Charting the Year Ahead with Marc Seidner

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GREG HALL: Hey everybody, welcome to another episode of Accrued Interest PIMCO's podcast dedicated to serving financial advisors and their clients. As always, I'm your host, Greg Hall. I lead the wealth management business for PIMCO here in the United States. This will be sadly our last podcast of the year. But happily I'm joined by our favorite, our returning champion Marc Seidner, who's the CIO of non-traditional strategies here at PIMCO. And we are going to do something that's a little bit new for us this year. Marc published a piece just in the last week or two, Marc, is that right?

MARC SEIDNER: Yeah, about a week or so. Yeah.

GREG HALL: About a week. Okay. And it's called “Charting the Year Ahead”. It's up on our website. We'll link to it in the show notes, but it was something that we wanted to put out there for you that maybe steps back from the ins and outs of what's going on, you know, today in the markets. And just takes an opportunity here at the end of the year to focus on 2026. Think about the big issues that we think are going to be you know, defining markets next year, going to be top of mind for you as advisors and of course for your clients. And it's just a great rundown, really quick, efficient, thought provoking. As you know, think about preparing for the coming year. So we are recording this. It's good that we're stepping back because I think we're recording this on Fed Day.

MARC SEIDNER: Yeah, we are indeed. Fed Hour, I think actually. Yeah, technically Fed Hour.

GREG HALL: So we'll finish this and then you'll hop back up to the trade floor and we'll see where the governors have come out for this round.

MARC SEIDNER: I'll run on up to the trade floor and absorb the press release and listen to the press conference.

GREG HALL: And I should also say we're in the middle of our, or to the tail end of our cyclical forum, which frequent listeners will know is our sort of quarterly meeting that we do internally as a firm to really think about the world and where things are going. And the cyclicals that we do have about a six month timeframe on them versus our secular, which we do in the spring. That takes more of a five or a ten-year timeframe. And, you know, it seems to me you know, we've got our views about what the Fed might do today, but it doesn't seem like we're overly levered to any specific outcome. There's a lot of opportunity in our space, and I think the theme of this meeting, you know, really reinforced that.

MARC SEIDNER: I think that's right. Yeah. I think that's exactly right.

GREG HALL: Yeah. And that does, that gives us the space we need to talk about, you know, some broader topics.

MARC SEIDNER: The range. Yeah. We can range.

GREG HALL: I thought I heard you say rage. And that would be a totally different style of podcast.

MARC SEIDNER: 2022 fixed income managers had a lot of rage.

GREG HALL: I was gonna say 2025.

MARC SEIDNER: 2025, we've got a lot of range. Yes, indeed. Indeed.

GREG HALL: Good. Alright, well, speaking of range, that's great. You know, the piece is really broad-ranging. And let's do something that we don't often do as fixed income managers. Let's start with equities. Let's talk about the equity market in 2026 and how we're thinking about that.

MARC SEIDNER: Well, it's obviously an important question on a lot of investors' minds. As we think about 2025, it's been a remarkable year to be an investor. Everything has done well — almost everything has done well. U.S. equities clearly have continued their streak of strong performance. Narrow, somewhat mixed, and I think we'll talk about that in a second. Global equities have done extraordinarily well. Fixed income has done great. We've got plenty of portfolios around this building and around our global offices that are up 6, 7, 8, 9, 10%, which is well outpacing cash, as we all know.

GREG HALL: Equity-like returns in fixed income…

MARC SEIDNER:  Equity-like returns. And it's funny, we've been talking about that for a couple years now. Three-year trailing returns of 8% for a lot of our portfolios are equity-like returns. In a broader asset allocation, fixed income and starting yields are kind of making it easy in some regard. But then you range out to things like commodities and gold — up 50-plus percent. But specifically on equities, you mentioned we're wrapping up our cyclical forum and our quarterly strategy meetings. Our views in terms of the macro backdrop continue to be quite supportive for equities. We will probably end 2025 slightly below trend growth in the United States.

Inflation is still elevated, but the volatility of inflation is coming down, which is quite reassuring for markets. In 2026, we look for inflation to continue to moderate. Growth will be mixed — probably some data points of stronger growth in the first half, largely as a result of One Big Beautiful Bill and its provisions kicking in.

Then maybe a little bit more softness and some payback in the second half of the year. But we're looking at 2% growth in the United States — something around 2% — which is trend-like growth, which is exactly fine. It paints a fine backdrop for investors and for investing. Our only concern about equities is that valuation continues to look a little bit stretched.

