00:00I do want to talk about this balance between the opportunities and those hidden risks.
00:04Where exactly, or I should say, where do you think some of those hidden risks are?
00:08Well, I think as you outlined at the beginning of the program,
00:11there's a lot of differentiation that's going on in the marketplace.
00:14There's an increase in the cost of capital that is going on within the market,
00:17an increase in the demand of capital, more broadly speaking,
00:21both from the public sector, clearly with government financing needs to be done,
00:24but also in the private sectors.
00:25We have the AI demand for capital expenditure.
00:27We also have equity financing as well as debt financing that needs to come along.
00:31But from an investor point of view, we're sort of in an odd period
00:35of where there's the great planes of opportunity.
00:37Think about like back to the 1800s of the diaspora of the United States.
00:41You had opportunities which are great open spaces,
00:44but you also had unknown risks lurking in the grasslands.
00:46And those unknown risks are inflation, there are unknown costs of capital,
00:50and the endpoint for more productive pursuits being AI at that point in time.
00:55On the inflation front, I know there's the energy component.
00:58By energy, I mean primarily oil and gas prices that was the result of the war in Iran.
01:04But there's also been some concern, and the BIS raises about potential energy inflation
01:08as a result of the AI build-out.
01:10What's your general view, outlook right now?
01:12We do think there's a tension at PIMCO,
01:13and we do recognize the fact that energy prices have come down.
01:16And it might take a little bit longer for those to be removed from the marketplace.
01:19But longer term, while we don't necessarily see inflationary pressures emanating from wages precisely,
01:26we do see a tension that's developed,
01:28which doesn't necessarily mean that you're going to get inflation back
01:31to that 2-point-something percent target in the immediate sense.
01:34It might take several years at this point in time,
01:37which means that the Federal Reserve is probably going to be more on its hands
01:40over the course of the next several meetings
01:42rather than reacting proactively to this inflationary forecast.
01:45But at the same time, we also then have to look in the longer-term lens,
01:49understanding where growth comes into the equation in addition to inflation.
01:53And that's just a different tension that investors need to take into account
01:56as they look to make investment allocations over those medium terms.
02:01Let's talk a little bit more about the investment implications of that fact
02:04that the Federal Reserve looks like it's going to be set firmly on its hands for the time being
02:10because I take a look at money market funds.
02:12I mean, the numbers just continue to climb.
02:14We're sitting at $7.9 trillion right now, I believe.
02:18I even look in the ETF universe at the fixed income flows.
02:21I mean, it's zero- to three-month T-bills that are the hot ticket right now.
02:25So, I mean, it seems like the answer has been to just go into cash.
02:29I mean, do you agree with that impulse?
02:31No, we actually don't agree with this impulse because of two different factors.
02:34Number one, while it might seem an easy task to simply go into cash and earn that coupon carry,
02:39there's one major factor which should be at the top of my eyes
02:42for institutional and individual investors like, which is purchasing power preservation,
02:46meaning how do you actually protect your cash against inflation that is higher than 3 percent?
02:51And we forecast that over the medium term here.
02:53So, what the consequence is, is that if you're in cash, you're earning something around 3 percent.
02:59If the Fed cuts, you're underperforming not only in a nominal sense, you're earning 2 percent,
03:04but you're also earning less in the inflation-adjusted sense.
03:06So, the concern is that although the market is forecasting potential for rate hikes,
03:11at PIMCO, we believe this is at least on hold for the remainder of the year.
03:15And at the same time, you're on hold earning a rate that's less than the inflation rate.
03:20That is effectively not necessarily a positive trade in the real sense,
03:23in an inflation-adjusted sense for most clients, most investors.
03:26And we would encourage them to look out beyond that to the short-term space,
03:30really to fixed income in general, which is producing 5 to 7 percent nominal returns,
03:33but also be equally calibrated to the potential that the outlook for the Fed might actually change.
03:39Not necessarily mean that we're going to get those three rate hikes that the market's expecting at this point in
03:44short order,
03:45but it might actually be more reflective of what growth happens in 2027 and 2028.
03:50So, encouraging them to move out a little bit, how do those conversations go?
03:55I mean, is that appealing, the idea that if you step out a little bit, you can get 5 percent?
03:59Or, you know, are folks happy to say, I don't know, I can get 3 percent and no risk at
04:04all?
04:04So, without a doubt, a lot of the growth you're seeing in money market funds is organic growth,
04:09just simply a simple compounding of money market funds,
04:12but also seeing a holding place for a lot of the capital that's being raised for the AI pursuits in
04:17other places.
04:17So, we have to really create some differentiation.
04:19The clients who are really sensitive to purchasing prices and forward obligations in terms of liabilities,
04:26could be college, retirement, building a manufacturing plant.
04:29They're the ones who are really taking a close look at those opportunities to move out of cash
04:33into the front end of the yield curve, where they can pick up another 100 or 200 basis points.
04:38And we're seeing that growth in ETFs and mutual funds, et cetera, by running a diversified portfolio.
04:43And I think in this environment, what we would really strongly suggest is that if you make that move,
04:48make sure you're diversifying across industry groups, categories of opportunity sets,
04:53from corporate bonds to asset-backed securities, even agency mortgages.
04:56And in doing so, it allows you to do one of the key factors that this market is sensitive to,
05:01which is producing price volatility.
05:03And we don't necessarily know where the outcomes of the equity market might be,
05:06but there's going to be volatility as we recalibrate to those inflation expectations,
05:10and ultimately, the Federal Reserve reacts one way or the other.
05:13Fixed income is a way to mute that volatility while still producing those equity-like returns.
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