Pimco CEO Manny Roman on Japanese Bonds and the Sell America Trade | Odd Lots

when you look at how much the market reacted,

they didn't react that much. I mean, bond yield went up five or six bips yesterday on the tenure, and the stock market is is down 2%. I mean, it's it's it's uh

Right.

it's not exactly an earthquake.

Uh and and so I do think that uh the market is very rational and essentially discount a lot of the noise and look through it. The day where um the market is really concerned about something,

the second point I think is,

the currency barely moved.

I mean, I was looking at Euro and Sterling this morning. I mean, we we we flat as a pancake.

And so the move away from the dollar, yes, as a a secular trend, the fact that you want to diversify away from the dollar makes makes sense and you want to have other currency than the dollar, but the dollar remains the real reserve currency of the world.

Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

And I'm Joe Weisenthal.

Joe, it's back.

What's back?

It's back.

What's back?

They're back.

Um, no, it's

The bond vigilantes are back.

Sell America trade.

Oh, the sell America trade. Various flavors of what they could have been, but all seem to be converging at once.

Yeah, I should have been more clear.

Um, so we are recording this on January 21st, and this comes a day after we saw a pretty big sell-off in the market. What was interesting about that sell-off is it was a trifecta of US assets.

So you had the S&P 500 down, bond yields up, and the dollar index down as well. And so, obviously, people are talking about is this the start or the restart of the sell America trade.

All of this is coming in the context of Trump's threats against Greenland.

Lots of geopolitical risk.

And I should also just mention, we are recording this literally at the end of this discussion.

Trump is due to speak at Davos.

I don't know why we do this to ourselves.

Yeah, right.

So all of this could change on a dime within like 60 minutes.

But there's a lot going on.

Yeah, and it probably won't change on a dime.

And the reason is because, well, yes, it is true that probably the, um, you know, tensions in Europe over Greenland, NATO, et cetera,

are very important. Mark Carney having given a pretty extraordinary speech yesterday.

There's also the Japan element.

Of course.

And the rising bond yields in Japan, which is related to, you know, Abenomics 2.0 perhaps with the, uh, new Prime Minister and so forth.

And so then part of the story yesterday, and you mentioned the trifecta sell-off, but part of the story yesterday, fairly sharp, um, increase lately in, uh, long-end rates.

In the US and, uh, Japan.

The 40-year bond in JGB, which never existed up until like 2007, apparently, hit 4% for the first time in history.

Um, you know, we were looking at sub 4% 10-year rates, uh, as recently as October.

In the US, actually, maybe even as recently as December, now are closer to 4.3% again.

So like, you know, those people who keep thinking like mortgages are going to like come down, et cetera.

Not going to happen.

It's not looking like it. So there is a lot going on in terms of potential theoretical drivers, et cetera.

But the important thing is that rates at the long end keep pushing up.

And people seem to be avoiding traditional safe havens.

Well, this is the debate, right?

So Scott Bessent, uh, in Davos, like a lot of people at the moment.

He thinks the US Treasury sell-off was just, you know, the Japan effect.

Yeah.

And others think it's a geopolitical risk premium.

So, you know, we need to get into all of this.

And we have the perfect guest.

Really the perfect guest.

We're going to be speaking with Manny Roman. He is, of course, the CEO of Pimco.

So Manny, thank you so much for coming on Odd Lots.

Thank you for having me.

Why don't we start with that last question, when you're looking at bond yields today?

How much of that do you see as the geopolitical risk premium, um, versus just a follow-through from the Japan sell-off?

Well, I think I think the honest answer is it's a mix of both.

But, um, when you look when I was listening to you and when you look at how much the market reacted,

they didn't react that much.

I mean, bond yield went up five or six bips yesterday on the tenure.

And the stock market is is down 2%.

I mean, it's it's it's uh

Right.

it's not exactly an earthquake.

Uh and and so I do think that uh the market is very rational and essentially discount a lot of the noise and look through it.

The day where um the market is really concerned about something,

you're going to see a much bigger reaction.

That's the first point.

The second point I think is,

the currency barely moved.

I mean, I was looking at Euro and Sterling this morning.

I mean, we we we flat as a pancake.

And so the move away from the dollar, yes, as a a secular trend, the fact that you want to diversify away from the dollar makes makes sense and you want to have other currency than the dollar, but the dollar remains the real reserve currency of the world.

And so, I take all of this with a grain of salt.

And and and you know, we we we animals in in the best possible way.

And we look at the screen and we tend to overreact to what we hear and so on and so forth.