I said in a call recently — I don’t know if it was fortuitous or not — but I decided to be an active fixed income manager when I started my career 35, 36 years ago. And that feels like a better and better choice these days. I think most active equity managers have one job, and that's to think about seven stocks. And that's tough — with a starting point of a strong fundamental story but also a valuation that is quite extended. Our point on equities is that 2026 could very well be another pretty good year for equity investors. But we'd make a few points there. One would be the starting point of valuation — take the Mag Seven. You're talking about mid- to upper-30-times P/E ratios.

GREG HALL: Where there's an E.

MARC SEIDNER: Where there's an E.

GREG HALL: Sorry, maybe not in the Mag seven, but yeah, I'm making the broader point. Yeah.

MARC SEIDNER: And that's obviously pretty lofty. It's not dot-com–like early-2000s valuations of that cohort of equity, which were, you know, 50, 60, 70 times, but it's certainly elevated. I guess your point was, when you look under the surface, there are plenty of companies and industries that are perfectly healthy that sport, you know, mid- to upper-teens-type valuations. And then when you extend the aperture and look globally, there are plenty of forces around the world that have mid- to upper-teens-type valuations with the supportive macro backdrop of trend-like growth and continuing-to-moderate inflation and central banks that are likely to continue lowering short-term interest rates and monetary policy. That's a pretty decent backdrop for equities more broadly.

But again, the two themes that we would reinforce would be: one of, looking at value rather than momentum as a key factor in committing capital, and looking around the world to diversify globally.

GREG HALL: Yeah. Broaden out your… the index has narrowed. Whether you like it or not, the index has narrowed your exposure to equities. So you may need, as an advisor, to intentionally broaden out your exposure to other parts of the market.

We had Cameron Dawson, who's the CIO at NewEdge, on the pod a couple episodes ago. You know Cameron; you spend time with her. And she spoke really eloquently about some of the circularity in investment spending in AI and how, even within the Mag Seven, you have historically capital-light — she referred to them as monopolistic businesses, in the sense that they had a lot of pricing power and network effect driving their business models — and now that's being transformed into something far more competitive, far more capital-intensive as they pursue AI investments.

Something we're quite obviously familiar with; we've financed some of that. We can talk about that.

Do you have a view on the valuation, the expectations, the fundamental story behind some of these high-flying stocks? And do you think we'll see some resolution to that tension as we go through 2026?

MARC SEIDNER: Well, the interesting factor about 2026 is there are a lot of unanswered questions from 2025 that will likely — I don’t know if they'll get answered — but we'll certainly have more data and more evidence that points you in one direction or the other for an answer..

I mean, from a macro perspective, if you actually look at the data — the change in capital expenditure in the United States, as an example — all of it is technology. All of it’s technology. The rest of the economy, in terms of investment spending in CapEx, the rate of change is almost exactly zero.

And one of those questions is: how sustainable is that from a macroeconomic perspective?

Specific to AI — the AI investing cycle — a boss of mine early in my career… I think the name of the book was Who Moved My Cheese? And you talked about this circularity, and in some regards, there's just cheese being moved around the plate from one person who's eating to the next person who's eating. And I suppose we will have to have some answers in that regard.

There are macroeconomic questions; there are also investing questions. Our general sense is that what differentiates the mid-2020s versus the early-2000s or late-1990s is that a lot of the investment is coming out of free cash flow. And that is still narrow in scope because it's a handful of companies. And as long as that investment spending is coming out of free cash flow generation and not debt and leverage, it's still a relatively healthy environment.

What we might be on the precipice of now is that, shifting — and in particular for specific companies. I won’t name the name, but there's one that's been in the press where their CDS spreads have widened a lot, almost as the “anti-AI play” or the “anti-AI hedge.” I think most of your listeners will know who we're talking about.

So one of the questions will be: to fund this massive amount of capital expenditure, will that shift at some point in 2026 from free cash flow to requiring a bit of debt financing and leverage — or maybe more than a bit of debt financing and leverage? And that will probably change the landscape.

You're starting with high valuation and perhaps deteriorating fundamentals, even though there’s this great hope of AI. That's a question we’ll probably have greater evidence on as we head into and further into 2026.

GREG HALL: Yeah, and in a very simplistic sense, the whole point of an arms race is that not everybody wins.

MARC SEIDNER: Yeah. Right.

GREG HALL: And so we’ll see some differentiation.

MARC SEIDNER: And you wonder in this instance… I mean, technological disruption is not new to us. And it’s interesting — this is maybe not slightly off-topic — but one of the founding tenets of PIMCO’s New Normal view from 2013–2014 was the idea that neutral levels of real short-term interest rates were quite low, call it zero to 50 basis points. Part of it was an aging demographic and the need for income, which represses yields and represses income. Part of it was technological disruption and the uncertainty created because of it — and this winner-take-all mentality.

Because as we know with technology, maybe the first mover wins… but with regard to data and large-language models, a lot of this can be replicated very quickly. And so it’s more like the first-mover benefit becomes the most efficient-mover benefit to a high degree. And that, I think, is an interesting question.

