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Chapter 1: What is the main topic discussed in this episode?
Hello and welcome. This is The Michelle Hussein Show. I'm Michelle Hussein. I speak with people like Elon Musk. I think I've done enough. And Shonda Rhimes. That's so cute. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.
So please join me, listen and subscribe to The Michelle Hussein Show from Bloomberg Weekend, wherever you get your podcasts.
You certainly ask interesting questions.
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Meta is set to have selected PIMCO to help lead a $29 billion financing for its data center expansion. I'm happy to say that PIMCO CEO Manny Roman joins us now for more. Manny, good morning. Good morning, Jonathan. Nice to see you. It's good to see you, sir. How does a man like you deal with a 3 a.m. alarm clock on the West Coast? How does that work? You've got our life.
I make the best espresso known to mankind, you know, and you'll be happy. Triple espresso? Triple espresso. And it feels good every day and happy to be at work.
Well, I'm happy to have you with us this morning. Let's get into some of these deals. I know there's certain deals you can talk about, can't talk about. I want to talk in broad terms about the appetite here. For the capital that we need to provide to this particular force, this growing force, AI data centers, where it's going to come from, and where you and the team are going to fit in.
So I think it's a huge, super secular opportunity. There is an enormous need for funding and equity in data centers. I don't know whether the $6.7 trillion from McKinsey is remotely right, but it's very, very big, and there'll be plenty of financing deals to be done, and there'll be plenty of construction to be done, and it's true in the US, but it's true in other parts of the world.
the need also to have the infrastructure and the energy will come after that. So, you know, we all talk about data center, but there's going to be a real rush for energy in terms of providing the right setup for all this data center.
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Chapter 2: What major financing opportunity is PIMCO involved in?
And, you know, that's one of the reasons to be very bullish on natural gas.
We've reflected on one particular statement from one particular tech CEO over the last 12 months that I think was really quite important. It was last summer. It was the Alphabet CEO when essentially he said that the greatest risk here was underinvesting and not overinvesting.
And I wonder how you think about that from the perspective as an asset manager when you've got a group of companies that are willing to run the risk of overinvesting. How do you think about the risk around it?
In terms of... I think what we will do is we will look at every single deal and we will say, this makes sense for us and this may make less sense. And I think one of the strengths we have is to be pretty focused on relative value and sort of think that You know, there may be a fantastic deal to be done, which would be very, very good for our investors.
And then we look at the next one in the full light of day and decide whether it fits our portfolio and whether it is something we want to do.
I think it's important to build on this that Mark Rowan said recently, we are what we originate. When it comes to private markets, you are what you originate. It's quite labor intensive. It takes a lot of work. When you think about scaling this and building this as an opportunity, how difficult is it in practice?
I think we have built it differently from Mark. We have built it based on our experience in fixed income, our experience in relative value in a history of 54 years in looking at all sorts of credit. We have 55 credit analysts who looks at every single segment of the market. And I think we look at it from a value standpoint. Does it make sense? Is it something we want to do?
We shouldn't be originating for the sake of originating. And there's a lot of money coming to this market. Some sectors will be very attractive and some will be less so. And I think you want to be very much on top of this and say, I want to do this and I want to do less of this.
There's a concern, especially as CEOs say, it's more important to be throwing enough money at this rather than being under-invested. And then you have people like David Heinhorn of Greenlight coming out and saying the numbers that are being thrown around are so extreme that it's really, really hard to understand them.
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Chapter 3: How is AI influencing investment in data centers?
I think six months horizon is about all we can do in terms of the demand. And then, you know, the environment may change dramatically. You know, there are business cycles. Sometimes things are cheap. Sometimes they're expensive. If there's a recession, all of a sudden spreads will widen. Company may revisit what they're trying to do and so on and so forth.
So this is a difficulty. How do you have a six-month horizon when a lot of these investments are 10-year build-outs, when they're 10-year usage, when they are labor-intensive, and infrastructure projects by nature are a lot longer than six months?
So in terms of committing capital and in terms of finding the right opportunity with the right length of time, we're totally fine to have a very long-term horizon. What I'm saying is I'm saying making long-term prediction in terms of how big the market will be is very hard. I think you have
some visibility over the next six months in terms of what the demand is, what the real demand is, and whether that slows down or whether that accelerate, you just don't know. And I think you have to be very humble about these things and just say, look, we'll take it one step at a time and see what the market gives us. And by the way, there may be other opportunities which are more attractive.
You know, you look, for example, in an asset-backed finance business, aircraft leasing. Aircraft leasing is incredibly interesting, and then nothing happens for five years, and then it becomes very interesting again. And you've got to constantly say to yourself, are there better opportunities for me to deploy money? And what do I want to do? How do I think about the risk? How will I get out?
What's the right risk-return profile?
You made a headline recently. Wanted to ask you about it. Private markets haven't been tested. Can you build that out a little bit more? What did you mean when you said that, that private markets haven't been tested?
Well, my partner, Dan Iverson, and our CIO of core, Mohit Mittal, have the chart. And we checked the number about 20 times because we kind of didn't believe it. But it shows the return on weak single B. which is a reasonably good proxy for direct lending. And what you see is you make money because the yield is higher, and then there's a recession, and then you lose it all.
