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Meta is said to have selected Pimco to help lead a twenty nine billion dollar financing for its data center expansion. I'm happy to say the Pimco CEO, Manay Roman, joins us now for more manic.
Good morning, Good morning, Johnathan, Nice to see you.
It's good to see you, sir. How does a man like you deal with a three am alarm clock on the West Coast? How does that work?
You've got I make, I make the best expresso known to mankind, you know, and you'll be hippy triple espresso, triple expresso, 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, the certain deals you can talk about, can't talk about. What are talking 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 I mean, it's it's a huge super secular opportunity. There is an enormous need for funding an equity in data center. We I don't know whether the six point seven trillion dollars 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 part of the world. And 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 set up for this data center. And you know that's one of the reason to be very bullish on natural gas.
We've reflected on one particular statement from one particular tax CEO over the last twelve 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 under investing 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 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 I think we I think one of the one of the strength we have is to be to be pretty 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 this 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 Prentice, I.
Think we have built it differently from ourk We have built it based on or experiencing fixed income or experience in relative value. In a history of fifty four years, in looking at all sorts of credit, we have fifty five 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. There's
a lot of money coming to this market. You know, some sectors would 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 underinvested. And then you have people like David Heinhorn of Green Light coming out and saying the numbers that are being thrown around are so extreme that it's really really hard to understand them. How difficult is it to invest in a market where people are throwing spaghetti at the wall
to try to understand what's going to stick. And there is a feeling of excess that continues to bubble up around there.
So my friend, my friend, Richard Thayler, who is an economic number price and console for US, has this this say. He says, you know, when you make long term product prediction, the degree of humidity understanding around the estimate should be very very big. So when I hear an estimate like six months seven trillion dollars, I don't know what to make of it. David may be very well be right,
but we'll take it one step at the time. 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, they are business cycles. Sometimes things are cheap, sometimes they're expensive. If there's a recession, all of a sudden spreads world widened, 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 ten year buildouts, when there are ten 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 riding length of time, we totally find 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, it's 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,
whether that accelerate. You just don't know, And I think you've got to have I think you have to be very humble about the season, just say, look, will take it one step at the time and see what the market gives us. And by the way, there may be other opportunity which are more attractive. You know, you look, for example, in 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 got to constantly say to yourself, are they better opportunity 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 may have 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 the private markets haven't been tested?
Well, my partner Dana Versin and a CIO of course admit, I have the charts and we will check the number. About twenty times because we kind of didn't believe it. But it shows the return on week 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 to remember nineteen ninety one, I saw that, you know, there's a recession which came out of nowhere from you know, essentially SNL having too much high yelled nineteen ninety seven. The world is absolutely final until there's an Asian crisis, and then you have AILITCM. Then things become very cheap. And so you've got to
remember these things. And we have been in a period since two thousand and nine of exceptionalism where you have had very strong equity of return and very strong higher return. If you believe this is gonna this is going to continue for the next fifteen years, then I think you should have the same position. But it may not be the case. And I think I think we bring that and said, the data's a the data.
Do you see parallels between now and those periods?
Well, I think the initial condition where we are right now as search that equity markets are expensive by any measure, they may go higher because momentum is strong and credit market are tight in some part of the of the of the spectrum. And I think that's that's the reality.
And look, we've been in period where things things are expensive for a long time two thousand and five, two thousand and six, where search period where things remain expensive and become more expensive, and then something breaks and then all of a sudden, you have you have a lot of work to be done.
Many let's continue the conversation. We were having equity markets very close to all time highs, credit spreads and their multi decade ties on investment great high you'r spreads near the ties of the year, and yet we've got a FED official saying that we're excessively restrictive year across a range of funds. You look across markets all the time and the economy with the team, do you see any signs that are excessively restrictive?
Well, I think rates are very high across across the globe, right And I think I think you know, part of the reason why I get up so early and happy to go to work is because you know the opportunity has 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 going to cut next year remant to be to be proven. No one knows what's going to 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. We have a partner in Tokyo called Tomoroya Messano, and you know, for the longest time, there's not much happening
in Tokyo. So you sort of call him and you have much 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 disappear because they don't do it anymore. And so you have a liber market which hasn't supply fixed income investor because there was nothing to do for the longest time. And so what I think is interesting is the difference of you.
