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- [00:00]
Barclays Brief Host
Markets move fast. Get the insights you need in 10 minutes with Barclays Brief, a podcast from Barclays Investment Bank. Each week our experts analyze market themes, helping you anticipate what's next. Listen to Barclays Brief wherever you get your podcasts. Bloomberg Audio Studios Podcasts Radio News.
- [00:34]
Tracy Alloway
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
- [00:38]
Joe Weisenthal
And I'm Joe Weisenthal.
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Tracy Alloway
Joe, it's back.
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Joe Weisenthal
What's back?
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Tracy Alloway
It's back.
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Joe Weisenthal
What's back?
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Tracy Alloway
They're back. No, it's the bond vigilantes are back. The Sell America trade.
- [00:47]
Joe Weisenthal
Oh, the sell America trade. Various flavors of what the back could have been, but all seem to be converging at once.
- [00:52]
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 had the S&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. So all of this could change on a dime within like 60 minutes. But there's a lot going on. Yeah.
- [01:43]
Joe Weisenthal
And it probably won't change on a dime. And the reason is because while yes, it is true that probably the tensions in Europe over Greenland, NATO, etc. 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. We were looking at sub 4% 10 year rates as recently as October in the US actually, maybe even as recently as December. Now we're closer to 4.3 again. So those people keep thinking mortgages are going to come down, et cetera. It's not looking like It. 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.
- [02:55]
Tracy Alloway
Well, this is the debate, right? Yes. 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.
- [03:05]
Joe Weisenthal
Yeah.
- [03:06]
Tracy Alloway
And others think it's a geopolitical risk premium. So, you know, we need to get into all of this.
- [03:12]
Manny Roman
Yes.
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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.
- [03:21]
Manny Roman
Thank you for having me.
- [03:22]
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?
- [03:34]
Manny Roman
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 5 or 6 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 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.
- [04:36]
Joe Weisenthal
I was thinking about this last night looking at The S&P 500 follow.
- [04:40]
Tracy Alloway
You were thinking about how you're an animal looking at the screen.
- [04:42]
Joe Weisenthal
I was thinking about exact. I wasn't in a moment of being an animal looking at the screen last night. It did occur to me as like, okay, S and p had fallen 2% on Tuesday the 20th. However, in the context of an incredible year and an incredible 15 years and a month, 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.
- [05:30]
Manny Roman
Well, I think Japan is quite a peculiar situation.
- [05:32]
Joe Weisenthal
Okay, let's talk about Japan.
- [05:34]
Manny Roman
Let me start with the US because it's the, 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 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. People have come and bought US asset and the trend is very clear, 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 are very bounded in terms of where they're going to go. Okay, Japan is a very specific situation. I just came back from Japan last week.
- [06:30]
Joe Weisenthal
Oh great.
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Manny Roman
I mean you feel bullish. I think everyone you meet is bullish. Equity. You know, I started my career in 1987. 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. But I think one of the things 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.
- [07:07]
Joe Weisenthal
Sure, I agree. The 40 year, they're probably hardly trading.
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Manny Roman
And the same goes in the U.S. right? I mean you really want to look at the 10 year. The 30 is a bit of a different story.
- [07:15]
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?
- [07:50]
Manny Roman
It's a funny thing, we do like volatility because with volatility comes alpha, right? 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. This is going to be plenty to do. And it may be on NIM 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. 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 structured 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.
- [08:57]
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, 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 say everyone feels bullish, etc. Tell us a little more color what you learned in your trip to Japan.
- [09:17]
Manny Roman
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 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 conglomerate. It's not the first time I hear that, but I think this time it's certainly more real than it has been. And then when you think of the AI robotic trend, 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 number of stock which looks attractive, forget about whether they price right or wrong, but in terms of business model, they're quite attractive.
- [10:51]
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?
- [11:09]
Manny Roman
So I was talking with Rich Clarida, who is our chief economist, friend of.
- [11:16]
Tracy Alloway
The POD as well.
- [11:18]
Manny Roman
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 there's just a lot of money 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 $80 trillion 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.
