Tina Adatia: So Joachim, I'm going to start with you. What are the chances of recession, and what will cause it?
Joachim Fels: Okay. So on a 12-month horizon, I would say chance of recession may be one in five or one in four, 20% or 25%. On a three- to five-year horizon, our secular horizon, I would say definitely greater than 50%. And that's why it's part of the baseline.
Tina Adatia: Dan, one for you.
What are the weakest links in financial markets today?
Dan Ivascyn: From a geographic perspective, we're a bit concerned about Europe, the periphery in Europe in particular.
If we do see a recession, and perhaps one that's more harsh than we anticipate in the base case, and in the midst of this significant political uncertainty, there are some risks.
Europe's growing at a very slow rate. There's a lot of division within the political environment there. And there are economies that aren't growing that have debt that could become very difficult to service under a different political regime or a much more challenging macro environment.
Tina Adatia: Okay. Now one to you, Joachim. We talked about low growth and also sort of low inflation.
But what's the risk of higher inflation?
Joachim Fels: Our baseline is for continuation of the low inflation environment. We've mentioned that. A lot of factors still weighing down on inflation, but I think the risks are asymmetric, and they are on the on the upside.
We talked about a more active fiscal policy, which has a much more direct impact on inflation. We talked about the risks of populism, which could also lead to rising inflation.
So I think there is more risk on the upside than there is on the downside, partly also because central banks, particularly the Fed, would actually like to see higher inflation, but they do not like to see lower inflation or deflation. So their reaction function is also asymmetric.
Tina Adatia: What are you worried about over the secular horizon that is not on other people's radar?
Dan, let me start with you.
Dan Ivascyn: That there's too much debt in the world and growth is too low. And any time you have that combination as a fixed-income-oriented investor, you can never sleep easy at night. You have to be absolutely careful about capital preservation or the type of uncertainty that can cause write-downs of that debt, either through an anticipated inflation at some point down the road, or through outright debt restructurings. We've seen a few of those in the last few years. It can be very, very painful to an investor that's not prepared at least for that type of outcome.
Joachim Fels: My worry is that the next big wave of populism is going to be a left-wing populism that aims much more at redistribution, so we could see much higher wealth taxes, income taxes. And I think this is something that equity markets at least are not focused on. I think equity markets understand populism leads to protectionism. They enjoy the tax cuts and the deregulation that we had, but that's the aspect that I think they're not focused on.
Tina Adatia: Thank you Joachim and Dan. If you've got any other questions, please contact your PIMCO representative. Thank you and have a good day.
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