The difference of opinion is also a source of incredible alpha. And you know, if you want to think about white performance has been quite good, it's partially because the alpha that is being 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 US for treasures even if the FED cuts No.
I think they're very big investors in US 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 by for US investors buying, for example, JGB and setting forward the yen in two dollar and having a different credit risk with JGB than you have
with US 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 sort of a blunt instrument. So dumb, do you like international more than the United That's really a wonderful once it.
Has an enormous amount of money to put to work, and has is a nation of savers, and so there's a you know the reason. The thing that I always say is you need to put your money somewhere, and the reality is the US is the only place where you can actually put scale and when you want a thing. For example, of the Australian problem, there was a whole
delegation last week from the UN from Australia. They need to move capital all the way from Australia because they are a nation of savers and the Australian market is not big enough for them, and so they need to pivot too.
For a long time, Japan had to do the same thing. They didn't have to yield. To your point, the story is change one thing we're trying to track is whether the Japanese bring the money home, whether we see this great repatriation where I could leave markets vulnerable. What's hip that deployed that capitt on thinking as serting European markets to the US as well. 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 made us be that the marginal dollar goes into JGB But the credit markets are very underdeveloped, and if you want to buy, for example, cigole exposure, you much better off going to the US.
The conversation we had back in April was maybe the decline of US exceptionalism. The money was going to leave, was going to go outsewhere. 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 our way 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 quare our for position. We're still very much like emerging market currency. We do like Australian There's plenty to do. But you know, there was there was a short dollar position to be had, and you know, it moved ten percent, 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, talking about private investments through infrastructure, not mentioning equities. And this is a time when people.
Are trying to fixed income. I'm a fixed in combust 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 our three years consecutive twenty plus percent returns. I mean, at what point will 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 US is going to be six percent for the next three years or something like this. I mean, we you know, we look at cape valuation. You know it's it's treading at twenty eight times earnings. It looks really really high to us. We understand the excitement about the hyperscalo, but if you look outside of the hyperscalo, life in industrial America isn't great. I mean, top line is not is
not 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 of the of the equation that we haven't really seen.
Stock investors have been trying to outpull each other this morning, and Max Katner was on earlier of HSBC and he was saying, look, he thinks that the Fed is making a policy error by cutting more significantly, but they're along for the ride because it's just going to inflate the prices of hasse has significantly. They want to gain from that. Do you agree with that assessment?
Well, I haven't. I haven't listened. I haven't listened to him, so I would not be.
Good initial punt.
I don't.
I don't.
I don't know.
I have.
We have a lot of trust in in the FED in terms of them doing the right thing. And I think that the FED usually doesn't know much more than we all do. They look at the same data and so the decision is a very well thought out decision where they will decide what to do with the condition that they are being given. And if, for example, we were to see a very bad inflation print, it would
be very difficult for them to cut Now. They may argue that they have to look through inflation and so and so forth, But the FED is a very rational actor in the market, and I don't think anything is going to change. And the same goes for the Central Bank in the UK and the ECB and so and so forth. And I think I think once you're in a job, you behavior changes also in terms of how you think about what the right thing to do is.
Even listing to the new fetcher next.
To no, I'm just I'm just saying it's it's it's like being a Supreme Court justice. You know, it's a very important job and I think people take their job very seriously.
It's a good change. Next year there's going to be a new FED chair. Do you expect to be to see any daylight between a FED chair selected by appointed by this White House and Chairman J. Powell and his current leadership.
Do you know I was reflecting on this and what we're talking about this. I mean, every single FED share has been to some degree of political appointee. And you know, there's been a history of very good FED chair since the Burns and the Nixon presidency. And I see no reason why that would change the.
List of candidates we've seen so far. We've said repeatedly, very credible names on that list from this White House on a treasury and it is.
It is, it is. It is important to remember that it's in everyone's incentive to have a very credible feed share because the market will not like a non credible feat.
Schhair you running. I was going to.
Means, yes, he's affirms.
Money wants that job, and it's going to see you. Thank you, thank you for we do this in Newport next time. Okay, when the weather starts to warm up a little bit around it's very cool in the winter turn of the year. Works for me. In a January time, Yeah, we'll try and make that happen, all right, Money, thank you sir, appreciate it. Money Roman there the Pimco CEO