I was, uh, I was thinking about this last night, looking at the S&P 500.

You were thinking about how you're an animal.

I was thinking about exactly, I wasn't in a moment of being an animal looking at the screen last night.

It did occur to me as like, okay, S&P had fallen 2% on Tuesday the 20th.

However, in the context of an incredible year and an incredible 15 years, it's not that much.

Nonetheless, I guess it's the confluence of headlines coming together.

It's like, oh, I'm going to like pay attention.

to this 2% down day.

But even but I and I take I certainly take your point.

These are modest moves in the grand scheme of things.

On the other hand, this upward pressure that we continue to see on the long end of curves, setting aside one week or whatever, whether we're talking about Japan,

the US,

elsewhere.

Like, what is the bigger story that we're like taking from that?

Well, I think I think Japan is quite a quite a peculiar situation.

Okay, let's talk about Japan.

Let me start with the US.

Because it's the it's the easiest thing.

Look, rates have been essentially in a range for the past year and a half.

And I think I think the Treasury and the Fed would be very focused on the long end of the curve.

And I think that fixed income offers a really good entry point in terms of investment.

I mean, we talked about the S&P.

The S&P is very expensive.

Investors are going to look at, you know, long-term fixed income and say, I can make 6 or 7%.

Holding a basket of fixed income, that looks really attractive.

And so, I think every time yield back up, you see money coming back.

Uh, you know, I talk about Pimco, the flows have been incredibly good over the past 12 months.

You know, people have come and bought US asset.

And and and the trend is very is very clear.

Nothing is changing.

And we have people basically saying, I can get, you know, equity-like return using fixed income.

And for as long as that remains the case,

I I think the rates are very bounded in terms of where they're going to go.

Okay.

Japan is a very, uh, specific situation.

I just came back from Japan last week.

Oh, great.

I mean, uh, you feel you feel bullish.

I think everyone you meet, uh, is bullish equity.

Uh, you know, I started my career in 1987.

It's the first time that I see the Nikkei above when I started.

Wow.

I mean, it's it's

Yeah.

It's it's it's unbelievable.

But yes, you know, there is for the first time inflation.

And the long end of the curve, uh, is is probably going to go higher.

And that's probably overall, um, a good thing.

Now, the super secular trend is the demographic

pressures are a real problem.

A real problem.

But the I think one of the thing we try to do is look at the liquid instruments.

So the 40-year JGB may not be the most liquid instrument.

The 10-year JGB is a real

Sure, I agree.

The 40-year they're probably hardly trading.

Yeah, and and you know, the same goes in the US, right?

I mean, you really want to look at the 10-year.

The 30 is a bit of a

different story.

Um, you mentioned US Treasuries trading in a band, and this is something I wanted to talk about.

Because, you know, before yesterday, the non-movement in the bond market was really remarkable.

So the move index is at its lowest since I think like 2021.

That's the bond volatility index.

And if you look at the 30-day trading range for 10-year Treasuries, that was at the tightest since the 1970s, which is pretty remarkable.

What has that lack of volatility been like for a big bond shop like Pimco?

It's a funny thing.

We do like volatility because with volatility comes alpha.

Right.

And so we do like the opportunity to provide liquidity and add interesting position to our portfolio.

For sure.

But we need to scale up and scale down the risk depending on what's happening in the market and depending on the opportunity.

And so we just came back from a very strong period of performance.

Um, there's going to be plenty to do.

Uh, and it may be on name specific, it may be on macro trend.

I I do think that a competitive edge is not to be able to predict day-to-day what's going to happen to the market.

Our competitive edge is to have structural position, to think about where value is, to optimize our portfolio, to think about the downside risk.

You know, that's what we know how to do.

And, you know, it's an interesting market.

Some things are cheap.

You know, I would say rates are cheap.

And some things are rather tight, you know, investment grade are probably rather tight.

But in structural product and mortgages, there's a lot to do.

So you have this environment where you can build portfolio and sort of feel reasonably comfortable.

That you will perform over the next 12 to 24 months.

Let's talk about, uh, go back to Japan since you just got back from Japan.

And actually, I don't think we've done an episode on Japan since the election of the new Prime Minister.

But tell us a little bit more.

I mean, why now? What's going on? You say everyone feels bullish, et cetera.

Tell us a little more color what you learned in your trip to Japan.

Well, I mean, look, we have a we have a big Japanese, we have a big Japanese office.

And there are people in Pimco who knows a lot about a lot about this.