GREG HALL: Yeah, and moving at a pace that doesn't allow for a lot of conversations like this on reflection of what's going on. Let's leave equities and come home a little bit, talk about fixed income?  Topic, I’m pretty sure I don’t need to prompt you on.

One of the most interesting dynamics we're talking to clients about right now — and we've been saying “it's coming, it's coming” for years — is that we've now finally seen a resumption of Fed cuts. We may see another one this afternoon. And the differential between cash and what you can achieve further out on the yield curve is becoming more and more stark.

We haven't seen a massive move off the cash sidelines — in fact, money-market funds topped $8 trillion a little while ago. At the risk of previewing what I think you might say, I think we would probably advise advisors and their clients to look more carefully at their cash balances relative to what they can do further out the yield curve.

MARC SEIDNER: Alan Greenspan, the former Chair of the FOMC, used to use the word “conundrum,” and I would probably use the word conundrum with regards to exactly that dynamic you just mentioned.

I know this is a podcast so it's all audio and not visual, but as you said — $8 trillion sitting in money-market funds — I had this crazy look of bewilderment on my face. It’s like the spiral-eye emoji that we all use with our kids more often.

GREG HALL: I can confirm that for the audience. You look confused.

MARC SEIDNER: Yeah, it was literally the spiral eye emoji looking back at you. And we hear from a lot of folks that they're perfectly comfortable rolling over T-bills, or sitting with $8 trillion in money-market accounts.

You know, that's sort of their comfort zone. And we just don't understand that comfort zone anymore. It made perfectly good sense when T-bills yielded 5.25% and they were the peak of the yield curve by tens, if not hundreds, of basis points. That's just not the case anymore. I mean, we had a Fed easing cycle, or rate-cutting cycle, in 2024, and as you've said, it's resumed in 2025. We've already had two rate cuts. We may very well — who really knows — get another one today.

But that, I think, masks the point that rates will continue to normalize. The Federal Reserve and other global central banks will continue to bring down short-term interest rates. And so that 5.25% T-bill yield is now 3.75%, and probably, by the end of next year, going down to 2.75% or 3%.

Now, that stands in stark contrast to high-quality fixed income portfolios. A lot of folks ask, “Have we missed it? Bonds have done well this year. Have we missed our opportunity to deploy money out of cash or out of T-bills or out of money market accounts into something else in the fixed income universe?” And the answer to that is absolutely not. There's plenty of portfolios — I run a portfolio, you know it — that is an AA-minus average credit quality, so a high-quality portfolio, a very liquid portfolio, three to three-and-a-half years of duration, right in the sweet spot of the yield curve, and it yields 6.5%.

And with this volatile environment that's giving an active manager like PIMCO a chance to pick and choose what looks cheap, what looks rich, pivot, redeploy, and capitalize on opportunity in interim periods of volatility — that 6.5% yield might just be a starting point in terms of potential return.

And so the answer to your question — or my comment on “conundrum” — is: this is a conundrum. Why sit in something that is going to yield much, much less when you're foregoing the opportunity to lock in, at least for the next two, three, four years, a highly elevated level of yields and potentially deliver really strong returns?

And then bridging to the equity discussion that we just came from: look, the backdrop seems fine, but there are plenty of scenarios — given the starting point of valuation — where equities do less well. And as we're seeing, that stock-bond correlation, which didn't look very favorable for bonds in 2022, is once again looking favorable. So you're getting a high starting point of yields, a lot of carry on top of cash, and the benefit of diversification. To us, that's a call to action more than anything else. You haven't missed it. But if you're still sitting in cash at the end of 2026, you might very well be disappointed with your results.

GREG HALL: I think the analogy that you've used in the past — which I really like because it crystallizes it for anybody just going about their day-to-day — was: we all watched in 2021, end of 2020, as rates came down. And what did we all do? We all ran out and refinanced our mortgages, and we locked in the liability at a level that we rationally expected to be maybe the best level we would see over our investing lifetime. And today's markets sort of present investors with the opportunity to do some more on the asset side.

MARC SEIDNER: Exactly.

MARC SEIDNER: 100%. All the smartest people we know — whether it's individuals who refinanced into a 2% or 2.5% 30-year fixed-rate mortgage, or smart folks we know who run businesses and termed out two- and three-year borrowings into 20- or 30-year borrowings — looked really smart. I mean, those mortgages, that 2%–2.5% mortgage that all of us have or many of us have, trades at 80 or 85 cents on the dollar. That's an asset, right?

GREG HALL: Yeah.

MARC SEIDNER: You wanna keep that thing.

GREG HALL: Yeah.

