How PIMCO is Preparing for the Next Capital Loss Cycle with Dan Ivascyn

Summary

The Compound and Friends — Episode Summary

Episode Title: How Pimco is Preparing for the Next Capital Loss Cycle with Dan Ivascyn
Date: June 15, 2026
Host(s): Josh Brown, Michael Batnick
Guest: Dan Ivascyn (Group CIO & Managing Director, PIMCO)

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Episode Overview

This episode welcomes Dan Ivascyn, Group Chief Investment Officer at PIMCO, for a long-awaited and in-depth conversation about PIMCO’s approach to the next capital loss cycle. The hosts explore Ivascyn’s leadership, the evolving fixed income landscape, the current investment outlook amid “rupture and resilience” in the macro environment, and how seismic shifts like AI, geopolitical upheaval, and persistent inflation are shaping investment and risk management strategies. The discussion is rich with actionable insights for portfolio construction and macro thinking in today’s turbulent markets.

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Key Discussion Points & Insights

1. PIMCO’s Leadership and the Post-Gross Era

• Dan Ivascyn discusses the transition period after Bill Gross’ departure, emphasizing the increased focus on team-driven investment decisions and leveraging the expertise of individual portfolio managers.
• "What wasn’t required at the time was a major change in investment philosophy…from a process perspective, not a lot has changed other than the fact that markets have become more global…things have become a bit more technical, maybe more precise." — Dan Ivascyn [09:13]
• The move was away from a single figurehead to a flatter, more collaborative structure constantly searching for “the big trade,” but increasingly reliant on lots of smaller, effective decisions as big opportunities have become less frequent.

2. Secular Forum & Long-Term Thinking

• The PIMCO Secular Forum, running for over four decades, remains the backbone of PIMCO’s investment process. It brings together portfolio managers and outside experts (increasingly from the AI and tech sectors) to identify themes and escape the day-to-day noise.
• "The whole idea…was to get away from the noise…stepping back and looking at trends and themes that would impact economies or markets was pretty important. Today, I think it’s critical—just the information flow is unbelievable." — Dan Ivascyn [16:25]

3. Rupture & Resilience: Macro Themes

• The 2026 outlook centers on "rupture and resilience." Rupture describes a break from the stable, post-WWII global order due to geopolitical conflict, populism, disruptive technology, and persistent uncertainty.
• "You’re starting with financial market valuations that are high…yet you’re dealing with a type of uncertainty now that most investors haven’t had to deal with to the same degree. Be real careful about being surprised." — Dan Ivascyn [20:51]
• Despite these ruptures, core economic resilience is underscored by high investment, continued consumer strength, and the positive macro impact of large-scale capital expenditure in AI and infrastructure.

4. The Trillion-Dollar Investment Wave

• Four major drivers for the coming years highlighted:
  • AI Infrastructure: $7.6 trillion (Japan + France GDP)
  • Energy & Grid Modernization: $2.6 trillion (Italy GDP)
  • Defense Spending: $2.4 trillion (Canada GDP)
  • Reshoring & Supply Chains: $1.4 trillion (Netherlands GDP)
• These create both opportunity and mismatched timing risk for financial markets.
• "Over the short term…all of these investments can be great for the economy…From a fixed income opportunity perspective, people need to raise money for a while." — Dan Ivascyn [32:02]

5. Changing Landscape of Credit and Fixed Income

• The data center and AI infrastructure buildout is accelerating a fresh wave of new bond issuance—giving active managers more deals, better terms, and a unique opportunity to structure and underwrite risk within a more favorable environment than the post-crisis era.
• "For the first time in a long time…there’s all this froth in private credit…Those that were borrowing didn’t have to give on terms because there were plenty of people…raising money to give them."
• "Everyone can eat, and we could go out there to actually drive terms." — Dan Ivascyn [35:08]
• Careful structuring is vital to buffer against the risk and uncertainty inherent to sectors like tech and data infrastructure.

6. Return of Capital vs. Return on Capital

• Emphasis on the critical distinction for bond investors: principal preservation (return of capital) is just as important as achieving high yields (return on capital), particularly in an era of rapid technological change.
• "Even if you get the macro right and you make a few mistakes in a bond portfolio…they’re like grenades going off." — Dan Ivascyn [18:33]

7. The New Credit Loss Cycle

• The long period of negligible credit losses (extended by policy interventions post-GFC and COVID) is ending. PIMCO expects a “steady stream of losses, not a wave,” primarily driven by fundamental AI disruption to established business models—even outside of a classical recession.
• "AI disruption’s here, all this AI investment is looking to feast on old economy businesses…That time has arrived." — Dan Ivascyn [51:01]
• If a growth shock combines with stubborn inflation, risk in floating-rate and lower-quality credit could escalate: "A risky macro setup in that almost all of that debt…is floating rate. If you don’t get that short rate down…companies that are facing AI disruption, already have a lot of debt and higher costs…" [52:26]

8. Equity Valuations vs. Bonds

• US equity risk premiums are at or near zero; while they're not outright bearish, PIMCO notes future returns on equities may disappoint from these starting valuations, especially when compared to the more predictable returns now available in fixed income.
• "When you look at these starting valuations and then you look at subsequent returns…they’re quite negative relative to the starting point for yields" — Dan Ivascyn [45:10]

9. AI as Disinflationary and Disruptive Force

• AI investment may create near-term inflationary pressures (materials, supply chain constraints), but is expected to be broadly disinflationary longer-term through increased productivity and reduced costs of goods and services.
• But this also means severe job displacement, particularly for middle-income professionals: "We do think it’s going to lead to some displacement of workers, particularly the middle-income professional cohort…White collar unemployment…will move…It’s moving fast…" — Dan Ivascyn [62:31], [66:27].

10. Fed Policy and Communication

• Dan’s take: The current era of over-communication and ongoing market signaling from the Fed may be unnecessary. Market participants can internalize macro shocks independently of daily Fed commentary.
• "I think a lot of the speaking that’s gone on is interesting but not essential for the markets to have a good sense of what’s coming...I think it’s a lot of noise, and I think the markets will be just fine with more standard and targeted communication." — Dan Ivascyn [55:16], [56:40]

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Notable Quotes & Memorable Moments

• "You’re dealing with a type of uncertainty now that most investors haven’t had to deal with…Be real careful about being surprised." — Dan Ivascyn [20:51]
• "That old 8% type return that you were getting back when high-quality bonds were returning one or two is probably going to be 4 or 5% for a while." — Dan Ivascyn [54:07]
• "We do think unfortunately [AI] is going to lead to some displacement of workers, particularly the middle-income professional cohort group…White collar unemployment." — Dan Ivascyn [62:31]
• "For the first time in a long time…we could go out there to actually drive terms." — Dan Ivascyn [35:08]
• "As a fixed income investor…you’re probably not optimizing portfolios if you’re getting wildly defensive and just hunker down in the absolute safest stuff." — Dan Ivascyn [30:04]
• "If you’re not very good at something, you should do less of it. These forecasts have been abysmal." — (quoting Kevin Warsh on Fed communication) [58:25]

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Timestamps for Important Segments

• PIMCO’s Team Approach & Post-Gross Transition: [09:13]–[12:28]
• Secular Forum/Long-Term Strategic Thinking: [15:38]–[17:54]
• Rupture & Resilience Macro Outlook: [18:52]–[24:53]
• The Case for Optimism (US Consumer, Capex Wave): [28:16]–[32:02]
• AI, Credit Structuring, and the New Funding Needs: [33:06]–[39:51]
• Credit Loss Cycle Outlook: [48:14]–[54:07]
• Fed Policy, Communication, & Market Signals: [55:01]–[59:57]
• Long-Term Impact of AI on Inflation, Jobs, and Society: [60:54]–[66:23]

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Tone & Closing Thoughts

The conversation was candid, analytical, and accessible—balancing realism about market fragility with clear-eyed optimism about the opportunities emerging from technological and structural realignment. Dan Ivascyn’s style is pragmatic, detail-oriented, and forward-looking, emphasizing resilience over alarmism, while warning about the complacency around credit risk and the illusion of safety in certain yield strategies. The hosts close out celebrating Dan’s appearance and underscoring the episode’s robust, practical wisdom for investors navigating the next market cycle.

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Transcript

[Josh Brown]

One of the things that I haven't really discussed because I think it's obvious to me, but maybe not everybody is we've been so bad for so long. Like, it's been so long and so many horrendous errors from. I mean, I was safe for Jackson, but way before that, Isaiah and d' Antoni and Herb Williams and Mike Woodson and just so much garbage and. Are you a big basketball fan or not really?

