PIMCO Perspectives: When Geopolitics Becomes an Economic Input

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. Today I'm excited to be joined by frequent flyers, returning champions, you know, popular guests backed by popular demand, Marc Seidner, our CIO for Non-traditional strategies, and Pramol Dhawan, who leads our emerging market investment business. Hi guys, welcome!

PRAMOL DHAWAN: Hey! Thanks for having us.

MARC SEIDNER: Hey, Greg! Thanks for bringing us together again! It's always fun!

GREG HALL: It's good to have you back. Listeners will remember, I hope, that we try to feature you guys at least four times a year talking about a piece that you write called PIMCO Perspectives, which is published quarterly, hence the four times a year, and where you try to take a little bit of a zoom-out view on what's going on in markets.

It may or may not be directly related to what we publish in our outlook pieces or what's going on kind of the day of, but you get a chance to sort of ruminate on what's going on out there. And the latest piece, which was published just a little while ago, is entitled, ‘When Geopolitics Becomes an Economic Input’. I'm sorry to say that my fears that that title would become dated by the time we did this podcast have not come to pass, and the situation in the Strait of Hormuz remains tense.

So maybe Pramol, just walk us through kind of the lens, the thesis behind the most recent piece.

PRAMOL DHAWAN: Thanks very much, Greg. We've been seeing more and more regime-changing headlines, particularly this first quarter in 2026, and most of us have been accustomed to in a full economic cycle. So this sort of note was an extension of previous messages that we've been delivering around the fragmentation era. And really what's changed here is just the pace. The thesis is playing out faster and more broadly than even we had anticipated. And the core idea here is that surprise is now the new baseline. It's not the exception anymore.

That fragmentation should not be a forecast. It's an observable reality across trade, fiscal policy, and economic alliances. And when we sort of think about that, we sort of think that the old framework, which was around open markets, shared norms, predictable institutions, that's under genuine threat and genuine stress, and accordingly, the frameworks that one puts in places, dear in the old norms can become outdated very quickly. So it's really a call to action to start to rethink and to widen one's aperture.

GREG HALL: Yeah. We've mentioned that. You've mentioned that. Well, the last time we spoke, we talked about that.

It was, I think, Marc, remind me, keep me honest here, but I think it was our 2025 outlook piece was the Fragmentation Era, that Pramol just referenced there, core thesis sort of being that, you know, in the modern era, or the current era of politics, certainly influenced heavily by the current administration, we cannot rely as much as we used to on norms and common practices, free trade, global unity, that there's just going to be, you know, a little bit of a breakdown in that pattern.

And I guess the question for today is how do we place the Iran conflict into that, I was gonna say framework but I suppose lack of framework?

MARC SEIDNER: Well, I think it's part of the framework, right? I mean, historically, as Pramol sort of alluded to, you know, geopolitics, particularly for most of the Cold War period, sort of functioned in the background and, you know, sort of, you know, episodic moments. But it really has become a first-order economic variable.

And that's exactly how you place the current Iran conflict and concerns in the Middle East. I mean, one has to look at energy dependency or independency. One has to look at supply shocks, supply chains, resilience around the globe, look for areas of differentiation, and build it into one's analysis of the outlook. Because, you know, I think as a result of all of this, geopolitics now belongs alongside growth, inflation, and monetary policy as part of the core economic analysis.

And I think that the Iran conflict does absolutely nothing but reinforce that view and continue to elevate the importance. I think Pramol and I probably got high praise from Rich Clarida, and it's nice when you get high praise from Rich Clarida. He grabbed me when I was in the New York office last week and said, I love your piece, love your piece.

We have our secular forum, and you talked about the fragmentation era being the theme of our secular forum output from 2025. We'll see what we coalesce around in 2026, but I am sure that this will be a topic for much discussion, hot debate, and hopefully coalescing around conclusions when we all gather together next week to think about the next three- to five-year outlook.

GREG HALL: Let me just jump in for listeners who may not already know, Rich Clarida is PIMCO's Global Economic Advisor. He was a vice chair of the Fed for many years, is a professor at Columbia University, and amongst, you know, his other responsibilities advising our investment committee and helping us think through day-to-day investment issues.

