Moneta recently hosted a macroeconomic and markets discussion with Tiffany Wilding, managing director and economist at PIMCO, where she leads PIMCO’s Cyclical Forum, crafts the firm’s outlook for the global economy, and analyzes key macro risks for the firm’s Investment Committee. The conversation spanned key themes arising from PIMCO’s recent Secular Outlook as well recent topics that have garnered investor attention. We very much welcomed her insights and thoughtful observations.
Secular Economic Outlook
PIMCO’s outlook emphasizes a shift from the post-Global Financial Crisis (GFC) era to a period of greater macroeconomic and policy volatility, increased geopolitical tensions, and the need for investment resilience and diversification. Tiffany noted that the stable, low-growth, low-inflation environment following the GFC is now behind us, replaced by increased macroeconomic and policy volatility, and more pronounced wealth bifurcation and political shifts, especially in the United States. She highlighted that the generational reset in yields offers investors an opportunity to diversify, particularly in high-quality bond markets, as greater uncertainty and volatility increase the benefits of diversification.
Geopolitical tensions are clearly high currently and referencing the elevated geopolitical risk index since the pandemic, she noted that these tensions are symptomatic of deeper transformations in the global economy, which are expected to persist. She described the global surge in state interventions and industrial policies, leading to a broad capital-expenditure super-cycle, with governments, businesses, and households investing to build resilience, particularly in AI infrastructure, energy, defense, and supply chains. To be sure, Tiffany warned of more pronounced boom and bust cycles, especially as investment in new technologies like AI accelerates, potentially leading to over-investment and subsequent corrections, even as these technologies drive productivity growth over time.
Inflation Dynamics and Central Bank Credibility
On price stability, Tiffany noted that both business cycles and inflation volatility are expected to be more elevated, with AI potentially contributing to disinflation and productivity, but with ‘fat tails’ in inflation outcomes due to ongoing transformations. This dynamic places immense importance on the Federal Reserves ability to maintain credibility to keep term premiums contained and anchoring long-term inflation expectations, as evidenced by market pricing during the pandemic. On that note Kevin Warsh’s appointment as Fed Chair is likely to reinforce inflation-fighting credibility, given his orthodox and hawkish stance, which could be positive for longer-dated interest rates.
Dollar Reserve Status and De-Dollarization Concerns:
Despite dollar relative strength this year, investors continue to raise concerns about de-dollarization and the US dollar’s reserve status. Tiffany responded that PIMCO remains skeptical of any near-term loss of reserve status given the dollar’s global prominence is supported by its use in payments and contracts, and reinforced by China’s closed capital account, making a shift away from the dollar unlikely in the near term. That said, she admitted that while some diversification away from US assets may occur, this does not necessarily imply a change in the dollar’s reserve status; it rather reflects recent outperformance of US assets and passive investor allocations.
Private Credit Market Assessment
Private credit has made the headlines recently as investors face consternation over valuation protocols, sector concentration and liquidity constraints. Tiffany described the rapid expansion of private credit markets, likening it to the growth seen in non-agency MBS before the GFC, though she does not expect a similar systemic event due to structural differences. She noted that lower-quality borrowers have migrated from the public high yield market to private credit, resulting in improved credit quality in the upper end of the high yield market. Tiffany cautioned that compressed relative spreads, deteriorating underwriting standards, and lower liquidity in private credit may not offer sufficient compensation compared to public markets. This dynamic is supporting secondary market transactions which naturally reprice private credit assets and do create potential opportunities for long-term investors. Overall, within private credit, as with many asset classes, the importance of manager selection and diversification in a non-homogenous asset class, is critical as is investing with seasoned private credit entities who have navigated multiple credit cycles.
PIMCO Disclosure:
Used with permission from Pacific Investment Management Company LLC (PIMCO). The views expressed by Tiffany Wilding are her own and do not necessarily reflect the opinion of PIMCO. The content above does not represent any endorsement or recommendation of any investment or investment strategy.
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