MARC SEIDNER: And I think when we look back at the end of ’26, ’27, ’28, the smartest people we know,

GREG HALL: That translates to: you paid 15% less for your house.

MARC SEIDNER: Yeah. I mean, somebody gave you—let’s say your mortgage was a hundred thousand dollars, right? Somebody gave you a hundred thousand dollars. That’s now worth 85. Their asset is now worth 85.

GREG HALL: Yeah. You could pay back 85 and they’d be happy.

MARC SEIDNER: They’d be happy—if you could actually do that. That’s what you tell folks to do. But folks that are sitting in cash have a chance to do that. They can turn that mortgage—or companies that are sitting in cash can turn those 20 and 30-year financings into positive carry by locking in AA-minus average credit quality, three-and-a-half years of duration, 6.5% yield. I mean, it’s a world turned upside down because you don’t normally get a chance to do that.

GREG HALL: And then three and a half years of duration… I guess one of the things we hear from advisors sometimes is they get a little nervous about the fiscal situation and how sustainable spending is. How worried should we be about the long end of the curve? You’re not at the long end of the curve.

MARC SEIDNER: No. In fact, I mean, I'm blessed with the ability to run a flexible portfolio that is actually short the long end of the curve. Because one of the dynamics that was strong post-Liberation Day in 2025, and that may reassert itself in 2026, is the steepening of the yield curve.

We’ve seen this a bit in the United States: the Fed has cut short-term interest rates 50 basis points; two-year, three-year, four-year maturities have been well anchored; ten-year yields are actually higher than back in September when the Fed started easing. And you’re seeing that not just here—you see it in Australia, you see it in the UK. We call it, technically, fiscal dominance.

Your clients and advisors would likely call it concerns about debt-deficit dynamics. The beauty of a two-year bond is: in two years you get your money back and you can decide whether it was a good investment or a bad investment. The problem with a 30-year bond is: in two years, you still have to wait 28 years to get par back.

And so we would definitely not—again, except for folks who have liabilities to match the long duration? Absolutely, go for it.. But for individuals and advisors, yes, stick to those two- to five-year maturities. They are anchored by a Federal Reserve that’s going to continue lowering short-term rates, rather than unanchored by poor debt and deficit dynamics.

GREG HALL: Yeah. And I think across the platform, we’re in the four, five, six-percent type opportunities. I haven’t seen a lot of numbers bigger than that at this point. Let’s take a break from fixed income—characteristically. Let’s talk about real assets.

Gold has been an unbelievable story this year. It’s still hovering near its highs—maybe off a little bit. For a while, Bitcoin was pacing it penny-for-penny, and people were talking about Bitcoin as our new reserve, our new store of value. That story has… well, we’ll see. It has temporarily maybe lost a little of its strength with Bitcoin down, looks to me, 20–30% in the last couple months.

But let’s talk about the commodity space. Let’s talk about real assets—how we’re feeling about opportunities there, and how they fit into a diversified portfolio for an advisor.

MARC SEIDNER: I mean, one of the main points we would make—and we’ve touched on this in equities, diversification into sort of the value space; we’ve talked about it in terms of global diversification; we’d say the same for fixed income, global diversification is a key theme across many of our portfolios. And we’d say the same across a broader asset allocation, diversification.

And that’s where commodities come into play. It’s not just about gold; it’s about a broad swath of commodities. On gold in particular: in our metrics of valuing gold relative to real yields—because it’s just a real asset—actually, inflation-protected bonds or bonds more generally look a little more attractive.

Doesn’t mean gold can’t continue to go up in price, but potentially, on a risk-adjusted basis, bonds could do a little bit better. When writing this piece, we came across the fact that central banks now own more gold than they own Treasuries. Interesting, right? And that’s probably creating a little of that richness.

And you’re right—in that theme of diversification, the concept of diversification and the idea of bridging back to what we just talked about (bad government debt and deficit dynamics)—you’re looking for something outside that system, that feels like for a younger cohort, that is cryptocurrencies. And that’s perfectly fine—volatile. It's a volatile asset as we've, as we've all realized recently. but fine. It’s a medium of exchange that is different from fiat currencies, and so it's totally understandable.

Gold is the more traditional diversifier and can and should continue to do well in 2026 and beyond. But in addition to gold, a broader exposure to real assets—commodities more generally—is a prudent strategy.

GREG HALL: Intuitively, the utility case for gold is interesting. After sanctions were imposed post-Ukraine, the US began seizing assets internationally. Central banks, just looking not to rely on the Western banking system as a store of value, began storing value in gold. So utility increased.

Bitcoin—I’ll reserve judgment on. I’m no expert and prone to skepticism, so I’ll keep my tongue.

MARC SEIDNER: Don’t be so old-fashioned.