- [12:17]
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 you might have. Putting on the sort of like CEO of a big asset manager hat. You know, in California there's talk about a wealth tax, et cetera. There's talk in Europe about wealth taxes. There's people talking about, 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? Do you see money moving at a significant degree, high net worth or ultra high net worth clients really thinking about where their money is domiciled in a different way?
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Manny Roman
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.
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Joe Weisenthal
Yeah, Tell us more about that.
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Manny Roman
Well, 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 2 to 3% 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.
- [13:48]
Joe Weisenthal
Forbid, but then you have to live in Nevada.
- [13:50]
Manny Roman
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, 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.
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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.
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Manny Roman
About them all secondhand? And all from the tech industry. And I read the same news than you do. 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.
- [14:44]
Tracy Alloway
Joe's aware of that.
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Joe Weisenthal
My alma mater.
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Manny Roman
So is it. Yeah. There we go.
- [14:48]
Joe Weisenthal
Thank you for saying that.
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Manny Roman
Here we go. 90% of the graduate from UT stay in Austin. So you're one of the exceptions because that was one of the pitch.
- [14:55]
Joe Weisenthal
I deserved it myself.
- [14:57]
Manny Roman
But it's been a real good thing for us. You.
- [15:15]
Barclays Brief Host
Today's markets move fast. Get the insights you need in 10 minutes with the Barclays Brief, a new podcast from Barclays Investment Bank. Through sharp dialogue and scenario based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.
- [15:45]
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 hold. I think they have 100 million or something like that.
- [16:02]
Joe Weisenthal
Not mega, right?
- [16:03]
Tracy Alloway
So a drop in the bucket of the U.S. 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?
- [16:22]
Manny Roman
That there's an upset Danish pension plan for reasons that I think we can understand, but that in the large scale of things represents absolutely nothing. And one of the things 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. 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 Sell 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, you know, if I was a guessing man, I think the macro wins.
- [17:53]
Joe Weisenthal
Nonetheless, I'm gonna still try to goad you 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?
- [18:14]
Manny Roman
My excuses, I think. I mean, look, I always say my partner, Diane Everson, who was on your pod months ago, and I look, our life belongs to a client. We're here to manage the firm. We're here to sort of fly.
- [18:26]
Tracy Alloway
Aren't they all in Davos?
- [18:27]
Joe Weisenthal
Yeah. This is what they.
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Manny Roman
This is why a lot of them.
- [18:29]
Joe Weisenthal
Are saying, oh, I go to Davos because this is where my clients are networking. Yeah, networking. Why isn't Jamie Dimon's there? He would say, my clients are here. I gotta meet with them, see.
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Manny Roman
What's your simple people, we mind. 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.
- [18:49]
Joe Weisenthal
I love being in the office. That being said, Tracy wrote about this yesterday in our newsletter. 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 all the time.
- [19:22]
Manny Roman
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?
- [19:33]
Joe Weisenthal
Yeah.
- [19:33]
Manny Roman
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, Marx says to everyone at the same time what he thinks. And that's the way it should work.
- [19:47]
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.
- [20:06]
Manny Roman
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 see 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 actually what can the President do in terms of Greenland? The reality is he needs 2 3rd of the Senate and a Congress approval. That 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. 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, I come back to currency. 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.
- [21:23]
Joe Weisenthal
Why?
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Manny Roman
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 how much of your portfolio it is? 20, 25%? Something like this. It cannot be 100.
- [21:36]
Joe Weisenthal
What do you make of the relentless bid in gold?
- [21:38]
Manny Roman
Honestly, there's things where I just give up. And I say, really? And I say, I don't understand. That's one of them.
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Joe Weisenthal
Really?
- [21:44]
Manny Roman
Yes, totally.
- [21:46]
Joe Weisenthal
Say more.
- [21:47]
Manny Roman
Well, I believe that assets are being moved by two factors, 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 at 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 gig. I shouldn't be doing this. Other people understand it better than I do.
- [22:22]
Tracy Alloway
I think you gave us a very polite prompt earlier to talk about mortgages and mortgage reform and we should do that. 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 30 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, BO yields that seem to be pretty stuck at high levels.
- [23:04]
Manny Roman
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. 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. It's too early to have any intelligent thing to say, but a lot of things can happen.
