Pimco's Schneider Sees Reason for Caution Amid Clouded Outlooks

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00:00All right, Jerome, let's start there here with the income-based allegations, particularly

00:03against the backdrop of this Fed meeting next week.

00:08Yeah, you know, it's a confluence of events. And, you know, we would urge investors simply

00:12not overlook the last few weeks of 2025. You have three main implications to think about.

00:18Number one, continue to focus on the FOMC. Perhaps this meeting is live in more regards than just

00:23simply a rate cut. It's live in the sense of the messaging as you get into 2026. And really,

00:28what the FOMC is going to be focused on, that balance between labor and that balance between

00:33inflationary numbers that are pushing up against that 3 percent core is incredibly important.

00:37The second thing to pay attention to is liquidity conditions. And what we've seen over the past

00:42few weeks is a focus on the micro of liquidity conditions, fluctuations in repo rates, funding

00:47rates, et cetera, sort of piquing people's interest. We're not necessarily concerned about any systemic

00:51risks there here at PIMCO. But more broadly speaking, as you've seen excess reserves decline in the

00:57overall economy, that means there's simply less cash chasing investments and risk assets at that

01:03point in time. And it's something to think about in terms of those asset allocations in the longer

01:07term. And the final thing is the economic outlook. This is clearly a K-shaped economy. And the last

01:12month is going to begin to have people emerge from their morass, that dearth of data, economic data

01:18that we've had over the past few months. We're going to begin to see inclinations to that. And perhaps

01:22that data will shed some light on where the economy lies, where we stand today at PIMCO. We believe

01:27that it's a bifurcated economy, one where you have growth areas clearly delineated by AI and productivity

01:33there and labor, a labor market, which is under pressure at points in time. That's going to perhaps

01:38be the focus of FOMC over the next at the next meeting. Given that, you know, you can probably bet with

01:43some certainty here that we're going to get lower rates. How does one position a portfolio around that?

01:49And I'll point out a headline coming from Crane today that money market assets, for example,

01:53rose to $8 trillion for the first time, Jerome.

01:59Two things to think about in this context. Number one, risk assets have been buoyed by the

02:03expectation of Fed rate cuts over the foreseeable future. Perhaps the market's forecasting as many

02:08as four rate cuts over the next year. And it's supporting animal spirits on those risk assets

02:13pretty substantively. If those don't come to fruition over the course of the next year, perhaps that

02:18creates some deflation in terms of risk asset pricing, leading to market volatility, et cetera.

02:22That's where the entrance of fixed income comes in and really the derivation of fixed income. We

02:27believe that not only are we having attractive nominal yields here, but real yields. Inflation

02:32adjusted yields help protect investors from that broader market volatility, which could emerge next

02:36year. So the starting point of things like risk assets, credit spreads. Yes, those are perhaps a

02:41concern in the immediate focus. But when you take a broader step back, ways to derive total return

02:47are really fixed income based. Now, back to the point about money market funds, $8 trillion is a

02:52substantive amount. What we're finding ourselves is people who are becoming defensive. That defensive

02:57momentum is picking up and we're finding them go to money market funds. Those savers were once shadow

03:03savers. They're now real savers. And we have to encourage them to take a step out of that saving in

03:07the traditional sense, out of T-bills, out of money market funds into something more active, more active

03:13out the curve, more active in terms of diversification of the portfolio that allows them to outperform

03:17not only Fed funds, but earn an additional return of a percent, maybe 1.5% above money market returns

03:22by being in that ultra short type of mutual fund space. That being said, we think that there's

03:29a reason to be a little more cautious at this point in time, given those clouded outlooks and

03:33where the market is pricing the longer term expectation of rate cuts.

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