[Dan Iverson]

I am. No. I, I'm. I'm.

[Josh Brown]

Do you remember this guy, Anthony Randolph? He was like a skinny 611 kid from that like never came to fruition. He was. We got him when he was like 25 from Golden State and he was going to be the next guy. Like there's just so much, so many years of just misery. Barnyani. Just all these washed up guys.

[Michael Batnick]

Really big Knicks fan.

[Dan Iverson]

No, I know. And I'm a big Celtic fan. So. I've had season tickets to the Celtics since I want to say 2013.

[Michael Batnick]

Okay.

[Dan Iverson]

We're pretty bad back then, you remember, but same deal. Stock. Stocks and draft books.

[Josh Brown]

Who was the, the squad when you. When you got in there?

[Dan Iverson]

Oh God, we were. I don't even remember who.

[Michael Batnick]

2013.

[Josh Brown]

Celtics.

[Dan Iverson]

It was almost.

[Josh Brown]

It was obviously after Walker. Well, Pierce was still there.

[Dan Iverson]

Yeah, it was almost nobody.

[Josh Brown]

Pierce. What did they transition?

[Dan Iverson]

Pierce ended in 08. So.

[Josh Brown]

So he was already gone.

[Dan Iverson]

He would have. He would have like two years left. We had cleaned house pretty much.

[Josh Brown]

It was just a lot of young Brown. I don't remember who was there.

[Dan Iverson]

The Utah kid that we got.

[Michael Batnick]

Oh, yeah.

[Dan Iverson]

Well, we had.

[Josh Brown]

We had Kyrie.

[Dan Iverson]

The Kyrie rolled through. Hayward rolled through.

[Josh Brown]

Yeah, yeah.

[Michael Batnick]

Injured.

[Josh Brown]

That was gruesome. That's the only time I've ever seen a sports injury that I cried at. That wasn't like one of my guys because that was opening night of Gordon Hayward and Kyrie and it was just so devastating.

[Michael Batnick]

What? He broke his leg on the court.

[Josh Brown]

His ankle just went like this.

[Michael Batnick]

Yeah, that was ugly.

[Josh Brown]

Really hard to watch.

[Dan Iverson]

But I was looking forward to Nick Celtics. I thought, I thought we were going to have that series.

[Josh Brown]

I can't believe you guys. You lost game seven at home. Right?

[Michael Batnick]

As a Celtics fan though, you don't. You don't begrudge the Knicks. It's not the same as Yankees, Red Sox.

[Josh Brown]

You can speak freely.

[Dan Iverson]

You know, it's. It hurts. It hurts.

[Michael Batnick]

By the end though.

[Dan Iverson]

It hurts. It hurts.

[Josh Brown]

Which part?

[Dan Iverson]

Agnes is laughing. No, no, no. Right from the beginning. I. I tend to. I tend to.

[Josh Brown]

You're A hater.

[Dan Iverson]

Well, the way I look at it.

[Michael Batnick]

Get out.

[Dan Iverson]

Yeah. Yeah. If it's not Boston, it's usually the cities that are tougher to live in. Bad weather, you know, we thought you would. That's sort of how I. Sequentially, you know, root for two.

[Michael Batnick]

You like underdog cities.

[Dan Iverson]

Exactly.

[Michael Batnick]

Root for Detroit.

[Dan Iverson]

Detroit, Cleveland.

[Josh Brown]

Yeah.

[Michael Batnick]

Okay.

[Dan Iverson]

Buffalo. With one caveat.

[Michael Batnick]

We mangled Cleveland.

[Josh Brown]

What's the cap? What's the caveat?

[Dan Iverson]

Well, in football, one of. One of the fixed income rivals of ours really likes the Bills.

[Michael Batnick]

Oh, Jeffrey. Yeah, yeah, understood.

[Dan Iverson]

But no, we have. We actually have a few guys on the team that PM team that are from Buffalo. So Buffalo's another one that.

[Josh Brown]

I've been rooting for them hard the last five years.

[Dan Iverson]

Yeah.

[Josh Brown]

Brutal.

[Michael Batnick]

I don't think you have to worry about them ever winning. How we doing? All right. Light, Light. Dan. Beautifully. This is a very important.

[Josh Brown]

I was telling Dan, he. He doesn't know this, but we've been trying to get him for years.

[Michael Batnick]

Yeah, we really have. There's a fortress around you.

[Josh Brown]

Yeah, there's.

[Michael Batnick]

They don't let you do a lot of stuff.

[Dan Iverson]

No, I tend to stay on the floor, Trade floor, but you don't do

[Josh Brown]

a lot of media at all.

[Michael Batnick]

So. We like that about you, actually. We admire that about you, and we're going to talk about that a little bit later on. But, like, not focused as much being the face of the firm, but more focused on the returns of the firm, I think is, like, extremely admirable. So.

[Dan Iverson]

Yeah, thank you. Yeah, appreciate that. And we have a lot. Again, we have a big team, so we have a lot of folks, as you know. You speak to us a lot. I know that. Are good at the messaging.

[Michael Batnick]

So we became PIMCO clients by accident. You guys acquired a little municipal bond shop in La Jolla. What was Garton? Oh, Girton was the original name. And no issues with the transition.

[Josh Brown]

That was a while ago. It was probably 2016.

[Michael Batnick]

But the Pimco guys called us immediately and said, you haven't done business with us yet, but we're gonna. We're gonna continue. You know what. What we've been doing for you, and it worked.

[Dan Iverson]

Yeah, no, we appreciate that. We. We leave them to themselves. They. They do a great job. Dave Hammer oversees the team. So, you know, we've. We've integrated in areas where it's helpful on the credit side in particular, but they got a nice, nice office down further south. Newport's a great place, too. It's just different.

[Michael Batnick]

Yeah.

[Dan Iverson]

So why. Where are they, they're down right where they were before. I think, I think they shifted office location, but they were right down near, near La Jolla.

[Josh Brown]

How long have you been in Newport for?

[Dan Iverson]

Well, Pimco's been there from since the very beginning.

[Josh Brown]

What about you?

[Dan Iverson]

Late 70s, early 80s. I got there in 98.

[Josh Brown]

Oh, wow.

[Dan Iverson]

So I pretend to dislike it. I pretend to.

[Josh Brown]

Yeah, it's terrible.

[Dan Iverson]

A good Boston fan, You can't, you can't like it too much. But the weather, weather's phenomenal. I have two young, young girls and it's just nice.

[Josh Brown]

You know, we have somebody in Manhattan beach, so I try and get there once a year if I can. It's best, best part of the country.

[Dan Iverson]

Manhattan beach is great. The issue is just traffic. Yeah. So with no traffic, Newport to Manhattan beach is 30, 35 minutes. With traffic, it could be, you know, you could have a two hour.

[Michael Batnick]

So, you know, we, we do this future proof festival in your backyard in, in Huntington beach. And last year we had 5,000 people, mostly wealth management, you know, professionals.

[Josh Brown]

You guys are definitely.

[Dan Iverson]

Well, I'd like to do that one. I think we had, I thought we tried maybe this past year and I, I had a conflict or something came up. But that's, that's a great event. I blame Agnes. Yeah, no, I don't. I never know if it was me or if, or if we get double booked. But we'll figure it out.

[Michael Batnick]

We would absolutely love to have you there. And it's, and it's nearby. It's the Combine and ring special with Dan Iverson.

[Josh Brown]

Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor.

[Michael Batnick]

This podcast is brought to you by Vaneck. You've heard a lot about AI and what it means for markets. But behind every tech breakthrough, there's a physical supply chain that has to be built first. This means more energy, more raw materials and more infrastructure. On top of that, the fiscal spending required to finance this build out is the kind of environment where gold and scarce assets have historically done well. Rax Rax. The VanEck Real Assets ETF is built for these market conditions. It's an actively managed one stop shop for real assets, including gold, commodities, natural resource equities and infrastructure that adjusts as macro conditions change. Head over to vaneck.comraax compound to learn more. That's vanack.comraax compound. Welcome to the compound and friends. All opinions expressed by Josh Brown, Michael Batnick and their castmates are solely their own opinions and do not reflect the opinion of Redholtz.

[Josh Brown]

Wealth Management.

