Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, Suncloud, Bloomberg dot
Speaker 1: com and of course on the Bloomberg terminals in the
Speaker 1: count Well. The outlooks that we had at the end
Speaker 1: of the year are basically useless, like all the outlooks
Speaker 1: Bill Gross wrote over the years. Let's migrate on Thatch
Speaker 1: to a conversation with one William Gross, former PIMCO of
Speaker 1: co c i O that barely describes his contribution to
Speaker 1: bond investment. He's put out a book which is hugely readable.
Speaker 1: I wasn't sure what to expect from the stamp collector.
Speaker 1: I'm still standing has a lot of smart notes in it,
Speaker 1: in some extremely frank talk about his turmoil of the
Speaker 1: recent years. Bill Gross, Um, thank you so much. I
Speaker 1: love the idea in the beginning of the book there
Speaker 1: never was a bond king. I met you the first
Speaker 1: time at the Waldorf Story, and you were almost in
Speaker 1: tears because you got the bond market wrong. I can't
Speaker 1: remember Bill if it was price up, yield down, or
Speaker 1: yields up, price down. But you blew it on a
Speaker 1: but at that at that time, you completely blew it.
Speaker 1: What did you get right that made you the so
Speaker 1: called bond king? Well, I think Tom that I from
Speaker 1: an early stage I wrote a book called the you know,
Speaker 1: the Long Term Secular View of Financial Markets and UM.
Speaker 1: It seemed to me that if you know, you could
Speaker 1: eliminate human emotion, which is what you just talked about
Speaker 1: on a day to day basis that if you look
Speaker 1: three to five years out and had a intelligent forecast
Speaker 1: as to the direction of inflation, UM and the economy,
Speaker 1: than you have a better chance. Not not that you
Speaker 1: terribly succeed, but you'd have a better chance. And so
Speaker 1: I think the the secular outlook at PIMCO, which was
Speaker 1: three to five years was key going forward. You were
Speaker 1: in Indian Wells. There's a small tennis tournament there UH
Speaker 1: this week which will be of great interest to those
Speaker 1: that follow tennis. And part of his getting the ball
Speaker 1: in play and putting the ball back and forth across
Speaker 1: the net. You started out in the mail room at PIMCO.
Speaker 1: How did you get the ball moving on the Pimco
Speaker 1: tennis court. Starting out in the mail room, well, we
Speaker 1: had a billion dollar portfolio. Pacific Mutual did. It wasn't
Speaker 1: Pimco at the time. And Uh I just graduated from
Speaker 1: U C. L A. Anderson, I had a master's degree.
Speaker 1: I was clipping coupons, um, not exactly in the mail room,
Speaker 1: but clipping coupons. And uh I said to myself, wouldn't
Speaker 1: it be better to get out of the vault and
Speaker 1: into the chine and and maybe you could trade these bonds? Um.
Speaker 1: You know, back then there weren't computers, IBM at A
Speaker 1: three sixty, etcetera. But um, you couldn't really move them
Speaker 1: back and forth except physically. And so most banks and
Speaker 1: most insurance companies didn't. And so I thought that if
Speaker 1: I could take five million of that one billion portfolio
Speaker 1: and traded and performed, then we could get some clients
Speaker 1: and grow a little investment company. Called a little investment company,
Speaker 1: they grew quite large. Bill. You talk also about your
Speaker 1: start just even with education, with two hundred dollars into
Speaker 1: your pants, going to Las Vegas gambling and getting ten
Speaker 1: thousand dollars to pay for your college education. Partly that
Speaker 1: gambling to the markets and how the game has changed.
Speaker 1: How much has the game changed over your tenure? Those
Speaker 1: change a lot, you know since I when I started, UH,
Speaker 1: there weren't really liquid UH mortgage passed through certainly, wasn't
Speaker 1: interest in foreign bonds. There weren't any tips, inflation protected securities, etcetera, etcetera.
