EXECUTIVE SUMMARY

  • While the expansion has been

    ageing

    gracefully, we believe the global economy is past peak growth in the cycle.

  • Yet it may be the derating of financial assets – rather than traditional macroeconomic overheating or overborrowing – that leads to the next recession.

  • In this environment, we see substantial option value in leaving room in our risk budget to respond either to specific opportunities or to a broad spread widening and rise in volatility.

Our long-standing views on risks to the status quo are being priced into financial markets, with heightened volatility one indicator. As we argued in our Secular Outlook, “Rude Awakenings,” and Cyclical Outlook, “Growing, But Slowing,” we believe the global economy is past peak growth in the cycle, central bank support continues to be reduced and political risk looms large across countries. These trends support our relatively cautious positioning and intense focus on liquid assets, which will allow us to respond either to specific opportunities or generic spread widening and higher volatility.

We expect to continue to have positive carry positions – even with an underweight in corporate cash bonds – based on specific credit opportunities, non-agency and agency mortgage-backed securities (MBS), a small amount of emerging market (EM) foreign exchange (FX) and curve steepeners. This is consistent with our still fairly constructive cyclical baseline as well as our desire to hedge against downside risks and focus on credit market structure and liquidity in the event of a rotation out of crowded positions.

This, in a nutshell, is what PIMCO’s Investment Committee distilled from the discussions at our December Cyclical Forum, which brought together the firm’s investment professionals from around the globe and several of our trusted senior advisors including Ben Bernanke, the chair of PIMCO’s Global Advisory Board, Michael Spence, the 2001 Nobel laureate in Economics, and Gene Sperling, the former Director of the National Economic Council and Assistant to the President for Economic Policy under Bill Clinton and Barack Obama.

"We also benefitted from contributions by Richard Thaler, the 2017 Nobel laureate in Economics, on how to avoid the pitfalls of groupthink and behavioral investor biases.”

We also benefitted from contributions by Alan M. Taylor, professor of economics at the University of California, Davis, on the lessons from credit booms and busts across many countries over the past 150 years, and Richard Thaler, the 2017 Nobel laureate in Economics, on how to avoid the pitfalls of groupthink and behavioral investor biases.