How should I be positioned? with Dan Ivascyn (PIMCO) and Jason Draho (UBS CIO)
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Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. As you know, on this podcast, we do like to catch up with our industry colleagues and partners to talk about the market and macro environment, along with thinking when it comes to asset allocation.

Joining me here today in our 1285 podcast studio in New York, to my right, glad to welcome back from the UBS Chief Investment Office, Head of Asset Allocation for the Americas, Jason Draho. Across the table from me, very excited to have with us today here in person, Dan Iveson, Group Chief Investment Officer for PIMCO. So with that, Dan, thank you for dropping by, Jason. It's great to have you here as well, and a lot to talk about. So looking forward to our conversation today. Well, thank you, Dan, for joining us in person today. I appreciate it.

Great. Thanks. It's really good to be here and here in person. So, unfortunately, to the conversation. So, where to begin? I know there's a lot of topics top of mind at the moment for investors. Front and center, perhaps, over the past few weeks has been the evolution of U.S. trade policy tariffs that really seems to be driving so much of the economic and investment outlook. So, Dan, I'm curious from your vantage point, and this is coming off of the U.S.-China trade talks last week, how do you anticipate

This will all evolve from here over the near term and throughout the balance of 2025. Sure. So we think tariffs and tariff policy will be a key part of uncertainty related to this administration. President Trump has talked about tariffs now for several decades. He believes in tariffs. He said that very clearly going again all the way back to the 1980s when he was a private citizen and used to be on late night talk shows. So

And Oprah. And Oprah as well. Absolutely right. So I think we should believe that he and this administration will use this as a significant policy tool. We believe that there will be compromise along the way, but this is going to continue to be a source of considerable uncertainty for the global economy. We do think that Trump will take it –

approach where he's aggressive up front and then we'll look to use tariffs to negotiate other outcomes, both geopolitical and more traditional economic outcomes. But tariffs are going to be higher than we've grown accustomed to for a long time. We don't know exactly where they're going to land. The situation with China in particular is going to continue to be uncertain.

And it's going to lead to some risks as well as opportunity to deploy capital on a global basis as well. And Jason, per Dan's commentary, a lot of historical precedent in terms of how this administration approaches tariffs and a lot of uncertainty remains at the moment. What are your thoughts? Well, I agree with everything Dan said in terms of this being a central part of what Trump has been talking about for 40 years.

And that's not going to change. I think there's no reason to think that will change. So, you know, the job that all of us have who are in the markets and making investment decisions is trying to figure out what is sort of an endgame, an open question of what is the objective for them, because there's aspects of the policy that seem a little bit

You know, for example, if you are trying to use tariffs to raise revenue to offset potential budget or tax cuts elsewhere, at the same time you want manufacturing to come back to the U.S. and shrink those trade deficits, well, that would shrink the trade revenue. So what is the primary goal? Is it revenue or is it more manufacturing? So there's some very much kind of open questions, you know, there. Ultimately, we think kind of where we are now, given a lot of noise, but this is sort of, I think, we'll settle on something like this in aggregate, which is, you know, I think that's a key point is aggregate versus manufacturing.

you know, it's kind of a specific levels and thinking about an effective tariff rate in the low teens is like something like 13, 14%, give or take, you know, not the 27% after liberation day, not, you know, that obviously 2% we came to the year, probably not single digits somewhere in this range. I think what seems like the markets have become comfortable with that. But I want to pick up on this with that general point, Dan, in terms of maybe how you think about,

making investment decisions. And you hit on a key point of that the way the administration and Trump and team will use it, it's not just presumably to get a lower tariff rate. They might accept currency evaluation from the Chinese. They might accept other trade or security measures from other countries.

So it's easy, I think, for the market overall, you know, in kind of quotes, the market to think about an effective tariff rate to quantify the macro implications. But when you actually want to get into like single security or individual securities, like the details do matter. So how do you sort of balance between, you know, a fast moving situation where like trying to get specific is in real time is hard to think maybe a big picture, where is this going for the overall view versus like,

thinking more micro, where does this create opportunities if you think about cross-regional allocations and bonds in one country versus the other? Yeah, there's a lot there. And I think if you step back and look at this investment environment over a multi-year horizon, this approach to governing is different than what we've grown accustomed to. I'll simplify and perhaps oversimplify a bit, but

Throughout much of our careers, you or we could typically assume that economics and positive financial market outcomes drives politics. Politicians tend to do pretty well when the economy is performing well, when markets are going up and not down.

