 The Sharpe Angle: PIMCO's Dan Ivascyn Investors should brace for a much more challenging market environment  PIMCO is the world's largest active bond manager, cultivating more than $2 trillion under management over the course of its 50-year history.
The firm held its annual client event Thursday where it took a closer look at how investors should view macro factors over the next five years. The client conference is known for spurring calls on secular trends like the housing bubble and the "new normal."
We sat down with PIMCO CIO Dan Ivascyn ahead of that event, in an exclusive interview, where he offered his take on the Fed, inflation, cryptocurrency, and more.
(The content below has been edited for length & clarity.)
Leslie Picker: You recently published a secular outlook, something that you call the age of transformation. I just want to kind of quote from it to help our viewers understand exactly what you're getting at.
You believe that it will be "radically different macro environment" as the "post-financial-crisis, pre-pandemic New Normal decade of subpar-but-stable growth, below-target inflation, subdued volatility, and juicy asset returns is rapidly fading in the rearview mirror."
All that sounds great. So what are we in for in the future then?
Dan Ivascyn: It's great from a past tense perspective, but unfortunately for investors, we think the next five to 10 years is gonna be a lot more difficult. We've seen a tremendous rally in nearly all financial assets. And when we look forward in time, we think it's gonna be much harder to replicate those returns. Fixed income yields are low, equity valuations - credit valuations - are stretched, particularly compared to the last financial crisis 12 years ago, where you had a lot more return cushion coming out of that period of uncertainty. So [I] think as a starting point, investors have to be comfortable with lower returns going forward and unfortunately, higher volatility or more uncertainty. And that's exactly the combination of outcomes you don't want as an investor. And therefore, we think it's going to be a much more challenging environment going forward with a lot of uncertainty, a lot of potential volatility, but with relatively low return prospects, and the need to be very, very careful and committed capital over this period.
Picker: I want to get your viewpoint on inflation, because I know that's front and center for a lot of managers these days. And in your report, you talk about there being periods of higher highs and lower lows for inflation. What about more in the near term? How are you viewing what we're seeing right now with regard to prices?
Ivascyn: We do think in the base case, inflation will remain elevated. There's considerable near term risks to the upside in terms of inflation. But we generally believe that inflation will prove to be relatively temporary. And by that I mean that inflation will tail off over the course of the next 12 months or so, to a point where it doesn't get embedded into longer term expectations. That's the definition or the thought process we like because the Fed and other central banks have told us that if inflation expectations become embedded in the marketplace, they will act and they'll move sooner than they would like to move… And then when we look at the markets, the markets aren't pricing in a lot of inflation still. So it's not the type of market environment, particularly on the fixed income side where we want to make a strong bet against inflation at this point. So we remain quite defensive regarding interest rate risk more broadly, we remain a little bit concerned that higher inflation over the course of the next few months could seep into confidence more broadly, and potentially begin to impact credit spreads and equity valuations as well.
Picker: Do you trust that the Fed has everything under control at this point in time we had Paul Tudor Jones on CNBC [Wednesday] morning. He was on "Squawk Box" where he basically was saying, 'I wouldn't invest in fixed income at all as an asset class, because I don't know what is going on with regard to the central bank right now.' Do you feel differently?
Ivascyn: I think there's a tremendous amount of uncertainty and I don't think that the Fed, you know, behind closed doors, will think that they have everything under control. Central banks tend to project optimism, they don't like to unsettle markets, but it's a Fed that's dealing with a very, very challenging situation. This is an incredible economic environment - a sudden stop of a global economy, massive health related frictions, potential changes in preferences, and we're seeing that with labor supply more broadly. So the Fed has a tough job. I think it's pretty easy to criticize the Fed. I think it's very, very tough to be in that seat making those decisions.
But with that said, the Fed is betting on inflation remaining under control. And there are some risks that if it isn't under control, they'll need to move more abruptly. And again, that can have spillover effects into financial market volatility more broadly. So I think they're trying real hard. I think they're doing the best they can do under a highly uncertain situation or circumstances. But sure, there's a risk that they won't get things perfectly right, and we will have a much more volatile 2022 if inflation remains elevated.
Picker: What are your thoughts on what we're seeing right now, with regard to supply chain challenges with labor shortages? Do you see these things kind of working themselves out over time or is this something that we really should be paying attention to, regardless of what it's meant for inflation?
Ivascyn: One of the big, big risks to our base case forecast, and why we are still very cautious about betting against inflation here is that we and economists more broadly don't understand what's going on on the labor supply side. There's clearly been a shift in preferences coming out of this Covid period - work from home, flex work, less work. People aren't returning the labor force as quickly as we would have anticipated and again, this was a very, very unique shock that none of us as investors have gone through in our lifetimes. So I think a healthy degree of humility is very, very important.