I mean, look, it's a it's

it's for 20 years, Japan has tried to restart inflation.

And, uh, for 19 years, it really hasn't worked.

And then all of a sudden, they managed to get somewhere in a labor market which is fairly tight.

Where immigration is a problem.

And where when you go there, I think there's a clear desire, um, to monitor immigration.

And the new Prime Minister, uh, is, uh, has been very vocal about making sure that, um,

there's a limit in terms of labor force moving into Japan.

Now, over the medium term, that's a problem.

But when you look at the inflationary pressure, it's pretty clear that there's more inflation in Japan.

That there has been for the longest possible time.

Now, the second thing is, I think you see other factor.

In Japan that you haven't seen in a long time.

I was surprised by the fact that you have much more activism in the stock market.

People to try to take ownership in company, trying to turn them around.

Breaking down conglomerate.

It's not the first time I hear that.

Yeah, we yeah.

But I think this time it's certainly more real than it has been.

And then when you think of the AI robotic trend, you know, the one thing Japan knows how to do is to make things.

And to make sophisticated product.

And and I think that all of a sudden, there is a competitive edge that Japan has, uh, in terms of a number of stock which looks attractive.

Forget about whether they're price, you know, right or wrong.

But in terms of business model, they're quite, uh, they're quite attractive.

Just on the bond sell-off, how much of that is the return or expected return of inflation?

Versus debt sustainability concerns, because this is the other thing that's been very long-running in Japan.

You always hear it's a heavily indebted country.

Is this, you know, maybe the bond vigilantes finally turning their attention to Japan?

So I I was I was talking with Rich Clarida.

Hmm.

Uh, who is our chief economist.

Friend of the pod as well.

Friend of the pod.

And I said to him, I said, you know, we tend to look at debt to GDP.

What if we look at debt to household savings?

Hmm.

And then you realize for both the US and Japan, that there's just a lot of money.

Yeah, in the US with the baby boomer, in Japan with savers who tend to not to spend enough.

And if you believe in fiscal policy and the fact that eventually taxes will go higher,

then I think that the dynamic becomes quite different and you can have higher sustainability in terms of debt.

Because the ability to collect money is there.

Uh, you look at the US, for example,

um, you know, you could have at some point in time higher inheritance taxes.

This 80 trillion dollars of wealth in the baby boomers, eventually that will go to the next generation.

But it will also go to the state.

And it's a question of how much goes to the state versus the next generation.

But there is the ability to tax more.

It also comes down, I suppose, to the political capacity of the state to tax.

Because on math, you say, look, there's tons of private household assets.

We've far more, uh, wealth than we do have debt as a society, and therefore it's just a matter of channeling in the right place.

But you also need the politics to be able.

Which actually gets me to a question.

Do you might have putting on the sort of like CEO of a big asset manager hat?

Um, you know, in California, there is talk about a wealth tax, et cetera.

There's talk in, um, there's talk in Europe about wealth taxes.

There's people talking about, oh, I'm going to like set up my family office or whatever somewhere in the Gulf.

And avoid all this.

What do you see on that front?

Do you see money moving in a significant degree, high net high net worth or ultra high net worth clients?

Really thinking about where their money is domiciled in a different way?

So you knew there was something good about me is that I'm French.

And so I've seen first hand the experience of a wealth tax.

Yeah, tell us more about that.

Well, it turned out to be a disaster.

Because the reality is people can move and uh they decided to vote with their feet.

And they didn't believe that the government would keep the taxes at, you know,

historically 23% of wealth, and they decided to go to Belgium or to Switzerland and to other places and so on.

So, I think the evidence in terms of how well wealth tax work is quite mixed.

Uh, in California, uh, you can cross the Nevada and uh decide you want to live in Nevada.

God forbid.

But then you have to live in Nevada.

But you got to live in Nevada.

But there are many other places and there's anecdotal evidence of people moving to Austin and domiciling themselves in Austin and so on and so forth.

And so, I think one of the thing about the US tax code is you have competition among states in terms of where people can reside.

Um, and so on and so forth.

Now, you know, there's many great things about California.

We're based in Newport Beach.

We're happy to be in Newport Beach.

We pay high taxes.

It's all good.

Um, but, um,

But do you see in say California, or even like right now, are you getting, you know, interest from, are you hearing about high net worth or ultra high net worth clients?

Making these decisions right now or thinking about that?

Uh, all second hand and all from, uh, all from the tech industry.

Yeah.

Uh, and I read the same news than you do.

Okay.

