Pod Insights Odd Lots Pimco CEO Manny Roman on Japanese Bonds and the Sell America Trade About this episode Earlier this week, we saw something unusual happen in markets. The S&P 500 fell 2%, US Treasury yields rose, and the dollar simultaneously declined. This trifecta of market moves has rekindled talk of the "Sell America" trade as investors worry about the Trump administrations threats to take over Greenland. At the same time, Japanese bonds sold off after Prime Minister Sanae Takaichi called a snap election. So, how concerned should investors be about these latest developments? Is the "Sell America" trade really back? Or are we seeing a global rise in long bond yields? In this episode, we talk with Pimco CEO Emmanuel Roman about how he’s reading the moves. We also discuss Pimco's investment in data center debt, how the company is using AI internally, and why he doesn't 'get' gold. Read more:Why Investors Are Worried About Japan’s Bond MarketHow Gold’s Safe-Haven Appeal Is Fueling Record Prices Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.
Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Tracy Alloway? There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.
0:26 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
1:08 Speaker 01 and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.
1:52 Speaker 01 Bloomberg Audio Studios. Podcasts, radio, news.
2:07 Tracy Alloway? Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.
2:12 Joe Weisenthal? And I'm Joe Weisenthal.
2:13 Tracy Alloway? Joe, it's back.
2:15 Joe Weisenthal? What's back?
2:16 Tracy Alloway? It's back.
2:16 Joe Weisenthal? What's back?
2:17 Tracy Alloway? They're back. No, it's
2:18 Joe Weisenthal? The bond vigilantes are back?
2:19 Tracy Alloway? Sell America trade.
2:20 Joe Weisenthal? Oh, the Sell America trade.
2:21 Tracy Alloway? Yes.
2:22 Joe Weisenthal? Various flavors of what the back could have been, but all seemed to be converging at once.
2:26 Tracy Alloway? Yeah, I should have been more clear. So we are recording this on January 21st, and this comes a day after we saw a pretty big sell-off in the market. What was interesting about that sell-off is it was a trifecta of US assets. So you have the S and P 500 down, bond yields up, and the dollar index down as well. And so obviously, people are talking about, is this the start or the restart of the Sell America trade? All of this is coming in the context of Trump's threats against Greenland, lots of geopolitical risk. And I should also just mention, we are recording this literally at the end of this discussion. Trump is due to speak at Davos. I don't know why we do this to ourselves.
3:10 Joe Weisenthal? Yeah, right.
3:11 Tracy Alloway? So all of this could change on a dime within like 60 minutes, but there's a lot going on.
3:17 Joe Weisenthal? Yeah, and it probably won't change on a dime. And the reason is because, well, yes, it is true that probably the tensions in Europe over Greenland, NATO, et cetera, are very important. Mark Carney having given a pretty extraordinary speech yesterday. There's also the Japan element and the rising bond yields in Japan, which is related to, you know, I don't know, Abenomics 2.0 perhaps with the new prime minister and so forth. And so then part of the story yesterday, and you mentioned the trifecta sell-off, but part of the story yesterday, fairly sharp increase lately in long-end rates in the US and Japan. The 40-year bond in JGB, which never existed up until like 2007, apparently, hit 4% for the first time in history.
4:03 Joe Weisenthal? We are looking at sub 4% 10-year rates as recently as October in the US. Actually, maybe even as recently as December now are closer to 4.3%. Again, so like those people keep thinking like mortgages are going to like come down, et cetera.
4:18 Tracy Alloway? Not gonna happen.
4:19 Joe Weisenthal? So there is a lot going on in terms of potential theoretical drivers, et cetera. But the important thing is that rates at the long end keep pushing up.
4:29 Tracy Alloway? Well, this is the debate, right?
4:31 Joe Weisenthal? Yes.
4:31 Tracy Alloway? So Scott Besant in Davos, like a lot of people at the moment, was saying that he thinks the US Treasury sell off was just, you know, the Japan effect.
4:39 Joe Weisenthal? Yeah.
4:40 Tracy Alloway? And others think it's a geopolitical risk premium. So, you know, we need to get into all of this.
4:45 Joe Weisenthal? Yes.
4:46 Tracy Alloway? And we have the perfect guest, really the perfect guest. We're going to be speaking with Manny Roman. He is, of course, the CEO of PIMCO. So Manny, thank you so much for coming on All Thoughts.
4:55 Speaker 03 Thank you for having me.
4:56 Tracy Alloway? Why don't we start with that last question? When you're looking at bond yields today, how much of that do you see as the geopolitical risk premium versus just a follow through from the Japan sell off?
5:08 Speaker 03 Well, I think the honest answer is it's a mix of both. But when I was listening to you and when you look at how much the market reacted, they didn't react that much. I mean, bond yield went up five or six bips yesterday on the 10 year and the stock market is down 2%. I mean, it's not exactly an earthquake. And so I do think that the market is very rational and essentially discount a lot of the noise and look through it. The day where the market is really concerned about something, you're going to see a much bigger reaction. That's the first point. The second point, I think, is the currency barely move. I mean, I was looking at euro and sterling this morning. I mean, we flat as a pancake. The move away from the dollar, yes, as a secular trend, the fact that you want to diversify
5:53 Speaker 03 away from the dollar makes sense and you want to have other currency than the dollar. But the dollar remains the real reserve currency of the world. And so I take all of this with a grain of salt and we animals in the best possible way. And we look at the screen and we tend to overreact to what we hear and so on and so forth.
