00:00I do want to take a moment to talk about the report that you and Dan Iverson and others put
00:04out yesterday, your annual secular outlook. And there are a lot of themes in there, but obviously
00:09one big thing that you couldn't ignore was AI. And you kind of described it as a potential
00:14disinflationary force because of increased productivity, maybe wage compression, but also
00:19presenting a certain degree of financing risk as well. Kind of square that circle for us.
00:23Well, you know, Romain, AI's gone from really being a wildcard what if to a major driver of
00:29economy and markets the next five years. Right now we're seeing it in this CapEx boom we talked about
00:34not just in the U.S., but really a global CapEx cycle, including defense and potentially energy
00:40security. But also at the margin, a lot of this AI is being financed in the credit markets and in
00:46the
00:46bond markets. You know, PIMCO has been active in that in certain select deals. And so, you know,
00:52like it or dislike it, investors are going to need to factor in AI and all of their calculations going
00:58forward. Well, one thing I thought was interesting there, and you talk about the CapEx boom,
01:01obviously not just in AI, but you also mentioned defense and a few other areas. But I mean,
01:05you've been doing this a long time. There was a criticism for years, decades, really,
01:09that there wasn't enough CapEx spending coming out of corporate America, that they were taking
01:13their cash and just using it for buybacks and things like that. And now we're finally getting it
01:16and everyone's wringing their hands over it. So I know there's got to be a balance. But when you think
01:21about the potential for an increase in productivity, something that's been relatively absent, at least in any kind of
01:25headline numbers for years and decades, are you kind of excited that maybe we're finally here?
01:30Oh, no, certainly. I want to be very clear. We think AI is a transformative technology. In fact,
01:37if anything, we think the productivity benefits and boom from AI could happen sooner than a lot of folks
01:42believe. But we're also humble. We don't have a crystal ball. We think there's a wide range of
01:46outcomes. But let me be clear. We think this is how capitalism and financial markets are supposed to
01:52work. Attractive investment opportunities receive funding. And as I said, we participated in some of
01:58those deals as well. And I expect we'll continue. Well, it's interesting, you know, how this is all
02:03being financed because you're seeing a lot of this coming through in the private markets. But it's
02:07making a big splash in the public markets as well. You think about the hyperscalers and some of their
02:12plans for borrowing for this year. And I wonder, you know, how you're viewing that over at PIMCO. You
02:18know, you think about a world where credit spreads are so, so tight. And the fact that we have this
02:22influx of supply, it hasn't yet really made a dent on those spreads. Well, there are a couple of things
02:27going on. First, a lot of the companies that are issuing and borrowing are very, very prosperous and
02:34profitable companies. And so that's a big difference from some of the previous CapEx cycles where we've seen
02:40where a lot of borrowing is companies don't have a lot of revenue or cash flow. So that's one big
02:44difference. But Katie, you bring up an excellent point. We do think we're in a world where
02:49investors are going to need to do their homework or hire firms to manage their money that does their
02:54homework because you need to look at the details on the deal. You need to look at the way the
02:58deals
02:58are structured. And the details will matter. You know, we believe that if you're going to provide
03:03liquidity in public markets, you should be paid for providing liquidity in public markets. And so we look
03:10at each deal on its own merits. And talk to us a little bit about, you know, how this is
03:16wrapping
03:16into the view that you put out yesterday about the credit loss cycle. You sort of think about the
03:21heavy spending that we're seeing on AI. Obviously, there's going to be certain companies that come
03:28in a big way and, you know, really try to spend there that maybe don't have the fundamentals to fall
03:33back on in the way the Magnificent Seven does. And I was hoping that you could sort of thread that
03:38needle for us. Well, there are a couple of things that that we highlight in the essay that I'd like
03:43to bring forward. The first is that a lot of the incremental growth in lending in the last dozen or
03:4915 years has been in a particular segment of the private credit markets, in particular direct lending to
03:56middle market companies. You know, that's probably the area of the credit market that we would highlight
04:01is the one in which the credit loss cycle has begun already to turn. Right now, you see it not
04:08so much in in actual losses as you do for creative financing, payment in kind and other arrangements.
04:15But as I said, this is going to be with us for the next five or 10 years. Opportunities will
04:22will be
04:22there. But it's also important for investors to do their homework. Is this when we start to talk about
04:28not only the increase in CapEx spend across industries? This is a global story. Are we going
04:37to see a better share of this spend from, say, Europe, for example, Asia, maybe even some of the
04:43emerging market nations? Exactly. So when we highlight this in the report, we're talking not just about the
04:49AI piece, which is really relevant in the U.S., and also, frankly, some Asian countries that are going to
04:54be
04:54big providers of the chips and silicon into into AI CapEx. But in Europe, there's a real push, as we
05:01all
05:01know, to for really now, they really need it to increase defense spending, in particular in Germany. And so CapEx
05:08there may be more have more of a defense. And then also in Europe, a big push on continuing on
05:14the green transition.
05:15I am curious. And I know, you know, you're not, you know, picking stocks or anything like that. But
05:19there's a lot of people focused on this SpaceX IPO, not only for the company itself, but the idea that
05:24it
05:24could be a catalyst for a much broader investment in not just AI, but the space economy. A lot of
05:30new
05:30areas of the world are and really beyond this world that haven't been invested in. Have you started to
05:36kind of factor that into your economic forecast about maybe the potential increase and broadening out of
05:41economic activity around these new technologies? Oh, oh, oh, sure. And again, we want to be wary of
05:48thinking we have false precision. So I think we're more confident in the direction of travel than
05:55necessarily in the pace and and and and the path to the destination. But but absolutely. And and again,
06:02I'll defer to your equity experts here about how to think about the IPOs this week. But they're
06:07certainly eye popping numbers. Yeah. I mean, you can't ignore them. Yeah. I mean, not only this.
06:11And then maybe we get another trillion dollar IPO in a few weeks or months. Now turning it back to
06:15the I know better macroeconomics, obviously buoyant equity markets and financing availability for
06:23companies also increases wealth value. There's a wealth affecting consumption in the economy. And that's
06:28an important tailwind for the economy.
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