From the Middle East to Credit Markets: Christian Stracke on Today’s Uncertainty

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CHRISTIAN STRACKE: Let’s be honest with ourselves. There have been huge, to use Mark Carney's term, huge ruptures out there in trade negotiations, trade relationships, capital flows. And now very much in the geopolitical realm as well. So, I think is the has got to be our lodestar, which is that there is higher uncertainty and then that needs to be reflected in all sorts of things.

GREG HALL: Hey everybody, welcome to another edition 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. We changed up our scheduled programming to bring to you today a discussion with Christian Stracke.

Christian is our president. He runs business and operations for PIMCO outside the United States—Europe, the Middle East, Africa, and Asia—and has been a long-time portfolio manager at the firm and until very recently led our global credit research effort. And we wanted to have Christian on because his purview, of course, includes the Middle East, and we want to talk about events unfolding there and get you as up-to-date thinking as we can offer you in terms of frameworks for digesting those events and implementing them within portfolios.

We also wanted to see what Christian's observations are on the recent crisis of confidence, as I'll refer to it, in private credit. And there are few people in the markets who are as well qualified to comment on that as Christian himself. So Christian, thanks for taking the time, and thank you for joining us.

CHRISTIAN STRACKE: Thanks. Very happy to. Thanks, Greg.

GREG HALL: So first of all, Christian, I, like many probably listening, woke up Saturday morning to the news that we had, along with Israel begun attacks on the Iranian regime.

Also to an email from you telling us, thankfully, that our colleagues and friends in the region were safe and taking appropriate safety measures. So, thank you for that. It's obviously not the news we wanted to get, but obviously happy to get the email from you saying everybody's safe and sound.

CHRISTIAN STRACKE: Right. No, I mean, that is our top priority right now, just making sure that our colleagues in the region are safe. And certainly there's some concern there, but it's been really impressive to see not just our colleagues, but the industry as a whole there in the region showing real resilience and calm in the face of what's a very difficult and stressful scenario.

GREG HALL: Yeah. It's clearly not business as usual, but does business continue? Are we in touch with clients, major pools of money in that region?

CHRISTIAN STRACKE: Yep, we are. The clients now more than ever really need PIMCO's advice. What do we feel about what's going on? What's going on in other markets? What are the global implications? A lot of the things that we'll be talking about here today.

So yeah, we've been very much in contact with our clients. I think in terms of allocating funds, this week has been a slower one. Of course, people are a little bit wait and see, which is very reasonable. But yes, very much it is a time to be out there in front of our clients, helping them understand how we see things, what the big questions are, what we're hearing, that kind of thing.

GREG HALL: So why don't we get into it. I think one of the things that I wanted to mention to listeners upfront here is we as habitual listeners to the podcast will know we host four sessions a year that we refer to as our forums, our firm-wide investment meetings where we come together to discuss and debate and try to think through the issues of the day.

And that has actually occurred this week. The timing for us to get together must have been fortuitous to digest and begin to debate what we think the implications are for what's going on.

There's a lot of different directions that we can take the conversation, but why don't we just start with how we are thinking about the first few days of market digestion of the military action. What have we seen and how are we putting frameworks together to evaluate what we're likely to see going forward?

CHRISTIAN STRACKE: Yeah, I think the first thing to say is we don't know. And I think anyone who has strong views on how this is all gonna play out is delusional. There's a huge amount of uncertainty here. One can take a view on what the more probable scenario is, but there's huge uncertainty.

I think the second thing is that this should remind us all that we are in a period of materially higher uncertainty and potential volatility in financial markets. I think that's the most important conclusion from this.

And I guess there's always a temptation to say in whatever era you're in, whatever year you're in, to say wow, this is a really uncertain time. There's a lot of volatility. And there is always uncertainty, of course.

But I think we should be honest with ourselves. There have been huge—to use Mark Carney's term—huge ruptures out there in trade negotiations, trade relationships, capital flows, and now very much in the geopolitical realm as well.