GREG HALL: Yeah, exactly. But in the broader commodity universe, one of the things that appeals to me is: they can be used. Oil can be used. Metals can be used. Rare earths—we’ve seen in the news a lot recently—can be used. And in the piece, you do a nice job of saying: “This universe is broad. There’s lots to do, and broad commodity exposure can—”

MARC SEIDNER: I mean, this is a concept that goes way back in my thinking. As individuals think about asset allocation, we should think a little bit about our liabilities. One of our big liabilities is energy. We’ve got to heat our houses, cool our houses—that’s oil and natural gas. We’ve got to fill our tanks—that’s unleaded. Or we’ve got to power our cars—electricity, which still comes from a decent amount of fossil fuels.

So it makes sense to have a little commodity exposure in your asset allocation to hedge some of that risk, that price sensitivity.

And we’re not talking about a lot—a little goes a long way. Same with global diversification. If you want to travel overseas and the dollar depreciates (which is another theme of ours), then your purchasing power goes down. So having a little global asset exposure—equity or fixed income—also helps hedge your own future liabilities or your need for return.

Because if energy prices go down, you might feel bad looking at your statement if you own commodities. But when you go to the gas station to fill up your tank, when you get your heating bill, you’ll be quite happy. Same with planning a trip somewhere else over the summer, if your global diversification goes down a bit in value again, you look at your statement and be like, oh, that's a shame, you’ll feel great when you book the hotel room or buying a meal.

GREG HALL: I don’t fancy telling my wife we can only go to places where I own the currency in the portfolio. “Sorry honey, we had a view on the sterling, so we can only go to the UK”

MARC SEIDNER: I just came back from a trip to London. It’d be great if you're stuck there for the rest of—

GREG HALL: We took my mom. We took my mom to Oxford and the surrounding area for her 75th birthday, so,

MARC SEIDNER: Well, happy birthday to your mom.

GREG HALL: Happy birthday to my mom. All right. That's great. We're going to keep going around the world. I think this is one of the most interesting topics and one where, you know, I personally think we're gonna start to see a lot of data points in 2026 that helped to answer questions that have been raised in 2025, that's credit. And that's obviously broad credit markets, but maybe with little bit of an emphasis on private credit and direct lending, they've been so much a part of the headlines over the last, you know, couple of months. Talk to us about your feelings on broader credit and then let's spend a little bit of time on developments and on the private space.

MARC SEIDNER: Yeah. I mean, credit — public credit, investment grade, high yield — similar to equities, the valuation is quite extended. For those of you that know us well, you know that we often quote percentile rankings of spreads or risk premia. And for both investment grade and high yield, you're in your lowest decile of attractiveness over the last 10 years. So there's a lot of good economic news priced into credit markets.

Again, fundamentals are exactly fine, but valuation is exactly unattractive. So we would comment on two things. One: there are a lot of other sectors of the global bond market, in the U.S. bond market, that look much more attractive. And as you know, we've been heavily invested in either mortgage-backed securities or asset-backed securities because their valuations have looked much more attractive to us. It's worked quite well this year, and that gap has narrowed a decent bit — but there's still a gap.

And so we’d much rather have the security of a mortgage or an asset-backed security versus unsecured corporate credit at a more attractive yield spread or risk premia. And that largely continues. Again, we look for opportunities outside. That does not mean that there aren’t attractive bonds and that does not mean you can't find attractive credits to invest in. Active management really does matter, and active selection really does matter.

GREG HALL: And if I can offer — it also doesn’t mean we can’t create those opportunities. Not a PIMCO advertisement, but with scale comes the ability to go to an issuer and look to do something creative and compelling at a really large scale and create some excess return out of it.

MARC SEIDNER: Well, that's a super interesting dynamic, right? Because up until probably within the last few months, there was this either/or — you were either a public credit investor or you were a private credit investor. And I guess one of the points we will make is: the private credit markets have existed for decades.

This is not a new thing. This is not the new-new theme. It was originally, when I started my career, when you started your career, called Rule 144A issuance — that would circumvent SEC registration to bring a debt deal to market, and you would get paid an excess risk premium for what was a less, you know, potentially at the time, not so much anymore, but a less liquid security.

And that’s our theme — our battle cry — which is: don’t compartmentalize either/or. Find something that has the ability to range between the two and look for the most attractive valuation and opportunity — whether in the corporate spectrum, the mortgage spectrum, the real-estate spectrum — and whether it is a fully public issue or something that is a little less liquid.

There was a well-advertised transaction we’ve done recently where we were picking up hundreds of basis points relative to where that risk would price in the public corporate credit market. That worked to our advantage, and there will be plenty more of those opportunities in 2026.