6:10 Joe Weisenthal? I was thinking about this last night, looking at the S and P 500.
6:13 Tracy Alloway? You were thinking about how you're an animal looking at the screen?
6:16 Joe Weisenthal? I was thinking about exactly. I wasn't in a moment of being an animal looking at the screen last night. It did occur to me, it was like, okay, S and P had fallen 2% on Tuesday, the 20th. However, in the context of an incredible year and incredible 15 years,
6:34 Speaker 03 And a market.
6:35 Joe Weisenthal? It's not that much. Nonetheless, I guess it's the confluence of headlines coming together. It's like, oh, I'm going to like, pay attention to this 2% down day. But I certainly take your point. These are modest moves in the grand scheme of things. On the other hand, this upward pressure that we continue to see on the long end of curves, setting aside one week or whatever, whether we're talking about Japan, the US, elsewhere. Like, what is the bigger story that we're like, taking from that?
7:04 Speaker 03 Well, I think Japan is quite a peculiar situation.
7:06 Joe Weisenthal? Okay, let's talk about Japan.
7:07 Speaker 03 Let me start with the US because it's the easiest thing. Look, rates have been essentially in a range for the past year and a half. And I think the Treasury and the Fed would be very focused on the long end of the curve. And I think that fixed income offers a real good entry point in terms of investment. I mean, we talked about the S and P. The S and P is very expensive. Investors are going to look at, you know, long-term fixed income and say, I can make 6% or 7% holding a basket of fixed income. That looks really attractive. And so I think every time yield back up, you see money coming back. I talk about PIMCO, the flows have been incredibly good over the past 12 months. You know, people have come and bought US assets and the trend is very clear.
7:47 Speaker 03 Nothing is changing and we have people basically saying, I can get equity-like return using fixed income. And for as long as that remains the case, I think the rates have very bounded in terms of where they're going to go.
8:00 Joe Weisenthal? Okay.
8:00 Speaker 03 Japan is a very specific situation. I just came back from Japan last week.
8:04 Joe Weisenthal? Oh, great.
8:05 Speaker 03 I mean, you feel bullish. I think everyone you meet is bullish equity. You know, I started my career in 1997. It's the first time that I see the Nikkei above when I started. I mean, it's unbelievable. But yes, you know, there is for the first time inflation and the long end of the curve is probably going to go higher. And that's probably overall a good thing. Now, the super secular trend is the demographic pressures are a real problem, a real problem.
8:33 Speaker 03 But I think one other thing we try to do is look at the liquid instruments. So the 40-year JGB may not be the most liquid instrument. The 10-year JGB is a real.
8:41 Joe Weisenthal? Sure, I agree. The 40-year, they're probably hardly trading.
8:43 Speaker 03 And, you know, the same goes in the US, right? I mean, you really want to look at the 10-year. The 30 is a bit of a different story.
8:49 Tracy Alloway? You mentioned US Treasuries trading in a band. And this is something I wanted to talk about because, you know, before yesterday, the non-movement in the bond market was really remarkable. So the move index is at its lowest since, I think, like 2021. That's the bond volatility index. And if you look at the 30-day trading range for 10-year Treasuries, that was at the tightest since the 1970s, which is pretty remarkable. What has that lack of volatility been like for a big bond shop like PIMCO?
9:23 Speaker 03 It's a funny thing. We do like volatility because with volatility comes alpha.
9:28 Tracy Alloway? Right.
9:29 Speaker 03 And so we do like the opportunity to provide liquidity and add interesting position to our portfolio, for sure. But we need to scale up and scale down the risk depending on what's happening in the market and depending on the opportunity. And so we just came back from a very strong period of performance. There's going to be plenty to do. And it may be on name-specific, it may be on macro trend. I do think that our competitive edge is not to be able to predict day-to-day what's going to happen to the market. Our competitive edge is to have structural position, to think about where value is, to optimize our portfolio, to think about the downside risk. You know, that's what we know how to do. And, you know, it's an interesting market.
10:13 Speaker 03 Some things are cheap, I would say rates are cheap. And some things are rather tight. You know, investment grade are probably rather tight. But in structural product and mortgages, there's a lot to do. So you have this environment where you can build portfolio and sort of feel reasonably comfortable that you will perform over the next 12 to 24 months.
10:31 Joe Weisenthal? Let's talk about, go back to Japan, since you just got back from Japan. And actually, I don't think we've done an episode on Japan since the election of the new prime minister. But tell us a little bit more. I mean, why now? What's going on? You see, everyone feels bullish, et cetera. Tell us a little more color of what you learned in your trip to Japan.
10:50 Speaker 03 Well, I mean, look, we have a big Japanese office and there are people in Pimco who knows a lot about this. I mean, look, it's for 20 years, Japan has tried to restart inflation. And for 19 years, it really hasn't worked. And then all of a sudden, they managed to get somewhere in a labor market, which is fairly tight, where immigration is a problem. And where, when you go there, I think there's a clear desire to monitor immigration. And the new prime minister has been very vocal about making sure that there's a limit in terms of labor force moving into Japan. Now, over the medium term, that's a problem. But when you look at the inflationary pressure, it's pretty clear that there's more inflation
11:35 Speaker 03 in Japan than there has been for the longest possible time. Now, the second thing is, I think you see other factor in Japan that you haven't seen in a long time. I was surprised by the fact that you have much more activism in the stock market, people to try to take ownership in company, trying to turn them around, breaking down conglomerates. It's not the first time I hear that.