Speaker 1: And so that and the evolution of financial futures, which
Speaker 1: is probably the biggest change. You introduced liquidity into the marketplace,
Speaker 1: and it allowed for even a small firm at the
Speaker 1: time like Pimco UH to to basically trade and to
Speaker 1: make money. UH. Financial futures back in the day were cheap, cheap, cheap,
Speaker 1: and we could buy a treasury bond through the financial
Speaker 1: futures market and turn a at the time ten percent
Speaker 1: yield into a twelve percent yield. And UH the first
Speaker 1: mover advantage for Pimco in terms of all of these
Speaker 1: categories was quite critical as well. Bill. The reason why
Speaker 1: I ask is because we're in an era where a
Speaker 1: lot of people talk about the distortions in the de
Speaker 1: bond markets by the Federal Reserve, where the feed is
Speaker 1: prepared to start moving back from some of their support
Speaker 1: from their bond purchases. Today marks the last day of
Speaker 1: those pandemic era purchases, at least the expansion much. Can
Speaker 1: the bond market really give the same kinds of messages
Speaker 1: as it did back when you started out clipping coupons, Well,
Speaker 1: certainly not as much. There's there's more involvement by almost
Speaker 1: all central banks, despite the pullback that you mentioned occurring today.
Speaker 1: And um, you know, interest rates are so artificially low
Speaker 1: that that it's hard for institutional investors or even individual
Speaker 1: and private investors too to make much of a difference.
Speaker 1: Central banks control the market. Um. I think they're terribly
Speaker 1: wrong in terms of what they've done, stayed so low
Speaker 1: for so long. Uh, and now we have inflation, not
Speaker 1: necessarily because of those policies, but probably in a large
Speaker 1: part because of them. And so it's um, it's just
Speaker 1: a difficult market. You you try and anticipate the central banks,
Speaker 1: which has been relatively seen the past few years because
Speaker 1: they haven't done anything. But now they're about moving. It's
Speaker 1: simply a question of what Coal and others UM do
Speaker 1: in terms of the policy rate. Bill Gross I've been
Speaker 1: out to Newport to see your Monroe trader on your
Speaker 1: desk of long ago and far away where you calculated
Speaker 1: convexity like no one that could do it. And part
Speaker 1: of the as you mentioned, the first mover advantage of
Speaker 1: PIMCO was intellect. I want you to speak about what
Speaker 1: you and Dr al Arian did when the two of
Speaker 1: you got together and put intellect first for a bye
Speaker 1: side house. Every single by side shop had to react
Speaker 1: and pattern themselves against what you and Mohammed invented. Tell
Speaker 1: us how you put intellect first at your Pimco. Well,
Speaker 1: we we did build a small company than a larger
Speaker 1: company of very smart people. And um, it wasn't just
Speaker 1: myself and uh and Mohammed. Mommed came much later. PIMCO
Speaker 1: was very much of a success before Mohammed, but Paul
Speaker 1: mcculloy was very key in terms of FED policy and
Speaker 1: anticipating the Great Recession. Chris Dialmus was very important in
Speaker 1: terms of bringing financial futures to the company. Um, there
Speaker 1: were lots of others that were innovators, that were mild
Speaker 1: risk takers, and um, you know, putting together a group
Speaker 1: of bond kings and later Queen's was quite important. Was
Speaker 1: the challenges that you had later in your career and
Speaker 1: I don't want to get into the soap opera of it,
Speaker 1: but Bill gross or the challenges that you had, like
Speaker 1: at so many other shops due to the decline and
Speaker 1: profitability of the Bye side. It used to be a
Speaker 1: cozy job bill. You'd show up for two hours, then
Speaker 1: you'd go pay cof golf trying to get your handicap
Speaker 1: up and that bill the Bye side. You know, every
Speaker 1: single by side story is about lower and lower and
Speaker 1: lower reven new and squeezed margin. Is that what you
Speaker 1: ran into later in your career, Well, that's what I
Speaker 1: was advocating. In the von market. There was this um
Speaker 1: uh extension of trading into E T F s and
Speaker 1: too um vehicles that charged lower and lower and lower fees.