Uh, I don't, I, you know, I'll be honest with you, I never met Larry Page.

But, uh, I understand he moved to to, uh, Texas.

And, you know,

and we, by the way, one of the thing we've done really, really well is we set up an Austin office.

And it's been a great success.

So we have 500 people in Austin.

It's a big business for us.

Uh, there's a there's a great university there which produce a lot of grad in, uh, in STEM.

I've heard.

Yeah.

That's my alma mater.

Is it?

Yes.

So.

Thank you for saying that.

Here we go.

90% of the graduate from, uh, UT stay in Austin.

So you're one of the exception.

I deserted my school.

Because that was one of the pitch.

One of the pitch.

Got out.

But it's been a real, it's been a really good thing for us.

Um, I want to go back to the sell America trade and, um, dollar diversification.

Because one of the things that I think contributed to the atmosphere yesterday was we saw a headline about a Danish pension fund selling its Treasury holdings.

Um, I think they have a hundred million or something like that.

So not a not mega.

Right. So a drop in the bucket of the US Treasury market.

But the fact that a pension fund is saying, we're going to get rid of all our exposure because things are just too unpredictable.

Obviously feeds into concerns about again, that geopolitical risk premium.

When you see a headline like that, what goes through your mind?

Well, I that there's an upset Danish pension plan.

Uh, for reason that I think we can we can understand.

Uh, but that in the large scale of thing represents absolutely nothing.

And, um,

you know, one of the thing when you when you work for Pimco that you see is country with high savings rate.

And low population.

Canada, Australia, need the US to put capital to work.

Because the local market is too small.

So, imagine, for example, that you are one of the superannuation in Australia, the reality is you need the US to put money to work.

Your local market is too small.

You're not going to put 50% of your assets in Asia.

And Europe.

I don't know. I mean, I'm European.

Uh, there's many things that I love about Europe.

But the investment opportunity, um, may not be as exciting as as as it should be.

Uh, we haven't seen growth over the past six years.

Um, it's a problem.

So, you know, the other trend which is happening exactly at the same time that we've been very involved with,

is the AI build up.

And the fact that at the same time you you have the sell America at the same time, you have an enormous amount of money, um, coming into AI and data center.

And build up building up a whole new ecosystem.

And that, I think, will provide exciting investment opportunity for plenty of people.

Um, and,

so you have to weigh the two and and the micro versus the politics.

And, you know, if I was a guessing man, I think the micro, the macro wins.

Nonetheless, I'm going to still try to go to you.

to the politics-ish question because we're very flattered.

that you come came to visit us here at our offices in New York City.

But it's hard not to note that you're not in Davos right now.

I was there in 2015.

I got a flu, so I vowed to never go again.

What's your excuse?

Oh, my my excuse is I think, I mean, look, I I

I always say my partner, Dina Hassan, who was on your pod a month ago and I.

Look, our life our life belongs to our client.

We here we here to manage the firm.

We here to sort of

They're all in Davos.

Yeah, this is what they this is why a lot of them are saying, oh, I go to Davos because this is where my clients are.

Networking.

Yeah, networking. Why is Jamie Diamond there?

He would say my clients are here.

I got to meet with them.

See, why what's your excuse?

We're simple people.

We we mind the shop.

We mind the shop.

And look, I I people make different decision and and so on and so forth.

And I I given what's happening in the market.

Given everything else, I think we're glad we're in the office.

I love being in the office.

That being said, Tracy wrote about this yesterday in our newsletter.

You know, it's hard the the conversations that are happening in Davos.

They're pretty serious.

I mean, Mark Carney talking about this sort of, it's time for us to not be a rupture.

It's time to us to not we can't be nostalgic about how the world was five or 10 or 30 years ago, et cetera.

But it's hard markets don't like when we take markets don't easily price in geopolitical turning points.

Or when they do, it tends to be in an L-shape, et cetera.

Surely you're like thinking about these things.

All the time.

And look, Mark Carney is a friend, he used to be on our global advisory board.

I think he's a fantastic human being and a great Prime Minister for Canada.

Uh, but I will read the transcript of his, uh, of his of his speech at the same time you will.

Yeah, and I understand the predicament and the question is how much Canadian bonds do I want to own?

And how much Canadian dollar do I want to own?

And, you know, information is very, very efficient.

I I.

And the reality is, is Mark says to everyone at the same time what he thinks.

And that's the way it should work.

How do you actually factor in geopolitical risk into the way you manage your portfolios?

Because this seems to be something that investors understandably struggle with, especially since a lot of the outcomes are so binary, right?