11:59 Joe Weisenthal? Yeah.
12:00 Speaker 03 But I think this time it's certainly more real than it has been. And then when you think of the AI robotic trend, you know, the one thing Japan knows how to do is to make things and to make sophisticated product. And I think that all of a sudden, there is a competitive edge that Japan has in terms of a number of stock which looks attractive. Forget about whether they're priced right or wrong, but in terms of business model, they're quite attractive.
12:25 Tracy Alloway? Just on the bond sell off, how much of that is the return or expected return of inflation versus debt sustainability concerns? Because this is the other thing that's been very long running in Japan. You always hear it's a heavily indebted country. Is this maybe the bond vigilantes finally turning their attention to Japan?
12:43 Speaker 03 So I was talking with Rich Clarida, who is our chief economist.
12:49 Tracy Alloway? Friend of the pod as well.
12:51 Speaker 03 Friend of the pod. And I said to him, I said, you know, We tend to look at debt to GDP. What if we look at debt to household savings? And then you realize for both the US and Japan, that is just a lot of money.
13:08 Joe Weisenthal? Yeah.
13:09 Speaker 03 In the US with the baby boomer, in Japan with savers who tend to not to spend enough. And if you believe in fiscal policy and the fact that eventually taxes will go higher, then I think that the dynamic becomes quite different. And you can have higher sustainability in terms of debt because the ability to collect money is there. You look at the US, for example, you could have at some point in time higher inheritance taxes, this eighty trillion dollars of wealth in the baby boomers. Eventually, that will go to the next generation, but it will also go to the state. And it's a question of how much goes to the state versus the next generation. But there is the ability to tax more.
13:51 Joe Weisenthal? It also comes down, I suppose, to the political capacity of the state to tax. Because on math, you say, look, there's tons of private household assets. We have far more wealth than we do have debt as a society. And therefore, it's just a matter of channeling in the right place. But you also need the politics to rebuild, which actually gets me to a question that you might have put on the sort of like CEO of a big asset manager hat. You know, in California, there is talk about a wealth tax, et cetera. There's talk in Europe about wealth taxes. There's people talking about, oh, I want to like, set up my family office or whatever somewhere in the Gulf and avoid all this. What do you see on that front?
14:35 Joe Weisenthal? Do you see money moving in a significant degree, high net worth or ultra-high net worth clients really thinking about where their money is domiciled in a different way?
14:46 Speaker 03 So you knew there was something good about me is that I'm French. And so I've seen firsthand the experience of a wealth tax.
14:52 Joe Weisenthal? Yeah, tell us more about that.
14:54 Speaker 03 It turned out to be a disaster because the reality is people can move. They decided to vote with their feet and they didn't believe that the government would keep the taxes at historically 23% of wealth and they decided to go to Belgium or to Switzerland and to other places and so on. So I think the evidence in terms of how well wealth tax work is quite mixed. In California, you can cross to Nevada and decide you want to live in Nevada, God forbid.
15:22 Joe Weisenthal? But then you have to live in Nevada.
15:24 Speaker 03 But you've got to live in Nevada. But there are many other places and there's anecdotal evidence of people moving to Austin and domiciling themselves in Austin and so on and so forth. And so I think one of the things about the US tax code is you have competition among states in terms of where people can reside and so on and so forth. Now, you know, there's many great things about California. We're based in Newport Beach. We're happy to be in Newport Beach. We pay high taxes. It's all good.
15:46 Joe Weisenthal? But do you see in, say, California, or even on like right now, are you hearing about high net worth clients making these decisions right now or thinking about?
15:56 Speaker 03 All secondhand and all from the tech industry.
15:59 Joe Weisenthal? Yeah.
15:59 Speaker 03 And I read the same news than you do.
16:01 Joe Weisenthal? Okay.
16:01 Speaker 03 I'll be honest with you. I never met Larry Page, but I understand he moved to Texas and, you know. By the way, one of the things we've done really, really well is we set up an Austin office and it's been a great success. So we have 500 people in Austin. It's a big business for us. There's a great university there which produce a lot of grad in STEM. Joe's aware of it.
16:19 Joe Weisenthal? That's my alma mater. So.
16:20 Speaker 03 Is it?
16:20 Joe Weisenthal? Yeah.
16:21 Speaker 03 Well, here we go.
16:21 Joe Weisenthal? Thank you for saying that.
16:22 Speaker 03 Here we go. 90% of the graduates from UT stay in Austin. So you're one of the exceptions. Because that was one of the pitches.
16:29 Joe Weisenthal? I deserted my fellow.
16:30 Speaker 03 You got out. But it's been a real good thing for us.
16:32 Joe Weisenthal? Yeah.
16:48 Tracy Alloway? There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.
17:15 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
17:57 Speaker 01 and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.
18:38 Tracy Alloway? I want to go back to the sell-America trade and dollar diversification because one of the things that I think contributed to the atmosphere yesterday was we saw a headline about a Danish pension fund selling its treasury holdings. I think they have 100 million or something like that.
18:55 Joe Weisenthal? Not mega.
18:56 Tracy Alloway? Right, so a drop in the bucket of the US Treasury market, but the fact that a pension fund is saying we're going to get rid of all our exposure because things are just too unpredictable, obviously feeds into concerns about, again, that geopolitical risk premium. When you see a headline like that, what goes through your mind?