Rich runs what we call our secular forum, and that's what Marc's referring to. We all gather in Newport Beach next week, and literally from the youngest associate on the team to the most senior veteran portfolio manager, everybody gets input, everybody has a point of view, everybody gets to debate, and usually some interesting things come out of it.

So, having said that the Iran conflict sort of fits within the expect-the-unexpected umbrella here, how are we thinking about that conflict at this point? What's the debate inside the investment committee today about, you know, where things stand, how likely they are to persist? How would you gauge the risk to markets from here on out, knowing of course that, you know, these are maybe base-case scenarios and we consider the tails as well?

PRAMOL DHAWAN: Yeah. Maybe I can just start on that one and just say that, look, the honest answer is that nobody knows on the timing of when this crisis is going to be over. And anyone claiming precision is sort of selling something that is inherently a falsehood. But look, we think from an investment committee scenario that framing is far more important than point forecasts and point estimates.

And we're sort of not in the business of calling the day that the conflict ends, but we are in the business of making sure that portfolios don't require us to do so. And when we think about various different scenarios, we think about containment and de-escalation in which oil retraces, rates will rally, risk assets will stabilize, and then we think about escalation and supply disruption in which you may have stagflationary impulses and central banks become somewhat in a bind, and we try to place probabilities around them based on new information.

We also take a look at just the underpinnings of the markets and say, gosh, you know, for an oil shock like this, the underlying PMIs have been inherently stable and have trended on an uptrend, which is very dissimilar to the 1970s oil price shock. And when we sort of think about that, we think that there are some competing forces which are allowing the US economy to keep trundling on, the global economy to keep trundling on.

AI CapEx expenditure and the widening out of that is chief amongst those, but also tariff rebates have been very, very important. Fiscal spending, particularly in Europe as it pertains to defense spending, has also been very important.

And we sort of think to ourselves, gosh, we came into this year, and Marc will know better, with a pretty constructive growth outlook and a sort of slightly benign inflation outlook. And we're sort of shaving a little bit off the growth and a little bit more on inflation. But, you know, if and when the dust settles, I think Marc and I both think it's a pretty good backdrop for risk assets.

GREG HALL: Yeah, I was going to say, Marc, markets seem to have been remarkably resilient. We've ventured into discussions of equity valuations in this segment of the podcast in the past, so maybe I'll ask you to do so again, but why, to continue on Pramol's point, why have markets held up as well as they have? And then I was going to ask also, do you see a difference in how the stock markets and the bond markets are reacting to what's going on?

MARC SEIDNER: Yeah, I mean, I think a couple things, Greg. And I think part of the way markets are responding to this event or this moment of uncertainty or an unexpected input, part of the reason we wrote this piece is it's a reminder that, you know, we have to think about this on a forward-looking basis rather than just go back to the historic playbook.

In early March, after the initial conflict, I mean, the market immediately went back to a narrative that, you know, geopolitical conflict in the Middle East with a supply disruption on the energy markets and ensuing volatility in the energy markets is equivalent to, or hearkens back to, the 2022 invasion by Russia of Ukraine.

And our analysis would say that, well, yeah, that's a nice starting point, but let's look forward. This is very different, right? I mean, in 2022, we had a supply disruption in energy markets as a result of Russia's aggressions, but we also had a demand shock coming out of COVID with pent-up demand for all kinds of stuff, initially goods, then services, that was supported by massive fiscal and monetary stimulus, not just in the United States but around the world, but certainly centred in the United States, and that created that inflationary narrative. Here, it's obviously very different.

We have the supply shock, but the demand side of the equation is very, very different. And this is a—we'll actually debate this in our investment committee this week because the outlook is one of expected demand destruction because of the rise in energy prices.

Labour markets are not nearly as robust as they were in 2022. Real wages are stagnating for most of the economy. We're in this no-hire, no-fire moment for labour markets. Fiscal policy, while being, you know, supportive in the United States from One Big Beautiful Bill, becomes restrictive or not supportive in the second half of this year around the world. And so when we look at the potential stagflationary outcome from this geopolitical event, this moment, it's very different than the most recent historical narrative.

