Bond giant Pimco is out with its annual report that takes a look at issues shaping the global economy and financial markets over the next five years. For details on that report and much more, we want to bring in Rich Clarida. He is the former vice chairman of the Federal Reserve, also a global economic advisor at Pimco. And Rich, we'll talk about inflation numbers and other news of the day. But first, let's talk about this longer outlook. You take a lot of time to sit back and really try and figure out what's changing from a secular perspective. What is changing?
Well, Becky, a lot is changing. You think about the last 12 months and I lose count of all the events. But what we're really focusing on is what we call the idea that we're entering an era of fragmentation. So if you look around the world, we're in a world in which we see fragmenting security alliances and trading blocs and currency moving
away from globalization. What we're moving away from is globalization.
And we have been for some time. But under Trump 2.0, it's accelerating. And in particular, we also think we're in a world in which economics no longer drives politics, but politics can drive economics. It's going to amplify cycles and market volatility, but it's going to increase opportunities to generate returns if you understand these trends.
What does that mean specifically that economics no longer drives politics, but politics drives economics?
Well, there was a consensus. It was oftentimes called the Washington consensus: globalization, open markets, integration. And it had a good run for about 30 years. We saw the world start to move away from that in the last decade. And after Covid, it's accelerated. Whether or not you call it industrial policy or building at home, all these trends are in play. And we're saying that under Trump 2.0, it's accelerated. So it becomes the new reality.
I think it's different. I mean, if you look at the way the Biden administration, you talk about industrial policy.
There's even bigger than the Biden administration. And it reminded me of something that President Obama reportedly said early on was that, you know, I'd like to grow the economy, but that's not my primary goal. My primary goal is to divide this huge economy more evenly, and that's politics driving economy, right?
Again, this has been ongoing for some time. It's just accelerating now. So I think we really have had a clean break with the old globalization world that we're in. And of course, you see it in Europe. China has been mastering this model for three decades. And so our point in the fragmentation era is that it's no longer something where we may arrive there. We're in it now. And so we need to understand that as investors.
What are the impacts on the markets, on the economy, on the markets, let's say for those?
We think we're in a world of more amplified cycles, you know, in part because we think governments have less fiscal space. There's a lot of debt out there that somebody has to hold. Again, we may be in a world, Becky, where central banks become the only game in town. Unlike in the last decade, they have some room to cut rates. But we think we're also in a world in which there are going to be lots of winners and losers across sectors and countries and individual companies. And so, not surprisingly, perhaps from Pimco's point of view, we're thinking a world where active management is really going to be essential to doing well.
Do you think that, I'm still going around with this politics driving economics, do you think that it makes it way tougher for businesses to make these long-term decisions? Because every two years or four years, you could be dealing with a different set of rules and regulations. I mean, we have seen that play out to this point.
That's, you know, that's the $64 billion question. And there's no doubt that right now that trade policy uncertainty is a fact of life. On the other hand, once I think businesses and investors start to understand that we're in this regime, I think that especially in the US economy, it's a very nimble economy. I think it will adapt and potentially thrive in this regime. But there is going to be a transition. But again, this is not just a US issue, Becky. We see it in Europe in particular.
In Europe in particular too. Okay, let's talk about that, because I was thinking of this GM announcement this morning that they're going to be putting $4 billion back into reinvesting in US plants and getting rid of what they were going to do in an EV plant and turning that into a truck plant, or to a factory that's making SUVs that are gas-powered. And again, that's a shift from what the Biden administration was pushing them toward. Does that last and stand the test of time? And what do you see in Europe?
Well, and indeed, you know, we point that out in the essay that the US has industrial policy under Trump, but it's just different industries. So I think that's an element. One of the things that we picked up at our forum about a month ago, and we heard from folks in Europe, is that these trends are also underway in Europe. You know, Germany did a U-turn, for example, by releasing their fiscal brake. The Germans are now going to have budget deficits, and they're going to be focusing on defense. Also, more of an emphasis on energy security as opposed to the green transition. So I think that these trends probably will last longer than the current officials in place.
So you say they're going to be winners and losers. Who are some of the winners, you say?
Well, obviously, you know, it's got depending on how the trade arrangements shake out, there will be countries in which the US has enhanced trade arrangements, others where there's probably more hostility. Also, it looks like the Trump administration is really serious about the issue of China exporting to third countries, who in turn then re-export to the US. So I think this is going to be a case where the details will be important. Let me also emphasize, Becky, that, you know, when I did your show probably six or nine months ago, we were talking about US exceptionalism. And a lot of the factors that made the US exceptional are still in play: strong productivity growth, an innovative economy, efficient capital markets. And I do think when we get on the other side of the uncertainty, what the critics will call chaos, the exceptionalism meme may return pretty sooner than a lot of people think.