19:15 Speaker 03 That there's an upset Danish pension plan for a reason that I think we can understand, but that in the large scale of thing represents absolutely nothing.
19:27 Speaker 03 And you know, one of the thing when you work for PIMCO that you see is country with high savings rate and low population, Canada, Australia, need the US to put capital to work because the local market is too small. So imagine, for example, that you are one of the superannuation in Australia. The reality is you need the US to put money to work. Your local market is too small. You're not going to put 50% of your assets in Asia. And Europe, I don't know, I mean, I'm European. There's many things that I love about Europe, but the investment opportunity may not be as exciting as it should be.
20:12 Speaker 03 We haven't seen growth over the past six years. It's a problem. So the other trend, which is happening exactly at the same time that we've been very involved with, is the AI buildup. And the fact that at the same time you have the South America, at the same time you have an enormous amount of money coming into AI and data center and building up a whole new ecosystem. And that, I think, will provide exciting investment opportunity for plenty of people. So you have to weigh the two and the micro versus the politics. And if I was a guessing man, I think the macro wins.
20:46 Joe Weisenthal? Nonetheless, I'm going to still try to go into the politics-ish question because we're very flattered that you came to visit us here at our offices in New York City. But it's hard not to note that you're not in Davos right now. I was there in 2015. I got a flu, so I vowed to never go again. What's your excuse?
21:07 Speaker 03 Oh, my excuse is, I think, I mean, look, I always say, my partner, Diane Anderson, who was on your pod a month ago, and I, look, our life belongs to our client. We're here to manage the firm, we're here to sort of.
21:19 Tracy Alloway? Aren't they all in Davos?
21:20 Joe Weisenthal? Yeah, this is what they, this is why a lot of them are saying, oh, I go to Davos because this is where my clients are.
21:25 Tracy Alloway? Networking.
21:25 Joe Weisenthal? Yeah, networking. Why, Jamie Dimon's there. He would say, my clients are here, I got to meet with them. See, what's your excuse?
21:30 Speaker 03 Simple people, we mind the shop. We mind the shop and look, people make different decision and so on and so forth. And given what's happening in the market, given everything else, I think we're glad, we're glad we're in the office.
21:42 Joe Weisenthal? I love being in the office. That being said, Tracy wrote about this yesterday in our newsletter.
21:48 Joe Weisenthal? The conversations that are happening in Davos, they're pretty serious. I mean, Mark Carney talking about this sort of, it's time for us to not be a rupture. It's time to not, we can't be nostalgic about how the world was five or 10 or 30 years ago, et cetera. But it's hard. Markets don't easily price in geopolitical turning points, or when they do, it tends to be in an L shape, et cetera. Surely you're like thinking about these things.
22:14 Speaker 03 All the time. And look, Mark Carney is a friend. He used to be on our global advisory board. I think he's a fantastic human being and a great prime minister for Canada. But I will read the transcript of his speech at the same time you will.
22:26 Joe Weisenthal? Yeah.
22:26 Speaker 03 And I understand the predicament that the question is, how much Canadian bonds do I want to own and how much Canadian dollar do I want to own? And, you know, information is very, very efficient. And the reality is, is Mark says to everyone at the same time what he thinks, and that's the way it should work.
22:40 Tracy Alloway? How do you actually factor in geopolitical risk into the way you manage your portfolios? Because this seems to be something that investors understandably struggle with, especially since a lot of the outcomes are so binary, right? It's like, well, either the US takes over Canada or the US doesn't take over Canada.
22:59 Speaker 03 I think we try to be incredibly humble and say, why do we have an edge? And the reality is, if the three of us sees the exact same thing at the same time, we don't have an edge. I think we really, really try to understand politics. We have, one of my partner, Libby Cantrell, is solely focused on US politics. She does a great job. We care, but we care about macro issues that may not make it to a pod. We care about mortgage reform. We care about, you know, what, actually, what can the president do in terms of Greenland? The reality is, he needs two thirds of the Senate and a Congress approval. That's seems like a lot. So we care about smaller things. And often we said, look, we don't know anything that the market doesn't know.
23:44 Speaker 03 And so we shouldn't build position based on politics because the reality is we all see the same thing at the same time. In some markets, you know, I come back to currency.
23:53 Joe Weisenthal? Yeah.
23:53 Speaker 03 I mean, you look at the big currency, it's the most efficient market in the world. I mean, if you look statistically, they're incredibly hard to predict. I mean, you look at time series of, you know, dollar yen or dollar sterling or dollar euro and so on. I mean, it is as close to white noise as anything can be. So you build a portfolio, yes, there is a theme that the dollar may get weaker, in which case you want to have other currency. You know, we like the Australian dollars, we like the British pound. Why? Because the economy is slowing down and you have high rates and so there's plenty of room to cut. And you say to yourself, that's something you want to own. But, you know, how much of your portfolio it is, twenty, twenty-five percent, something like this. It cannot be a hundred.
24:29 Joe Weisenthal? What do you make of the relentless bid in gold?
24:32 Speaker 03 Honestly, there's things where I just give up and I say.
24:34 Joe Weisenthal? Really?
24:35 Speaker 03 And I say, I don't understand, that's one of them.
24:37 Joe Weisenthal? Really?
24:38 Speaker 03 Yes, totally.
24:39 Joe Weisenthal? Say more.