And you really have to put a forward-looking lens on it to think about the impact for financial markets. And maybe I'll just tease this out and you can ask us both to dig deeper in it, but, you know, our assessment, and I think anybody's assessment, would be that markets' response over the last eight weeks is very, very different in terms of, you know, pricing, you know, impact both on the growth element and the inflation part of the equation.

Equity markets making new record highs, credit spreads back to historic tights, while the front end of yield curves and the levels of interest rates are pricing in a very, very, very different scenario. So it's almost as if risk assets, as I think Pramol said, have already looked through this event to resolution versus fixed income or central bank policy expectations expecting much more meaningful implications.

And perhaps both can be right, but I think we've learned in the past that when markets are pricing in different outcomes, that is a key opportunity for active management, for repositioning, for deployment of capital, and an opportunity to engage with investors, advisors, clients on some of the implications.

GREG HALL: It does seem like the crux of the disconnect though is this growth outlook. And Pramol mentioned, you know, some reasons to have been optimistic at the start of the year. Marc, you just mentioned how some of those reasons might ebb over the balance of the year.

And then I guess the unknown is to what extent high energy prices begin to change behaviour and kind of kick into eroding growth. How are we thinking about that balance right now between kind of the ongoing look through the volatility and have a more Goldilocks outlook versus the potential for a recession in the not-distant future?

MARC SEIDNER: I mean, recession probabilities have definitely gone up. We have downgraded, you know, I mean, growth has been slowing sequentially, right? I mean, 2024 was upper twos real growth in the United States. 2025 was mid twos. Our initial forecast, as Pramol had sort of alluded to, was sort of lower twos for 2026 growth.

We're now probably mid-ish to upper twos in terms of the growth outlook, and while inflation expectations, particularly core, we don't see the second-round pass-throughs because of weakness in labour markets and demand destruction. We don't see as much pass-through in inflation as we do see deterioration in growth. And so we've probably marked up our inflation expectations by two or three tenths of a percent and marked down our growth expectations by five or six tenths of a percent.

And so I think that gives you some sense of the direction of travel and order of magnitude. And I'd be curious what Pramol's probabilities are, but recession probabilities are certainly going up. I mean, second quarter GDP, or the first quarter GDP report, was quite telling in the sense that, once again, outside of technology there is very little growth dynamic in the economy.

And so we still have this very bifurcated set of circumstances when there is one behemoth sector that continues to drive the lion's share of growth while the rest of the economy is largely stagnating. And it certainly feels as if this is a moment or event of increased uncertainty that will sort of freeze the system and have negative economic consequences.

So to summarize, I worry, and I think Pramol would probably join me, we worry more about the stag than deflation. Although it might be sequential, like we might get deflation before we get the stag. But I worry for the balance of 2026 much more about the stag than deflation.

PRAMOL DHAWAN: I also think this gets to one of our central points in the piece and in previous pieces, that this notion around dispersion being far more important than beta, trying to predict the sort of tipping point on the US economy has proven to be very difficult for many cycles, specifically because of the sizable fiscal stimulus that we have and trying to predict when that fiscal momentum starts to deteriorate in the economy.

But I think from an investment committee perspective, the global opportunity set means you don't have to be that precise. You can find high-quality bonds that out-yield that of the US in Australia and in parts of the emerging market world, which can help, together with a US Treasury portfolio, build a ballast for duration.

You can find equity-sensitive assets, credit assets in Asia, which allow you to play the AI CapEx expansion just at a 30, 40, 50% discount to US equities that are not as fully valued so that you can play both states of the world and not be forced into a sort of precision on a tipping point.

And I think that that's really what's changed this time around versus previous states where I think you placed a lot more emphasis on that question, on the stag versus the deflation.

GREG HALL: Yeah. I'm sorry, go ahead, Marc.

MARC SEIDNER: No, I was going to say, and sorry. I mean, there's so much to talk about here that we could keep going back and forth.