[Michael Batnick]

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Ladies and gentlemen, welcome to the greatest investing podcast in the world. My name is Downtown Josh Brown. My guest today is bewildered at what's going on in his headphones. I promise the show gets more serious in two seconds, all right? I promise. All right, you guys. We have a special edition of the show today. I'm super excited to welcome a first time guest, somebody that we have wanted to have on the show for a very long time. He doesn't like us very much, so it took a while, but he's here. Dan Iverson is the group Chief Investment Officer and a Managing Director in the Newport beach office at Pimpo. Dan is lead portfolio manager for the firm's Income Credit hedge fund and Mortgage Opportunistic Strategies and is also a portfolio manager for Total Return Strategies. He's a member of Pimco's executive committee and a member of the investment committee. Morningstar named Dan Fixed Income Fund Manager of the year for 2013, and he was inducted into the Fixed Income Analyst Society hall of fame in 2019. That's quite a buildup.

[Dan Iverson]

Thank you.

[Michael Batnick]

Appreciate it.

[Dan Iverson]

Great to be.

[Michael Batnick]

Congratulations on all that.

[Dan Iverson]

Thank you. Congratulations for the Knicks as well, by the way.

[Josh Brown]

Thank you.

[Michael Batnick]

So we're gonna talk current events, but I gotta go back first. The first time I had ever heard of you was during your succession. And the Wall Street Journal wrote a really nice piece about you in 2017. And I think you sort of came in at the end of a tumultuous time, which we don't have to get into. But you seemed like kind of a big pivot for the firm where it was gonna be much more focused on the products and the portfolios and a little bit less about FaceTime for Dan and creating a new bond king. Would you say that's sort of accurate?

[Dan Iverson]

Yeah, I think the second part for sure, and it's really the fact that we have a team. A lot of folks like to get out there and share what we're thinking. We're doing slightly different set of preferences. What wasn't required at the time was a major change in investment philosophy. Yeah, Bill Mohammed, but certainly Bill Gross had a big personality. He liked to share views. He would do it in a very direct way behind the scenes. For him, it was all about building teams, process lots of small trades. So from that perspective, things haven't changed nearly as Much as people may have

[Michael Batnick]

thought, I think the tumult was more of a media story than it was like an investing story.

[Dan Iverson]

But we provided a lot of ammo there for the media. If you're looking back then, we would have tried to do things a little bit differently, a little smoother. But other than the pressure to perform, anytime you have a change with someone of Bill's caliber exiting the firm, a lot of pressure on us. But from a process perspective, not a lot has changed other than the fact that markets have become more global. The tech stuff matters, the numbers matter a little bit more. There are more numbers out there to crunch. So things have become a bit more technical, maybe more precise, at least in terms of the way you make decisions. But philosophically, the emphasis on the team, the stuff that we structures, we use to make decisions, haven't changed as much as people would maybe have expected. And again, it's a tribute to Bill and folks that are around a lot longer than I was, no question.

[Michael Batnick]

Shout to Bill. Of course, Muhammad, in the Journal article that chronicled your first year or so at the helm, you were able to stop outflows, and it mentions the team as well. Somebody called you the perfect CIO for the PIMCO we think of in the future, which was present about nine years ago. And you've certainly accomplished a lot. And then I thought this was interesting. In another departure from the previous era, Mr. Iverson relies more heavily on the expertise of individual portfolio managers to find profitable trades. So it became less about making the big firm wide call and then delegating other people. And it seems like it was much more of a group effort. You say that's accurate.

[Dan Iverson]

I think that's right. And I think you also have to take what the market gives you. So, you know, years leading up to the financial crisis, there was a big trade to do. Yeah, coming out of the financial crisis, there was a big trade to do. Lots of cheap paper. You could make a bold call, go out there and find anything housing related you could buy and, and you know, produce great outcomes. You know, as, as you progressed further away from the global financial crisis, yields were low, volatility was low, lots of support from monetary policy agents, the fiscal side. So in some sense you almost needed a lot of small things to go well. And then, you know, at times there is a big trade. So we're, you know, we want to be on the, on the lookout for the big trade, but they're just harder to find.

[Michael Batnick]

They don't come every, they don't come every quarter Right. I would say post the great financial crisis, you.

[Dan Iverson]

Yeah.

[Michael Batnick]

Moment is probably an opportunity for big trades, but not a ton of like fat pitches coming in from a macro perspective.

[Dan Iverson]

Correct.

[Michael Batnick]

Okay.

[Josh Brown]

And not only were bonds not cheap, but there were voices calling them a bubble. I think Bill Gross has called them a bubble for a while. There was very little opportunity bonds were. You had to have them. Cause you can't be all in on equities. But it was like a huge. It was annoying.

[Dan Iverson]

Well, yes, it was annoying and tough to operate if you're in Europe. Again, you had negative yields. So you know, again we try to, you know, we market in this industry and you try to put on a positive tone. Inflation was low. Yeah. But you had no value, you know, so you took a low inflation rate, subtracted that small rate from starting bond yields, you ended up with a negative number. And we've had 10 or 15 years. I don't, I don't have the math or the numbers in front of me, but last 10 or 15 years, high quality bonds have generated returns of about 2.5%. Take away 2 ish percent inflation, nothing there. The math is much more favorable today. And unlike growth equity investing vc with a little bit of time you typically earn your yield. And then if we do our jobs properly and generate some additional return, some thoughtful asset allocating, expand the opportunity set a little more complexity. You know, the math works out better today.

[Josh Brown]

Obviously with investing in life, you have to play the ball as it lies. I believe shooter McGavin said that to Happy. Prior to the inflationary environment, there was a lot of people, I think I was one of them, who thought that yields, we were just in a new universe where interest rates were going to stay low and anytime they crept up, there was just this tidal wave of boomers with trillions of dollars that was waiting to come in and bring yields lowered by the bonds. And that dynamic has obviously shifted dramatically. We can't play in an alternate universe. But was that your operating assumption that yields were going to stay low for the foreseeable future?

[Dan Iverson]

Yeah, pre, pre. Covid, that was the general thinking at PIMCO as well. Global savings glut tremendous disinflationary pressure. Or put more simplistically, you know, central bankers had been trying to create inflation for a long time, unsuccessfully. So it was reasonable and rational to think that if inflation didn't pick up that you're going to be in this relatively low yielding environment again. A lot has changed. Covid, I think was the starting point. Now turns out all they had to

[Michael Batnick]

do to create inflation was mail everyone checks until they literally couldn't find places to spend it, turn the economy off and. And tell a quarter of the workers they could stay home. That's kind of all you had to do.

[Dan Iverson]

So, yeah, and it's funny, I was down at a event that was looking at, you know, the inflation process, monetary policy decisions and balance sheets and things, and you for much more of an academic perspective. But when you look at what was different that last cycle, it amounted to trillions of direct stimulus. And there's always been stimulus when the economy slow. But this time, checks came to us and you were invited or encouraged to spend them. And I think that had a lot to do with what we're going through. Plus, you got a tremendous amount of monetary policy accommodation at the same time.

[Michael Batnick]

One of the things that. One of the areas of continuity under your leadership is that Pimco has continued the Secular Forum, and the firm has been doing this for over 40 years. So I wanted to just ask you quickly, for the audience that maybe isn't familiar, what is the Secular Forum and what is the meaning of it to the portfolio managers of Pimco?

[Dan Iverson]

Yeah, so it's important, and we've been doing it as long as the firm's been around. It's a bit of a rite of passage. I. I remember I had come out the summer before I started at Pimco to observe the Secular Forum. That was a trick. Got there and they threw a microphone in front of me. Now, there was only about 25 of us at the time.

[Michael Batnick]

First. The first time you were in the

[Dan Iverson]

first, I said, they're supposedly, you know, watching the process.

[Michael Batnick]

You were like, wait, wait, wait. I'm not even in Skull and Bones. I'm not ready. I'm not ready to.

[Dan Iverson]

Wasn't ready. But that was an important part of the process. And, you know, all young people had to go through and contribute to presentations or to present. So I think it was bigger than just trying to get to the right investment answer. Even today, we treat it like an internal conference. So we bring people out. We have, you know, ice cream socials. We actually had a Pimco band led by New Yorkers here that came out and joined some folks out in. In Newport beach, just, just for a little bit of fun. But the whole idea, and again, I think this is even more important today, was to get away from the noise. As we all know, we get measured over two short periods of time. There's a fascination on what UNAV did today. And even back then 30 or so years ago when I joined the firm, there's just a lot of noise. So I think stepping back away from the noise and looking at trends and themes that would impact economies or markets was pretty important. Today, I think it's critical. Just the information flow is unbelievable.

[Michael Batnick]

So you guys. But you guys bring in outside voices, too. It's not an insular thing. You'll bring in thought leaders and experts, subject matter experts, to talk to the group. I would imagine you're having a lot of AI people coming in these days to just educate everybody.