Speaker 1: I sensed that as a trade, as a UM as
Speaker 1: a a sense, it as a trend because simply as
Speaker 1: interest rates themselves lowered went down to five four three
Speaker 1: to one, UM, you know, you couldn't charge fifty basis
Speaker 1: points on a one tenure treasure. That's half of the
Speaker 1: half of the yield. And it was almost an egregious
Speaker 1: type of uh of situation, and so um, you know,
Speaker 1: fees became important, became important in terms of my leaving
Speaker 1: PIMCO because the the surviving contingent basically wanted higher yield
Speaker 1: products hedge fund types of products, and I wanted to
Speaker 1: stick to the old total return formula that had done
Speaker 1: so well. The total return formula is in a very
Speaker 1: tenuous moment simply because of where yields are and where
Speaker 1: inflation is expected to be. Some people consider Jeff Gunlock
Speaker 1: your successor when it comes to the bond king moniker.
Speaker 1: You may disagree, others do. The question I have is
Speaker 1: do you agree with his prognostications of a ten percent
Speaker 1: inflation rate this year and the likelihood that the FED
Speaker 1: is vastly behind the curve? Well, the latter, yes, Uh,
Speaker 1: you know, a ten percent inflation rate is problematic. We'll
Speaker 1: say a little bit of it tomorrow. And it depends
Speaker 1: a course on commodity prices, oil prices, and you know
Speaker 1: the wage follow on. But I do think inflation will
Speaker 1: be in a fort five percent category for the next
Speaker 1: several years. And and does that validated tenure at one
Speaker 1: eighty or eighty five It does not. Um does it
Speaker 1: mean that there will be a huge amount of sellers
Speaker 1: because of the lack of FED buying um, you know,
Speaker 1: probably not. You know, as we've seen in the last
Speaker 1: few weeks, treasuries are a safe haven much like gold,
Speaker 1: and so investors that can hit to stick at one
Speaker 1: point eight percent until the coast clears. I do think
Speaker 1: though that uh, you know, bonds are risk investment here.
Speaker 1: Durations are very very very low, as low as almost
Speaker 1: they've ever been. And so when uh inflation is accepted
Speaker 1: in the marketplace at four to five percent, which I
Speaker 1: think it might UM, then bonds are a sale. And
Speaker 1: you know, once we get above on the tenure, once
Speaker 1: we get above to fifteen UM, I think there's substantial risk.
Speaker 1: There's a if you give me just one second, there's
Speaker 1: a long term trend, a thirty five year downward trend
Speaker 1: in terms of the tenure and the third year UM
Speaker 1: that hasn't been broken. It's one of the most amazing
Speaker 1: trend line that exist in financial markets. And right now,
Speaker 1: the tenure at two fifteen would break of the downward
Speaker 1: trend for thirty or five years, and so I think
Speaker 1: that's critical, but I think it will happen. So you
Speaker 1: do think that that trend will be broken. But do
Speaker 1: you think that we're going to escape the negative real
Speaker 1: yield vortex or do you think that that's going to
Speaker 1: persist well and might in certain areas. I mean they're
Speaker 1: they're less fewer and fewer negative yielding bonds. I think
Speaker 1: we're down to four trillion as opposed to fifteen trillion
Speaker 1: and the German tenures of but a magnificent eight basis
Speaker 1: points this morning, um so UM. I think ultimately we
Speaker 1: have to as a finance based global economy. Negative interest
Speaker 1: rates are definitely a negative, a detriment to UH to
Speaker 1: economic growth because they encourage or discourage savers, which is
Speaker 1: the thrust of investment. If you don't have I means
Speaker 1: you don't have an investment, and UM to a certain extent,
Speaker 1: if you stayed down there in negative territory, investors will
Speaker 1: put some of that money into a mattress and it
Speaker 1: doesn't do very well in terms of productivity in a mattress.
Speaker 1: We're going to continue with Bill Gross. He's gonna stay
Speaker 1: where this with his new e book out. I'm still
Speaker 1: standing right now and more timely, perhaps because of the
Speaker 1: invasion of Ukraine. It is a launch of SpaceX. They're
Speaker 1: preparing uh that right now. This is SpaceX Falcon nine.