In this environment today, particularly with this administration, there are a few political priorities that may at times be inconsistent with shorter-term economic growth, short-term pain to further certain long-term priorities. And that's different. And it's not just true here in this country. We've seen similar themes develop over the course of the last few months or the last couple of years.

from a global perspective. But I think as allocators, we just have to understand that things are different. The textbooks we read when we're going to school to analyze markets don't necessarily have many chapters to operate in this world. But it's exciting as well. I know a lot of people yearn for that pre-COVID period, very, very low, well-behaved inflation rates.

steady growth, less uncertainty, less volatility. But back then there wasn't much value, particularly in fixed income markets. And today we truly have a global opportunity set. We have less synchronized cycles. We have the unanticipated impacts of policy on markets. So from our perspective, we think investors should take a long-term horizon, try to filter out the noise. I try to tell myself that every day as well, easier said than done.

But take advantage of what, again, is an exciting global opportunity set. Don't have too much implied conviction in any one theme, any one trade. Have a healthy degree of humility that it's going to be hard to figure out.

this environment or this investment environment in a very narrow or precise sense. But the great news is you don't have to. You can take advantage of good value, take advantage of inevitable overshooting across markets, and again, leverage an opportunity set that looks more exciting than we've seen in many, many years with less direct influence from policymakers. So again, a lot of optimism as long as we step back and realize it's going to be a bit of a bumpier road than many of us have become accustomed to.

So in your recent secular outlook that was published a couple weeks ago, the point that you just made that – and I want to just kind of quote this here. The traditional world order in which economics shaped politics has been turned on its head with politics now driving economics. I think that's a critical thing, just almost like a fundamental kind of paradigm shift. And there's multiple ways to kind of pick up on that point, but two sort of maybe come to mind. I want to ask you kind of questions on this.

One is maybe more conceptually, how does that maybe change the way you think about sort of evaluated investment opportunities? And I'll give you the context of suppose politics doesn't matter. It's more traditional economics. And in traditional sort of therefore like the financial markets behave in a certain way. And look, we've reduced finances that are reduced to like somewhat normal distribution for outcomes, maybe some fat tails, derivative pricing, option pricing theories kind of based on this sort of this kind of world of risks behaving in a certain way.

In a world where politics drives things, when we know politicians don't always follow standard economic rules, their reaction function can be different. That can lead to nonlinear risks or jump risks or things of that sort. And that's just one example. But in this idea of a politics driving economics versus the other way around...

How might it change some of the frameworks, the way you think about investing, thinking about risk? Or has it changed? Ultimately, you kind of rely on more fundamentals. So I'm just curious how you might think of that paradigm shift changing how you think about investments. Yeah, it has changed. And I think it's important to acknowledge that.

There will be other factors that are driving investment returns outside of the type of data that we've historically looked at. So if you're looking at a mortgage-related investment, particularly a non-government guaranteed mortgage investment, typically you look at home prices and you use that as the primary factor that you adjust to understand how

Investments tied to housing may perform on an ongoing basis. When you look at interest rates, you look at credit, you tend to, at least in a macro sense, think about GDP. Positive growth tends to be good for more economically sensitive credit assets. Lower growth, less attractive. And a lot of times, the models sort of begin and end there.

I think in today's environment, policy matters a lot. We spend a lot more time at our investment committees getting input from our advisory board members. We have a great group of advisors that provide us insights here. We also use Liberty Control, our head of public policy, a lot more, trying to understand the direction policy may take, particularly policy as uncertain as tariffs and the type of variability or uncertainty around tariffs that could have immediate outcome effects

And then again, there are going to be situations that are even more uncertain, various import and export restrictions on key inputs to the manufacturing process. So I think, again, it's acknowledgement that the traditional approach that many of us have gotten used to and has served us well early in our career need to be supplemented by additional insights in terms of policymaker responses,

priorities that may seem irrational from a narrow economic perspective. So we're running more scenarios. We're looking at more scenarios that aren't related to more traditional economic variables. And again, I try to diversify, diversify in a geographic sense, diversify across key sectors of the market and

What can sound daunting is really, really exciting, given that valuations have repriced so significantly, particularly within the fixed income or the bond opportunity set the last few years, and where you can accept a starting point that's much more attractive than around the fringes, be able to take advantage of volatility on an ongoing basis. So picking up on this point of other factors, other data points, other considerations, you

I go back two years ago, three years ago, when they can come in under the pandemic, the consensus view once the Fed started raising rates was, well, there'll be a recession. Then people will look at some very simple heuristics, the yield curve inverted, ergo, you know, that's like that's preceded recessions, even the Psalm rule a year ago, preceded recessions.