[Dan Iverson]

We did. And actually this year, realizing you can't get to all of it, in the week where we conduct the actual forum, we had a secular speaker series, which was comprised of almost all AI folks.

[Michael Batnick]

Right.

[Dan Iverson]

You tend to get the bullish AI message. You know, I. People ask me, you know, what podcast do I like? I like sports and I like our industry, but I try to spend the bulk of my time listening to all the tech stuff because that's the area where I have the least amount of feel. But it's very, very important. And then we're trying to get a bit more of a. A bearish or cautionary message when you're lending against AI investments. And at best, you get par back, hopefully, unlike some of these private AI companies where you're talking about 5, 10 times multiples, tripling money, it's a different conversation.

[Michael Batnick]

You guys are worried about return of capital as much as you're worried about return on capital.

[Dan Iverson]

Correct. And of course, there are huge macro implications here. But even if you get the macro right and you make a few mistakes in a bond portfolio, you know, they're like grenades going off. You know, you can, you could quickly lose, you know, half a percent here, half a percent there. And, you know, you work hard to generate that incremental return.

[Michael Batnick]

We're going to talk about that. We're going to talk about that secular theme and what the. And what the implications might be for fixed income. But in this particular outlook. Well, last year the outlook was the fragmentation era. This year it's called rupture and resilience. I like that you saved us with the resilience part after the rupture part. But it is a meaningful escalation in language from fragmentation to rupture. So why don't you talk us through what's changed between last year and this year as far as that outlook and what you mean when you say rupture and resilience.

[Dan Iverson]

Sure. And we've talked about this for the last few Years in the general thought, at least when you look at the geopolitical stuff, is that for a while it was safe to assume you're a politician, you generate good economic outcomes, everything's fine, you get reelected. And most policy was based on global economic efficiency. The whole globalization trend. And then we had the COVID shock and now we have a series of shocks. Populism within politics, the realization that significant parts of the economy, middle income, lower income households, haven't done so well the last few decades. China sort of snuck up on the world quite large, quite impactful, both in terms of trying to grow its own economy, but creating disruption all around the globe by exporting cheap products. AI related uncertainty. We're just at a point where something did change. A few years ago, politics began in some sense dominating traditional economic decisions like tariffs as an example. Tariffs aren't there just out of purely economic fairness or efficiency, as Trump has said.

[Michael Batnick]

The textbooks say tariffs are bad, we're doing them anyway because there's a political reason to do them.

[Dan Iverson]

Correct.

[Michael Batnick]

Maybe not necessarily a purely economic reason.

[Dan Iverson]

Absolutely right.

[Michael Batnick]

And there's a lot of that going around.

[Dan Iverson]

Absolutely right. So that sort of set the stage in something we've talked about. But when you look at the last fall months in particular, you have outright armed conflict now still in the Ukraine with a risk of escalation, actual war in the Middle east alongside the type of direct trade tensions, geopolitical tensions, extreme political uncertainty within this country. You look over at the uk, similar dynamic. You look at elections all around the world now. You tend to have candidates from extreme perspectives typically battling out for control of countries. There is very little true middle nowadays. So our point with the piece is that you're starting with financial market valuations that are high. You've had pretty good performance the last few years, yet you're dealing with a type of uncertainty now that most investors haven't had to deal with to the same degree. So be real careful about being surprised. And some of the surprises could be very good ones. AI, again, incredible investment in this technology. People are making these investments because they think that by making those investments things will change. So even just the tech Trends alone, almost $10 trillion of anticipated investment are creating just massive uncertainty. And I think that's great. As an active asset manager, it's better to have this type of uncertainty, these types of frictions in markets to generate returns relative to passive alternatives. But anytime things move around a lot, you can, you can lose money too if you're on the wrong side of the trade.

[Michael Batnick]

So, so by rupture you mean like a rupture of the existing world order. And some of the, I guess people have talked about this like in terms of NATO and like just some of the things that we've come to believe are like part of the bedrock of the global order. All of a sudden there seem to be bigger shifts than we're accustomed to and then that has implications further on down until you get to financial instruments, currencies. Okay, yeah.

[Dan Iverson]

And that's the macro point and that's usually enough to create a lot of uncertainty. Yet you have now, with this highly innovative new technology that just arrived on the scene, massive potential disruption to old economy business models. The way that we conduct work, you know, we used to go out to get an accountant to do our taxes. I'm learning, you know, the young kids are teaching me how to do this in the organization. But I actually think that with a little training, you know, that's something you could do with a few clicks of the button and you can go on through different areas, you know, where we have gotten used to things happening a certain way or all of a sudden a few years from now it could be completely different. So yeah, it's geopolitics while also seeing these trends that we haven't seen in a very, very long time. I guess the Internet in the early, late 90s, early 2000s comes close, but even there it feels like the disruptive aspects of this new technology can be quite impactful for markets. So yeah, geopolitics, traditional monetary policy, uncertainties, high debt levels, all these are going to be sources of volatility. And then despite all that, we still have this other source of uncertainty that again, it's moving fast and it's going to matter. We just don't quite know exactly how it's going to matter just yet.

[Michael Batnick]

Staying on geopolitics, you quoted Mark Carney, who very memorably, I guess that was a few months ago at the U.N. perhaps he was addressing the world and talking about the rupture itself and a transition away from the post World War II rules based regime. I wanted to ask, do you actually believe that we're at the point of no return on globalization and that things can never go back to the way they were? Or do you think that maybe some of this is cyclical and not secular?

[Dan Iverson]

Well, so we think many of these themes and trends will be hard to reverse anytime soon. Now politics in our country, of course, at least the President changes every four years. We've already seen so far. So far, so far Good point. So we've already seen now this is the second term of Trump with Biden in between. When Biden got elected, there was a partial reversal in some of the Trump trends. And we have an election coming up in a couple of years. And you very well could see if you had a Democrat, the more traditional administration embracing certain global institutions and looking to reverse some of which has been done. It's the nature of our politics. But with that said, we think it may be bumpy. You may see a situation where different administrations, or depending on who controls Congress, may move in a different direction or look to try to get back to where we were a few years ago. But all in the midst of very, very powerful in accelerating secular themes that are going to be very, very hard to reverse. Probably a good example would be tariffs. You know, Trump put tariffs on during his first administration. The Democrats weren't super supportive of that. Many Republicans weren't super supportive of that. He left. The tariffs didn't get reversed. I think just an example of how from a political perspective today people realize that trade isn't helping all segments of the economy in that tariff policy. And if it's not tariffs, some type of more aggressive industrial policy or policy towards our adversaries is warranted. So it may take a slightly different form, but this idea of dealing with conflict, addressing the China problem, trying to come up with some creative ways to ensure that those that have been left behind by globalization see a shot for their incomes to go up. Some of these are themes that, again, could be hard to reverse and are unpredictable in nature. They can be orderly or at times represent more disorderly change, like we've seen all of a sudden in the Middle east this year. Tensions had existed there for quite some time. In the absence of armed conflict, the economy and market performance this year would likely have been quite different. So you're not sure when these things are going to erupt. You just know that they're likely to erupt with more frequency than what we remember from the old days.

[Josh Brown]

So, Dan, the more you zoom out and take a big picture view, the scarier things get. At the global level, people are always fighting. There's always uncertainty. And the more you zoom in, the more the picture gets a little bit less horrific. So how do you think about the juxtaposition between global uncertainty, what's going on with the strait, and the juxtaposition of that between our economy, which has proven to be remarkably resilient, and the consumer that powers the economy, despite the tariffs and the inflation and the AI uncertainty and everything that has been thrown at us, our economy just continues to chug along. And when you're making investment decisions, there's this push and pull between the fears and whatever might or might not happen versus what is happening today. And what is happening today has been a continued, remarkable push through all of these dangers.