24:40 Speaker 03 Well, I believe that assets are being moved by two factor, valuation and momentum. So the momentum in gold is incredibly strong. I see it goes up every single day. Someone is buying it, maybe it's CTA, maybe it's individual, maybe it's central bank, I don't know. When I don't understand, I stay on the sideline. But the same token, I don't really understand crypto and that's okay. I think when you're in asset management, the one thing you need to know is sort of stick to your knitting and do what you know how to do. And when you don't understand, sort of said, okay, that's not my, my gig, I shouldn't be doing this. Other people understand it better than I do.
25:15 Tracy Alloway? I think you gave us a very polite prompt earlier to talk about mortgages and mortgage reform. And we should do that because I know that PIMCO has been very bullish on mortgages recently. I see a Bloomberg headline just from last week saying PIMCO sees mortgage rates easing on Fannie Freddie purchases. Those are part of the Trump administration's efforts to bring down mortgage rates. But of course, at the same time, you know, we started out this conversation talking about the thirty year yield, which is ticking up. How are you thinking of, I guess, those two tensions in the market? So the efforts on the political side to bring rates down versus bond yields, longer term bond yields that seem to, you know, be pretty stuck at high levels?
25:57 Speaker 03 That's right. Look, it's a complicated tension. And if you put yourself into the shoes of the US administration, what looks clear to me is you want mortgage rate to be lower rather than higher. And for that, part of it you control and part of it you don't. And it's inflation expectation, it's the shape of the curve, and it's discipline. And whether they get there or not, I don't know, is the short answer. The 30-year mortgages and the whole mortgage ecosystem looks cheap, and there's plenty to buy, and it looks attractive. Yes, we do think that the purchase will help in terms of valuation. But I don't know what I don't know. You have midterm coming in November.
26:41 Speaker 03 You know, it's too early to have any intelligent thing to say, but a lot of things can happen.
26:46 Joe Weisenthal? Speaking of mortgages, one of the things that we've heard over the past several weeks, the administration wants to make it harder for big asset managers to buy single-family homes. To actually do anything like that, probably might have to go through Congress. But we did get an order last night, or a statement last night, from the White House, talking about Fannie and Freddie putting bigger constraints on large institutional investors. Like, what do you make of some of these, I don't know, populist-inspired impulses to sort of change the distribution of who can buy what assets?
27:15 Speaker 03 Not much.
27:16 Joe Weisenthal? Okay, why?
27:17 Speaker 03 Well, I mean, look, you know, we don't do that, but there is, you know, some people do build to rent.
27:23 Joe Weisenthal? Yeah, and they said build to rent, so I think that's already a pretty big chunk of like what this whole phenomenon is.
27:29 Speaker 03 Yeah, and, and, and, look, it's hard work. I mean, it's, the US, if you look at it from a macro standpoint, has a shortage of house, right? So we need more, more homes. And the reality is, when you look over the 30-year period, the only places where costs haven't gone down is building. And the reality is we need more cheap houses, especially in affordable housing. And that's a policy that I think would be quite good, but it's not because institution shouldn't own single house. You need more houses. You need people to be able to afford proper houses. And that's true, I think, in a lot of states. And there are states like, you know, Texas, for example, where you have plenty of space and you look at the cost of housing and it's going down and you have states like California where it's really complicated.
28:14 Tracy Alloway? You need the robots to build houses, right? So, okay, speaking of robots, AI has come up a couple of times in this conversation. One of the interesting things that's happening in the credit market right now is that AI is becoming a much bigger force when it comes to investment grade debt. So lots of big companies issuing even more into that particular market. How does that change the credit market, if at all, for you? How are you thinking about the increased, I guess, exposure or presence of AI in something like IG?
28:44 Speaker 03 Well, I think you reported, we try not to talk about single position, but you reported that we got involved into a very large twenty-plus billion dollar transaction to build data center. And some of these deals are going to be incredibly attractive and some won't be. And so I think what's really interesting is the big data center user may actually be the double A or better rated company. And so Oracle or Meta or any of these companies actually have a capital structure where they may need a lot of money, but the money is backed by market cap. If you use a Merton model, which is, you know, above a trillion dollars. And so they're pretty safe investment. That's pretty unique.
29:28 Speaker 03 And so size is a competitive edge that plays well to our strength. We're positioning ourselves to have plenty of capacity to do it if and when it comes. And then some people like Microsoft and Google probably can do it with their cash and build up their cash and don't need to issue debt to be able to do it. So different people will go with different strategy.
29:49 Tracy Alloway? My understanding is you made a pretty chunky return already on that data center deal. And I've heard in the market that since you did that, everyone wants to come in and finance data centers. Are you seeing a lot of copycats or competition in the space to get on these new deals?
30:05 Speaker 03 Well, not everyone can take twenty-five billion dollar of a deal.
30:08 Tracy Alloway? True.
30:09 Speaker 03 And so I always say. You know, one other thing we've done that we constantly think about is what's our competitive edge? And we're big and we do one thing. We do fixed income in all shapes and form. And so we always say we're going to make money where our strengths are. And that's clearly one of our strengths.
30:27 Tracy Alloway? It's good to be PIMCO when it comes to new issuance, for sure.
30:30 Speaker 03 It is good to be PIMCO when it comes to new issue where we were part of the structuring, working with, in this case, Morgan Stanley. And we understood the credit quite well, and it was something which fit into our portfolio. It may very well be that the next one doesn't fit into what we do, in which case we'll pass.