And I kind of looked at it and thought, well, I'm not sure how much I'd want to rely on these models that have been calibrated the past 50 years of economic data. How can they explain a post-pandemic, forget about the politics, but just the general economic relationships? And now you have the politics, which is driving things. It further moves us in a direction where I feel like I'm

We'd want to shift more to a qualitative approach to assessing things versus quantitative, at least the relative balance of power. And if you rely too much on quantitative solutions, and I'm not saying like pure quant models, but even just, you know, our relationship between the ISM and equities, you know, could be broken down.

It sounds like that's kind of ultimately where you sort of, you know, you have to kind of go in that direction. If you rely too much on those more standard rules or approaches, you will end up making the wrong decisions because you're not factoring the stuff in. I think that's absolutely right. And then I think it's also important to acknowledge that you're going to make some correct decisions. You're going to make a few incorrect decisions in an environment like this one. I think the key as an allocator is to be able to size things.

your investments such that you can make a few bad decisions, maybe even a lot of bad decisions in a portfolio context and still end up with positive outcomes. And that gets back to this idea of inherent diversification, respect for the unknown, and then ideally have enough risk flexibility and enough liquidity to be able to course correct, to be able to shift as you get new information and as markets inevitably overshoot fundamentals and then provide an opportunity.

So just going back to the secular outlook, one of the points that you made regarding the U.S. was over the secular horizon, which is about five years, that you'd expect inflation to get back to the kind of the Fed's target, like basically get back to 2%. Is that correct? Am I interpreting that correct? Yeah. Well, yes. We think inflation will head back towards central bank targets. Whether we get to that neat and clean 2%, not sure yet.

The next five years or so very well could be an environment where inflation structurally runs a bit higher than, again, what we grew to anticipate pre-COVID. Over the short term now, with tariff policy going into effect, perhaps tariff rates with certain trading partners going higher from here,

We do think we may be in a 3% inflation world here in the United States a bit longer than would have been the case in the absence of these increases in tariffs. Again, a lot of uncertainty, but we do think that over the course of the next decade,

A few years, at least in the base case, you know, we get back closer to the central bank targets we again were accustomed to. If I recall the secular outlooks that you guys published a year ago, two years ago, definitely focus, I think, on inflation. So without kind of doing a side by side comparison, it seemed like the inflation narrative was in prominence was a little bit less this time than it was two years ago. Do you think that is that a fair assessment?

Yes. And to be clear, a couple of years ago, inflation was higher and inflation was the primary concern to markets. We're coming off a period of the highest inflation rates we've seen in several decades. The Fed's primary role and focus, as well as other central banks, was to get that inflation lower.

And markets reacted in a very narrow sense to inflation more than other economic themes. But we look at the world today, we've been in this higher inflation environment now for several years. We're back down to levels that are more reasonable in terms of current inflation relative to central bank targets. And now markets are correctly beginning to focus on the trade-offs or the tension between getting inflation back down to the central bank target and

and any resulting economic weakness that may occur as well. So we do think on a go-forward basis, there'll be more of a balance, and we think investors should focus on that balance or that tension between growth and inflation. And the other key point relative to where we were just a couple or a few years ago is that there's been a significant repricing in fixed-income markets. So today, you don't need inflation to get back down to a 2% level today.

to justify a meaningful allocation to bonds. Bonds are at nominal and real yield levels today where we can operate in an environment of moderately higher inflation relative to central bank targets and still generate some good returns. So a lot of this just has to do with the valuation cushion that's finally developed in these markets also. So picking up on that point, the valuation premiums, especially along another curve, and I want to come back to this because it ties into...

at least one of the factors that's been driving the tenure, but the 30-year in particular, you know, the yields higher. But, you know, the fiscal situation, the fact that what is working its way through Congress right now would actually result in bigger deficits next year, it looks like, than sort of, you know, the 6%, like getting over to 7%. Given these high debt levels, given the U.S. debt situation is unsustainable based on current trajectory,

There's an argument that can be made, well, one of the ways you get out of that is you'll lead to higher inflation, and you'd almost want to inflate your way to that problem. If you're assuming, over the years, the forecast rise in inflation trends towards that level...