So that I think has got to be our lodestar, which is that there is higher uncertainty. And then that needs to be reflected in all sorts of things—making sure that you have portfolios that are liquid for making it through more uncertain times, making sure that you do have downside protection. And that may be through defensive positioning.

It could be through smaller positions in riskier assets. It could be through more diversification than you might otherwise have in all sorts of ways of baking resilience into portfolios. But in an environment with this kind of uncertainty, it really does speak for a different type of portfolio management and portfolio construction.

GREG HALL: Help me quantify how-- It's not as if the threat of violence was completely unknown. It wasn't utterly unanticipated. And yet markets do seem to have been caught by surprise. How would you think about quantifying the degree to which people were surprised by the weekend?

CHRISTIAN STRACKE: Yeah, I think the real surprise is how quickly and how severely the Strait of Hormuz has been shut. I think there was an expectation that there could be a strike or an attack, but that it would be more limited than what we've seen.

And what we've seen is really a full-blown war on Iran and also a full-blown response from Iran. Given the realities on the ground in Iran, where there's less centralized control, it generates much more uncertainty about what will the response from Iran be. And so that's been the real surprise. The surprise has been the closure of the Strait of Hormuz and then the real uncertainty about when it might reopen.

And so that has then wreaked havoc on a lot of commodities markets. We've seen this extreme pressure on things like jet fuel. The energy markets in general have shown very serious stress, and that ripples through the rest of the market and the economy. If this goes on for much longer, then certainly there will be an impact at the pump. So gas prices will be affected and could be affected for some time.

And that will be in all sorts of other ways that we use energy, transportation of course foremost among them. So that I think is the surprise. It's also the uncertainty. There's hope that maybe there's some off-ramp resolution, that kind of thing. But for now, as we speak right here today, the straits are closed and there doesn't seem to be much of a prospect of them reopening.

And that can have a real ripple effect on the broader economy, on consumer sentiment as well, because consumer sentiment in the US and globally can be very responsive to changes in gasoline prices. So this is having real impact, and it did come as a surprise with the severity in the straits.

GREG HALL: Yeah. So wider in scale than kind of precedents would have suggested. And so the linkage to commodity markets, it's interesting. I just pulled some week-to-date numbers, and these may be slightly out of date this morning because things are moving around, but very consistent with what you said. 20% move roughly in crude oil globally.

The dollar strengthening modestly, maybe having something to do with oil strengthening. It's interesting, the rates markets in the US have backed up. So the 10-years trading today around 4.13, 4.14. That's up 15 basis points off of the recent lows, but still actually down five basis points over the last 30 days.

So we're getting a lot of questions, of course, about the inflationary impact of oil prices and what could happen to the rates market. I mean, I would characterize that as a relatively gentle response. But I'd ask that question of you. Do you think US rates markets are digesting this fully? Is there more cause for concern there? Or do you think they've kind of priced it in and found a level?

CHRISTIAN STRACKE: Yeah, I mean, I think obviously there's always room for there to be more volatility and more downside or upside in yields, downside in bond prices. But our view is that generally speaking the fixed income markets have been pretty rational in terms of how they're digesting this. What's interesting is that if you look at Treasury yields and disaggregate them into real rates and inflation expectations.

And if you look at inflation expectations and the move in nominal yields, it's about half real and half inflation expectations so far since the Iran shock. And now if you look at 10-year inflation expectations higher now by, call it five, six, seven basis points. Does that mean that the market really thinks that inflation is going to be higher for seven basis points for 10 years?

GREG HALL: That's a very precise, that's a very precise articulation of market expectations.

CHRISTIAN STRACKE: Exactly. Exactly. Or is it just that there's more uncertainty around where inflation could go, and there is some scenario of a really extreme shock in global supply chains that would lead to much higher inflation that could linger for quite some time. I think that's probably what the market is saying, is not that the base case is that inflation is seven basis points higher, as you say, it's so precise.

But rather that there's higher probabilities of the tails. The tails meaning out the probability distribution that there could be something much more serious in terms of a global supply shock. But also, we have to keep an eye. And Greg, you mentioned we just had our cyclical forum.