GREG HALL: I think it's interesting because the wealth space in particular has become the locus of a lot of the fundraising in quote unquote, “private credit.” And when I say private credit, what I really mean is direct lending — lending to companies being acquired by private-equity sponsors or going through some other transformation. And that introduces a new factor we have to evaluate: it's not just about the fundamentals of the economy or the fundamentals of underlying credits — it's about this new investor base being exposed to this asset class for the first time in real scale.

You spoke about conundrums earlier. Maybe I'll be more provocative than I actually feel, but I feel a conundrum right now given the amount of direct-lending fundraising that is still going on. If I came to you, Marc, and said: “I've got a great opportunity for you — here’s what I'd like you to do. Invest in this security. It’s floating-rate, so it tags to the part of the curve that’s coming down — so as rates come down, so does your coupon.

It's at the lower end of credit quality — more highly levered companies, with potentially optimistic assumptions built in by their acquirers. It sits outside the traditional high-yield or bank-loan markets, so it's by definition lower quality. There's a lot of competition in the space, so we can't quite get the terms and covenants we used to get. It prices on top of some other stuff without the bells and whistles it used to have.

Oh, and by the way, you’ve read the headlines — maybe some of your clients are concerned about what’s going on underneath the portfolio. We may see rising credit costs; not just me saying it — alternatives folks are citing it for 2026 and beyond. But here's the kicker: it's illiquid, and your ability to get out is contingent on other people deciding whether or not to get out of it. And it will largely be marked at par… until it isn't.”

MARC SEIDNER: Right.

GREG HALL: And it's a conundrum for me to understand how that competes with a more liquid, higher-credit-quality security that is actually out-yielding and outperforming. But I am curious how you reconcile that dynamic in the marketplace right now.

MARC SEIDNER: Well, I think you pretty much answered your own question.

GREG HALL: I do that sometimes.

MARC SEIDNER: The only thing I would add is: I don’t think it's a conundrum at all. A lot of investing is based on trailing returns and great marketing pitches. In a world of rising interest rates, floating-rate debt looked really good — when you start at zero and go to 5.25 percent, with a spread, even if it's not that attractive, your total returns look, you know, or your income returns look quite good when you're not marking to market in a good investment environment.

Information ratios look spectacular. Right. Return per unit of risk, right there's, your return is going up because short term interest rates are going up, you've got a reasonable spread because underwriting back then was a little bit more– you know, 4, 5, 6 years ago was more disciplined and you weren't marking to market or you were barely marking to market.

And you had you know, good numbers, you know, good returns, low volatility, high information ratios, and of course it looks good. I mean, what we do is we look forward, right? And we say, and that's what, and that's what everybody should do. And we say, well, is you said short term interest rates are coming down, right? So your return is going down, your spreads are narrower.

And I’ll come back to that in a second. And so, you know, your return is declining vis-a-vis the last 3, 5, 7 years and your risk is going up, right? Because we know that the fundamental, the fundamentals for small and medium sized enterprises continue to deteriorate. And there's more and more signs of trouble. We call them cracks in the sidewalk. Jamie Dimon called them cockroaches, right?

I don't know if they're cracks or cockroaches, but either one will work just fine. If you're thinking of the analogy — and Dan Ivascyn, who all of you know, uses this — he makes this comparison to the consumer and subprime in the 2000s. When you have too much money chasing too few good ideas, you're either pushing down and investing in less-good ideas, or you're pushing your risk premium, your spread, down.

And both of those are bad. They foreshadow, they potentially foreshadow, a much less appealing — yeah, I'm trying to be kind here — but much, much worse outcomes. Whether it's a fundamental downdraft that causes real principal loss or whether it's just less attractive returns, I don't know. But if we're forward looking, we want to lock in attractive yields, pick and choose where we think we're getting paid an attractive risk premium, and hopefully harvest terrific returns for the next three to five years.

GREG HALL: Yeah. And preserve the ability to change our minds because the environment’s moving around. I think the other thing that you referenced in the piece is the best proxy we have for market pricing on some of these direct lending private portfolios are the public BDCs, which are trading on average — not all of them — but on average at a meaningful discount to par, which is where the private ones are marked.

So the market's telling us some combination of the factors that we've referenced here. They've concluded that they don't want to pay a dollar; they want to pay 90 cents or 85 cents to access that cash-flow stream. I just observe, I feel like markets don't love arbitrage. It's not a perfect arbitrage, but it's close. And so that feels like something that's got to resolve itself in the coming months and maybe 2026.

MARC SEIDNER: I think that's right. It's probably a little bit of, it's probably a little bit of everything, right? A rationalization of credit, some evidence of deteriorating fundamentals, and you know, more realistic marking of portfolios. I mean, we see this in secondary portfolio trades all the time. There's a wide bid-off — there's a wide bid-offer — and as that bid-offer narrows, that means that alternative asset investors’ direct lending portfolios are going to have to be marked more reasonably.