It's like, well, either the US takes over Canada or the US doesn't take over Canada.

I think I think we we try to be incredibly humble.

And say, what do we have an edge?

And the reality is if the three of us sees the exact same thing at the same time, we don't have an edge.

I think we really, really try to understand politics.

We have one of my partner, Libby Cantrill, is solely focused on US politics.

She does a great job.

We we care, but we care about micro issues that may not make it to a pod.

We care about mortgage reform.

We care about, you know, what actually what can the president do?

In terms of Greenland.

The reality is he needs two thirds of the Senate and Congress approval.

That seems like a lot.

You know, so we care about smaller things.

And often we said, look, we we don't know anything that the market doesn't know.

And so we shouldn't build position based on on politics.

Because the reality is, is we all see the same thing at the same time.

And and and in some markets,

you know, I come back to currency.

Yeah, I mean, you look at the big currency, it's the most efficient market in the world.

I mean, I mean, if you look statistically, they're incredibly hard to predict.

I mean, you look at you look at time series of, you know, dollar yen or dollar sterling or dollar euro and so on.

I mean, it is it is as close to white noise as anything can be.

So you build a portfolio, yes, there is a theme that the dollar may get weaker.

In which case you want to have other currency.

You know, we like the Australian dollars.

We like we like, um,

you know, the British pound, why? Because the economy is slowing down and you have high rates.

And so there's plenty of room to cut and you say to yourself that's something you want to own.

But, you know, how much of your portfolio it is, 20, 25%, something like this.

It cannot be a hundred.

What do you make of the relentless bid in gold?

I I am honestly, there's things where I just give up.

And I say,

Really?

And I say, I don't understand.

That's one of them.

Really?

Yes, totally.

I mean, uh, well, uh, I believe that assets are being moved by two factor.

Valuation and momentum.

So the momentum in gold is incredibly strong.

Uh, I I see it goes up every single day.

Uh, someone is buying it.

Uh, maybe it's CTA, maybe it's individual, maybe it's Central Bank.

I don't know.

When I don't understand, I stay on the sideline.

Um, but at the same token, I don't really understand crypto.

And that's okay.

I think, you know, when you when you work for Pimco, the one thing you need to know is sort of stick to your knitting.

And do what you know how to do.

And when you don't understand, sort of say, okay, that's that's not my my gig.

I shouldn't be doing this.

Um, other people other people understand it better than I do.

My understanding is you made a pretty chunky return already on, um, that data center deal.

And I've heard in the market that since since you did that, everyone wants to come in and finance data centers.

Are you seeing a lot of copycats or competition in the space to get on these new deals?

Well, not everyone can take 25 billion dollar of a deal.

True.

And so,

I always say, you know, one of the thing we've done.

That we constantly think about is what's our competitive edge?

And we're big.

So, and we do one thing, we do fixed income in all shapes and form.

And so, we always say we're going to make money where, um, our strength are.

And that's clearly one of our strength.

It's good to be Pimco when it comes to new issuance, for sure.

It it is good to be Pimco when it comes to new issue.

Where we were part of the structuring, working with, in this case, Morgan Stanley.

And we understood the credit quite well, and it was something which fit into our portfolio.

It may be it may very well be that the next one doesn't fit into what we do.

In which case we'll pass.

Uh, and,

Returns to scale.

Are such a common, uh, such a common theme in our discussions.

Last night.

Size per se is a competitive advantage.

Which is not always the case because sometimes you like to hear small and nimble.

But it seems like in many of these things we're talking about these days, size is huge.

You know, just like from the perspective of CEO.

And you know, this conversation sort of blends the line of like what I would think of as a CEO discussion.

And CIO discussion, right? When we're talking about rates.

That's a CIO discussion when we're talking about where you have offices in Austin.

That's kind of a CEO discussion.

But from the perspective of CEO, like,

where else are you putting your chips besides you mentioned Texas?

And there's okay, there's some migration.

I think Asia.

I think Asia.

I think, um, all the high growth market from a CEO standpoint are quite interesting.

So we have a great Asian business.

Um, and when you look at the population, the savings rate, and what it will be 10 years from now, I think it is incredibly important that we do extremely well in Asia.

And so we have offices in Japan, Hong Kong, Singapore, Taiwan,

Australia,

and they're doing great.

Uh, and the build up of wealth, uh, is really, really important.

And that's before we start talking about China.

And so, if you use if you look at the super secular horizon,

Asia will become significantly bigger than Europe in terms of the amount of money.