[Dan Iverson]

Absolutely. And I look back at some of pimco's views. We may talk about this later. Back in the mid-2000s, aggressive underwriting concerns, developing the banking system, we were worried, we thought, wait a minute, if this continues, we're going to have a recession. And we began to get really, really concerned and really, really defensive. You flip forward today and yeah, there may be some excesses in certain areas and you know, yes, there's uncertainty, but our economy has been incredibly strong. We have a real, real strong, at least middle and upper income consumer home prices have gone up for many, many years. Most people are, you know, close to half the people you know in this country own homes. The consumer balance sheet, solid, you know, many years of, you know, real, you know, good labor market performance for middle and upper income cohort groups. And now this technology through capital investment through. And the productivity numbers are noisy, but we get the sense that you're already beginning to see the positive effect of productivity on the US economy. So despite uncertainty, despite Trump tariffs, that in a narrow sense could lead to some additional frictions in the markets, we're fairly optimistic. And that does change the way you think about investing. When you're really pessimistic about growth, when you see lots of problems that just for the passage of time are eventually going to lead to a slowdown, you have a very different approach. So the bottom line today is that you want to be cognizant of the uncertainty, but also optimistic about growth. As a fixed income investor, that means you're probably not optimizing portfolios if you're getting wildly defensive and just hunker down in the absolute safest stuff.

[Michael Batnick]

Now is not the time for wildly defensive.

[Dan Iverson]

No, not in our opinion. I think it's time for resilience. And it's a great word. And everyone in our industry who disagrees with resilience, but I think the idea is be up in quality or take advantage of this exciting global opportunity set of higher quality risks that can actually generate similar returns to the real risky stuff if we continue to grow like we expect. But we'll provide some downside protection if you end up having a recession.

[Michael Batnick]

Let's talk about these. Dan, gimme chart four, please. This is from Your presentation you're talking about. I don't know if you're calling these like the four drivers, but I'll say these are like the four biggest drivers, I guess, of global GDP growth or spending or. So you're, you're highlighting. AI infrastructure is $7.6 trillion over the next five years, and you say that is the GDP equivalent of the economies of Japan and France. Then you've got energy and grid, I guess, modernization or reinvestment, 2.6 trillion, about the size of Italy's economy. You've got defense spending, NATO plus whatever else, 2.4 trillion, which is about the size of Canada's economy. And then finally reshoring and supply chain, I guess, like less manufacturing overseas, more here. Okay, 1.4 trillion, about the size of the Netherlands. So add those four things up. It obviously does seem like along with the rupture of the way things used to be, there's a ton of opportunity given how much money is going to go pouring into these things. So talk a little bit about why that's important for PIMCO and for your investors.

[Dan Iverson]

Yeah, so it's important just from a macroeconomic perspective. As long as that type of capital investment can be maintained, it's gonna create a lot of positive momentum for economies making those investments.

[Michael Batnick]

It's gotta be bullish. I mean, to have that much investment.

[Josh Brown]

It's a lot of stimulant.

[Dan Iverson]

Yeah, it is, it is. And by the way, that bears watching as well. You know, over the short term, you know, all of these investments can be great for the economy. It could lead to better productivity, lower inflation. But there very well could be a timing mismatch. And that's why, again, I think it's important to note that although our base case is that inflation, if we get the situation in Iran stabilized, inflation probably stays at this level and trends lower. There's some uncertainty just given the massive amount of materials you got to go find to make these investments. But generally speaking, positive. And then from a fixed income opportunity perspective, you know, people need to raise money for a while. You know, these large hyperscalers, these big tech firms were generating so much cash flow they never had to come to the bond market today.

[Josh Brown]

Nvidia.

[Dan Iverson]

Nvidia came today. They don't even need the money, and they're coming today, which again, is a pretty strong forward indicator that even Nvidia, generating the most cash flow of all, is still looking to lock in. I saw it take 20, 30 billion.

[Josh Brown]

This is a key part of the story. As you mentioned, all of These hyperscalers were producing more money than they didn't know what to do with it. Just sitting on hundreds of billions of dollars.

[Michael Batnick]

Buying back some stuff.

[Josh Brown]

Yeah, buying back stock. So it's, that's no longer the case. Google did an equity offering for the first time I think since 2001. Recently they, they raised $10 billion. Oracle announced earlier in the year in the last call that they were going to do $20 billion of equity, another $20 billion of debt. Nvidia to your point, first time since 2021 they're raising $20 billion. You guys actually were a big part of the financing. Meta's Hyperion Data Center. Right. Is that in Louisiana you guys worked. So was that with Blue Owl Blue.

[Dan Iverson]

I was in the equity on that trade.

[Josh Brown]

Okay, so you obviously have a great lens into what's happening with the build out and where this is going for the next 10 years. So what is your view on the data center build out?

[Dan Iverson]

Yeah, so look at the, the bill that's going to continue and it's going to accelerate and it's going to accelerate from here. From, from here. Now, now again you're going to have, you're going to get a, you're going to, you're, you're seeing even over the course of the last few months in a signal like, like we're seeing from Nvidia today that you know, capital investment targets have just gone higher and we would expect them to remain higher, even going a bit higher from here. Frictions are going to increase. You're even seeing at the local political level some pushback and that Bear is watching as well. So it may be bumpy in terms of actual implementation. But the bottom line, to keep it simple for a long time there was very little issuance during COVID Lots of companies were able to term out their debt. Sort of everyone's been like, well why, why are high yield spreads and IG spreads so tight? Well, there hasn't been a tremendous growth of issuance. No new product until, no new product until recently. And this is concentrated within the tech space. That's great for an active manager in that for the first time in a long time, you know, there's all this froth and private credit people falling all over themselves to do deals. You know, those that were borrowing didn't have to give on terms because there are plenty of people out there raising money to give them.

[Michael Batnick]

Oh, this is competition for private credit investors.

[Dan Iverson]

Well, it's so big now that the capital needs are so large relative to the amount of money we all have. So everybody can eat, Everyone can eat and we could go out there to actually drive terms. Now that doesn't mean you like every deal because again this dynamic that if I'm a bond investor, at best I get my coupon and I get par back. And these companies, although they're doing great things, they're going to lead to, you know, better productivity. All of them haven't figured out how to make money yet. So it's a great opportunity because for the first time we can look at 10, 15, 20 deals and that's probably what we have in our pipeline today. Some of which are on the order of 20, 30, $40 billion in size. Those are great deals where you can come in, you can do version very precise underwriting, you can look to create structures that insulate our shareholders from some of those longer term AI related risks and end up with the spread on the deals we like at a significant pickup to your typical investment grade bond or your typical lower quality below investment grade type bond. Now you gotta be careful and sometimes it may say IG on it. We don't quite believe the rating agencies in that it's investment grade. But you get enough spread cushion where you can compare it to some type of lower quality bank loan where you don't get good protective terms in the deal. All this stuff, you know, we read about all the time where wait a minute, I thought I was senior and then ended up because I had bad docs, you know, someone was able to, you know, lend, lend and take away my collateral. Here you have a lot of ability to negotiate and find value.

[Josh Brown]

I think Munger or Buffett, I can't remember which one said this, you'd make the price, I'll set the terms. And it sounds like you would rather be on the terms setting side than the pricing side or both.

[Dan Iverson]

Ideally, yeah, ideally. But I think in this environment the terms matter a lot. Just given, given the uncertainty, given the complexity. So we think that if we have a chance to help drive terms that we're a large enough firm. We have perspectives from our real estate group on the risks of developing a data center. We have folks on the infrastructure team or the asset backed lending team that understand the nature of those types of contracts and how in theory it may sound like you have good collateral, but you better make sure you have the ability to go get it and realize on it and then when you have to go get it, the price is a lot lower on that collateral than you tend to think. So that's an environment where we should Be able to add good value for investors. But one, we don't want to be wildly overweight. This risk, it's a sector where we want to generate attractive return, not own too much of it.

[Josh Brown]

And your investors own equities too. Correct. And they're already probably all in.

[Dan Iverson]

Yeah. And that's a great point. And then I was going to mention the correlation piece. So when you looked at that chart over there, you know, you know, you saw, okay, well, there's AI investment and then there's energy investment. Well, they're, they're related because, you know, you got to figure a way to keep the data centers or the manufacturing facilities on. So when you start looking at portfolios, it's pretty important to think about how that risk may move together and realize that you're not going to quite know for sure. Which gets back to this idea that anytime you get to raise $10 trillion in a market, yeah, there's great opportunity. There's also a lot of risk, especially if you own.

[Michael Batnick]

So I want to ask you from the perspective of an end investor, so not you guys as the portfolio manager, but your clients. I understand the benefits of investing in AI infrastructure. On the equity side, I might invest in something at $10 million valuation that turns into core weave. I totally understand that part. What's the pitch to invest in digital infrastructure or AI cloud data centers from a fixed income investor standpoint, why is that attractive? Are the yields so much higher or is the risk mispriced in some way where it's way less risky than people assume? Or what would be your answer to that question?

[Dan Iverson]

You know, I'll give. I'll bring it to two reasons. I mean, we could talk a lot about all the nuance in the market, but the first would be that you can structure safe risk. True investment grade type risk.