And by the way, that's quite healthy for an industry, right? I mean, that's very healthy for an industry and we would welcome it because it again speaks to that public–private continuum. It's not either/or, it's just what is the most attractive deployment of a dollar of capital on any given day. Rather than set it and forget it, you know, and hope the crockpot cooks you dinner by the time you get home.

GREG HALL: Yeah.

MARC SEIDNER: And you don't, you, you're think gonna end up with like rare meat or mush and I don't know which one's better or worse. That's probably a terrible analogy, but I'm gonna go with a crockpot.

GREG HALL: Crockpot. I think I, I do think the…

MARC SEIDNER: Greg, I'll go with a crockpot for $200

GREG HALL: I think I won’t make a cooking analogy. I think you're—I agree with you entirely that price discovery is a healthy mechanism for markets right now. And what we don't have…

MARC SEIDNER: By the way, PIMCO was founded 50-plus years ago by a guy everyone knows, Bill Gross, who got tired of sitting in a vault clipping coupons on bonds and mailing them in hoping he'd get a check, saying, “There's got to be a better way of trading this,” of price discovery and capitalizing on opportunity.

And you know, it's almost back to the future, right? That's exactly right: mark things to market, make investment decisions, deploy capital based upon fundamentals and pricing, and then adjust when fundamentals change or pricing changes. And I go back to your question — I said, you know, I think you just answered your own question. That's the answer to the industry.

GREG HALL: Yeah. I think people have become very enamored of the NAV that rarely changes. And so that transition to a more market-driven or price-discovery-driven process could be bumpy, and so it's something for people to think about as we think about 2026.

MARC SEIDNER:  Well, again — now — I mean, there's increasing numbers of headlines of idiosyncratic risk. Right? And one of the things we haven't touched on is — you know, I feel quite strongly about this, and we talked about this this week — we are definitely in a K-shaped economy. Okay, maybe “definitely” is too strong, but I think there's evidence that we're in a K-shaped economy.

GREG HALL: Define K-shaped, because this is really interesting—yeah, I heard you on this topic earlier this week and I'm glad you brought it up. But just for anybody listening who doesn't immediately know what we mean by that term—

MARC SEIDNER: Picture the letter K. Right? There's an upward-sloping line and a downward-sloping line. And picture the economy and think about it in terms of size: the large economy — meaning large, high-quality companies — and the upper-income earners, the top half of the income earners, are doing very well. Part of that is asset-price appreciation, part of that is an economy that's favoring the larger.

The bottom spike of that K is actually doing quite poorly. And you see that fundamentally — charge-offs and delinquencies in the lower-income cohort. The bottom two quintiles of income earners are struggling. And you also see that on the corporate side, right? Small and medium-sized enterprises — companies with, call it, less than $100 million in EBITDA — are, quite frankly, not able to pay their quarterly or semiannual interest payments.

And I mentioned this — or we mentioned this — in the piece: 11.4% of companies in that cohort are now PIK-ing on their debt. They're paying in kind, which means I'm calling you up and saying, “Greg, I'm sorry, I don't have the money to give you the interest on the money I borrowed from you. But good news is I'm not going to default — I'm just going to tack that onto the final maturity payment.”

That's kicking the can down the road. And when you do the simple math, you know, 11.4% of companies in that cohort don't have the cash to cover their interest expense, that’s one in eight small and medium-sized companies. Now, 50 to 60 million Americans are employed by companies that have fewer than 50 employees. That's exactly that cohort.

And so it's both a fundamental concern and absolutely a warning sign for this direct-lending cohort, which is why BDCs are trading at a discount. Which is why publicly traded alternative asset-management firms have seen their equities do poorly this year off a relatively high base. And again, this is, I think, another one of those questions that's definitely going to get answered in 2026: whether or not that K-shaped economy is real — which I think it is — and whether or not it means anything to US investors — which I think it does. Again, cracks in the sidewalk, cockroaches, whatever you want to call it — to me it's real.

GREG HALL: Yeah. And it again invokes the topic of active management and choosing, as investors — however we might think, especially this time of year — how we might think about that personally, socially, politically, about those less fortunate than the upper part of that K. From an investment perspective, how do you want to be allocated? Where do you want to pursue safety? And I think to give, oh shoot I'm about to say to give credit as we talk about credit, but to give credit-

MARC SEIDNER: Pun intended.

GREG HALL: I think we will probably see some differentiation — a spread of outcomes — amongst the direct lenders out there. There are some who have remained more disciplined, who have refused to deploy into a very competitive, difficult environment, to the extent they're able to refuse with the money coming in the way that it has. And so this will be a good opportunity to see, as the tide goes out — to use the metaphor

MARC SEIDNER: Who's got a bathing suit on.