30:49 Joe Weisenthal? Returns to scale are such a common theme in our discussions last night. Size, per se, is a competitive advantage, which is not always the case, because sometimes you like to hear, oh, we're small and nimble. But it seems like in many of these things we're talking about these days, size is huge. You know, just like from the perspective of CEO, and you know, this conversation sort of blends the line of like what I would think of as a CEO discussion and CIO discussion, right? When we're talking about rates, it's a CIO discussion. When we're talking about where you have offices in Austin, that's kind of a CEO discussion. But from the perspective of CEO, like where else are you putting your chips? Besides, you mentioned Texas and there's, okay, there's some migration.
31:33 Speaker 03 I think Asia. I think all the high-growth market from a CEO standpoint is quite interesting. So we have a great Asian business. And when you look at the population, the savings rate, and what it will be 10 years from now, I think it is incredibly important that we do extremely well in Asia. And so we have offices in Japan, Hong Kong, Singapore, Taiwan, Australia, and they're doing great. The buildup of wealth is really, really important, and that's before we start talking about China. And so if you look at the super secular horizon, Asia will become significantly bigger than
32:14 Speaker 03 Europe in terms of the amount of money for asset manager and what the opportunity set is. And I think that's pretty clear to me.
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34:03 Joe Weisenthal? Do you anticipate mainland China ever being a real, a bigger opportunity?
34:08 Speaker 03 I hope so. I hope, I hope the market, the market offer a level playing field at some point in time and something that all of us feel comfortable investing in.
34:17 Tracy Alloway? What would make you feel comfortable? Is it just the easing of capital controls or something else?
34:23 Speaker 03 Easing of capital control, the rules in terms of setting up proper trading operation, all of these things. And I always say you can break the world differently. So you look at a business.
34:32 Joe Weisenthal? Yeah.
34:33 Speaker 03 I can break it and say you have high-growth region, Middle East, Australia, Canada, Asia, where they all have the same characteristics. They have high growth and high savings rate.
34:49 Speaker 03 And those are, you know, usually pretty good for asset manager.
34:52 Joe Weisenthal? Yeah.
34:52 Speaker 03 And then you have mature market like US and the UK where you'd be happy to grow at 5%. Because, you know, there's nothing really new happening and the market is the market. You may take market share, you may lose market share, but the secular growth in the markets is is sort of well known.
35:09 Joe Weisenthal? And what about in the Gulf?
35:11 Speaker 03 I think the Gulf is very exciting. I mean, I always make this joke. If you close your eyes and you take a direct plane from LA to Abu Dhabi. So as you know, we're in Newport Beach.
35:21 Joe Weisenthal? Yeah.
35:22 Speaker 03 Honestly, you you think you think you went around the world and kind of came back.
35:26 Joe Weisenthal? Abu Dhabi is the LA of the world.
35:28 Speaker 03 Is it? Well, it's very similar to Newport Beach, actually. People are super friendly. They've done a really, really good job.
35:34 Joe Weisenthal? Super friendly, great weather and the most interesting culture and intellectual hubs that you can think of. When I associate Abu Dhabi and Newport Beach.
35:44 Speaker 03 I mean, Abu Dhabi is, once again, over the super secular trend. I think the Middle East has come a long way. And I think you you also had, you have a new generation of investment professional, locally trained and locally raised, which is pretty good. And so, once again, I think that's quite good. You know, and then there's what we don't know, you know, everything happening with Iran and whether Iran is, something will happen or not. And, you know, I think the understatement is no one knows.
36:12 Tracy Alloway? I lived in Abu Dhabi for two years and I always likened it to Texas in that it's hot all the time and you spend a lot of time, a lot of your time at the pool and at the shopping mall. And that's pretty much it.
36:23 Speaker 03 Oh, that could be, that could be California.
36:24 Tracy Alloway? Exactly, exactly. Since we're on sort of CEO executive level topics, just on AI, this is a question we've been asking a lot of our guests. But how are you incorporating AI, if at all, into your own workflow and organization?
36:39 Speaker 03 Oh, I think for us, the sort of defensive and offensive opportunity. So.
36:47 Speaker 03 The defensive one, it should increase significantly productivity in terms of everything we do. From the way we manipulate document, the way we create marketing, the way we optimize our trade function. But remember, every time we buy a bond, it goes into many different accounts. And every single account has different parameters, different restriction. It's all goes to a custodian, it gets split, it has best X. All of these things is a complicated factory. Anything which makes the factory simpler, more efficient and safer is a really, really good thing. AI will help to do this.
37:28 Speaker 03 We spend a lot of time discussing NDA and things like this where honestly, it's probably fair to say that we have better things to do. And so if AI gets us to a more efficient and less costly solution, that's good. I always say if AI allows us to reallocate resource more in R and D than in repetitive manual function that we don't need to do, that's good. I think compliance will also benefit quite a bit from AI and the ability to do deep learning and sort of figure out whether they trend, whether we miss something, whether look at every possible situation, I think that's also quite good.
38:13 Speaker 03 And then there's the offensive part where you sort of said, okay, can I use a large language model to try to extract from data insight and opportunity that I may have missed? And I think on this, some of it will say, okay, that doesn't work. Yes, you know, we've analyzed every single sentence from the Fed and every single transcript. And, you know, we found nothing that we didn't know. And then sometimes we may find things that are new and allows us to have an additional alpha. And I do think that large language model have a competitive edge when you have a lot of data.