[Michael Batnick]

That's my favorite type of risk.

[Dan Iverson]

Yeah, it's easier. One safe risk is great. Safe risk, but lower yielding. Again, the investment grade space nowadays still

[Michael Batnick]

have the give or take.

[Dan Iverson]

Yeah. You're looking at 6, 7, 8% type returns in a asset that if structured properly at the end of the day, have cool credit risk that looks a lot like meta. And Meta again is a much better tech firm than others in this space because they're more diversified, they're generating more cash flow, they're in popular indices. So you can take advantage of owning meta risk. A company that we do think is solid investment grade, generates tons of cash

[Michael Batnick]

flow, very sticky business model, probably going to be around for a long time, right?

[Dan Iverson]

Exactly. And you can do that at a spread pickup to their underlying credit of 2 percentage points as an example. So now you're talking about getting the same type of yield you'd get on typically a very high risk investment for something that's a bit more complex, happens to be quite liquid as well. So if investors change their mind, they can sell out of it very, very quickly. In fact, that bond in question is one of the most liquid bonds out there in the market.

[Michael Batnick]

What's that? The Meta data center deal?

[Dan Iverson]

That'd be the Beignet deal, that data center deal, just given its size and given the sponsorship out there, that's a very, very liquid instrument. So that would be one a high quality way to generate much higher incremental returns. So instead of owning a high yield bond fund, I can own this type of risk that's investment grade, get the same type of spread the other bucket. And there is this entire other part of the ecosystem which is risky lending. Within this space there, we think investors and we'll look at that risk as a equity alternative. So we'll compare it to a NASDAQ stock or we'll compare it to a dividend producing equity investment and say yeah, it doesn't have the same type of safeguards. We still gotta be careful about concentrations. But we could go out there and target deals that are well structured but lower quality. And now we're looking at 9, 10, 11, 12, 13, 14, 15% type returns. So you compare that to historical risky stock returns, it looks pretty good. I think it's very, very important though for investors within Pimco and elsewhere to put it in the risky bucket though. I think the problem is when you have a lot of AI euphoria going on, when you've had a period where we haven't had a loss cycle in a long time, you can create the illusion of safety just because the those types of assets haven't moved around a lot in the past.

[Michael Batnick]

Nothing bad has happened yet. Therefore it's all okay.

[Dan Iverson]

Yeah. And of course you do get the current coupon. So you know, again, unlike a AI stock or VC stock or some of the names that are out there that are doing real well there, you know, you buy it and then you hope you can sell it to someone at a higher price in the future. On some of the riskier areas of this market, a lot of times you are getting a 10% yield or 12% coupon. That creates some stability. Because once I get that coupon, you can't take it away from me either. So we do think that as a form of maybe equity replacement or as an alternative to equities at these very high valuations. You can carefully move into some of these areas of the market in the higher yielding, riskier space and generate good value.

[Michael Batnick]

Let's stay on that. Equity high valuations. Dan, can I have chart 6? The equity risk premium in the US is basically zero. That's by your own data. But you're not calling for any kind of imminent equity correction or bear market. But sort of like, is that implied when you think about today, how much do you care about equity risk premium would be the way I would phrase that question.

[Dan Iverson]

Yeah. So first of all, we picked a chart. As you know, there's 10 different ways we could have essentially communicated the same. The same.

[Michael Batnick]

What are we looking at here?

[Dan Iverson]

Just. Well, I don't even know which one this is here. This is probably a Shiller. A Shiller PE that's just being graphed

[Michael Batnick]

here, showing forward returns below the 0% line.

[Dan Iverson]

Yeah. Basically what this says is if you smooth earnings or if you adjust earnings and then compare what you have to pay for stocks based on this assumption, they're very, very expensive and they're near the most expensive they've been relative to bonds in many, many years. Now, again, you can look back at the last time this stuff got real expensive and you'll notice it's expensive today. It can get a little bit more expensive. Those were the years leading up to the Internet bubble bursting. So I say this and it'll sound more alarmist than I intend, but one way you poke hole in these charts is you say, okay, well, yes, under these types of longer term valuation metrics, equities look expensive. But if these tech companies are leading equity markets and their earnings growth is, you know, double digits for the next few years, you can justify these values.

[Michael Batnick]

You have to adjust by the earnings growth. And as it comes in, it makes the multiple look more reasonable.

[Josh Brown]

In hindsight, we were talking about the Shiller Cape ratio, screaming about it. Literally in 2015, people were getting alarmed. So I'm not making a prediction on full returns, but by traditional metrics. Valuations have looked stretched forever and these tech giants have just continued to rewrite

[Michael Batnick]

and margins just keep growing.

[Josh Brown]

What we thought was possible.

[Dan Iverson]

Correct. And that's why these types of relationships aren't great as a trading signal to say, okay, all of a sudden short the market. And then they also get into concentration type risks where for the average investor, you're getting to a point now where because the tech stuff's gone up so much. You need to go out there and find diversification. And you can shift around these metrics depending on what equities you're looking at. But I think the bottom line is when you look at these starting valuations and then you look at subsequent returns over a five or a ten year period and you go all the way back to the late, late 1800s.

[Josh Brown]

Not great.

[Dan Iverson]

Not great and in fact quite negative relative to the starting point for yields. But again, this time could be different. It does feel a little bit different. But I think the point is that it's been a bad period for bonds. They've generated almost no return after inflation for 15 years. Stocks have just steadily gone higher. And in theory you get to a point where, and we strongly believe that valuations have shifted to a point where the next five to 10 years are probably going to be different. And on the fixed income side, you earn your yield, you don't know what it is after inflation, you don't know what it is if it's in a different currency. But in high quality bonds, it's fairly simple in that you start with a yield, a boring index. I say it respectfully, but it's not super exciting. The Bloomberg aggregate index. And you're at near a 5% type return. You, you buy a bunch of other high quality paper, give up some liquidity, you're at a 7 or 8% yield, 95ish percent correlation between starting yield and five year forward returns.

[Michael Batnick]

You could almost set your watch by it.

[Dan Iverson]

Set your watch by it.

[Michael Batnick]

So let's explain that for the audience. Starting. So the correlation between the starting yield and what you end up returning over a given period of time. So if the starting yield of a portfolio is 7%, you should not be expecting 11% returns or 3% returns. It's going to look hopefully if things go well closer to that seven on an average annual.

[Dan Iverson]

That's right. Then you know, it could go up or down based on, you know, trading strategies along the way. Hopefully it's a little bit higher than that. But simplistically, if you don't want to give any benefit to, you know, the active piece, that's what you earn. So going back a few years ago when yields on that index were 2%,

[Michael Batnick]

what were you right? What do you expect?

[Dan Iverson]

And we ended up with two, we ended up with now 22 is back. Because it can all happen at once, just like stocks people. Show me that chart. Well, what does it mean? Well, it could mean that equities just disappoint slowly or they reprice massively and then they look cheap again, that we don't know. And bonds bounce around as well. But what I do for a living, I say it time and time again when our clients come in. I'm glad I don't do the VC stuff. It's just not the way that myself and others at Pimco are wired to the same degree in that we like the cash flow piece. We like to forecast based on cash flows. They create predictability to what we do. You guys talking about, you know, again, you know, the AI investments and you know, where someone's going to pay for something that's not going to have a dividend, you know, maybe ever. That, that, that's tough. It's unpredictable I guess.

[Michael Batnick]

Whole different, it's a whole different mentality on part of the pm. Can we talk about, we talk about fixed income. You say the credit loss cycle is upon us. Define what you mean by that. Are you talking about like a wave of defaults or are you talking about sort of a slow grind of maturity, extensions, payment in kind negotiations? Like is it, it's a blow up or it's just sort of a return to normal and it's glacial and nothing to be alarmed about. How do you see it?

[Dan Iverson]

Yeah, so I think the return to normal parts of. Yes and in that this does require a little bit of, a little bit of nuance. But we coming out of the global financial crisis, you know, it's been a very, very unique period in that you've typically and investors have grown used to earning almost your entire yield when you invest in risky credit, below investment grade credit.

[Michael Batnick]

No, no recessions, no recessions.

[Dan Iverson]

And then Covid came, they papered it over. No losses, papered it over. So, so you just, you look at the stats and you can see that if you looked at the same type of risky credit, by the way, mid market direct lending is risky lending. It is, it's performed very well, but it's risky.

[Michael Batnick]

Not recently.