GREG HALL: Yes, exactly. Okay. Last topic. Near and dear to my heart — let's talk about Munis. This is something… it's great. We put out a lot of global pieces; we don't get to talk about the U.S. Muni market in some of these outlook pieces. In this instance, we were able to make a case for municipal bonds. Interesting year for Munis — never quite recovered from Liberation Day. We had what I call the “summer of our discontent,” where they just simply couldn't find a bid. They've come back nicely over the last couple of months. Do we still see value for taxable investors in the Muni space?

MARC SEIDNER: Yeah. It's not quite the flashing green-light opportunity it was in July, August, or September. No, that's not right. It's still a green-light opportunity for sure. It's just not quite as unbelievably awesome as it was a few months ago. But there's no doubt that Munis — particularly as part of a wealthy household or a high tax-bracket household that they have lagged, and the after-tax yields look super attractive. And by the way, that's for a reasonably high-quality portfolio.

Where we worry a little bit is down in credit quality, because there's been an awful lot of project finance that has happened in the past few years, and some of that is becoming quite treacherous. And so again, it's this idea of active management. The general theme is that all-in yields and after-tax basis, Munis are very attractive for the taxable investor, but there's got to be caution and discretion. As with credit, one size does not fit all.

GREG HALL: Yeah. I think if we could give one piece of advice to advisors, in this space, there's a temptation to pursue the highest nominal yield. And that often carries you to the high-yield segment — and that's where some of these episodic issues, like the commuter train in Florida, have created problems for folks.

Our approach has been more risk-adjusted and return-oriented. But yes, your broader point is that there's a rich array of opportunities — a great way to create after-tax yield. You live in California; I live in New York — states that exact their share of income for taxes. So if advisors and clients are similarly situated, it's a great place to look. The other…

MARC SEIDNER: Well, as you say — our cost is the gain, right? Fundamentals at a state level are actually quite good because receipts have been quite high in recent years. And while there are certainly challenges facing almost every state in the union, fundamentals are quite strong, yields are still relatively high, and as a result after-tax yields and potential returns look really good. And that’s the other point — you don’t have to go far down in credit quality to get a really attractive after-tax yield. We shall taketh what the market giveth. And if you're not taking, then you effectively are giving and you're giving up, it's opportunity cost, you're missing out on an opportunity. 

GREG HALL: I'm smiling because I was thinking about your analogy with energy. We all know we're going to spend on living in our states; we might as well benefit by investing in our states. It's a reasonable hedge. The other thing I was going to mention on Munis, and I don't think we do a good enough job articulating this — is the market has developed to the point where there's a lot of private financing activity, and you referenced this in the piece.

Some of the good parts of private credit and direct lending exist in the Muni space, and we should make clients and advisors more aware of the power of controlling your own destiny that exists in that market. To use your analogy, it's not all necessarily taking what the market giveth, but there's a whole segment of what we do that is actually creating opportunities, which is a nice counterpoint to…

MARC SEIDNER: Affordable housing fits right into that. Fits right into that spectrum.

GREG HALL: And a big theme in our portfolios.

MARC SEIDNER: Big theme in portfolios and products and product generation. Again — you're getting a good return for giving something back.

GREG HALL: Yeah.

MARC SEIDNER: Win-win.

GREG HALL: What a nice thought to end the podcast on as we head into the holiday season. Next time we do this, we should do ugly Christmas sweaters. I know you pretty well, and I’m pretty sure you've got some ugly Christmas sweaters.

MARC SEIDNER I got a closet full of them. And by the way, it's nice to do this. I mean, we've done a few of these this year. It's nice to actually do it in in person with you.

GREG HALL: It's nice and it's nice that I got to come to Newport Beach where it's 80 degrees. Rather than my hometown of New York City, where it is somewhat less than 80 degrees, let's just say.

Alright, everybody — thank you, Marc, for joining us. This was great, great round the world. Can't wait to do it again. We'll do it again next year, but I'm sure we'll hear from you in between. As I said, this will be our last pod of the year. If anything we said today interested you, please do visit us at www.pimco.com or your country's PIMCO site. If you identify yourself as a financial advisor, you'll be taken to Advisor Forum, that is our one-stop shop, our destination for you to get everything that you need.

To learn about markets, explore topics more deeply, and prepare yourself for end-of-year client meetings. We will be back in January. We're going to kick off the year with our CIO, Dan Ivascyn, doing a deep dive on the outlook for fixed income markets. Until then, have a restful, recuperative, wonderful festive holiday season. Pat yourselves on the back and congratulate yourselves for the great work you've no doubt done for your clients this year. And we'll see you in 2026.