38:56 Speaker 03 Which don't necessarily match perfectly. So when it's, you know, in the mortgage market, you have your house, your mortgage, your credit score, a picture of your house, your insurance, your employment history, your communication with your mortgage provider. All of these things, I think, should give us a finer assessment in terms of what's happening. And then the more data you have, the more of an edge presumably you get. But I think you embark into this journey being humble and sort of hope that, you know, you you have a few wins.
39:32 Joe Weisenthal? Just on the, I suppose, defensive AI, because we just recorded an episode talking about some of the coding models. And there's a huge theme in the stock market, specifically lots of sort of mid-level enterprise software companies getting very hurt because their clients are like, well, maybe we could buy this, or maybe the AI, we don't need to like, put in a sales ticket into a system because they can have an AI that just knows that tell the salesperson to make a call, et cetera. On this sort of basic blocking and tackling, at an asset manager, you must have tons of third-party enterprise software contracts and seat negotiations, et cetera. At that level, do you see AI tilting the playing field and said, you know what?
40:15 Joe Weisenthal? Maybe we could build this feature trivially and we don't need to pay this per-seat license or anything like that. Are you seeing this in action?
40:22 Speaker 03 I think you're totally right. I think that all of us have apps that we use and software that we use that we don't love and that costs too much money. And we'll try to replace them. And some of them you'll be able to replace quickly and some of them you won't, but.
40:36 Joe Weisenthal? But that's that's an effort. There's like, that's a real thing.
40:38 Tracy Alloway? In-house development, is that something you're doing already?
40:40 Speaker 03 Sure.
40:41 Tracy Alloway? Interesting.
40:42 Speaker 03 And I think to link that back to the market.
40:45 Joe Weisenthal? Sure.
40:46 Speaker 03 There's been quite a high level of activity in private equity in software because the cash flow were deemed to be predictable with high leverage. It will be interesting to see what happened to the returns of this software company for the years to come. There'll be winners and losers, but the top line of some of the software company will be interesting. And I know that Dan is worried about the software industry in terms of risk and every single credit we own. We look at it with an air length and say, if AI is as game changing as we think it is, what would it do to this business model?
41:31 Speaker 03 And I think that's a perfectly reasonable question in terms of what it may do.
41:35 Tracy Alloway? You mentioned the Fed a little earlier, and I realize we've gone this entire conversation without actually talking that much about the US central bank, but let's rectify that now. So one of the remarkable things about the bond market recently is even though there have been concerns and headlines around central bank credibility and possibly Powell, you know, coming under criminal indictment and all of that, the bond market hasn't really reacted that much. Again, it's been trading in a very narrow range. We've also seen TIPS and other inflation related bonds basically not incorporating any of what you would think would be these political risks. Do you worry at all about credibility of the central bank as a big bond buyer?
42:17 Speaker 03 I think we believe in Fed independence. And as we often say, I haven't met many politician who wants higher rate. And so there's two lever in economic policy. There's monetary and fiscal. You want the Fed to be in charge of monetary policy. And I think the good news is whoever gets the job as head of the Fed enters into the history book. I think the weight of the function is such that people tend to make very rational decision. It doesn't mean that they're always the correct one, but you're not going to see a situation where with a reading of inflation,
43:02 Speaker 03 they'd make totally suboptimal decision for political reason. I think it's very hard.
43:07 Joe Weisenthal? You think we're far from that?
43:08 Speaker 03 I think it's very hard to do.
43:09 Joe Weisenthal? OK.
43:10 Speaker 03 And you have a voting process. I think when your chief economist tells you you're crazy, it's just really difficult to kind of go against this. Now, you know, maybe once you can kind of look through the data and say, I do think the data are going to become better. Here's why. But it's a really, really dangerous game. Also, once you lose credibility, you really lose credibility.
43:32 Tracy Alloway? Yeah.
43:32 Speaker 03 And I often say, I think everyone has looked at the Liz Truss situation in the UK.
43:40 Tracy Alloway? Uh huh.
43:40 Speaker 03 When you do something borderline crazy, in literally five days, you can destroy your credibility on the bond market, and you have to move at the speed of light and with the Bank of England to be able to correct when rates go up literally a hundred bips. And so I do think the market punishes you and punishes you really hard if you try to do something which she doesn't want.
44:03 Joe Weisenthal? Hmm. Why is it that Liz Truss is like, okay, this was like a dangerous thing, it was like reckless, et cetera, whereas new Prime Minister of Japan comes in, talks about reflationary policies, and you describe it as like, everyone's excited about Japan right now. What is the difference between the inflationary impulse that Liz Truss was expected to have accelerated with the mini budget versus maybe the more benign reflation that you're mostly describing as a sort of positive development in Japan?
44:33 Speaker 03 Well, I think, I think what happened is she gave this whole tax package at the same time, so there was like this liberalization at the same time, a tax package, where clearly someone hadn't kind of figured out the very basic math in terms of what it did to government spending.
44:48 Joe Weisenthal? Yeah.
44:49 Speaker 03 And then all of a sudden, you had a huge deficit that the market saw and say, oh my god, there's no way you can do this, this is not realistic, and the back end of the curve just went crazy. I mean, at some point in time, fiscal policy really, really matters. And, you know, look, I, I, you know, one other thing about being European is you look at fiscal policy quite a bit, because that's, that's been one of the core lever of economic policy. And, and somehow, I think the left hand and the right hand forgot to talk to each other, and they came up with a package which made no sense and clearly hadn't been blessed by the UK Treasury, and, and the market reacted incredibly strongly to that.