You either – you kind of don't think that's sort of a near-term risk. The idea of financial repression of some form or another where like you've kind of forced the Fed to lower rates, other banks to buy debt to keep rates lower, that does lead to higher inflation. And if that – would you agree with that or not or where do you think that kind of breaks down? And is that – but it's also that simplicity why you think the curve ultimately will continue to steep and like the front end goes lower, the back end goes higher potentially? Yeah.

Yeah, so there's a lot there. And again, although our base case is that inflation, although it may spike over the course of the next couple of quarters associated with tariffs coming into effect, ultimately...

heads back down towards central bank targets, there's lots of uncertainty here. And when you look at portfolios at PIMCO, we own some treasury inflation protected securities. We own other inflation protected securities outside the United States because for all the focus on inflation for this multi-year period,

where inflation has run well above central bank targets, when you look at what's assumed in market pricing out five or 10 years, markets believe that this inflation situation is going to stay relatively stable. So when we look at that type of pricing, we think it's prudent, despite the fact that our base case view is that inflation will trend lower to own some inflation protection. And we have that exposure across markets.

most PIMCO portfolios. You also touched on yield curves and longer rates and absolutely right. It looks like this Trump bill, the big, beautiful bill will pass. There's still some uncertainty there, but our base case expectation is that towards the end of summer, we'll likely get a bill passed. And when that bill gets rewritten by the Senate, it

it's likely to continue to lead to mid-single-digit, even higher single-digit-type deficits for the foreseeable future. So this is a risk. It's not all bad news, though. We speak to investors a lot, and by far the most popular question we get is, what the heck's going on here with these U.S. deficits? And one point that we like to make is that

the fact that the U S is operating, um, with higher deficits and unsustainable deficits from a long-term perspective, likely allows us all as private investors to lend to the government at an attractive nominal real yield, uh, back pre, um, elevated, you know, deficit levels, um, you know, over this COVID period, uh,

We had lower inflation. We had lower overall debt levels. But you started with a yield. You subtracted that low inflation rate, and you ended up with a negative number. Some parts of the world, you started with a negative number. So it's not all bad. But again, if we continue to run deficits of 5%, 6%, 7% in this country, it likely will lead to heightened volatility out the curve.

We do think a steepening position, or put another way, we think investors, and we are concentrating our interest rate exposure in the five- to ten-year maturity sector, not entirely because of concerns around deficits. We think that there are a lot of reasons why the yield curve may steepen. Higher deficits, higher global debt levels, one of a handful of reasons. So again, although...

We don't expect there to be a major crisis in the United States. We still have a lot of advantages here relative to other smaller, more open economies. We think investors should keep their maturities in that five to 10 year space and even consider some alternatives outside the United States of a higher quality variety as well.

Just going back to the point about inflation, the market pricing for inflation, it's been to me kind of remarkable that even going back to 21, 22 when inflation got up to 9%, that the longer term inflation expectations have always been relatively anchored. The markets always believed ultimately inflation will come down, the Fed has credibility despite a lot of times claims otherwise.

sticking with the fixed income, what you like, you know, the five to 10 year for duration. But what about kind of credit quality given, you know, all in yields are have elevated. You can get five to 7% kind of portfolio yields without taking a lot of credit risk. Um,

you could say you're getting relatively attractive valuations. There may be less. So if you go into like high yield and parts like that. So how do you think about taking kind of credit risk and what do you like within the kind of the credit risk base right now? Yeah. So again, you know, higher quality bond yields are what looks attractive from a historical perspective. Um,

You look at equity markets, and equity markets tend to be quite correlated to credit markets. Valuations are stretched. They're up near the highest levels we've seen in quite some time. And when you look at equities versus these elevated yields,

valuations look even more stretched. So from that perspective, when we look at the world today, we see a lot of macro uncertainty, a lot of geopolitical uncertainty. Yes, a lot of positives, especially all this tech-related innovation emanating

from the U.S. economy, there are some positives. But we think investors should stay up in quality here. It's been a great run, particularly for the more economically sensitive areas of the credit markets, especially if you go all the way back to the GFC.

