Bloomberg Audio Studios, podcasts, radio, news.
Between everything going on with AI, the big IPO with SpaceX, raising rates over at the ECB, and a lot of concerns about geopolitics, who better to kick the show off with than Richard Clarida, managing director and global economic adviser at PIMCO and former vice chair over at the Federal Reserve Board of Governors. Rich, great to have you here.
Glad to be with you again, Roma. I do want to take a moment to talk about the report that you and Dan Iverson and others put out yesterday, your annual secular outlook. And there are a lot of themes in there, but obviously one big thing that you couldn't ignore was AI, and you kind of described it as a potential disinflationary force because of increased productivity, maybe wage compression, but also presenting a certain degree of financing risk as well. Kind of square that circle for us.
Well, you know, AI has gone from really being a wildcard what-if to a major driver of the economy and markets the next five years. Right now, we're seeing it in this capex boom we talked about, not just in the US, but really a global capex cycle, including defense and potentially energy security. But also at the margin, a lot of this AI is being financed in the credit markets and in the bond markets. You know, PIMCO has been active in that in certain select deals. And so, you know, like it or dislike it, investors are going to need to factor in AI in all of their calculations going forward.
Well, one thing I thought was interesting there, and you talk about the capex boom, obviously not just in AI, but you also mentioned defense and a few other areas. But I mean, you've been doing this a long time. There was a criticism for years, decades really, that there wasn't enough capex spending coming out of corporate America, that they were taking their cash and just using it for buybacks and things like that. And now we're finally getting it, and everyone's wringing their hands over it. So, I know there's got to be a balance, but when you think about the potential for an increase in productivity, something that's been relatively absent, at least in any kind of headline numbers for years and decades, are you kind of excited that maybe we're finally here?
Oh, certainly. I want to be very clear. We think AI is a transformative technology. In fact, if anything, we think the productivity benefits and boom from AI could happen sooner than a lot of folks believe. But we're also humble. We don't have a crystal ball. We think there's a wide range of outcomes. But let me be clear. We think this is how capitalism and financial markets are supposed to work. Attractive investment opportunities receive funding, and as I said, we participated in some of those deals as well, and I expect we'll continue.
Well, it's interesting, you know, how this is all being financed, because you're seeing a lot of this coming through in the private markets, but it's making a big splash in the public markets as well. You think about the hyperscalers and some of their plans for borrowing for this year. And I wonder, you know, how you're viewing that over at PIMCO. You know, you think about a world where credit spreads are so, so tight, and the fact that we have this influx of supply. It hasn't yet really made a dent on those spreads.
Well, there are a couple of things going on. First, a lot of the companies that are issuing and borrowing are very, very prosperous and profitable companies. And so, that's a big difference from some of the previous capex cycles we've seen, where a lot of borrowing is companies that don't have a lot of revenue or cash flow. So that's one big difference. But Katie, you bring up an excellent point. We do think we're in a world where investors are going to need to do their homework, or hire firms to manage their money that does their homework, because you need to look at the details on the deal. You need to look at the way the deals are structured. And the details will matter. You know, we believe that if you're going to provide liquidity in public markets, you should be paid for providing liquidity in public markets. And so we look at each deal on its own merits.
And talk to us a little bit about, you know, how this is wrapping into the view that you put out yesterday about the credit loss cycle. You sort of think about the heavy spending that we're seeing on AI. Obviously, there's going to be certain companies that come in a big way and, you know, really try to spend there that maybe don't have the fundamentals to fall back on the way the Magnificent 7 does. And I was hoping that you could sort of thread that needle for us.
Well, there are a couple of things that we highlight in the essay that I'd like to bring forward. The first is that a lot of the incremental growth in lending in the last dozen or 15 years has been in a particular segment of the private credit markets, in particular direct lending to middle-market companies. You know, that's probably the area of the credit market that we would highlight as the one in which the credit loss cycle has begun already to turn. Right now you see it not so much in actual losses as you do for creative financing, payment-in-kind, and other arrangements. But as I said, this is going to be with us for the next five or 10 years. Opportunities will be there, but it's also important for investors to do their homework.