GREG HALL: No, that's good. It's good.

MARC SEIDNER: We should let you do your job and prompt us, but just as a—

GREG HALL: My job is just sitting here listening to you guys say smart things, so it's good.

MARC SEIDNER: I was asked a question by our CEO, Manny Roman, at a dinner last night. And he was asking about NVIDIA, which is now a close to $5 trillion market cap company that has a forward PE looking to next year's earnings of 24 or 25.

And to compare and contrast that with some of the infrastructure support around data centres and some of the lending that we have been doing there. And a recent transaction would look something like a nine-year average life, a 19-year final maturity, and a seven-and-a-half-percent fixed-rate coupon to an investment-grade borrower backed by leases, collateral, and amortization schedule, all the things that are incredibly healthy for bondholders or supportive for bondholders.

And when thinking about that question or answering that question, it just seemed quite obvious to me that you'd almost much rather have the high-quality 7.5% fixed-rate coupon that, when compounded over a period of many years, turns into a one-and-a-half to two-and-a-half times multiple, again depending on the amortization schedule, versus a 4% earnings yield.

And so I think that's an example of the type of opportunities that exist for relative value, not just within a market, but across markets based upon what's being priced in today.

GREG HALL: Yeah. I'm really glad both of you just made really important points, I think, for the balance of the conversation. And Pramol, I was going to thank you for—you know, we do get caught up in the betas, and we do get caught up in the binary, and I have conversations with lots of advisors, you guys do too, where we very quickly find ourselves in a conversation of what's the Fed going to do next week with, you know, the rate, or where's the 10-year going to be in 12 months?

And rarely in these conversations with you guys, or when we sit back and talk about what's going on in portfolios, does performance really hinge on anything so binary as that. And it's a good reminder. And then, Marc, you've just sort of brought us back to the role that portfolio construction plays in a lot of these decisions, just knowing we're not going to be right about all these things.

I think, you know, for most advisors, you're right, it's not an either/or, right? You've got to be exposed to the growth, you've got to be exposed to the exciting part of the economy. But maybe with valuations where they are, and the economy growing in a way that is maybe a little counterintuitive given what's going on in the world, you want to be thinking about finding other sources of return that are a little less risky than what you've got.

The other thing that you bring up in the piece, sometimes when we talk about active versus passive, it feels a little self-dealing given how strongly we believe in active management. But, you know, one of the things you two think the old way of the world got us very comfortable with was passive investing. That a world where geopolitics was highly predictable rewarded passive investing. And we should be cautious about that unwinding in a world where geopolitics is less predictable. Maybe we can spend a couple minutes on that.

PRAMOL DHAWAN: Yeah. I think there is a state of the world where passive investing makes sense. Usually that's when dispersion is low, when stocks and bonds, I mean reverting, when geopolitical volatility is low, and predictability is high. The crux of this piece, and many other pieces that Marc and I have been writing that preceded this, is that that environment may be structurally behind us. In a fragmentation world, dispersion widens. Dispersion between countries, sectors, companies, it all widens.

And passive has no defense mechanism. When the shock comes, it fully absorbs that shock. The index owns the winners and losers equally. And active management is built precisely for this state of the world. It is a tool for separating out winners and losers. So, look, I don't want to sit here and, sort of, unabatedly bash passive investing.

There is a brilliant solution to a specific problem. The question we all have to ask ourselves is, is that problem still in this current state of the world? And we think that we've moved into a new regime, one of higher dispersion, one of less predictable policy, less mean-reverting markets. And I think that is a world which benefits active management.

MARC SEIDNER: Couldn't agree more. And I think if I just listen to everything that Pramol just said, which was spot on, you know, passive rewards what has worked. Active, when done well, should reward what will work or what can work or what should work. And that's the break. I mean, if advisors want to engage in this discussion, we'd love to do so because it's a critically important discussion.

We put the piece out, we could be wrong. I mean, someone could say to us, well, geopolitics is—you know, you're caught up in the firestorm of today, but, you know, it'll die down. And it'll once again become sort of this idiosyncratic risk that functions in the background and shouldn't be an input.