The returns we've seen in the lower quality areas of the corporate credit markets, almost unprecedented and very, very unique in that we've had almost a one-way market now for over 15 years where you just bought the lowest rated, the highest yielding area of the corporate credit market, and it tended to work year after year after year. So today, we think that investors should own a little bit more interest rate risk, stay in the higher quality areas of the market,

There's some exciting areas of the market you can pick up where you can pick up incremental yield versus treasuries or other government guaranteed bonds like agency mortgage-backed securities, like higher quality investments outside the United States where particularly from a U.S. investor's perspective, if you hedge that risk back to the U.S. dollar, you can pick up some incremental yield.

And then even some of the higher quality areas of the credit space, senior structured products, lending to the consumer where you can pick up solid investment grade risk at yields that continue to be quite attractive relative to government bonds. We think that makes a lot of sense. And then maintain some liquidity, maintain some flexibility.

to take advantage of opportunities in the more economically sensitive areas of the market if we were to get into an environment where people begin to fear harder landing type scenarios. I want to kind of drill a little more into diversification. You've kind of touched on that already. And I'm focusing on it from two perspectives. And the first is regarding kind of the global diversification piece of this. I've seen some data recently, and this is on the equity front of...

correlations between, say, US versus European equities or other regions actually dropped quite a bit. Like, at some point, if you take rolling correlations over, say, three months, it's the lowest it's been in almost a couple of decades. It's been rising a little bit higher. I'm not as familiar if that's been also true in the fixed income landscape. And I do wonder, like, is this a, after sort of

a multi-decade trend starting probably in the 90s of kind of the globalization brought more correlations closer together so you want to go what's the benefit of diversification because they're moving together is this a structural change that will actually lead to more like lower correlations going forward therefore the benefits of diversification globally are this will last like say for the rest of this decade so

So is that something you would have subscribed to? Are you seeing that kind of evidence in fixed income markets? And therefore, more so than ever, the benefits of going global is actually stronger than ever, at least stronger than it's been in 15, say, plus years. So the answer is yes. Perhaps not to the same degree that we've seen in equity markets, but we've been in an environment where...

growth cycles are less synchronized, policy cycles are less synchronized. Quite amazing what's been going on in China. A lot of growth pressure, a lot of challenges within segments of the Chinese corporate sector, and significant disinflationary or even deflationary pressure there, while much of the rest of the world's been dealing with an inflation problem. When you look at value, when you look at

outside the U.S. You have situations where very, very high-quality countries are running much more close to a balanced budget with, in many instances, a weaker economy than the United States. And that's pretty good for a bond investor. What we try to see is low inflation, fiscal prudence, and some economic weakness tends to be good for fixed-income performance. And I'm actually describing a lot of key areas outside the United States where

Australia, Canada, even the United Kingdom, which is going to be a more volatile market, represents good value as well. So not only are correlations favorable to global diversification, but also valuations are as well. Some of those countries I just mentioned went hedged back to the U.S. dollar or even on an unhedged basis offer a significant yield pickup to the United States. So again, we don't think the U.S. is going to lose its reserve currency status, but

We actually think from a long-term historical perspective, these higher deficits in the U.S. are manageable for now. But we do think this is a great environment to diversify. Even in emerging markets, there are some really good values as well. And you don't have to go deep down in credit quality to put together an attractive portfolio if you expand into some areas of greater complexity or a little bit less liquidity.

So that covers kind of global, like regional diversification. Then there's kind of cross-asset diversification. And, you know, as someone who does asset allocation, to me, like the foundation starts with like a stock bond kind of mix. And then you kind of go from there. For 20 years, the bonds were a perfect asset class, right? Good returns, low volatility, and gave you this negative correlation with equities. In 2022, inflation rose and that sort of disrupted that. And since then, it's been a little more fits and starts of like how well it's diversified. Right.

Even last Friday, this is the day after Iran or Israel launched a strike on Israel or on Iran, we saw equities sell off, but U.S. Treasury rates actually went higher. You didn't get that sort of kind of flight to safety. You didn't get that diversification. But I think if you look at different parts of the curve, like the two-year versus the equities, it seems like it's negatively correlated. It's diversified. The 30-year hasn't. So it's also – it's a blanket statement you shouldn't – we shouldn't say. Yeah.