We're very, very focused on the micro areas of the labor market to attempt to understand this dynamic, but it's a significant risk. And it's a significant risk to a more benign inflation forecast if we don't see at least a gradual return of people to the labor force, because that's going to mean even greater supply constraints, more inflationary pressure, and that could end up being more of a permanent nature.
Picker: Given all of that, what do you think are the best hedges? In light of this uncertainty? How should investors be positioning in a way that protects their downside?
Ivascyn: I think we very well could be in a period where at least locally, bonds provide less protection than they would have in the past because inflation will for the coming few quarters be the primary risk that investors are concerned with. Also, when you look at various direct forms of inflation protection, like the TIPS market, we've seen a rise in breakeven rates, but not a breakout from, you know, more normal patterns that we've seen over the course of the last couple of decades. So even there, although at breakeven rates today, you may lose a little bit of money in the base case with a big allocation to TIPS. You will benefit from that type of allocation in a more negative scenario or a scenario of higher and more sustained inflation.
Commodity markets although they've rallied considerably in certain areas from a longer term perspective look reasonable as an inflation hedge. Real estate to some degree will provide some deflationary hedges in certain sectors and sub sectors of that overall marketplace. Then things like gold and other stores of value also potentially could protect against that scenario. Gold's been quite out of favor on a relative basis but again, it has some room to perform if we get into a much more negative environment that we're in today.
Picker: Proponents of Bitcoin would say that's an inflation hedge of sorts - a unique, more untested inflation hedge - because it's uncorrelated to the broader economy. Do you have any views on that front, especially as we're seeing more momentum with regard to ETFs for Bitcoin and greater institutional acceptance of crypto just as a whole?
Ivascyn: Our perspective on cryptos is, it is potentially a store of value that can be an inflation hedge. This is an area of the market that's growing and changing rapidly. It's here to stay to some degree, but you have to be very, very careful of regulatory responses. We've seen it in China more recently. We've heard concerns expressed by the SEC. So you'd have to be careful in the crypto universe. But you know, we're of the mindset that there's plenty of investments out there in the world that don't have fundamental value in a more traditional sense, but that investors have a high demand for so I think crypto is a newer generation example of that. We respect that demand. And as a firm, we're spending a lot of time analyzing crypto thinking about decentralized finance, how it may disrupt our business, how we can offer solutions for end investors realizing that a lot of our backgrounds, you know, at least on the leadership side at PIMCO are in areas very, very different than crypto.
Picker: What have you learned so far? And have you made any strategic changes as a firm? Based on that research? Are you considering putting capital to work in crypto?
Ivascyn: Now we're looking at potentially trading certain cryptocurrencies as part of our trend-following strategies or more quant-oriented strategies, then doing more work on the fundamental side. So this will be a gradual process where we spent a lot of time on the internal diligence side speaking to investors. And we'll take baby steps in an area that's rapidly growing….you have to understand this technology, you have to understand decentralized finance, because it will be disruptive, and it very well may disrupt our industry, in our business in particular.
Picker: So are you speaking kind of about things like blockchain, that type of technology where you have ledger's that are over, you know, that are digital, as opposed to, you know, a much more supply chain-oriented system within the financial services industry?
Ivascyn: Absolutely. And that's where we're doing our research. We will be making some additional hires at a more senior level, to help us move forward - a lot of the strategic resource. And then of course, we learn a lot from our well-informed junior employees on this particular subject. And I know it's real, it's in front of us. There are, banks considering issuing debt, using this technology. And it's going to be again, in some sense, a competitor of ours. So an area of considerable focus, don't have all the answers yet but we're gonna be spending a lot of time in these areas over the next several months.
Picker: You of course, mentioned China in that current conversation about cryptocurrency. I'm curious, your thoughts on what's going on there right now...PIMCO made some headlines for being out front on the whole Evergrande situation by paring back its exposure ahead of some of the issues that we've seen recently. But given just the broader regulatory environment over there, is it investable in terms of debt at this point in time?
Ivascyn: We believe it's investable but you have to be very careful. Maybe to step back for a moment, China's going to continue to grow at a very high rate relative to much of the rest of the world. This is going to continue. You're going to see further development of capital markets. They're still going through a growth transition, you know, from an export-oriented economy to an economy focused more on internal demand. And this is a relatively young capital market, an untested area of the marketplace. So there's going be a lot of volatility.
China, you know, views capitalism very differently than we do in the West. And they will have priorities that seem foreign to us or different and that's going to lead to volatility or unpredictability in the way that certain sensitive situations, like the challenges within the property sector, are resolved. So we are very involved strategically on the ground in China, we intend to be there long term. But we're also very, very careful. And when we looked at that particular sector and segment of the market, it was very hard to understand how problems would be resolved. And that's been one of the reasons why we have been so cautious thus far, and even when we look at some of the more volatile, weaker names at these very low dollar prices, we've yet to gain considerable confidence to come in and put our clients' capital to work in some of those situations.