But if you believe that it's an input, and again, if you believe that passive rewards what has worked and active rewards what will work, then it's critical. And even if you think about the environment, you know, today, we should be looking for assets that are scarce, that have positive convexity or positively exposed to uncertainty or volatility, that have a real element, right? Real assets.

And we should talk about this because this is important given how markets have performed, you know, even over the past few weeks or even over the past few years, and where there's implicit or potential policy support. And those are all forward-looking concepts, not backward-looking. And that, in conjunction with everything that Pramol said, is exactly the framework to think about it.

GREG HALL: Yeah. You mentioned a focus on real assets. Do you guys want to spend a little time talking about insulating portfolios from the, Marc, to use your newly coined phrase, the flation? Not the stag, but the flation.

MARC SEIDNER: The flation, not the stag.

GREG HALL: Yeah.

MARC SEIDNER: Yeah. I mean, I can start there. I mean, again, maybe it's as simple as just looking at the last few years and recognizing that, you know, commodities, you know in broader real assets are probably grossly underheld in individuals' portfolios. And again, that makes sense, right?

It is the financial part of the economy that has done extraordinarily well in the post, even going back almost 20 years to the post-global financial crisis period. I was looking at a chart today that was fascinating. The rolling three-year correlations between stocks and commodities has been positive over the last few years, or even the last 10 or 15 years, and just now—it is a rolling three-year correlation, so it moves slowly—just now it has turned negative.

And so, you know, as we look for diversifiers, and by the way, people ask about the stock-bond correlation that has been elevated over the past few years, given the experience of 2022 and 2023, you know, we think ultimately stock-bond correlations return to their more normal historical relationship of true diversification.

And we think that's absolutely true, particularly if we do get more of the stag than the flation. But if you want to protect your portfolio about two sides of the distribution and look to where there might be an elevated risk premia given, sort of, uncertainty surrounding geopolitics and perhaps geopolitics as an economic input, then a little bit more exposure to commodities would probably benefit advisors and their clients going forward.

And, you know, we in the fixed income world would say inflation-protected bonds, you know, the starting point of real yields is pretty attractive.

And you get the inflation hedge. So there's plenty of tools that advisors can look at on behalf of themselves and their clients to try to diversify portfolios even further and add some protection against geopolitics becoming an economic input.

PRAMOL DHAWAN: And maybe I can just add, I've been on the road quite a bit recently, in London for our macro conference, in Japan last week. And whether it's speaking to corporate treasurers, to heads of state, or portfolio managers, the same theme keeps coming up over and over again, and I'd like to try and articulate that for our advisors.

That's a theme about resilience over efficiency. For corporate treasurers, that means that, you know, you've had the fourth supply shock in five years. At a certain point, there's no longer a shock to keep having these supply shocks. You need to build resilience in your supply chains.

For heads of state in the UK in particular, my home country, we've had another massive energy transition and shock. It wasn't five years ago when the UK got most of its natural gas from Russia and then had to shift to Qatar LNG, and now face that being closed off as well.

So resilience around energy, energy independence, resilience around military procurement, military independence, and of course for portfolios, when you speak to portfolio managers at PIMCO and in the broader industry, most people are trying to build portfolios that are resilient to various states of the world.

And I think with that, I would just say that the key points that we're trying to reflect in portfolios, we've already spoken about active over passive. I think that one is relatively uncontroversial. I think keeping liquidity is important. Dislocations are going to keep coming, and you want to have dry powder to be able to add to them when they do. I think it's also important to reduce concentrations in anything that requires specific macro outcomes to work.

This notion of not being point-specific and trying to build portfolios in different states of the world is very important. Marc and I certainly believe that geographic diversification is underutilized, that there are high real yields in many markets outside of the US and we want to be able to go global in this world. Look, we believe that bonds are doing their jobs again.

And Marc very, very nicely pointed out this notion that a high-quality fixed income portfolio can out-yield, and quite out-yield by quite a lot, the earnings yields of equity markets and using high-quality fixed income as a genuine diversifier now is really important. It's not a return drag anymore, it's additive. And then finally, I would just echo a point that our CIO, Dan Ivascyn, has consistently said, which is not to stretch for yield in credit markets.