Speaker 1: It is a launch of forty eight Starlink satellites, and
Speaker 1: you've got to you've got to believe that it is
Speaker 1: somehow changed off of Cape Canaveral. Then it would have
Speaker 1: been Lisa thirteen or fourteen days ago. Well, and actually
Speaker 1: this is important because it comes at a time and
Speaker 1: we do have this dominance of the tracking of a
Speaker 1: lot of individuals through their phones, which is part of
Speaker 1: how Ukraine actually got ahead of Russia and even attract tanks.
Speaker 1: There was an anecdote that actually they could tell where
Speaker 1: the tanks were because Google Maps was saying that there
Speaker 1: was a lot of traffic there. So these satellites are
Speaker 1: integral in the way that we understand the world and
Speaker 1: they we're operating, and it is a new regime. This
Speaker 1: will be a number of minutes here of a launch
Speaker 1: and then fifty six minutes in is when we would
Speaker 1: see a deployment. Make that one hour, sixty five minutes
Speaker 1: in we'll see the deployment of the starlink at satellites.
Speaker 1: We'll leave Cape Canado right now. For all of you
Speaker 1: on Bloomberg Radio and Bloomberg Television. Someone who's been of
Speaker 1: a great support to us over the years when William
Speaker 1: Gross always in forever of his Pimco and of course
Speaker 1: tenure at Janice as well. Out with a wonderful new book,
Speaker 1: Bill Gross. There is a hilarious moment in the book.
Speaker 1: And I'm not surprised because I've tried to fire you
Speaker 1: at least three times. Lu Roue Keiser went after you
Speaker 1: on Wall Street Week and said, who is this young turk?
Speaker 1: Get rid of them? How did lu Roue Keiser fire
Speaker 1: Bill Gross? Well, we always had a question as panelist,
Speaker 1: and my question was about the fiscal deficit and UH expanding,
Speaker 1: And so I thought I'd be cute and bring a
Speaker 1: rubber band into the studio and fire it at lose
Speaker 1: ear when I talked about an expanding fiscal deficit. I
Speaker 1: did that. It was a good shot. Missed his ear.
Speaker 1: He smiled, and UH went on in the conversation, but
Speaker 1: clearly it was very miffed and at the end UH
Speaker 1: he had his producer farming. It didn't take long. An
Speaker 1: important question. I know, Lisa and I've talked about this before,
Speaker 1: the parlor game of fed guessing. You've been a pinata
Speaker 1: on this. Sometimes you've got it right, sometimes you've got
Speaker 1: it wrong. Sometimes it's what you believe in and not
Speaker 1: so much what you think the FED will actually do.
Speaker 1: I get it is their value to the modern FED
Speaker 1: watching what I call the FED parlor game. Well, I
Speaker 1: think there still is uh, you know, debating whether it's
Speaker 1: a quarter or fifty base points may not have been
Speaker 1: of or may not be too much value. But if
Speaker 1: you can analyze the fits rather longer term moves in
Speaker 1: terms of twelve, thirty six months, and that's the critical judgment,
Speaker 1: and that becomes very difficult politically and otherwise. So I
Speaker 1: still think since central banks control the market, do you
Speaker 1: want to try and guess um what Powell and others
Speaker 1: are thinking in terms of interest rate hikes? And so yes,
Speaker 1: I'd say listen closely. Well, especially at a time when
Speaker 1: you think that the trend is going to be broken,
Speaker 1: the downward trend of yields that we had experienced for decades.