We talked a lot about this. We talked about, well, let's keep an eye on the other side of the probability distribution, which is that maybe this could be very disinflationary. That this could end up pushing global economies towards recession, maybe not outright recession, but towards recession. That's very far from our base case.

But you have to be respectful and intellectually honest that these kinds of shocks really do impact consumer sentiment, corporate investment sentiment, that type of thing. And not just in the US but globally. And that could then feed into economic weakness and the need for more aggressive monetary policy and rate cuts. So both are in play. Both are more possible today than they were a week ago. And what's certainly the case is that there's more uncertainty.

GREG HALL: Yeah, I think so. It's been a theme. I like the way that when we started the uncertainty conversation a little while ago, you kind of joked, which I always think is funny too. We have a tendency to refer to this kind of market as if we ever know what is going to happen next.

We'd probably be a lot better at what we do if, in fact, we had the proverbial crystal ball. But one of the strengths I think of our organization, and you alluded to it in your reference to cyclical forum, is the way that I think we try to establish frameworks or build scenarios. So it's not so much that while we may have a base case, it's not so much that we're trying to absolutely predict the path.

It's when things happen, we've thought about it in advance, and we have a playbook to contend with it. And the other thing that you mentioned was the importance of liquidity, which in volatile times obviously liquidity is the opportunity to change your mind, right? The ability to change your mind. And so I'm curious. I think I know the answer to this just being here.

We have been proponents of liquidity and we have had an expectation that volatility would pick up, remain high. We did an episode recently with Pramol Dhawan, our head of emerging markets, literally titled Expect the Unexpected.

And so walk us through how we think about creating these frameworks at a time like this, and then how those are implemented across the investment organization so that we can really in real time react to what the news flow suggests.

CHRISTIAN STRACKE: Yeah, yeah. And by the way, I mean I think it's one of the most exciting things about working at PIMCO, this process of developing scenarios, doing your scenario analysis, doing stress tests of portfolios around those scenarios. It can be very exciting. The first thing is, look, there are a billion different scenarios.

You can come up with all sorts of crazy scenarios, but you need to stay a little bit grounded in what's reasonable and what is possible. And so we rely a lot on our subject experts to guide us that way. So for instance we just had in our cyclical forum a presentation from Michèle Flournoy, who's a really leading geopolitical expert. And she did a very nice job in walking us through various scenarios, but within the realm of probability and possibility as opposed to wild out-there scenarios.

You always, I guess, have to keep an eye on the unknown unknowns, as Donald Rumsfeld used to say in the run-up to another US adventure in the Middle East. But you do have to keep an eye on that as well. But let's use subject experts, whether those are outside experts or Greg Sharenow who runs our commodities desk, who has been fantastic with us thinking about how this could unfold in the commodities markets.

And then we can think about how that unfolds in economic conditions and the rest of markets. So use your subject experts. Pramol Dhawan is another great example of an emerging markets specialist who can walk us through how this impacts the emerging markets, and then what global impact that could have.

So, all of this feeds into what are the reasonable scenarios, not bringing us to a conclusion about where we think things are going, but a sense for the various ways things could go and what the relative probabilities might be around those scenarios. And then with that in mind, how do you implement that in terms of portfolio construction?

All else equal, if your scenario is that this doesn't just go away in a day, but that it can linger for some time with some unknown and uncertain knock-on effects, which seems like that's a decent base case, then that would lead you to want to pull risk down a bit. It would lead you to wanting to be a little bit more liquid.

It would lead you to importantly question historical correlations. And that's a really important one. Because if you're just assuming that bonds do great when stocks do badly, or vice versa as one classic historical correlation, then that can break down.

Maybe not over the long term, but it can break down in the short term in a way that could be a nasty surprise to your client. So really focusing on the instability of correlations as you think about these scenarios is a key thing as we're thinking about how to adjust portfolios in the mix of all this.

