PIMCO's Jerome Schneider Talks Fed, US Economy

**SPEAKER_1** (0:02)
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**Tom Keene** (0:07)
So you're one year, you're in the 97th percentile. You know, that's like, you know, the way the Red Sox have been playing ball. And then the three year, you're in the 91st percentile. And the five year, you slump, it's like the Dodgers lose an eight in a row or whatever. You're in the 89% percentile.
You got to be kidding me. In short term paper, Darkening the Door, Jerome Schneider, Pacific Investment Management Company. Okay, cut to the chase. What's the methodology and process to deliver that shockily rare outperformance?

**Jerome Schneider** (0:44)
Yeah, good morning, Tom. It's great to be here. You know, it has to do with like, less of making calls on the Federal Reserve, hardly, well, you might believe.

**Tom Keene** (0:51)
Thank you, thank you, thank you, thank you.

**Jerome Schneider** (0:52)
And it's more about understanding the liquidity framework in the broader marketplace.
And that's ultimately what it is, is encouraging clients, encouraging those in the marketplace to really understand what liquidity means to them in the broader investing paradigm. It could go with equities, it could go with infrastructure, it goes with private equity, private debt, and most importantly, it goes with cash. And understanding how cash and liquidity go hand to hand, they're not the same thing.

**Tom Keene** (1:17)
In 28 flavors of cash, wicked sophisticated folks, is it picking up dimes in front of the cash bulldozer? No. Or is it more strategic?

**Jerome Schneider** (1:27)
It's more strategic, because you have to look at the big picture, structural changes, regulatory changes, how capital markets are functionally changing. I've been doing this 31, 32 years, Tom.
And I would tell you that things have changed pretty dramatically over that time, in terms of how things are funded, how sophisticated structure products can be. Obviously, we know the tail risks many times over. And the reality is, is that we're seeing it in real time calibrate. Those adjustments can't be overlooked. And that's where the structural opportunity to be in that performance helps to corroborate high returns for those looking to outperform basic cash performances and T-bills, et cetera. So it is humbling to be in that era of high returns, but at the same time, it's repeatable with proper research and proper understanding of how liquidity moves through the marketplace, not just domestically, but globally. All right.

**Paul Sweeney** (2:16)
At Pimco, you're head of short-term portfolio management. What's short-term for you?

**Jerome Schneider** (2:20)
Short-term for us has evolved over time admittedly. Traditional short-term management used to mean bank deposits, then it evolved to money market funds. At Pimco, we chose to believe in active money management, and that really was launched by our predecessors, Bill Gross, et cetera, back in 1987 when the short-term fund came around.
For us, when we think about short-term, it's really active management, zero to five years focused on capital preservation, liquidity management, and ultimately, returns which can be above a money market fund type of yield. How do we do that? You create balance and diversification in the market place.

**Tom Keene** (2:53)
How do you respond to funds that try to goose it with leverage like the triple leverage dollar cash fund?

**Jerome Schneider** (2:58)
Well, I think that's actually a really important construct. Leverage is one aspect.
Treating things as golden assets, triple A assets when there's obviously different mechanics in it are also in that. We look at triple A CLOs, great products, but they're not necessarily a money market surrogate yet. We see them branded oftentimes as a money market equivalent. So we want to be very truthful about what it is we're doing. Active management doesn't necessarily mean you're owning a T-bill all the time, but what it does mean is you have the resources to underwrite risks and balance that conservative approach.

**Tom Keene** (3:30)
I can't say enough, folks, how you're getting a view here, the massive inside baseball of short-term paper. Jerome Schneider, Pimco with Paul Sweeney.

**Paul Sweeney** (3:38)
BTMMGO, that is the treasury and money market screen on the Bloomberg Journal.

**Jerome Schneider** (3:43)
It's our Bible.

**Paul Sweeney** (3:45)
I mean, I'm looking at this stuff. I never look at this stuff. One year T-bill, I can get 4%.

**Jerome Schneider** (3:50)
Yeah, but you have to understand, it's been pretty volatile because of the expectation for rate hikes. The one thing to keep in mind, though, in this whole construct is the measure of inflation. Now, we have big numbers coming up, as you all have stated throughout the morning, tomorrow and Thursday. But the reality is for an investor in the money market space, over time, it wavers from positive real returns, positive inflation adjusted returns, to negative inflation adjusted returns. And just because you're getting that 4% handle doesn't necessarily mean you're being compensated for the real inflation adjusted returns over that point in time. Now, Pimco, we think that inflation is going to come down, but at the same time, if you believe that inflation is going to go remain static or maybe move even a little higher over that point in time, depending upon what your alloc is, it may not necessarily be the right protection. So you need to have a little bit more nominal return here, closer to 5%, that you can have an active management landscape.