- [23:53]
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 might have to go through Congress, but we did get an order last night or a statement last night from the White House. Talk 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 could buy what assets.
- [24:22]
Manny Roman
Not much.
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Joe Weisenthal
Okay. Why?
- [24:24]
Manny Roman
Well, I mean, look, you know, we don't do that. But there is, you know, some people do build rent.
- [24:29]
Joe Weisenthal
Yeah. You know, and they all, they said build to rent exempt. So I think that's already pretty big chunk of like what this whole phenomenon.
- [24:36]
Manny Roman
Yeah. And look, it's hard work and it's the US if you look at it from a macro standpoint, has a shortage of house. Right. So we need 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 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.
- [25:19]
Tracy Alloway
It'S really complicated, you need the robots to build houses. Right. So okay, speaking of robots, AI has come up a couple 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?
- [25:51]
Manny Roman
Well, I think you reported we try not to talk about single positions, but you reported that we got involved into a very large 20 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 AA 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 above a trillion dollars and so they're pretty safe investment, that's pretty unique. And so size is a competitive edge that plays well to our strength. We position 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.
- [26:56]
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?
- [27:12]
Manny Roman
Well, not everyone can take $25 billion of a deal.
- [27:15]
Tracy Alloway
True.
- [27:16]
Manny Roman
And so I always say, you know, one of the things with Dan 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.
- [27:34]
Tracy Alloway
It's good to be PIMCO when it comes to new issuance. For sure.
- [27:37]
Manny Roman
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 a portfolio. It may very well be that the next one doesn't fit into what we do, in which case we'll pass.
- [27:57]
Joe Weisenthal
Returns to scale are such a common theme in our discussions last night. Size per se is competitive advantage, which is not always the case because sometimes you like to hear or 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, where else are you putting your chips besides you mentioned Texas. And there's okay, there's some migration, I.
- [28:40]
Manny Roman
Think Asia, 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 a super secular horizon, Asia will become significantly bigger than 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.
- [29:46]
Joe Weisenthal
Do you anticipate mainland China ever being a real a bigger opportunity?
- [29:50]
Manny Roman
I hope so. I hope the market offer a level playing field at some point in time and something that all of us feel comfortable investing in.
- [30:00]
Tracy Alloway
What would make you feel comfortable? Is it just the easing of capital.
- [30:03]
Manny Roman
Controls or the 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. Yeah, 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. And those are usually pretty good for asset manager. Yeah, but then you have mature market like US and the UK, where you'd be happy to grow at 5% because 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 sort of well known.
- [30:52]
Joe Weisenthal
And what about in the Gulf?
- [30:54]
Manny Roman
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. Honestly, you think, you think you went around the world and kind of came back.
- [31:08]
Joe Weisenthal
Abu Dhabi is the LA of the world.
- [31:11]
Manny Roman
Well, it's very similar to Newport beach, actually. People are super friendly. They've done a really, really good job.
- [31:17]
Joe Weisenthal
Super friendly, great weather and the most interesting culture and intellectual hubs that you can think of. When I associate Abu Dhabi in Newport.
- [31:26]
Manny Roman
Beach, 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 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. And then there's what we don't know, everything happening with Iran and whether Iran is something will happen or not. And I think the honest answer is no one knows.
- [31:54]
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 your time at the pool and at the shop shopping mall. And that's pretty much it.
- [32:05]
Manny Roman
Or that could be. That could be California.
- [32:07]
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?
- [32:22]
Manny Roman
Oh, I think for us the sort of defensive and offensive opportunity. So 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. Remember, every time we buy a bond it goes into many different accounts and every single account has different parameters, different restriction. It 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. 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 menial 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. And then there's the offensive part where you sort of said okay, can I use 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 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 have a few win just.
- [35:15]
Joe Weisenthal
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 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, 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?
- [36:05]
Manny Roman
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 cost 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 won't.
- [36:18]
Joe Weisenthal
But that's an effort. There's like that's a real thing in house development.
- [36:22]
Tracy Alloway
Is that something you're doing already?
- [36:23]
Manny Roman
Sure.