GREG HALL: Yeah, I mean, I think that's obviously one that I think a lot of advisors are watching closely right now, is that positive correlation between stocks and bonds, which tends to be a function of inflation shocks. So, I'll ask you the question.

Knowing that it's sort of early days here. But obviously a 20% increase in crude oil prices is nothing to sneeze at. Are we feeling like we risk a structural increase in inflation here? Or does this feel like more of an episodic situation, whether oil prices come back down immediately or not? How concerned are we getting about the inflation outlook?

CHRISTIAN STRACKE: Yeah, I mean, I think Rich Clarida did a nice job of guiding us in the discussion around that in our cyclical forum. And we don't have the answer. Look, Rich is our chief economic advisor, former vice chair of the Fed, economics professor at Columbia. So if anybody has a good framework for thinking about this, it would be Rich.

And what he said is, you can't just go back to the 1970s and assume that it all unfolds the way that it did in the 1970s. You had a very different policy response to the energy shock. You had monetary policy accommodating the energy shock. You had fiscal policy accommodating the energy shock. You also had a very different economy that had greater sensitivity to energy prices. So his point is, so long as the Fed remains committed to its dual mandates, it's not going to accommodate this policy shock.

And by the way, that's what the market is saying. I mean, the market has reduced the probabilities of Fed rate cuts this year because the market essentially believes that the Fed is going to be responsible and reasonable as it addresses an energy shock and is not going to cut rates to support the economy in the middle of an energy shock. So I think that's probably the right way of thinking about it, is that if you continue to believe that the Fed is going to be very reasonable in its stance, and the nomination of Kevin Warsh is a reassuring fact as we think about how the Fed's going to respond to this, then, sorry, Greg, that's a very long answer to your question. But it gets, you.

GREG HALL: No, no. It’s the reason I ask the questions. 

CHRISTIAN STRACKE: But I mean this gets you to an outlook where this passes as a bit of a base case. So this passes, it's a one-off increase in energy prices, which certainly will have knock-on effects to broader prices. There's no way that it doesn't, especially if you assume that energy prices are going to be higher for longer, which seems like a safe assumption right now.

But it's not the beginning of an inflationary spiral like we had in the seventies, because you have a Fed that's not going to let that happen. And you also have a federal budget deficit which is kind of locked in given the—what do we call it—The Big Beautiful Bill. It seems like ancient history now.  But, you know.

GREG HALL: London and you and you forget all about your home country.

CHRISTIAN STRACKE: I can tell you all about the, His Majesty's treasury here. So.

GREG HALL: Inland Revenue or whatever?

CHRISTIAN STRACKE: Yeah, exactly.

GREG HALL: It's the one big, beautiful Bill, Christian and don’t you forget it.

CHRISTIAN STRACKE: One big beautiful bill. All right. I've forgotten it already. Sorry. No, no. But the point is that fiscal policy is pretty baked in. It's not going to change much. It is stimulative right now because you've got the rebates coming in from some of the tax changes last year.

But it's unlikely we're going to have much more in the way of fiscal stimulus that would make you worry about what's the path of inflation ahead. If you had fiscal and monetary policy accommodating this energy shock, that seems pretty unlikely. That could change, of course, if things got much worse on the geopolitical front. But for now that seems unlikely.

GREG HALL: Right. So yeah, I think it's obviously the other side of even a modest backup in rates is that you get to deploy capital at a higher coupon. And in some respects, as we found over the last couple of years, our ability to deploy capital going back—while 2022 was certainly painful for us—investments coming out of that period have tended to be quite successful and done what we like to tell advisors that fixed income is likely to do most of the time, which is earn its yield.

And then, yeah, if you are in the right economic conditions, then some capital appreciation as well with Fed rate cuts or good curve positioning and all the things we do on the active front to try to add to that yield to create some outperformance.

Let me—I want to switch gears with you because I think we will be talking about the situation in Iran for quite some time. Yeah, I will plug now and I will plug later. For advisors listening today, please do stay up to date at PIMCO's website, pimco.com.