45:23 Tracy Alloway? Hmm. You know, I think when it comes to PIMCO, I think it's often underappreciated how much of PIMCO is about those sort of overlays on top of the fixed income positions. And so I have to channel my inner Bill Gross here and ask, are you selling volatility into this particular environment?
45:42 Speaker 03 Well, I think we look at volatility all the time. And I think when we find opportunity to sell volatility, we do. And it's a source of alpha. And I think we've done it for a very long time. And you know, sometimes we, sometimes we think it's attractive. And sometimes we think it's less attractive. And we, you know, I'm not going to talk about opposition, but, uh, but it is, it is a source of risk premia. And I think we focus on it. I think we, to kind of come back to this, we hit single, right? And I think what makes our performance is really the work of 300 people on the dinavacin. But we hit a lot of single well. And when you put all this single together, the result is pretty good.
46:25 Speaker 03 The great men coming down from the mountain and thinking that all these great macro trend are going to happen. That doesn't quite work. It's really about being incredibly disciplined and essentially making a bit of money every single day with various different. I love that. Level. And maybe I demystify what we do, but I think, I think it's actually a lot of work. And that is why it works and it's repeatable. You know, I always say to a fund manager, why do you think you can make money? Question number one. Question number two, why is it repeatable? Why do you think you can do it again? And the great idea and the great man coming from the mountain. I was the table of the lows. I'm not entirely sure it's that repeatable.
47:07 Speaker 03 Because sometimes you get lost in the burning bush and, you know, other things and so on. And.
47:12 Tracy Alloway? These are very evocative images.
47:15 Speaker 03 You know, I'm an evocative guy. And, and I, I do think repeatability is really, really important. You want to make the process as industrial as possible and sort of say, okay, these are all the level I have. And on average, this is going to be pretty good.
47:27 Tracy Alloway? All right, Manny Roman, thank you so much for coming on.
47:31 Speaker 03 Thank you for having me. A real pleasure.
47:32 Joe Weisenthal? That was fantastic. Thank you so much.
47:46 Tracy Alloway? Joe, that was a really enjoyable conversation.
47:48 Joe Weisenthal? Yeah.
47:48 Tracy Alloway? And I like straddling the CEO and CIO worlds. It was interesting to get that perspective. You know, one thing I saw right before we recorded this episode, people were talking about the Bank of America Global Fund Manager Survey.
48:02 Joe Weisenthal? Oh, is that out today?
48:04 Tracy Alloway? I don't think it's out, but in the last one, relatively recently, I think geopolitical conflict topped the list, which, you know, kind of expected. But then the second concern, the second biggest concern, was a disorderly rise in bond yields.
48:19 Joe Weisenthal? Interesting.
48:20 Tracy Alloway? So like 19% of respondents had that down as their like top tail risk in January. That's pretty interesting to me. And that's, the atmosphere feels a little bit different because people are so primed for this particular event.
48:35 Joe Weisenthal? Totally. You know, the thing that I keep thinking about is we just have this combination right now of like, all right. So like, we didn't ask Manny this directly, but it's like this fundamental question. Why does the neutral rate appear to be higher than it used to be?
48:48 Tracy Alloway? Mm hmm.
48:49 Joe Weisenthal? And there's two big things going on, which is there's a lot of public spending because of remilitarization. And that's related to geopolitics. This desire for national self sufficiency across a range of technological and commodities and so forth. So there's like tons of spending. And we're throwing sand in the gears of trade. So that spending is less efficient than it otherwise would have been. Right? So for a dollar of spending, maybe only 75% does actually contribute to the economy and 25% is waste, et cetera. So these are two things going on at once. And so like, I certainly take Manny's point, and I think he's totally right. They say you can't, one day you get a blip. And it's like, it's not the end of the world. And you have to like, train yourself to like, not overthink a single day.
49:32 Joe Weisenthal? On the other hand, rates around the world remain, despite rate cuts, et cetera, and despite arguably a slowdown, significantly above where they were pre crisis.
49:41 Tracy Alloway? There's a direction of travel that seems to be clear.
49:43 Joe Weisenthal? Broader direction of travel that strikes me is very intuitive, given the simultaneous phenomenon of like, less efficient trading systems and more spending.
49:54 Tracy Alloway? All right, I see Trump is giving his address at Davos, so shall we leave it there?
50:00 Joe Weisenthal? Uh, the, the, another man from, the man, I, wait, can I just say, I love Manny's, like, man of the mountain. I feel, and finance, we're always talking about men of the mountain coming down with their wisdom.
50:08 Tracy Alloway? Yeah.
50:09 Joe Weisenthal? So I love that. But yes, we should go listen to a man literally in the mountain
50:12 Tracy Alloway? Lots of mountain men in Davos.
50:14 Joe Weisenthal? And hear what he has to say.
50:15 Tracy Alloway? All right.
50:15 Joe Weisenthal? Anyway, we can leave it there.
50:17 Tracy Alloway? This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
50:22 Joe Weisenthal? And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashil Bennett at Dashbot, and Kale Brooks at KaleBrooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.
50:43 Tracy Alloway? And if you enjoy Odd Lots, if you like it when we talk to the CEO of the world's biggest bond fund, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
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