For asset manager and where the opportunity set is.

And I think that's pretty clear to me.

Do you anticipate mainland China ever being a real a big opportunity?

I hope so.

I hope I hope the market the market offer a level playing field.

At some point in time and something that all of us feel comfortable investing in.

What would make you feel comfortable? Is it just the easing of capital controls?

Easing of capital control, the rules in terms of setting up proper trading operation.

Uh, all of these things.

Um, and and and, you know, you can I always say you can break the world differently.

So you look at our business.

I can break it and say you have high growth region, Middle East, Australia, Canada, Asia.

Where they all have the same the same, uh, characteristics.

They have high growth, uh, and high savings rate.

And those are, you know, usually pretty good for asset manager.

And then you have mature market like US and the UK, where you'd be happy to grow at 5%.

Um,

because, you know, there's nothing really new happening.

Uh, and the market is a market.

You may take market share, you may lose market share.

But the secular growth in the markets is is sort of well known.

And what about in the Gulf?

I think the Gulf is very exciting.

I mean, I always make this joke, if you close your eyes and you take a direct plane.

From LA to Abu Dhabi, so as you know, we're in Newport Beach.

Uh, honestly, you you think you think you want to run the world.

And kind of come back.

Abu Dhabi is the LA of the world.

Is it?

Well, I mean, Abu Dhabi, Abu Dhabi is, I mean, I I.

Once again, over the super secular, uh, trend, I think the Middle East has come a long way.

And I think you you also had.

You have a new generation of of investment professional locally trained.

And locally raised.

Which is pretty good.

And so, you know,

once again, that's I think that's quite good.

Um, you know, and then there's what we don't know.

You know, everything happening with Iran and whether Iran is is something will happen or not.

And, you know, I think the honest answer is no one knows.

I, uh, lived in Abu Dhabi for two years, and I always likened it to Texas.

In that it's hot all the time, and you spend a lot of time a lot of your time at the pool and at the shopping mall.

And that's pretty much it.

Well, that could be, uh, that could be California.

Exactly.

Just as much.

Exactly.

Um, since we're on sort of CEO executive level topics.

Just on AI, this is a question we've been asking a lot of our guests, but how are you incorporating AI?

If at all, into your own workflow and organization?

Oh, I think we I think for us, the sort of defensive and offensive opportunity.

So, the defensive one, uh, it should increase significantly productivity.

In terms of everything we do.

From, um, the way we manipulate document, the way we create marketing, the way we optimize our trade to function.

Remember, every time we buy a bond, it goes into many different account.

And every single account has different parameters, different restriction.

It's all goes to a custodian.

It gets split.

It has best X.

All of these things.

Is a complicated factory.

Anything which makes the factory simpler, more efficient and safer.

Is a really, really good thing.

AI will help to do this.

We spend a lot of time discussing NDA and things like this.

Where honestly, it's probably fair to say that we have better things to do.

And so if AI.

Gets us to a more efficient and less costly, uh, solution.

That's good.

I always say if AI allows us to reallocate resource more in R&D.

Than in repetitive manual function that we don't need to do.

That's good.

I think compliance will also benefit quite a bit from, uh, AI.

And the ability to do deep learning and sort of figure out whether they trend, whether we miss something.

Whether, you know, look at every possible situation.

I think that's also quite good.

And then there's the offensive part where you sort of said, okay,

can I use, um, large language model to try to extract from data.

Insight and opportunity that I may have missed.

And I think on this, some of it will say, okay,

that doesn't work, yes, uh, you know, we've analyzed every single sentence from the Fed.

And every single transcript.

And, you know, we found nothing that.

We we didn't know.

And then sometimes we may, uh, we may find things that, um, are new.

And allows us to have an additional alpha.

And, um,

I do think that large language model have a competitive edge when you have a lot of data.

Which don't necessarily match perfectly.

So when it's, you know, in the mortgage market, you have your house, your mortgage, your credit score.

A picture of your house.

Your insurance.

Um, your employment history, your communication with your mortgage provider.

All of these things.

I think should give us a finer assessment in terms of what's happening.

And then the more data you have, the more of an edge, presumably, you get.

But I think you I think you embark into this journey.

Being humble and sort of hope that.

You know, you you have a few win.

Just on the I suppose defensive AI.

Because we just recorded an episode talking about some of the coding models.

And one of the and there's a huge theme in the stock market specifically, um, lots of sort of mid-level enterprise software companies.

Get very hurt.