- [36:24]
Tracy Alloway
Interesting.
- [36:25]
Manny Roman
And I think to link that back to the market, sure there's been quite a high level of activity in private equity in software because the cash flow was deemed to be predictable with high leverage. It will be interesting to see what happen to the returns of this software company for the years to come. There'll be winners and loser, 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? And I think that's a perfectly reasonable question in terms of what, what it may do.
- [37:18]
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?
- [37:59]
Manny Roman
I think we believe in Fed independence and as we often say, I haven't met many politicians who want higher rate. And so there's 2 level 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 a. 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 the reading of inflation, they make totally suboptimal decision for political reason. I think it's very hard.
- [38:50]
Joe Weisenthal
You think we're far from that.
- [38:51]
Manny Roman
I think it's very hard to do okay. 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. And I often say, I think everyone has looked at the listos situation in the uk 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 100bps. And so I do think the market punishes you and punishes you really hard if you try to do something which it doesn't want.
- [39:46]
Joe Weisenthal
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 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?
- [40:16]
Manny Roman
Well, I think what happened is she gave this whole tax package at the same time, so there was 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. 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 look, 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 levers of economic policy. 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 the market reacted incredibly strongly to that.
- [41:07]
Tracy Alloway
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?
- [41:25]
Manny Roman
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. 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 Dynavicin. But we hit a lot of single well and when you put all the single together, the result is pretty good. The great man coming down from the mountain and thinking that all this 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 level. And maybe I demystify what we do, but I think it's actually a lot of work and this is why it works and it's repeatable. 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 because sometimes you get lost in the burning bush and you know, other things and so on.
- [42:54]
Tracy Alloway
And these are very evocative images.
- [42:57]
Manny Roman
You know, I'm an evocative guy and I do think repeatability is really, really important. You want to make the process as industrial as, as possible and sort of said, okay, those are all the level I have and on average this is going to be pretty good.
- [43:10]
Tracy Alloway
All right, Manny Roman, thank you so.
- [43:12]
Joe Weisenthal
Much for coming on.
- [43:13]
Manny Roman
A real pleasure.
- [43:14]
Joe Weisenthal
That was fantastic. Thank you so much.
- [43:28]
Tracy Alloway
Joe. That was a really enjoyable, incredible conversation. 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.
- [43:45]
Joe Weisenthal
Oh, is that out today?
- [43:46]
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 thing concern, the second biggest concern was a disorderly rise in bond yields.
- [44:02]
Manny Roman
Interesting.
- [44:03]
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.
- [44:18]
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 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? Right. 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 spend, maybe only 75% is actually contributed to the economy, and 25% is waste, et cetera. So these are two things going on at once. And so I certainly take Manny's point, and I think it's totally right there. 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 train yourself to not overthink a single day. On the other hand, rates around the world remain despite rate cuts, et cetera, and despite arguably a slowdown significantly above where they were.
- [45:23]
Tracy Alloway
There's a direction of travel.
- [45:24]
Joe Weisenthal
There's a broader direction of travel that strikes me is very intuitive given the simultaneous phenomenon of, like, less efficient trading systems and more spending.
- [45:37]
Tracy Alloway
All right, I see Trump is giving his address at Davos, so shall we leave it there?
- [45:42]
Manny Roman
The. The.
- [45:43]
Joe Weisenthal
Another man from the man can. I love Manny's like, man of the mountain. I feel in finance, we're always talking about man of the mountain coming down with their wisdom. So I loved that. But yes, we should go listen to a man literally in the mountain right.
- [45:55]
Tracy Alloway
Now, lots of mountain men in Davos.
- [45:56]
Joe Weisenthal
And hear what he has to say.
- [45:58]
Tracy Alloway
All right.
- [45:58]
Joe Weisenthal
Anyway, we can leave it there.
- [45:59]
Tracy Alloway
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
- [46:04]
Joe Weisenthal
And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez Ermenarmon, Dashiell Bennett at dashbot and Cale Brooks Alebrooks. 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 Oddlauts.
- [46:26]
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 for follow the instructions there. Thanks for listening.
- [47:10]
Joe Weisenthal
Sat.