In the US we will be doing everything we can to get information out to you, our evaluation of what's going on. Toward the end of the month we'll release a written report based on our cyclical forum that just occurred, with more detail and some of the conclusions coming out of that conversation that Christian has given a little bit of a preview now. So just stay tuned, hit refresh at the website, because there'll be a lot of good info coming your way.

Christian, the other major story in our neighborhood over the last couple of weeks has been the kind of ongoing—I'll call it—a crisis of confidence in private credit. And again, you have been on the record as voicing concerns about this space.

We've been on the record here on the podcast having concerns about overcrowding and the potential for disappointing results going forward. Give us your analysis on the last couple of weeks and some of the news flow that we've seen in that space.

CHRISTIAN STRACKE: Yeah, I mean, as you say, Greg, we have been talking about this for some time. And really, as you mentioned, Greg, I was once—until recently—the head of credit research at PIMCO, which is a phenomenal job and privilege to work with our 80 credit analysts around the world who are such experts in their industries and companies that they cover.

And what we did for years was scratch our heads as in, why would somebody make that loan? I mean, it's not just a crisis of confidence. It's a crisis of really bad underwriting, of hoping that the projections and the growth that you think is going to happen or continue, and it all works out just fine. And the Fed never raises rates. I mean, you need everything to come together to justify the underwriting that happened on a lot of these loans.

And sure enough, that's not happening. And so that's the very basic fact, that there's a lot of hope baked into the underwriting on a lot of these loans. Now what you're getting is that you're also getting a number of more disturbing trends coming out in the space.

The most disturbing of which is the fact that there's been this much fraud and this much sloppiness in the technical underwriting, technical defense against fraud in some of these loans. Look, fraud is a problem. It is always how you can blow yourself up. I mean, if you've been in credit for not that long—and I've been in credit since the nineties, so that is long—you see that the worst thing that happens in credit is fraud.

And so you have to be laser focused on fraud. You've got to have a very robust process—legal and compliance technology, basic financial review—to capture and ward off fraud because people want to steal your client's money. That's not going to change. It's always going to be the case. It's always a threat. You always have to protect yourself.

Now, over the last many years when markets were good, people were saying that they were good operators in private credit because they could deploy money. You know, give me your money because I'll deploy more of it for you and faster. And that is just a recipe for disaster. Because if you think that success is lending money, then you're going to lend money and you're going to turn a blind eye to warning signs of potential fraud.

And we see that in one of the headlines in recent weeks here.

I mean, there is a reckoning going on right now—bad underwriting in general, and very sloppy attention to detail in particular.

And now, of course, then we have the software question. And we can go back and forth about just how bad it is. I think we have a general consensus that the big guys in software, the IG names, are gonna be just fine. They've been around for decades.

They're deeply embedded in operating platforms. They're gonna buy the upstarts. They're gonna buy small AI-enabled disruptors and fold them into their platforms, and ultimately maybe be even more successful because of AI. But it's the smaller guys that are the bigger concern where they're in a niche.

They don't have much of a moat. Maybe they're the number three, number four provider in that niche, which is never a good place to be. And they've got a balance sheet that is overloaded with debt and a cash flow statement that's overloaded with interest payments.

And so they can't be responsive. They can't spend the money on R&D that they need to be able to adjust for changing conditions in their sector. That's the real risk right now.

And so we could see a really serious bifurcation between larger, more established, more financially flexible players who may go through some volatility in their share prices but ultimately emerge as survivors, and then those smaller ones that are sitting in private equity sponsors with direct lending loans or bank loans, public bank loans against them.

And that's an area of a lot of focus for us right now, trying to get on top of who are the smaller software names that are most exposed, what exposure do we have to them, et cetera.

GREG HALL: Yeah, I think it's, you know, we struggle with this, because what you're describing is basically nuance. It's that multiple things can be true at the same time. 

