Bloomberg Talks
00:03:26 · David Ingles, Emmanuel Roman
[00:03:26] S2: Yeah, I mean, talk to us a little more about the situation in Europe right now. It seems like in countries like your home country of France, they're spending more than they can collect when it comes to taxes, right? What does that mean for PIMCO in terms of how you manage your European exposure right now? [00:03:38] S0: So let's flip first at the macro level. I think there is a view that there are other places than the U.S. dollar to put your money. And on the one hand, it's true. On the other hand, the dollar is really the only reserve currency. If you are a US investor, like most people in the region, and you say, where else do I want to be money? Do I want to put money? You may want to have some Australian dollar that we like. You may want to have some emerging market currency that you like. But the diversification in terms of currency is not as attractive as one would hope. And so the days of strong dollars are likely to remain. Now, mind you, it's a difficult exercise to predict currency. And I have to be incredibly humble. But it is a fact. The situation in Europe... is essentially very low growth, high debt to GDP, high taxation, very little room to raise taxes, and clearly popular discontent, first in France, then in Germany, with some smaller problems in Switzerland, and that's a real structural problem, and it's The conclusion of 25 years of globalization and industrial challenges and a public sector which is quite big and what needs to be done.
00:03:38 · Emmanuel Roman, Yvonne Man
[00:03:38] S0: So let's flip first at the macro level. I think there is a view that there are other places than the U.S. dollar to put your money. And on the one hand, it's true. On the other hand, the dollar is really the only reserve currency. If you are a US investor, like most people in the region, and you say, where else do I want to be money? Do I want to put money? You may want to have some Australian dollar that we like. You may want to have some emerging market currency that you like. But the diversification in terms of currency is not as attractive as one would hope. And so the days of strong dollars are likely to remain. Now, mind you, it's a difficult exercise to predict currency. And I have to be incredibly humble. But it is a fact. The situation in Europe... is essentially very low growth, high debt to GDP, high taxation, very little room to raise taxes, and clearly popular discontent, first in France, then in Germany, with some smaller problems in Switzerland, and that's a real structural problem, and it's The conclusion of 25 years of globalization and industrial challenges and a public sector which is quite big and what needs to be done. [00:05:06] S1: What about the alternative that could be China? How far behind do you think the yuan is as a, you know, I wouldn't say alternative to the dollar currently, but simply just looking at the bond market, you'd be hard-pressed to find any other bond market in the world that's done better than China. What we're seeing in China with yields effectively going from, let's say, 3%, 4% to now 1.5%.
00:05:06 · Yvonne Man, S3, Emmanuel Roman, David Ingles
[00:05:06] S1: What about the alternative that could be China? How far behind do you think the yuan is as a, you know, I wouldn't say alternative to the dollar currently, but simply just looking at the bond market, you'd be hard-pressed to find any other bond market in the world that's done better than China. What we're seeing in China with yields effectively going from, let's say, 3%, 4% to now 1.5%. [00:05:26] S3: Over the next 20 years, the single most important decision, macro decision, is whether China will decide to let the currency float. [00:05:44] S0: And I think we all can agree on the plus and the minus. The plus is all of a sudden it will become a second reserve currency for all of the obvious reasons. So there will be real capital going to China to be able to invest in the currency. But then again, there may be Chinese money deciding that they're overexposed to their own currency and deciding to come out of the country and getting into other currency. And what the net effect is, it's very hard to tell. But that's the big decision that they will have to make. [00:06:21] S2: I mean, that's what they want to do in Hong Kong, right? To become this offshore renminbi sort of hub. What is still missing then for that reality to come true? [00:06:29] S0: Is it still liquidity? Is it still market? I think if you're a central bank, you're counting in hundreds of billions of dollars, not in billions. And so that is the key advantage of the dollar. Wow.
