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