I think that's very, very important in this state of the world where credits return back to pre-crisis valuations, not to just keep going out of the concentric circles and underwriting poor covenants. The cushion's just not there at current spreads. But look, we believe for the first time in many years, you're being paid to be patient in bonds.

That's a different world to the worlds that we've been accustomed to previously. And investors can sit tight, they can preserve optionality, and they can be paid a coupon in high-quality fixed income.

GREG HALL: Well, I was going to ask about portfolio construction, but I think you pretty much covered it off. I think, you know, what I hear the two of you saying is, you know, clearly against the backdrop of we don't know exactly what's going to happen next, a lot of the forces we identified at the outset of the year are still in play.

We have a US economy that had some juice coming into this year that ebbs over the back half of the year. You've got higher energy prices that could create a drag on growth. You've got a labour market that's a little bit of a question mark, obviously an unbalanced economy, as Marc said, with tech really being 100% of the growth impulse that we're seeing.

And over the course of the last eight weeks you've seen rates back—not, it hasn't been a massive reaction. I think they started the year at 4.20 on the 10-year in the US and maybe today 4.40 or 4.38. So, in the context of everything that's going on, certainly a contained reaction, but offering more value to investors coming in today.

I just offer to you guys what I see in the marketplace, and as we look at our own flows and industry flows, I think advisors are generally doing exactly what they ought to be doing. I mean, we might argue with the magnitude of how much fixed income they're buying, but the direction has been adding to fixed income, adding to active versus passive.

Although in moments of big stress, passive tends to get a wind behind it, but then that reverts back. And so I've seen a lot of just really strong, reasonable behaviour from advisors. I think your message today can maybe underscore what they've been doing, hopefully give them a little more confidence in pursuing that path on behalf of their clients.

I just wanted to mention to those listening, so I was prepping for the podcast today, realized I was doing so in a notebook that is emblazoned on the front Seidner, Department of Finance from Boston College, and, Mark, just give us a minute or two on your relationship to BC and what you've done there, because that was a nice moment for me to see it so tangibly in front of me on the desk.

MARC SEIDNER: Well, it's kind of you to mention it, Greg. I mean, I think we all have a need, or should feel a need, to give back in some way or form to, you know, what has made us successful and given us opportunities. And Boston College took a chance on me by accepting me in, I think, 1984, I started. My daughter went to BC. It's an institution that's near and dear to our hearts.

And importantly, finance has been a discipline or a career choice, you know, my time at PIMCO certainly, that I think was rewarded from my BC experience. And so having the chance to name the department was a way to give back and to pay back and pay forward, pay back in the sense of the opportunity that was given to me and pay forward in the sense of, you know, I mean, scholarship, academics, endowment, and opportunities for the next generation are critically important, and so it's sort of an honour to have our name on it.

And I hope you use the notebook, and if you want a case of them, I'm sure I could get you a few more.

GREG HALL: I think it's a terrific honour for you and the university and it's always exciting. I'm on college tours with my older daughter now, and it's always exciting to see a PIMCO name on the side of an economics classroom or building.

It definitely demonstrates the connection that I think we all aspire to, being close to the academic centres as well as markets.

But thank you both for being here. Thanks, as always, for joining us as often as you do, and we'll look forward to the next piece.

PRAMOL DHAWAN: We appreciate it, Greg! Thanks!

MARC SEIDNER: Thanks, Greg! Always fun!

GREG HALL: Alright. Well, that does it for today, everybody. Thank you so much for listening and spending this time with us. We know that you are busy, you're running around seeing clients, helping them interpret the world around them. So the fact that you take some time on the drive or on the subway or however you happen to get around, we really appreciate you listening with us.

If you found anything interesting and you want to dive a little bit further, certainly if you want to read the piece we referred to today, PIMCO Perspectives: When Geopolitics Becomes an Economic Input, please visit us at pimco.com in the US or your local website, wherever you may happen to be listening.

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