00:06:29 · Emmanuel Roman, Yvonne Man, David Ingles
[00:06:29] S0: Is it still liquidity? Is it still market? I think if you're a central bank, you're counting in hundreds of billions of dollars, not in billions. And so that is the key advantage of the dollar. Wow. [00:06:43] S1: Speaking of Hong Kong, we were going to get this later, but I'll bring it up now. I mean, the event, what stood out to you? [00:06:48] S0: Because everyone... Everyone's here. [00:06:50] S1: Everyone is here. [00:06:51] S0: I think this is the only one where everyone's in the same room. I think one has to pay an enormous amount of tribute to Eddie Hu and his team and the event they bring and the amount of people that want to come. as a support for Hong Kong and as a gateway to China. And the fact that, you know, the HKMA has done an amazing job. And it started in COVID. And I just cannot believe how well Hong Kong is doing. And if you had told me five years ago that the city would be at full speed doing great, I think it's wonderful. And I think it has exceeded a lot of people's expectation, rightly or wrongly. But I think the energy here is second to none. And once again, this is an absolutely fabulous event. [00:07:42] S2: It's interesting how, I think it was Jenny Johnson from Franklin Templeton said, people are very excited about Hong Kong. It's different on the other side of the border in China, where you continue to see sentiments quite weak. [00:07:52] S0: Yeah. [00:07:53] S2: I mean, how do you look at the China market here right now?
00:07:53 · David Ingles, Emmanuel Roman, Yvonne Man
[00:07:53] S2: I mean, how do you look at the China market here right now? [00:07:56] S0: It seems like... It's incredibly tight. We're bond investors, so we look at China and say, not much to do. Even in a global bond portfolio, we find a much better place to put money. Nothing wrong with China, but as you said, rates are very low. But, you know, things change. Look at Japan. Japan was incredibly quiet for 20 years. We have a big full-fledged operation in Japan. As a joke, I often say, our partner there, Tomoya Masano, wasn't too busy for 20 years. And then all of a sudden, it works. And then rates go back up. And there's all this arbitrage to be done. And then all of a sudden, we have a great business in Japan. And there's just a lot of alpha to generate. So it's exciting. [00:08:37] S1: Well, there was a narrative that China was headed in the direction of Japan. You know, the Japanification of Chinese rates. Where do you stand on that sort of argument? [00:08:47] S0: The economy is so different. I mean, I think the Japanese experiment, at first, it wasn't so clear that it was going to work. But ultimately, it did work. Yes. I don't know. I don't know what will happen to China in terms of rates. I mean, it's not an easy question. Sure. Because it's about consumption and whether they are nudged, which would change consumption in terms of spending more, savings less. Right. [00:09:13] S1: And, you know, it's come up on our show a lot. You know, people talk about the confidence issue there. [00:09:18] S0: And if one points to a crisis.
00:09:18 · Emmanuel Roman, Yvonne Man, David Ingles
[00:09:18] S0: And if one points to a crisis. [00:09:21] S1: I simply have to go, it's really not a crisis because all the money is just sitting in the bank. It's a crisis when there's nothing in the bank. [00:09:27] S0: There's plenty in the bank. There's plenty in the bank. And I think it's key to deployment. [00:09:30] S1: Speaking of deployment, you know, the strategies that you oversee at PIMCO. So what's been popular this year? What do people like to get into? [00:09:39] S0: I think people look at what we do and say, with rates where they are, I can deliver on a blended basis 7% to 8% return. And given what the equity markets are, that looks really attractive on a risk-adjusted basis. And I fully understand the exceptions. about the AI company from a stock standpoint. You can make an argument the stocks are cheap. You can make an argument that no one quite knows what the earnings will be five years from now. But when you look at the S & P as a whole, the S & P is not cheap. And so, as I think David Solomon said this morning, there is a lot of cash in the system. A little bit of this cash will go and buy the Anthropic IPO. A lot of cash is going into fixed income to rebalance portfolio and basically take some chips off the table and buy more fixed income. And it's true in the U.S., it's true in Europe, it's true in Asia. We see the trend pretty strongly. [00:10:53] S2: I'm sure you've been waiting for this moment for some time, Manny, the value to come back into bond markets here.