But there are a lot of high quality companies in China. They've widened in sympathy. There's more uncertainty in that market than other segments of the corporate universe. And in some of those higher quality names - we have begun to purchase certain higher quality names that have widened in sympathy and where we see a much stronger fundamental credit profile. So I wouldn't say un-investable. You just have to respect the uncertainty there, the untested nature of those markets, and be very, very careful.
Goldman Sachs wants to build an investor-friendly SPAC business Goldman Sachs just closed its second billion-dollar blank-check deal ever as the Wall Street firm seeks to change the struggling SPAC market by building a sustainable franchise that aligns investor interests with insiders.
Nuclear measurement and analytics company Mirion Technologies started trading on New York Stock Exchange Thursday after merging with GS Acquisition Holdings Corp. II, which values the combined company at about $2.6 billion including debt.
Unlike most of the SPACs on the market where sponsors are entitled to 20% of the total shares outstanding following the IPO for free, or at a big discount, Goldman's Mirion deal fully defers this so-called sponsor promote and sponsors will only start getting paid when shares rise more than 20%.
"If you earn the promote upfront, there is always a bias towards stretching a little bit more on price and a little bit more on projections because you are incented to get the deal done," said Tom Knott, head of Goldman's emerging SPAC business. This division falls under the asset management arm of the Wall Street bank.
Special purpose acquisition companies raise money on the public markets sometimes without a vision of which companies they will eventually take public within two years. They have come under scrutiny for disproportionate insider benefits and lucrative incentives, oftentimes at the expense of retail investors.
Elizabeth Warren and other Democratic senators recently sent open letters to a few high-profile SPAC leaders to question how they are compensated. SEC Chairman Gary Gensler has repeatedly warned of the misaligned interests between sponsors and shareholders and said greater disclosure is needed. Goldman is seeking to bridge the gap between the returns that insiders get versus average shareholders. The bank also invested $200 million in the Mirion deal, which makes it the biggest PIPE investor.
"At the firm we are trying to build a franchise doing this. In order to do that, we want to have strong relative performance over time," Knott said. "Sponsors who structure their transaction responsibly and bring really good businesses to market will always have a place to play." 
After a blockbuster 2020 and the first quarter of 2021, now a record amount of SPAC capital — over $135 billion — is seeking target companies to take public, according to Barclays Research.
The first deal Goldman Asset Management did was Vertiv Holdings at the end of 2019, which valued the data-center equipment company at over $5 billion. Shares have since more than doubled.
Goldman has registered additional SPACs with the SEC, including GS Acquisition Holdings Corp. VIII and IX.
"I sit down with 1000 companies with each deal we buy, and I tell everyone of them the statistical probability of us doing a deal with pretty low, but our hope is at the very least, the next SPAC that comes through your door, I hope the first thing you ask them is why are you not willing to fully defer your promote because Goldman Sachs is," Knott said.
"We are really focused on changing the market," he added.
Delivering Alpha Headlines Big thoughts from the big money Paul Tudor Jones calls inflation single biggest threat Billionaire hedge fund manager Paul Tudor Jones believes inflation is here to stay, posing a major threat to the U.S. markets and economy. "I think to me the No. 1 issue facing Main Street investors is inflation, and it's pretty clear to me that inflation is not transitory," Jones told CNBC. "It's probably the single biggest threat to certainly financial markets and I think to society just in general." The founder and chief investment officer of Tudor Investment Corp. said the trillions of dollars in fiscal and monetary stimulus is the impetus for inflation to run hotter for longer.
Carl Icahn says the market over the long run will certainly 'hit the wall' Longtime activist investor Carl Icahn said the U.S. markets could see major challenges over the long term in the face of excessive money supply and rising inflation. "In the long run we are certainly going to hit the wall," Icahn said. "I really think there will be a crisis the way we are going, the way we are printing money, the way we are going into inflation." Icahn was adamant about not making a market timing call, but he believes one day over the long term the markets will pay the price for those unprecedented stimulus programs. David Einhorn says his largest position is in a homebuilder stock as an inflation hedge Greenlight Capital's David Einhorn is betting big on homebuilder Green Brick Partners in the current inflationary environment. Einhorn told CNBC that Green Brick is his hedge fund's largest holding. Einhorn is the chairman of Green Brick and said he owns about a third of the company's shares. "The reason we're positioned for inflation is we believe that whether the Fed acts or doesn't act, there's going to be quite a lot of inflation," Einhorn said.
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Kamis, 21 Oktober 2021
Exclusive: PIMCO sees challenging environment | Goldman trying to change SPAC market | Big money's inflation fears
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