Speaker 1: At what point or do you think that investors should
Speaker 1: look to just break even on an inflation adjusted basis
Speaker 1: rather than actually get returns from financial instruments the way
Speaker 1: they've become accustomed to. Well, if you're talking about tips
Speaker 1: or in general, because I think that there's been this
Speaker 1: feeling where you were talking about investing in risky your
Speaker 1: assets to try to get bigger returns for the likes
Speaker 1: of pension funds and foundations. And you have a lot
Speaker 1: of big investors coming out and saying, look, you've got
Speaker 1: to lower your expectations in order to not just lose
Speaker 1: your shirt in really risky assets. What's your view? Yeah, correct,
Speaker 1: I think going forward, and I've said this for a
Speaker 1: few years now, and obviously not with the fangs and
Speaker 1: the high flyers that hasn't been the case. They've done
Speaker 1: very well until the last few months. But I think
Speaker 1: an investor can really only expect five to six percent
Speaker 1: going forward. Um. You know, these are days in which
Speaker 1: interest rates will be rising, They will be pressuring corporate
Speaker 1: profit margins. They will be affecting the housing market and
Speaker 1: slowing the economy down. Um, there's less liquidity in the
Speaker 1: marketplace and and so UM, you know, a five to
Speaker 1: six percent return instead of a tin banger like Peter
Speaker 1: Lynch used to call it, or even ten to twenty,
Speaker 1: which millennials um and new investors think they deserve. Um,
Speaker 1: it is probably a pretty good number, Bill if you're
Speaker 1: restarting a career now, which asset class would you choose
Speaker 1: as having the most promise, well, not bonds, um, you know,
Speaker 1: probably commodities, and not just because it's hot. Um. I
Speaker 1: wouldn't choose real because I think that's um been thwarted
Speaker 1: as well, because of the potential for higher indust rates.
Speaker 1: Bonds stocks um, you know, stocks are stocks for me,
Speaker 1: would still be an exciting young person's type of asset
Speaker 1: class despite the lower returns going forward. There's lots to choose. Uh,
Speaker 1: there's lots of a difference to make in terms of
Speaker 1: analyzing various sectors. And so I don't know I pick stocks.
Speaker 1: I pick stocks in the beginning, but they wouldn't have me.
Speaker 1: So I I went down and clip coupons the girls.
Speaker 1: How do was our listeners and our viewers? And I
Speaker 1: love thank you for the mention of the Bloomberg in
Speaker 1: your book. I'm still standing where you say you get
Speaker 1: up in the morning and look at the Bloomberg screen
Speaker 1: for five hours. I mean, you know that's a great
Speaker 1: retirement bill. But when you when you get up in
Speaker 1: the morning, and even with your caution over the years,
Speaker 1: you've never been associated with the gloom crew. How should
Speaker 1: our listeners and viewers respond to? Typically the Friday data
Speaker 1: and Internet dump of gloom out there on the markets.
Speaker 1: Well should you should take it very carefully because you know, Tom,
Speaker 1: human emotion is is critical in terms of an investor
Speaker 1: and attitudes towards markets. Um, you know, I've been a
Speaker 1: glass half empty because that's what fund investors are. They
Speaker 1: have to protect capital. But at the same time, PIMCO
Speaker 1: and myself rode the bond bull market from all the
Speaker 1: way down to a few years ago, and that's a
Speaker 1: very bullish, optimistic type of attitude in terms of bond prices.
Speaker 1: So I think an investor has to know who they
Speaker 1: are and then to to try and apply that servitablate
Speaker 1: to markets. You're more qualified on this and maybe five
Speaker 1: or ten guys in the world. I've been preaching for
Speaker 1: the last fifteen days that Ukraine is a crisis of
Speaker 1: tangible assets, commodities, things, as Gartman says, things that fall
Speaker 1: in your foot, like an oil drum, et cetera. You're
Speaker 1: the king. Some would say, of financial instruments. What's different
Speaker 1: about the financial system now given tangible asset crisis versus
Speaker 1: intangible asset financial instrument crisis like what we saw. Well,
Speaker 1: I think certainly liquidity is different in terms of at
Speaker 1: least Russia's central bank reserves, and I think that begins
Speaker 1: to affect other countries as well, and then ultimately it
Speaker 1: effects investor's attitude. You know, UM momentum which is a
Speaker 1: valid alpha generator meaning UM. Those that follow momentum types
Speaker 1: of trends have done very well over the past ten
Speaker 1: or twenty years. As markets have moved up UM. Momentum
Speaker 1: is now of course shifted the other way UM, and
Speaker 1: and so an investor has to be cautious of this
Speaker 1: ever increasing trend of higher and higher prices than buying
Speaker 1: the dips, because momentum is going the other way, and
Speaker 1: so I think financially that's a key consideration relative to
Speaker 1: what you mentioned with things, Bill, You've had a history
Speaker 1: of bold bats throughout your career. What's your boldest bet
Speaker 1: right now at this moment? Oh? Um, very few. You
Speaker 1: know I'm doing UM. I'm doing arbitrage corporate buyouts by
Speaker 1: Microsoft and Google. You know Google announced one just the
Speaker 1: other day. I'm content to take four or five. Actually,
Speaker 1: my biggest bet has taken place over the last year.