[Dan Iverson]

Not irresponsible bank loans, you know, broadly syndicated bank loans. You know, risky lending performed exceptionally well back in the 80s and the 90s and the 2000s. You know, you'd earn a lot of yield, then you'd have some type of loss cycle, you'd give a lot of it back, then you'd earn money for a few years, you'd give it back. It's been one way.

[Josh Brown]

But Dan, sorry to cut you off, but I think one of the problems or one of the things that lulled investors recently into complacency is Those bonds performed in 2022 because there was no recession and they're plain vanilla bonds and they don't, investors in general don't really understand that it was all interest rate risk. And so as interest rates went up, their government bonds got destroyed and these risky corporate loans to middle market companies returned 9 to 11%. And so it further made those, those coupons much more enticing.

[Dan Iverson]

Absolutely right. And then, and then the market convention is different if they were the private version of those investments. So you even had less volatility than what you had at least briefly in the tradable high yield bond market. So all true. And what we're getting at here is so we don't expect a wave because we expect economic growth to hold up. I said this the other day, offset it, a steady stream. But a couple of points. One, given how much money was pouring into the lower quality credit markets, it was easy for a while to just kick the can forward, pick interest where you know, a company you know was struggling to make their we can't pay

[Michael Batnick]

you back, but we'll give you more

[Dan Iverson]

bonds, we'll give you an iou, we'll pay you later when we, when we can. Or we'll extend the maturity.

[Michael Batnick]

So when you have inflows coming in, as a portfolio manager, you're feeling more generous to allow a company to do something like that versus take them to court and try to take blood from a stone.

[Dan Iverson]

Correct. And when you have a more traditional predictable economy where work as we know it isn't being disrupted. So you had the liquidity piece, money pouring in, easy to extend private equity. We can't realize on the investment we could wait, we'll extend our debt, someone will give us an extension or they won't make us pay our interest for a while. That dynamic has existed over the last few years now losses have actual actual losses have steadily gone higher. But the prediction in terms of future losses and usually when you're allowing a company or when a company can't meet their current interest payment, that's a good or bad signal in terms of their ability to afford that over the long run. So that's one piece. The piece we wanted to highlight this year though that has been the real change is that AI disruption's here. All this AI investment is looking to feast on old economy businesses. Businesses that had the so called moats, they had attractive current cash flows. They did so much of what we're used to them doing services, tax software, lawyers, financial services, financial services software. All of these, all of these Areas of the market that are likely to be disrupted and disrupted with increasing frequency. And I think the point we want to make is that that time has arrived. You're going to be, you're going to see higher realized losses that we've seen in quite some time. And those losses are going to be somewhat independent of the strength of the economy. You have this very, very unique situation where the more productive AI is at the economic economy level, the more disruptive it's going to be. It's almost necessary,

[Michael Batnick]

it almost has to be that way.

[Dan Iverson]

So that's what you're going to have. And then I want to be careful too, because it always comes across as overly alarmist if left there. We think it's a steady stream of losses now, not a wave. If you combine this AI disruption with a negative growth shock to the economy, especially if it's stagflationary, or put more simplistically, this is a risky macro setup in that almost all of that debt that we talked about that did so well in 2022 is floating rate. If you don't get that short rate down or if that short interest rate or the policy rate has to go higher. Now you have companies that are facing AI disruption. They already have a lot of debt and higher costs and higher cost to service that debt. So any type of growth shock with inflation remaining elevated would be a far worse scenario for credit. We're not forecasting that. So the point we are simply trying to make here is that what used to be unlevered 8% return with very few realized losses, especially given how aggressive lending got coming out of the COVID period. You know, those were really bad vintages where spreads were super tight. And because of this battle for market share, you just weren't getting good protective terms on your debt. So those types of segments of the economy that were used to having losses close to zero are likely going to have a period where those losses end up migrating up to the mid single digits. So that old 8% type return that you were getting back when high quality bonds were returning one or two is probably going to be 4 or 5% for a while. Probably with 4 or 5% today is I can buy an Australian government bond. I get that too, but I could buy, finally I could buy a Treasury bond at four and a half.

[Josh Brown]

Well, your piece, we started the show with the rupture. What was on the other side of the rupture? Something better.

[Michael Batnick]

Resilience.

[Dan Iverson]

Resilience.

[Josh Brown]

So one area of rupture, we have a new Fed chair pretty Unconventional by traditional standards. And one of the reasons why fixed income has been so challenging is all of the government intervention in the fixed income market. Some of it needed, some of it, you know, you could argue was, was, was very excessive. There was an article in the Journal this morning. Kevin Wash, Nick to Maria said he wants the Fed to stop explaining everything. For decades the central bank believed talking openly. All right, we, we understand. Are you a fan of the overwhelming amount of transparency? The fact that these Fed officials, these governors have on a podcast tour for the last decade or so. Do you like that level of transparency? Like what's your thoughts on policy today?

[Dan Iverson]

That's great. So I like to differentiate when I'm reflecting a PIMCO view versus a personal view. So this is an area where we have a little bit of difference of opinion. Of course we have Rich Clarita, the former vice chair of the Fed. He's done his share of speeches and things.

[Michael Batnick]

Great speeches.

[Dan Iverson]

Let me just say this. No, I don't. Look, I think don't care I guess would be the first point in the sense, in the sense that don't care

[Michael Batnick]

about whether they speak or not.

[Dan Iverson]

As a market practitioner, I think that a lot of the speaking that's gone on is interesting but not essential for the markets to have a good sense of what.

[Michael Batnick]

I agree. The crowd loves what you're saying.

[Josh Brown]

You want them to shut up.

[Michael Batnick]

Because I'm from the old school. I liked Greenspan. He would come out once a year and speak in riddles like the caterpillar from Alice in Wonderland. Nobody had any idea what he said. It was by design. He said, if you understood what I said, I made a mistake and we were somehow able to manage capital markets no problem. I understood the hard pivot toward over communication in the Bernanke years. It's already four Fed chairs ago. Why are we still doing press conferences like they just won the NBA Finals every time they go up or down or nothing. It makes no sense to me.

[Josh Brown]

Well, Wash is speaking on Wednesday, so.

[Dan Iverson]

Yeah, well, they're long and then even dots and things are the individual views which again views usually tend to be pretty good around policy when you're looking forward a month or two, but when you're looking forward several quarters and you

[Michael Batnick]

have we're data dependent but here's our 12 month outlook. What are we doing?

[Dan Iverson]

Yeah, so I think it's a lot of noise and I think the markets will be just fine with more standard and targeted communication. The other point is when we hear about Fed behind curves ahead of Curves. With just a few words, you can control market expectations. And sometimes you don't need any words at all. For example, we started this year, January and February, we had bonds rallying. There was this mindset, I think over the long run, it's a reasonable mindset that all this AI technology is going to put downward pressure on prices.

[Michael Batnick]

Disinflationary.

[Dan Iverson]

And then you had the war break out in Iran. It didn't take a single Fed speech to get the front end of the yield curve to go higher because now people knew inflation was higher in that it was less likely that you're going

[Michael Batnick]

to stop talking about insurance cuts. When the bombs started dropping in and around the Strait of Hormuz, we all understood it immediately. We didn't need a speech.

[Dan Iverson]

Correct. And then, you know, you see it with, with stocks. Trump administration, Trump himself tweets about the potential for a deal. Stocks rally. News comes out that a deal's not going to get done. They sell off. By the way, bonds were moving in the same direction more recently. So we do think also that a Fed has the ability to influence market expectations if they feel it's necessary with just a few targeted words. And that by the time you're beyond the occasional speech or the occasional comment into massive discussions, we just think there's just rapidly diminishing.

[Michael Batnick]

Marsh is seen as an anti activist, like a do Less. I think that's that. It's not. He's a hawk, he's a dove. It's not about that. It's. I don't think the Fed needs to be doing all that. Like the Fed might be doing too many things all the time.

[Josh Brown]

Well, this is a quote that he gave last year at a Stage three conference. He said, if you're not very good at something, you should do less of it. These forecasts have been abysmal. And he said my dots wouldn't be perfect either. So I just wouldn't give them.

[Dan Iverson]

Yeah. So we talked about this in our recent piece. We think a wash Fed will be sufficiently independent in the areas that matter to the markets, which are funds, policy and balance sheet. There's still some uncertainty. We think in a perfect world, a wash Fed would like to get the balance sheet down quite a bit. But I think that this is a Fed that again, it's committee, not a chair decision. And I think there is the appreciation that with inflation elevated, with the balance sheet down to a manageable level, that it probably makes sense in the base case just to wait and see. Don't rock the boat too much. That's our best sense of this Fed, even the Powell Fed has been dovishly inclined looking to get rates down ahead of inflation starting the year with at least the hope of getting that funds rate down further. So we do think that this is a, a Fed that would like to have the opportunity to get rates lower even before inflation makes meaningful progress towards their target. But we don't think that's super different than Powell. Other than your point in that we do think the Wash Fed from a philosophical perspective wants to be a bit more rules based, a bit clearer or more straightforward in there in their communication.

