Bloomberg Audio Studios, podcasts, radio news. Between everything going on with AI, the big IPO with SpaceX, raising rates over at the ECB, and a lot of concerns about geopolitics. Who better to kick the show off with than Richard Clara, Managing director and Global Economic Advisor at PIMCO and former vice chair over at the Federal Reserve Board of Governors, Rich Grick, to have you.
Here, Glad to be with you again, Romaine.
I do want to take a moment to talk about the report that you and Dan Ivison and others put out yesterday, your annual Secular Outlook, And there are a lot of themes in there, but obviously one big thing that you couldn't ignore was AI. And you kind of described it as a potential disinflationary force because of increased protivity, maybe wage compression, but also presenting a certain degree of financing risk as well. Kind of square that circle for us.
Well, you know, Romain, AI's gone from really being a wildcard what if to a major driver of economy and markets the next five years.
Right now we're seeing it in.
This Campex boom we talked about, not just in the US, but really a global capex cycle, including defense and potentially energy security, but also at the marginal A lot of this AI is being financed in the credit markets and in the bond markets.
You know, PIMCO has been active in that.
And certain select deals, and so, you know, like it or dislike it, investors are going to need to factor in AI and all of their calculations going forward.
One thing I thought was interesting there, and you talk about the capex boom obviously not just an AI, but you also mentioned defense in a few other areas. But I mean, you've been doing this a long time. There was a criticism for years, decades really that there wasn't enough capex spending coming, not of course for America, that they were taking their cash and just having them for buybacks and things like that. And now we're finally getting it and everyone's ringing their hands over it. So I
know there's got to be a balance. But when you think about the potential for an increase in productivity, something that's been relatively absent, at least in any kind of headline numbers for years and decades, are you kind of excited that maybe we'll finally hear Oh.
Yeah, certainly, I want to be very clear.
We think AI is a transformative technology. In fact, if anything, we think the productivity benefits in Boom from AI could happen sooner than.
A lot of folks believe. But we're also humble.
We don't have a crystal ball, and we think there's a wide range of outcomes. But let me be clear, we think this is how capitalism and financial markets are supposed to work. Attractive investment opportunities receive funding, and as I said, we've participated in some of those deals as well, and I think I expect we'll continue.
Well, it's interesting, you know how this is all being financed, because you're seeing a lot of this coming through in the private markets, but it's making a big splash in the public markets as well. You think about the hyperscalers and some of their plans for borrowing for this year, and I wonder, you know how you're viewing that over
at PIMCO. You know, you think about the world where credit spreads are so so tight and the fact that we have this influx of supply it hasn't yet really made a dent on those spreads.
Well, there are a couple of things going on.
First, A lot of the companies that are issuing and borrowing are very, very prosperous and profitable companies, and so that's a big difference from some of the previous capex cycles where we've seen where a lot of borrowing is companies that don't have a lot of revenue or cash flow.
So that's one big difference. But but Katie, you bring up an excellent point.
We do think we're in a world where investors are going to need to do their homework or hire firms to manage their money that does their homework, because you need to look at the details on the deal.
You need to look at the way the deals.
Are structured, and the details will matter. You know, we believe that if you're going to provide liquidity in public markets, you should be paid for providing liquidity in public markets, and so we look at each deal on its own merits and talk to.
Us a little bit about you know, how this is wrapping into the view that you put out yesterday about the credit loss cycle. You sort of think about the heavy spending that we're seeing on AI. Obviously there's going to be certain companies that come in a big way and you know, really try to spend there that maybe don't have the fundamentals to all back on on the way the Magnificent seven does, and I was hoping that you could sort of thread that needle for us.
Well, there are a couple things that we highlight in the essay that I'd like to bring forward. The first is that a lot of the incremental growth in lending in the last dozen or fifteen years has been in a particular segment of the private credit markets, in particular direct lending to middle market companies.
That's probably the area of the credit market.
That we would highlight as the one in which the credit loss cycle has begun already to turn right now, you see it not so much in actual losses as you do for creative financing, payment and kind and other arrangements. But as I said, this is going to be with us for the next five or ten years.
Opportunities will be there.
But it's also important for investors to do their homework.
Is this when we start to talk about not only the increase in CAPEX spend across industries, this.
Is a global story.
Are we going to see better share of this spend from say Europe for example, Asia, maybe even some of the emerging market nations exactly.
So when we highlight this in the report, we're talking not just about the AI piece, which is really relevant in the US and also frankly some Asia countries that are going to be big providers of the chips and silicon into AI Capex, But in Europe there's a real push as we all know too, for really now they really need it to increase defense spending, in particular in Germany, so Capex there maybe more have more of a defense and then also in Europe a big push on continuing on the green transition.
I am curious, and I know you're not picking stocks or anything like that, but there's a lot of people focus on this spacexipo, not only for the company itself, but the idea that it could be a catalyst for a much broader investment in not just AI, but the space economy. A lot of new areas of the world and really beyond the world that haven't been invested in.
Have you started to kind of factor that into your economic forecast about maybe the potential increase and broadening out of economic activity around these new technologies.
Oh oh sure, And again we want to be wary of thinking we have false precisions. So I think we're more confident in the direction of travel than necessarily in the pace and.
The path to the destination.
But absolutely, and again I'll defer to your equity experts here about how to think about the IPOs this week. But they're certainly eye popping numbers.
Yeah, I mean you can't ignore them, right, I mean, not only this, and then maybe we get another trillion dollar IPO in a few weeks or months.
Now, turning it back to the area I know better, macroeconomics. Obviously, buoyant equity markets and financing availability for companies also increases wealth value.
There's a wealth.
Affecting consumption and the economy, and that's an important tailwind for the economy.
Absolutely, well, you know, to brought them back, I mean to get to the conversation we were having, O Katie, I'm just going.
To interrupt you just for one second. We are getting some breaking news actually right now on SpaceX. The registration filing has finally been declared defective as of today, June eleventh, and as Bloomberg reporting has been, the document says the price will be at one hundred and thirty five dollars a share. Obviously, there was a lot of discussion about the fact that this was an attritional range that you typically see on these roadshows where everyone has to sort
it out. It was basically, this is what it's going to be. Just tell me how much you want and be thankful if you get any piece of it.
Exactly.
Maybe less surprise here than a traditional IPO, given that it seems like this price was very much set at one hundred and thirty five dollars and as you said, sort of take it or leave it for investors, Rich.
I do just want to give you one a final statement. Then we have to go, and I apologize. I mean SpaceX unfortunately impigio to welcome back, but I do just want to in all seriouses, let's get your general view on this idea of the cost of capital, particularly in light of not only this IPO, the borrowing that we've seen in the debt markets by a lot of these companies, and the idea that at least in Europe, you're in a rate hiking cycle. Who knows what happens with the
FED next week. Yeah, there are a lot of people betting we could be on an upcycle here as well.
Yeah, well, look, the energy shock in the Middle East is pushed the ECB and perhaps some other countries to hiking rates.
We don't think that's not our baseline for the FED.
We think the warshead will be wait and see for a while. But importantly, the borrowing that you're talking about in credit markets is potentially going to be putting some upper pressure on credit spreads that are at very tight levels and also probably lead to some important changes in some of the private markets as well.