So you think about maybe like that sort of more fundamental foundational kind of relationship between multi-asset portfolios. Do you think that correlation will stay sustainably higher than it's been? Maybe not positive, but not quite as negative. Is it actually then really require more selective allocations apart of the curve that you really need to focus on, different types of fixed income? So maybe how is...

this dividend regime that we're in impacted maybe that sort of more fundamental relationship of how stocks and bonds in a diversified portfolio used to think of it. Yeah. So maybe just starting with sentiment towards fixed income. Our sense is that sentiment towards fixed income, towards bonds in general continues to be fairly weak.

Perhaps that's not surprising. We are still in the midst of a period of inflation above central bank targets. We had inflation rise quite significantly around the globe or much of the globe coming out of this COVID period. We had the 22 experience, which was bad for all financial assets, but particularly bad for bonds. But again, value helps provide, you know, a pretty attractive cushion to returns going forward. And despite lots of concerns about U.S. deficits, you

still some negativity around fixed income and how it's performed in a diversified portfolio. The last 12-month returns have been pretty good. Depending on the type of strategy, we've seen mid-single-digit, even high-single-digit type returns over the last 12 months. And although correlations probably aren't going to go back to those nice, neat, and clean returns

that we had pre-COVID. As inflation, you know, trends towards central bank targets, we do think correlations will become more favorable or put more simplistically, we do think fixed income will be a diversifier of sorts. And we think that will particularly be the case when

when people begin to worry about harder landing type scenarios. Even though localized correlations may be less favorable, if people really begin to think, wait a minute, we're in a global hard landing type scenario, there's lots of room for reallocation of bonds. Even when you look at growth within fixed income, so much of it's come from more economically sensitive floating rate areas of the market, senior secured loans, private credit,

These are areas where you arguably don't have enough duration and where if you got into a scenario where people expected sustained economic weakness and even elevated credit losses, we do think fixed income can surprise not only in terms of relative returns, but price performance under an environment which typically would be a challenging environment for U.S. households. So we're fairly optimistic, but I think investors need to

understand that, you know, we're probably not going to get back to those days where, you know, vol was low and those correlations were really, really clean and therefore diversification tended to lead to, you know, materially lower overall volatility. My simple characterization when people ask me about is that when investors are more worried about inflation than growth, that's negative for the core. I mean, that's bad for the core. It doesn't work as well.

When inflation is sort of solved, in quotes, and you're more aware about growth, that's when bonds really kind of kick in. And for 20 years, inflation wasn't really a story. Now it will probably be at least...

somewhat persistent as a narrative over the markets. Yeah, we would tend to agree with you there. And then I didn't mention yield curve positioning. One of the reasons why we like valuations in that five to 10 year part of the curve is that not only are our yields attractive fundamentally from a historical perspective, now with a couple to a few of the Fed cuts priced out of the market and

We just think that that's a good area that balances value with lower volatility, given some of this uncertainty around deficits and debt levels. And then that tends to be the part of the curve that will perform well under harder landing type scenarios. So with deficits where they are and the fact that, you know, deficits as a percent of GDP will go higher if you take your growth assumptions lower, all else equal, we

We do think that's the sweet spot in terms of not only valuation or yield, but also the way in which that risk will interact with equities, private equity, other forms of more economically sensitive credit. So embedded in that allocation to the intermediate part of the curve is a correlation view here at PIMCO, but it doesn't have to be that complicated. There's still just some pretty good yield there relative to even today's elevated inflation rates.

So I have one kind of final question. It kind of gets into like how to think about managing portfolios in general in this environment. And I'll give you a little bit of preamble to kind of go to the actual question. And the preamble is that my sense is that the markets have become over the past decade or so much more prone to really rapid moves, you know, moves, you know, reversals. What we saw in April, you know, down 20% and then within weeks you're kind of back up.

We saw that last summer, 2024, where it took about two and a half weeks for the S&P to be down about 10%. And in almost two weeks, you're kind of fully recovered. Like this has always happened, but it feels like this stuff happens more. And some of it, I feel like it's a reflection of the fact that at least in a macroeconomic environment, when investors have less conviction, and you can add now the political environment, that the narrative changes very quickly. And a couple of data points, suddenly you go from like, oh, it's all finding to heart landing or whatever, you know, how you ever want to frame it.

