speaker 3: We do think we're in a world where investors are
Speaker 3: going to need to do their homework or hire firms
Speaker 3: to manage their money that does their homework, because you
Speaker 3: need to look at the details on the deal.
Speaker 2: You need to look at the way the deals.
Speaker 3: Are structured, and the details will matter. You know, we
Speaker 3: believe that if you're going to provide liquidity in public markets,
Speaker 3: you should be paid for providing liquidity in public markets,
Speaker 3: and so we look at each deal on its own
Speaker 3: merits and talk to.
Speaker 4: Us a little bit about you know, how this is
Speaker 4: wrapping into the view that you put out yesterday about
Speaker 4: the credit loss cycle. You sort of think about the
Speaker 4: heavy spending that we're seeing on AI. Obviously there's going
Speaker 4: to be certain companies that come in a big way
Speaker 4: and you know, really try to spend there that maybe
Speaker 4: don't have the fundamentals to all back on on the
Speaker 4: way the Magnificent seven does, and I was hoping that
Speaker 4: you could sort of thread that needle for us.
Speaker 3: Well, there are a couple things that we highlight in
Speaker 3: the essay that I'd like to bring forward. The first
Speaker 3: is that a lot of the incremental growth in lending
Speaker 3: in the last dozen or fifteen years has been in
Speaker 3: a particular segment of the private credit markets, in particular
Speaker 3: direct lending to middle market companies.
Speaker 2: That's probably the area of the credit market.
Speaker 3: That we would highlight as the one in which the
Speaker 3: credit loss cycle has begun already to turn right now,
Speaker 3: you see it not so much in actual losses as
Speaker 3: you do for creative financing, payment and kind and other arrangements.
Speaker 3: But as I said, this is going to be with
Speaker 3: us for the next five or ten years.
Speaker 2: Opportunities will be there.
Speaker 3: But it's also important for investors to do their homework.
Speaker 1: Is this when we start to talk about not only
Speaker 1: the increase in CAPEX spend across industries, this.
Speaker 2: Is a global story.
Speaker 1: Are we going to see better share of this spend
Speaker 1: from say Europe for example, Asia, maybe even some of
Speaker 1: the emerging market nations exactly.
Speaker 3: So when we highlight this in the report, we're talking
Speaker 3: not just about the AI piece, which is really relevant
Speaker 3: in the US and also frankly some Asia countries that
Speaker 3: are going to be big providers of the chips and
Speaker 3: silicon into AI Capex, But in Europe there's a real
Speaker 3: push as we all know too, for really now they
Speaker 3: really need it to increase defense spending, in particular in Germany,
Speaker 3: so Capex there maybe more have more of a defense
Speaker 3: and then also in Europe a big push on continuing
Speaker 3: on the green transition.
Speaker 1: I am curious, and I know you're not picking stocks
Speaker 1: or anything like that, but there's a lot of people
Speaker 1: focus on this spacexipo, not only for the company itself,
Speaker 1: but the idea that it could be a catalyst for
Speaker 1: a much broader investment in not just AI, but the
Speaker 1: space economy. A lot of new areas of the world
Speaker 1: and really beyond the world that haven't been invested in.
Speaker 1: Have you started to kind of factor that into your
Speaker 1: economic forecast about maybe the potential increase and broadening out
Speaker 1: of economic activity around these new technologies.
Speaker 3: Oh oh sure, And again we want to be wary
Speaker 3: of thinking we have false precisions. So I think we're
Speaker 3: more confident in the direction of travel than necessarily in
Speaker 3: the pace and.
Speaker 2: The path to the destination.
Speaker 3: But absolutely, and again I'll defer to your equity experts
Speaker 3: here about how to think about the IPOs this week.
Speaker 3: But they're certainly eye popping numbers.
Speaker 1: Yeah, I mean you can't ignore them, right, I mean,
Speaker 1: not only this, and then maybe we get another trillion
Speaker 1: dollar IPO in a few weeks or months.
Speaker 3: Now, turning it back to the area I know better, macroeconomics. Obviously,
Speaker 3: buoyant equity markets and financing availability for companies also increases
Speaker 3: wealth value.
Speaker 2: There's a wealth.
Speaker 3: Affecting consumption and the economy, and that's an important tailwind
Speaker 3: for the economy.
Speaker 4: Absolutely, well, you know, to brought them back, I mean
Speaker 4: to get to the conversation we were having, O Katie,
Speaker 4: I'm just going.
Speaker 1: To interrupt you just for one second. We are getting
Speaker 1: some breaking news actually right now on SpaceX. The registration
Speaker 1: filing has finally been declared defective as of today, June eleventh,
Speaker 1: and as Bloomberg reporting has been, the document says the
Speaker 1: price will be at one hundred and thirty five dollars
Speaker 1: a share. Obviously, there was a lot of discussion about
Speaker 1: the fact that this was an attritional range that you
Speaker 1: typically see on these roadshows where everyone has to sort
Speaker 1: it out. It was basically, this is what it's going
Speaker 1: to be. Just tell me how much you want and
Speaker 1: be thankful if you get any piece of it.
Speaker 2: Exactly.
Speaker 4: Maybe less surprise here than a traditional IPO, given that
Speaker 4: it seems like this price was very much set at
Speaker 4: one hundred and thirty five dollars and as you said,
Speaker 4: sort of take it or leave it for investors, Rich.
Speaker 1: I do just want to give you one a final statement.
Speaker 1: Then we have to go, and I apologize. I mean
Speaker 1: SpaceX unfortunately impigio to welcome back, but I do just
Speaker 1: want to in all seriouses, let's get your general view
Speaker 1: on this idea of the cost of capital, particularly in
Speaker 1: light of not only this IPO, the borrowing that we've
Speaker 1: seen in the debt markets by a lot of these companies,
Speaker 1: and the idea that at least in Europe, you're in
Speaker 1: a rate hiking cycle. Who knows what happens with the
Speaker 1: FED next week. Yeah, there are a lot of people
Speaker 1: betting we could be on an upcycle here as well.
Speaker 3: Yeah, well, look, the energy shock in the Middle East
Speaker 3: is pushed the ECB and perhaps some other countries to
Speaker 3: hiking rates.
Speaker 2: We don't think that's not our baseline for the FED.
Speaker 3: We think the warshead will be wait and see for
Speaker 3: a while. But importantly, the borrowing that you're talking about
Speaker 3: in credit markets is potentially going to be putting some
Speaker 3: upper pressure on credit spreads that are at very tight
Speaker 3: levels and also probably lead to some important changes in
Speaker 3: some of the private markets as well.