And so I'm old enough to remember 1991. I saw that. You know, there's a recession which came out of nowhere from, you know, essentially SNL having too much high yield. 1997, the world is absolutely fine until there's an Asian crisis and then you have LTCM and then things become very cheap. And so you've got to remember these things.
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Chapter 4: What are the risks associated with overinvestment in AI?
Manny, let's continue the conversation we were having. Equity markets very close to all-time highs, credit spreads near multi-decade tights on investment grade, high yield spreads near the tights of the year. And yet we've got a Fed official saying that we're excessively restrictive. You're across a range of funds. You look across markets all the time and the economy with the team.
Do you see any signs that we're excessively restrictive?
Well, I think rates are very high across the globe, right? And I think part of the reason why I get up so early and happy to go to work is because the opportunity has never been better. And, you know, we talk here about the US, but look at the UK. The UK, where you're from is, you know, tenure rates are four and three quarter. Australia looks really, really attractive.
So when we think about the opportunity in a way, yes, we do expect the Fed to cut. How much they're gonna cut next year remains to be proven. No one knows what's gonna happen to the labor market. But the reality is the opportunity in terms of global fixed income is very, very big. And the opportunity to add alpha is quite high. I'll tell you a funny story.
Chapter 5: How does PIMCO evaluate potential investment deals?
We have a partner in Tokyo called Tomoya Masano. And for the longest time, there's not much happening in Tokyo. So you sort of call him and you have match out with him and not much is happening. And then all of a sudden, the Japanese fixed income market becomes super exciting. And then there's a lot to do.
And there's a whole generation of people who have disappeared because they don't do it anymore. And so you have a labor market which hasn't supplied fixed income investor because there was nothing to do for the longest time. And so what I think is interesting is the difference of view, the difference of opinion is also a source of incredible alpha.
And if you want to think about why performance has been quite good, it's partially because the alpha that has been given by the market is quite good.
I think it's interesting that John was talking about the Fed and you talk about the international sphere. And I think that that's really telling about what people are looking to for that alpha, for that incremental extra yield. Are those Japanese investors staying in Japan right now and not coming to the U.S. for treasuries, even if the Fed cuts?
No, I think they're very big investors in U.S. asset. And remember, one of the opportunity everyone has is to buy foreign assets and swap them back into dollars or swap them back into yen and so on and so forth. And so you can actually buy synthetic credit, you can buy synthetic dollar exposure for U.S.
investors buying, for example, JGB and selling forward the yen into dollar and having a different credit risk with JGB than you have with U.S. dollar. And so there's a lot to do. Now, we do that a lot in short term and longer term in terms of adding alpha, but all the time you can do this sort of transaction and sort of
mitigate your exposure or increase your exposure or have different risk profile.
That's a much smarter way of looking at it. I'm looking at this with sort of a blunt instrument, sort of dumb. Do you like international more than the United States? And you come up with this really wonderful, nuanced view.
Japan has an enormous amount of money to put to work and is a nation of savers. The reason, the thing that I always say is you need to put your money somewhere. And the reality is the U.S. is the only place where you can actually put scale. And when you want to think, for example, of the Australian problem, there was a whole delegation last week from the U.N. from Australia.
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Chapter 6: What challenges do private markets face today?
For a long time, Japan had to do the same thing. They didn't have the yield. To your point, the story's changed. One thing we're trying to track is whether the Japanese bring the money home, whether we see this great repatriation, where it could leave markets vulnerable, where typically they deploy that capital. I'm thinking of certain European markets, the US as well.
Are you seeing any of that flow story start to turn? No, not so far. Would you expect it to change?
Honestly, not really. These things are very, very slow to move. And the reality is people keep on saving in Japan. And so it may just be that the marginal dollar goes into JGB, but the credit markets are very underdeveloped. And if you want to buy, for example, single exposure, you're much better off going to the U.S.
The conversation we had back in April was maybe the decline of US exceptionalism. The money was going to leave. It was going to go elsewhere. I want to understand where you are now six months later. What did you see at the time in April? Did we start to see that decay click into US exceptionalism? And are we back to where we were at the start of the year just six months later?
So I think we were dollar underweighted. We literally just queered off opposition. We're still very much like emerging market currency. We do like Australian dollars. There's plenty to do, but there was a short dollar position to be had, and it moved 10%, and I think we decided to square our position.
You're talking a lot about rates and the era of income. We've been talking a lot about that just based on the fact that yield has been higher. We're talking about private investments through infrastructure. You're not mentioning equities. And this is a time when people are talking about... What, I'm a fixed income guy? No, I know. And you have sympathy with us.
But I'm wondering how much a higher rate regime limits... future equity returns. We used to talk about that. That was before three years consecutive, 20 plus percent returns. I mean, at what point will it constrain the equity side of the portfolio, even though some people are wondering what kind of buffer bonds really provide?
Well, the PIMCO view is that equity return in the U.S. is going to be 6% for the next three years or something like this. I mean, we look at CAPE valuation. It's trading at 28 times earnings. It looks really, really high to us. We understand the excitement about the hyperscaler. But if you look outside of the hyperscaler, life in industrial America isn't great. I mean, top line is not growing.
And one of the questions that we don't know is the impact of tariff and what will happen in corporate America in terms of how they're going to deal with either passing on prices or diminishing margin and so on and so forth. And we don't know that. And so there's a whole leg of the equation that we haven't really seen.
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