There's also a lot of money, certainly in equities, and I think increasingly maybe in fixed income, that is these systematic strategies, trend chasing, vol strategies, that uses options to quickly move money that amplifies the move. So it's kind of like pouring fuel on the fire. So this is the environment that we're in. This is not a, what I kind of use the term, it's not a quirk, but it's a reality of sort of modern financial markets. If that's the case, then when you do asset allocation,

that if you can be a liquidity provider and take advantage of dislocations, that's advantageous. You should also sometimes learn to look through these things because this is just big swings. And so you want to take a longer term perspective.

It's also hard to be truly kind of a long-term strategic allocation because the world changes very quickly. So it's kind of shifting how we have to think about the markets. It's moving, in my sense, kind of faster than ever. And I'd be curious if you would agree with that or if it's never this time. It's different. It's always the same. But as a result, all this dictates that how do you think about making these shifts and

It can't be too tactical, but sometimes you want to take advantage of it. And it's a different, again, framework going back to like this different political environment. Therefore, the approach to thinking about asset allocation has to be different as well. And I know if that's something you think this is really different than it's been in the past 10, 20 plus years. Yeah. Well, I'm glad you asked me that question. I think we're, we think alike about, um, about, about these things. Um, I, I joined PIMCO back in 1998. So I've been there for, for, for, or been here for, for quite some time. And, uh,

I think you're onto something here. I think it may start with just the highly uncertain global macro and policy environment, one with more friction, more tension, and one because of shifting priorities between maximizing pure economic or financial market outcomes with other political considerations. We're just going to be in a choppy environment and one prone to the overshooting of fundamentals, which could create both risks and opportunities for

for active allocators that are prepared for them. But then I think the other piece relates to market structure. People keep talking about convergence, and I think a form of convergence that's going on is between equity markets and fixed income markets. A lot of this relates to significant growth in passive allocations, growth in ETFs, growth in technology around portfolio trading, etc.,

that allows there to be significant liquidity, at least local liquidity. When you have a reasonably balanced book and every day people are waking up and realizing, wow, liquidity is so much better today than it was 10, 20 years ago, at least in a more narrow sense, there's just a lot of activity, back and forth, back and forth, back and forth. And all of a sudden when there's a shock to the market, when there's a surprise and everyone moves in one direction all at once,

you realize that there may not be massive depth there. And you tend to have this dynamic where there's more localized overshooting in markets. And I think this is exacerbated by a lot of the tech-driven quant trading that makes money most of the time, small amounts, but they add up.

and then can run into some challenges when you do have a big shift in overall fundamentals. So, you know, back at PIMCO in the late 90s, early 2000s, we would have been a bigger seller of liquidity. We would have had less liquidity. We would have sold more tails or focused a bit more on mean reversion. Today, and really over the last decade or so, our mentality has shifted. Much more proactive and aggressive liquidity management, looking to hold back liquidity.

portfolio flexibility in order to take advantage of overshooting. And I think as an allocator in this type of market, being the provider of liquidity to those that need it is going to be a key source of alpha generation on an ongoing basis. I think you're seeing this with some surprises within the endowment community even today. Long-term models, hey, we never need the money anytime soon. We have

you know, a near infinite investment horizon. Oh, wait, there was a shock, an unanticipated shock where we need the liquidity today and you're going to get paid by providing that if you're in the position to do so. And that's just one example of what's going on currently, you know, in a world where being a liquidity provider during periods of market volatility is

is going to correlate well to the ability to generate alpha versus passive alternatives. So fully agree. And in my role overseeing the investment process at the firm, really, really try to create that type of mindset. And it's been profitable for us the last few years in a more uncertain investment environment. Well, it certainly means kind of the way you think about investing, that paradigm is sort of shifting the macro, the political environment, a lot of paradigms are shifting, which means

you know, interesting and stimulating to as an investor to think about it also means like having to like, you know, be willing and be uncomfortable, like how you want to change your process. And especially because if you have things that have worked before, you know,

it can always be a little bit uncomfortable to try and go down a different path, which is the right path. But nonetheless, it's, you know, a little bit uncertain what leads. So thank you for I really appreciate that perspective. Great. Well, thank you. Well, the time always goes by quick would be great at some point, Dan, to have you back continue with the conversation, but both very generous with your time today. Very actionable, rich discussion. So thank you both again for joining us on How Should I Be Positioned? Thank you. Appreciate the partnership as always. It was great to have me here today. Thanks very much. Great conversation. Thank you for joining us. Thank you.

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