The other thing—again, advisors here in the US, and you've probably seen some of these headlines as well—but what we're really beginning to contend with is the impact of outflows and redemptions and gates as people begin to conclude that whether they believe in the asset class or not, whether they believe in the manager they've entrusted with their capital or not, in my words the convexity of the investments has switched for them.

The most they can make is par, and then the downside is they make a lot less than that and they get stuck in an investment longer than they want to. I'm curious, how do you evaluate what you see going on in the US? Do you see global spread of that phenomenon? And then how is that maybe impacting broader credit markets?

CHRISTIAN STRACKE: Yeah. And that last one is a really good, important question. But yeah, the spread is happening, at least the spread in terms of risk aversion to some of these illiquid products and to direct lending in general.

I was just in Japan a couple weeks ago, for instance, and there you could feel a real chill in terms of investor appetite around direct lending and then around some of the wealth products around direct lending. And that's a real phenomenon. I highlight Japan just because I was there, but it's a global phenomenon around APAC, around EMEA, and as you see, Greg, in the US as well, as people come to terms with just what is inside of these things.

And then every single headline is another reason to say, well, why am I in this thing? Just today there was another headline about a manager marking a private credit loan down from par to zero in one quarter. What is that and why is that? And what else is there?

And the problem with this market, the private market, is that there's so little transparency that you just rush to assume that everything else is as bad as that one that just got marked down to zero, or that there's fraud everywhere, or that there's bad underwriting everywhere. That's not the case.

And ultimately the loss, barring a recession, it's our view that you'll see mid-single-digit default rates for a couple years, maybe a few years, in bank loans and in private credit, which means low single-digit losses per year on those, which brings your returns down from call it 10-ish percent to call it six, seven, 8% on average across managers. But the reality is you don't know which manager is good, which one is bad.

You don't know which loan is good, which one is bad. And if you're in this really for yield and you see that there's really interesting yield in other products out there that are more liquid, that are more diversified, that have better credit, that have actual credit ratings to begin with, then you have options. You have alternatives—alternatives to alternatives, as you might call them.

GREG HALL: Well, yeah, it's funny that you say that because I was listening to another podcast and literally heard somebody say we're seeking alternatives, and he was referring to liquid fixed income as the alternative. And I really thought the world had come full circle and we're living in like the upside down exactly.

And so, it tells you how these strategies have become in advisor portfolios. It tells you, to a degree, the complacency that's grown up around a product that can be marked at par until it's marked at zero. And I don't want to sensationalize either. I mean, I think our view has been that any lending sector that grows this quickly, where incentives, as you absolutely put, have been toward deployment and growth and fueling the expansion of the GP that manages the fund, it's bound to create incentives to make mistakes effectively.

And that's not a controversial statement. It's an age-old story in lending and credit. And we have predicted, you've predicted, Dan Ivascyn, our CIO, has predicted disappointing returns going forward in this space. You just articulated exactly how you bridge that, but this is what disappointment looks like when expectations were for perfection.

CHRISTIAN STRACKE: Yeah. Yeah. That is very well said. And then what happens, of course, is that there's an overreaction to this. You thought that you were going to get perfection, you get something worse than perfection, which by the way is not terrible.

I mean, if you have a few years of mid-single-digit returns in this space, well, that's unfortunate, but it's not the end of the world. But there will still be overreaction because that's not what you were supposed to get. It's not what you were sold, it's not what you sold your client. And so the overreaction—and then back to your question, Greg, about what does it mean to the credit market, what's the broader knock-on effect—the broader knock-on effect is that this will be a credit tightening.

It is already a credit tightening as people put pencils down on allocating more into private credit. And remember, private credit and public credit were really just part of one continuum. If you were a borrower, if you were a private equity sponsor-owned company, you could borrow from the public market, you could borrow from the private market. You looked at what was available out there.

If the private market is significantly reduced as a source of credit, then you really have one option, which is the public credit market, and it just means a credit tightening. And we're already starting to see it in small ways in terms of higher spreads, but also pickier markets in general. And so this is already a credit tightening that you'll see more of that come. It's not a credit crunch though, by any means, anytime soon.