[Josh Brown]

He's going to come out once and say no change. See you later.

[Dan Iverson]

Yeah, yeah, yeah. It'll be, it'll be interesting.

[Michael Batnick]

I think, I think something tells me the financial media would be able to even take that sentence and do three hours of content about it. So, like, which syllable did he emphasize most? All right, putting that aside, here's where I want to end. You talked about AI being this massive opportunity. You're forecasting trillions more in spending on data centers. You actually think it accelerates. You guys are funding these deals. I think our audience would love to hear from you your perspective on the way in which this could end up being disinflationary and what impact you think it might have on not just the overall economy, but the people that are in the economy. Are you glass half full? You glass half empty? Just what's your perspective on where all this is headed? And, and you can tell us your personal one as well as your professional one if you want to.

[Dan Iverson]

Well, yeah, and it depends on market practitioner.

[Michael Batnick]

Nobody's listening.

[Dan Iverson]

Yeah, no, but I mean, I think there's a markets view and all too often I think this is that, you know, what's good for markets is not so good for segments of the economy and those tend to be the lower income cohort groups, which is a challenge we saw with globalization. On paper it made a lot of sense. It probably did lead to higher global growth, but it also created instability for those that have the least economic flexibility. And we're still dealing with this today. So our general view, despite the uncertainty, is that AI could lead to some inflationary noise the next few years as you go out there to find materials to build this stuff and to power this stuff. Over the next several years though, we do think that AI could be a game changer on the productivity side. Bring the costs for providing goods and services down and down.

[Michael Batnick]

Quite those costs are people's salaries and

[Dan Iverson]

unfortunately I was going to get to that so again, from the standpoint of where the inflation rate may go, it's probably positive. It could even be positive for our debt picture. We didn't spend much time talking about, we talked about all the corporate investment, but we're still spending way too much money, you know, at the government.

[Michael Batnick]

I don't see that changing this year.

[Dan Iverson]

We'll come next time, we'll come back, we'll talk, we'll cover that. But we do think, you know, unfortunately we do think it's going to lead to some displacement of workers that particularly the middle income professional cohort group could see more uncertainty than they've experienced in quite some time.

[Michael Batnick]

White collar unemployment.

[Dan Iverson]

Agree. And that could lead to higher precautionary savings, a little bit less consumption, which can have a moderating impact on inflation and be good for the markets as a whole, both stocks and bonds. But it can also lead to more political uncertainty, the risk of regulatory backlash and a lot of tension. So we do think that it's hard to accomplish all of this in a neat and clean way where you can retrain folks fast enough to not create some frictions, some unpredictability, and perhaps even a pretty big reaction against what is perceived to be a technology in companies that are creating this disruption. So it's likely to be bumpy. So high level macro and financial market impact, we're fairly constructive while realizing that we got a lot of uncertainty. And again, when I take my investment hat off and look at the potential disruption that yeah, on a textbook basis, ultimately it's probably fine. You end up retrading folks. It's good for the economy as a whole. We just worry that there are going to be real timing issues here.

[Michael Batnick]

So the CEO of Google giving the commencement remarks at Stanford this weekend and they showed video on social media of hundreds of students walking out. And I said, oh, this is probably about AI. They don't want to hear the AI CEO in chief talk about. Turns out it wasn't. It was about Google's contracts with the government and all the causes.

[Josh Brown]

When I Smith, got booed out a

[Michael Batnick]

couple of weeks ago, yes, I was wrong with that assumption. But I do think the general direction of this stuff, I think it's gonna be an issue in the midterms, especially in states where there's a lot of data center construction happening. But putting that part of it Aside, we had 150,000 layoffs in tech this year, which is not big enough to have shifted like the national employment numbers but and 40,000 of those were last month. So the Pace of layoffs within tech is actually rising in the biggest bull market for the NASDAQ in 30 years. I thought that was interesting. A lot of people are saying this is AI, including the companies themselves. Look how efficient we're becoming thanks to the ROI from our AI investments. The venture capitalists who are backing more AI investments are saying, no, this is just CEOs with bloated workforces using AI as an excuse to do something they would have already done. You guys have a strong point of view about whether or not we're going to see that accelerating in the second half of this year. And will it spill over from tech into some more Main street industries?

[Dan Iverson]

Yes. Our biggest concern for the remainder of the year was the Iranian situation. That's a much classic energy shock in that if we didn't get that addressed, you know, you start seeing more imbalances on the physical side, that would really be the negative for the economy. We think if you get the Iranian situation under control, defined as not perfect clarity, but just more oil flowing through the strait, less uncertainty there, we're pretty bullish on the economy going into year end. What you're describing, absolutely, we think will be a key theme the next several quarters, certainly the next few years. We think it probably won't have as big of a direct economic impact, but it's going to be an ongoing theme. When we look at our business, we look to plan ahead three, four, five years. It's not so much that we're looking to make major changes in the work workforce, it's just the acknowledgment that the type of skill set that's optimal is going to evolve. So where you may have had, you know, 200, you know, new folks coming in, more with more traditional finance backgrounds,

[Michael Batnick]

spreadsheet, discounted cash flow analysis, people probably need less of.

[Dan Iverson]

Absolutely right. And then you're going to end up with, with folks in the tech groups looking to leverage the, the folks that have those skills. So I don't, we don't know what the ratio will be necessarily, but it's that type of dynamic. And again, you know, what's important is empowering, you know, the younger generations that understand this tech the best. So there's even just a shift in mindset in terms of seniority and who you, who you surround yourselves with, realizing that that optimal mix is likely to be different than what folks like myself that have been doing it for a long time would, would naturally think is the case. But we do think it's, it's, it will move it's moving fast by typical economic standards. But you know, we definitely think this is going to be a multi year theme.

[Michael Batnick]

He sounds bullish on balance.

[Dan Iverson]

He sounds like constructive.

[Michael Batnick]

Right?

[Josh Brown]

Yeah, most, most Bond guys are not that as constructive as yours.

[Dan Iverson]

And I'm not accused of being optimistic,

[Michael Batnick]

all that, you know, Poliano, I'm sure

[Dan Iverson]

that's where the Knicks hat on too. As a lifelong Celtic fan, I should be down right now.

[Josh Brown]

Oh, you have your share. Stop it.

[Michael Batnick]

Is there anything you'd like to say positively about Jalen Brunson before we let you go?

[Dan Iverson]

Yeah, he's a Villanova guy. I used to like him. He's a great player. He's a not to love this guy. He's a great player and he plays, plays the right way. So it's been an exciting, it's funny Saturday night I sent around a, I congratulated, I think it was Georgia for a win in the NCAA baseball tournament. And then I mentioned that Hartford Whalers won the cup this week.

[Michael Batnick]

Anything you could do except the Knicks,

[Dan Iverson]

any other than Knicks. But it's all good. I think we let some folks out early for the break.

[Michael Batnick]

Daniel Iverson, this has been such a pleasure for us. We, we're huge fans and admirers of yours and of Pimco's as well. And I wanted to let people know where. Agnes, where can people go for more insights from Pimco and the team? Is it pimco.com? okay. And is Dan going to start a podcast anytime soon? No, probably not.

[Dan Iverson]

All right, well, you guys do it, do it incredibly well. Really an honor to be here with you guys today.

[Michael Batnick]

Thank you.

[Dan Iverson]

Thank you.

[Michael Batnick]

All right, in hour two. No, I'm just kidding. All right. Dan Iverson, ladies and gentlemen. Thank you so much for joining us, guys. Thank you for watching. Thank you for listening. We'll talk to you soon.

[Dan Iverson]

Ryan Reynolds here from Mint Mobile with

[Josh Brown]

a message for everyone paying big wireless way too much.

[Dan Iverson]

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[Josh Brown]

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[Dan Iverson]

But that's weird.

[Josh Brown]

Okay, one judgment anyway, give it a try at mintmobile. Com.

[Dan Iverson]

Switch upfront payment of $45 for 3 month plan equivalent to $15 per month required intro rate first 3 months only, then full price plan options available, taxes and fees extra. See full terms at mintmobile. Com.