Because their clients are like, well, maybe we could buy this or maybe the AI, we don't need to like put in a sales ticket into a system.

Because they can have an AI that just knows that tell a salesperson to make a call, et cetera.

On this sort of basic blocking and tackling at an asset manager, you must have tons of third-party enterprise software contracts.

And seat negotiations, et cetera.

At that level, do you see AI tilting the playing field?

It's like, you know what, maybe we could build this feature trivially.

And we don't need to pay this Percy license or anything like that.

Do you are you seeing this in action?

I think you're totally right.

I think that all of us have apps that we use and software that we use that we don't love.

And that cost too much money.

And we'll try to replace them.

Uh, and in some of them you'll be able to replace quickly.

And some of them you won't.

But that's an effort.

There's like that's a real thing.

In-house development.

Is that something you're doing already?

Sure.

Interesting.

And I think to link that back to the market, there's been quite a quite a high level of activity.

In private equity in software because the cash flow were deemed to be predictable.

With high leverage.

It would be interesting to see what happened to the returns of this software company.

For the years to come.

There'll be winners and losers.

But the top line of some of these software company will be interesting, and I know that Dan is worried about the software industry in terms of risk.

And every single credit we own, we look at it with an air length.

And say, if AI is as game-changing as we think it is, what would it what would it do to this business model?

And I think that's a perfectly reasonable question.

Hmm.

In terms of what what it may do.

Um, you mentioned the Fed a little earlier, and I realized we've gone this entire conversation.

Without actually talking that much about the US Central Bank.

Um, but let's rectify that now.

So, one of the remarkable things about the bond market recently is even though there've been concerns and headlines around Central Bank credibility.

And possibly, um, Powell, you know, coming under criminal indictment and all of that.

The bond market hasn't really reacted that much. Again, it's been trading in a very narrow range.

Um, we've also seen tips and other inflation related bonds.

Basically not incorporating any of what you would think would be these political risks.

Do you worry at all about credibility of the Central Bank as a big bond buyer?

I think we are I think we believe in Fed independence.

And as we often say, I haven't met many politicians who wants higher rate.

And so, there's two level in economic policy.

There's monetary and fiscal.

You want the Fed to be in charge of monetary policy.

And I think the good news is whoever gets the job.

As head of the Fed enters into the history book.

I think the weight of the function is such that people tend to make very rational decision.

It doesn't mean that they're always the correct one.

But you're not going to see a situation where with a reading of inflation.

Did make totally sub-optimal decision for political reason.

I think it's very hard.

You think we're far from that.

I think it's very hard.

Okay.

And you have a voting process.

I think what your chief economist tells you, you're crazy.

It's just really difficult to kind of go against this.

Now,

one, you know, maybe once you can kind of look through the data and say, I do think the data are going to become better.

Here's why.

But it's a really, really dangerous game.

Also,

once you lose credibility, uh, you really lose credibility.

And I I often say,

I think everyone has looked at the Liz Truss situation in the UK.

And how when you do something borderline crazy, in literally five days, you can destroy your credibility on the bond market.

And you have to move at the speed of light and with the Bank of England to be able to correct.

Uh, when rates go up literally a hundred bips.

And so, and so I do think there are the market.

Punishes you and punishes you really hard if you try to do something which, um,

which it doesn't want.

All right, last question for me.

Because you mentioned Liz Truss.

Why is it that, um, Liz Truss is like, okay, this was like a dangerous thing.

It was like reckless, et cetera.

Whereas new Prime Minister of Japan comes in, takes talks about reflationary policies.

And you describe it as like, everyone's excited about Japan right now.

What is the difference between the inflationary impulse that Liz Truss was expected to have accelerated with the mini budget?

Versus maybe the more benign reflation that you're mostly describing as a sort of positive development in Japan.

Well, I think I think what happened is she gave this whole tax package at the same time.

So she wanted, you know, there was like this liberalization and at the same time a tax package.

Where clearly someone hadn't kind of figured out the math, the very basic math.

In terms of what it did to, uh,

government government spending.

And then all of a sudden, you had a huge deficit that the market saw and say, oh my God, there's no way you can do this.

This is not realistic.

And and and the back end of the curve just went crazy.

I mean, at some point in time, fiscal policy really, really matters.

And and I, you know,

look, I I, you know, one of the thing about being European is is is is you look at fiscal policy quite a bit.

Because that's that's been one of the core.

Uh, level of of economic policy and and somehow.

I think I think the left hand and the right hand forgot to talk to each other and they came up with a package which made no sense.