I mean, as long as the economy's doing reasonably well, as long as the Fed is at worst on hold and the next move is still a cut, it seems unlikely that there's gonna be a spiral in terms of a credit crunch. But it is a credit tightening, and it just means that if you're in the more problematic loans, whether they're private or traded bank loans, then it's gonna be very difficult for that borrower to refinance themselves.

So whereas you would hope that you would just get out by a refinancing, that's gonna be much less possible now because lenders are much more picky and choosy in where they're going. And so, there's gonna be a lot of dispersion, certainly a lot more dispersion of performance at the individual loan level, and then dispersion at the manager level as well.

GREG HALL: I will say, and maybe this is the theme of what you and I have kind of talked about today, because I think it does analogize well to geopolitics, the value of liquidity and the value of transparency, of knowing what you own and where your risk lies. I think that is coming home to advisors. They're reevaluating the value they assign to those things and increasing them so that they can take advantage of volatility and not necessarily be its victim.

CHRISTIAN STRACKE: Yeah. That's right. I think that's right. And I think that's the way to think about it. How do you take advantage of volatility and not be its victim? And also to remember that these products, which are not marked to market, still can be marked down, can still be volatile.

It's just that the volatility is amplified when you start to hit problems. You're stable, stable, stable, stable, stable, and then drop, and drop hard because you have loans that go from par to zero. And so there still is volatility. It's just a different profile of volatility.

GREG HALL: Yeah. We talk about that. It's everybody can be doing everything right and trying their honest hardest to mark things at the appropriate value, but there's still a human tendency, I think, to be optimistic that the markets don't always suffer from. And so it does underline the value of having a market-sourced price for risk.

CHRISTIAN STRACKE: Yeah, exactly. And I think maybe not to get too wonky on this, but a little-understood fact is that the accounting rules require you to do that—keep it steady, steady, steady, steady, and then drop. So the accounting rules say that when it's a level three asset, where there is no market, where there are no observable market inputs and it's not traded, the accounting rules then say, all right, well, do you think this thing is worth par?

Do you think you're gonna get paid back? Well, yes, I do think I'm gonna get paid back. And do you think you're gonna get it paid back on time, et cetera? Yes, I do. If you think that that is gonna be the case, then you don't mark it down by 20 points, even though the rest of the market may be down. The traded market is down 20 points, and that is just a technicality of the accounting rules that are required to be used in this space.

That I think a lot of people don't understand. People think, oh, well, they're just ignoring the volatility or they're ignoring reality. And there may be some of that, and there is that human tendency to be optimistic, particularly optimistic about investment decisions that you've made for your clients.

GREG HALL: Yeah. I shouldn't laugh, but yeah.

CHRISTIAN STRACKE: But the other reality is that a lot of managers are locked into that accounting rule, which then leads us to where we are.

GREG HALL: Yeah. It's a structural feature of those strategies that in benign markets can be a strength. You could make an argument from a behavioral standpoint that clients shouldn't react to modest moves in pricing. But in more punishing markets, obviously it leads to gap risk and surprises. Christian, let me just be mindful of time. You've got a lot going on.

You've got a big business to oversee and quite a lot going on in your part of the world. But thank you for making the time for us. For those listening, a couple of things. One, let me just reiterate, please do visit us at pimco.com in the US or your local website where you happen to be if you're listening globally.

If you identify yourself as a financial advisor here in the US, you'll be taken to Advisor Forum. That is our one-stop destination for you to get everything you need from PIMCO to power your client conversations, especially at a time like this. Please do check back daily with us. We will be publishing written reports, webcasts, bite-sized videos that you can use to either share with your clients or certainly to educate yourselves as to what's going on in markets so that you can help guide them through the volatility.

We will be talking more about geopolitics in the coming weeks. We will be talking more about private credit. But it was really nice, Christian, to have you here to just kind of get into this on a timely basis, and we'll be following up with folks in the weeks and months ahead to make sure that they've got the best of PIMCO's thoughts on these topics.