Cash Becoming Dominant 2025 Theme: PIMCO's Schneider

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00:00There's been a lot of talk today about this report on Oracle, whether there's cracks in the AI trade,

00:05but I want to start more broadly here with just general sentiment right now in this market,

00:09which we've seen record highs in equities. At the same time, we're seeing record highs in a safe

00:14haven like gold. And at the same time, we're seeing still records in terms of cash and cash

00:20like holdings in markets right now, at least as measured by money markets. Yeah, I think there's

00:24two elements here that we have to focus on. The first one is animal spirits. Risk-taking is still

00:28relatively prevalent in terms of the marketplace. You can see it in the form of tight credit spreads

00:33in public markets as well as private markets. You can see it in the form of equity markets and equity

00:37risk premium. And that's pretty much where we stand right now is that markets are paving way to an

00:44optimistic view that things are going to be A-OK over the intermediate term. At the second half,

00:49we also have a situation now, especially with the government situation, where investors are seeking

00:53visibility. And the visibility factor is one where it's confounded by obviously lack of data in the

00:59near term, a jobs market which is coming a little bit off the boil and we had some uncertainty there,

01:04inflationary expectations which are going to trend higher through the remainder of the year,

01:08and simply what is going to be the incremental facet which drives markets higher, equity markets

01:13higher, credit spreads tighter on a go-forward basis. And so this visibility question becomes really

01:18in focus. And unfortunately, the market practitioners as well as the monetary policy

01:23actors, including the central bank in the United States, have to react to this without great

01:28visibility. And that's why cash has become a dominant theme over the past year.

01:32Well, will cash remain a dominant theme? I mean, you go back just, what was it, only two years ago,

01:38you're getting five and a half percent on a six-month T-bill. Even last year, I think you were still

01:42getting above four. And as of right now, we're like at 3.8 percent. And it's been a trend line

01:48sloped downward. Exactly. At Pemco, we expect another two rate cuts for the remainder of this

01:53year. And while the visibility of those rate cuts might be clouded as we get into 2026, the important

01:57thing to recognize is that the comfortability of cash, the being able to sit in cash and earn that

02:025 percent yield is dissipating quickly. We need to be able to move out of cash that's going to be

02:07trending to that 3 percent or lower number in terms of that yield and income and find ways to preserve

02:11that income. And simply looking at the broader set of fixed income, adding a little bit of interest

02:16rate exposure, even if it's modestly moving out to a one-year type of strategy, forge your ability

02:21to preserve that income, be above that 3 percent number, and at the same time, optionality to have

02:26some liquidity. And so we think that there's obviously opportunities to be in well-diversified

02:30portfolios over the intermediate future, despite the lack of visibility from the Fed, as well as the

02:35outlook for the broader economy. Something that I always think about when it comes to cash is that for a lot

02:40of people, it seems like it's turned into an alternative to put their money that's not in the

02:45bank, that's not in a traditional deposit account. And certainly, you take a look at the five-year

02:49chart of money market assets. It was really in the aftermath of SBB that you saw a big leg higher

02:55in cash. So if you take a look at, you know, that $7.4 trillion from that lens that for a lot of people

03:02that's acting as their bank, how does how do you think about that in terms of the stickiness?

03:07Yeah, it's not just individuals. It's also corporations, central banks, official institutions.

03:11But it is a large amount of money. And we think at PIMCO that that number is somewhere between

03:15eight to 10 percent of that money market fund assets. It's actually risk-seeking. And so put

03:20that in a number of 500 to 800 billion dollars. The important thing is that as these yields go down,

03:25there are two effects. Number one, obviously, your income generation declines. And so you're going

03:29to earn less money. So a lot of the luxury that people had of earning those 5 percent yield is

03:33dissipating quickly. Secondly, we're still in an environment right now where inflation is 3 percent,

03:383 percent plus. And that ultimately means if you're earning 3 percent nominal on your cash

03:42and having a 3 percent inflation rate, your purchasing power is quickly eroding. And so

03:46if you're a corporation planning for capital expenditures in the next few years, if you're

03:50a person planning for retirement, this is a juncture where you have to take a moment and rationalize

03:56not just where your cash is, but how your investment allocations are, what type of volatility

04:00do you want? And are you being paid appropriately for the liquidity you're providing? And that

04:05is a fundamental question is, are you being paid appropriately for liquidity? That's a juncture

04:10that goes beyond what we're finding in liquid markets, but also private and credit-sensitive

04:14markets as well. Well, it's interesting to hear you say that, you know, that 8 to 10 percent figure

04:19of money market funds are probably risk-taking assets. And to just get into the psychology of risk

04:25appetite at this moment, it's not just cash that's seeing inflows. It's gold, too, knocking on the door

04:30of 4,000 at the same time that you have equity sitting at all-time highs. And it's hard to get

04:36a clean read on risk sentiment in this market when you think about those asset classes in relationship

04:42to each other. Well, you also have a demand supply mechanic going on in the gold trade as well as

04:47sentiments. You know, the animal spirits and the fear of inflation is sort of driving that. Central bank

04:51policies and central and other government policies are driving that as well. But when you put it

04:55together, people aren't certain as much as the opportunity cost to be in those risk-seeking

05:01environments. Volatility could exhibit itself at some point in the future. And what we're finding

05:06from clients is that they want a more sure thing. And the way they derive that sure thing is income

05:10generation. And having income generation of sure assets, perhaps asset-backed type of structures

05:15that have hard assets is important. And so while gold is important as a hard asset,

05:22it's not income generating. And so finding that balance is a tension that investors are going to

05:27be faced with over the intermediate term here. And right now, with the Fed coming into play,

05:31with rates coming down and lack of data, this is a great time to sort of be assessing

05:35exactly how those portfolios should be constructed, not just for the next few days, but really for the

05:39next few years at this point in time. I am curious, just longer term, I mean, given the government

05:44shutdown, given the persistent discussion right now about our fiscal situation in the U.S. and

05:50whether it leads us at some point in the future to a cliff, why aren't we seeing maybe a little bit

05:55more of an embrace of longer dated treasuries right now? And I don't mean that just because of what's

06:02happening in the government, but just overall, there just does not seem to be much appetite for it

06:05unless you have a mandate to go out there and buy it. One of the interesting things is, you know,

06:09we've been proponents at Pemco of yield curve steepening over the long period of time. A lot of that

06:13has to do with not only rate cuts in the front end, but longer end term premiums come from the

06:18fiscal outlook. But when you look at the shape of the curve, the back end really hasn't moved at all

06:21over the past six months. It's been fairly well studied and received, despite steady increase

06:26in issuance. Now, that might change longer term, but you don't foresee rates in the long end going

06:31up to 5% and beyond. We find it, you know, fairly, fairly sticky at this point in time. The demand

06:35mechanic remains healthy. So from that perspective, you know, we are going to find ourselves with a

06:39balance where term premiums do increase, but that doesn't necessarily mean that yields get out of hand in the

06:43longer end.

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