And and clearly hadn't been blessed by the UK Treasury.

And and and the market reacted incredibly strongly to that.

Um, I'll ask one more question, which, you know, I think when it comes to Pimco,

I I think it's often underappreciated how much of Pimco is about the sort of overlays on top of the fixed income positions.

And so I have to channel my inner Bill Gross here and ask,

are you selling volatility into this particular environment?

Well, I think I think we, um, I think we look at volatility all the time.

And I think when, uh, when we find opportunity to sell volatility, we do.

Uh, and it's all sort of fun, I think we've done it for a very long time.

And, you know, sometimes we sometimes we think it's attractive.

And sometimes, uh, we think it's less attractive.

And we, you know,

I'm not going to talk about position.

But, uh, but it is it is a source of risk premium.

And I think I think we we focus on it.

I think we to kind of.

Come back to this, we hit single, right?

And I think what makes our performance is really the work of 300 people on the.

Dina Hassan.

But we hit a lot of single well.

And when you put all this single together, the result is pretty good.

The great man coming down from the mountain and thinking that all these great macro trend.

Are going to happen.

That doesn't quite work.

Uh, it's it's really about being incredibly disciplined.

And essentially making a bit of money every single day with various different level.

Uh, and.

Maybe I demystify what, uh,

what we do.

But I think I think it's actually a lot of work.

And that's is why it works.

And it's repeatable.

You know, I always say to a fund manager, what do you think you can make money?

Question number one.

Question number two, why is it repeatable?

Why do you think you can do it again?

And the great idea and the great man coming from the mountain, I with the table of the laws.

I'm not entirely sure it's that repeatable.

Because sometimes you get lost in the burning bush and, you know, other things and so on.

These are very evocative images.

Yeah, yeah.

I'm an evocative guy.

And and I do think repeatability is is is is really, really important.

You want to make the process as industrial as possible and sort of say, okay.

Those are all the level I have.

And on average, this is going to be pretty good.

All right, Manny Roman, thank you so much for coming on.

It was a real pleasure.

That was fantastic.

Thank you so much.

Joe, that was a really enjoyable conversation.

And I like, uh, straddling the CEO and CIO world, so it was interesting to get that perspective.

You know, one thing I saw right before we recorded this episode, um, people were talking about the Bank of America Global Fund Manager survey.

Oh, is that out today?

I don't think it's out, but in the last one, relatively recently, I think.

Geopolitical conflict topped the list, which, you know, kind of expected.

But then the second concern, the second biggest concern was a disorderly rise in bond yields.

So like 19% of respondents had that down as their like top tail risk in January.

That's pretty interesting to me.

And the atmosphere feels a little bit different because people are so primed for this particular event.

Totally. You know, the thing that I keep thinking about is we just have this combination right now.

Because of like, all right, so like, and we've had we didn't ask Manny this directly.

But it's like this fundamental question, why does the neutral rate appear to be higher than it used to be, right?

And there's two big things going on, which is,

there's a lot of public spending because of remilitarization, and that's related to geopolitics.

This desire for national self-sufficiency across a range of technological and commodities and so forth.

So there's like tons of spending.

And we're throwing sand in the gears of trade.

So that spending is less efficient than it otherwise would have been, right?

So for a dollar of spending, maybe only 75% is actually contribute to the economy.

And 25% is waste, et cetera.

So these are two things going on at once.

And so like, I certainly take Manny's point, and I think it's totally right that you can't one day you get a blip.

And it's like, it's not the end of the world.

And you have to like train yourself to like not overthink a single day.

On the other hand, rates around the world remain, despite rate cuts, et cetera, and despite arguably a slowdown.

Significantly above where they were pre-crisis.

Right, there's a direction of travel.

There's a broader direction of travel.

That strikes me as very intuitive given the the simultaneous phenomenon.

Of like less efficient trading systems and more spending.

All right, I see Trump is, uh, giving his address at Davos.

So, shall we leave it there?

Uh, the the another man from the man, I wait, can I just say I loved Manny's like man of the mountain?

I feel in finance, we're always talking about men of the mountain coming down with their wisdom.

Lots of mountain men.

Um, so I loved that.

But yes, we should go listen to a man literally in the mountain.

Lots of mountain men in Davos.

Right now, and hear what he has to say.

All right, let's leave it there.

This has been another episode of the Odd Lots podcast.

I'm Tracy Alloway.

You can follow me at Tracy Alloway.

And I'm Joe Weisenthal.

You can follow me at the Stalwart.

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