Speaker 1: I did very well and have done very well in
Speaker 1: gas pipelines partnerships, Uh, there aren't too many of them,
Speaker 1: but they yield eight to nine percent and their tax deferred.
Speaker 1: Check your tax consultant. But um, you know they've gone
Speaker 1: up as the fangs and high flighters have gone down.
Speaker 1: And so the last six to twelve months have been
Speaker 1: very good to my uh foundation. Girl. It's good to
Speaker 1: see you. Thank you so Mutching. Congratulations on the essays
Speaker 1: within your book, and of course of wonderful new text
Speaker 1: as well from Bill Gross. I'm still standing. Let's get
Speaker 1: to the institutional conversation of the day. All institutions react.
Speaker 1: We wait on the international Monetary phone in Christiana, Gorgeva.
Speaker 1: But David mel Pass is at the World Bank. To
Speaker 1: his immense credit, they have not taken down World Bank
Speaker 1: research on the Russian Federation, but front and center on
Speaker 1: the front of the page of their website, the World
Speaker 1: Bank Group is taking quick action to support Ukraine. David
Speaker 1: mel Pass, what do you do this morning? Hi, good
Speaker 1: morning Tom. Well, I'm grateful that our board on Monday
Speaker 1: passed a major package Monday afternoon, so that money becomes
Speaker 1: available right away, meaning I don't know today or tomorrow
Speaker 1: through means for Ukraine, and that helps them survive as
Speaker 1: there as they're fighting, uh, fighting back against the Russian invasion. UH.
Speaker 1: It goes for things like food and salaries and doctors
Speaker 1: that they desperately need. So today now we look to
Speaker 1: build a bigger, a bigger, broader package that can begin
Speaker 1: to think about reconstruction as well. But right now we're
Speaker 1: focused on refugees, on the region, and on how do
Speaker 1: you how do you hold it together? Do you believe
Speaker 1: that you can have a relationship with Mr Putin the
Speaker 1: invader where you can go directly into these these ravaged
Speaker 1: cities and provide World Bank support, or you basically working
Speaker 1: at the border like the Red Cross. Today we're working
Speaker 1: through the Ministry of Finance of Ukraine, which still exists
Speaker 1: and is operational, so they're they're supporting the basic services
Speaker 1: in Ukraine. We're not working with Russians in Ukraine or
Speaker 1: with Russians in Russia. We've suspended, we've stopped all of
Speaker 1: our operations in both Russia and Belarus. David, there's a
Speaker 1: lot of focus on Ukraine and helping the refugees, as
Speaker 1: there should be. There's also growing focus on nations that
Speaker 1: rely on Ukraine and Russia for wheat, for a lot
Speaker 1: of the commodities and thinking of Egypt of their import
Speaker 1: parts of wheat come from Russia and Ukraine. How are
Speaker 1: you preparing a package to help some of those countries
Speaker 1: as they deal with the food inflation and a commodities
Speaker 1: inflation more broadly that they haven't seen before. Yeah, this
Speaker 1: is a huge problem for developing countries in general, and
Speaker 1: especially the poorest ones. People at the that are that
Speaker 1: are inland from ports are having a great deal of
Speaker 1: trouble getting food because the supplies would cut off. I
Speaker 1: spoke with the Prime Minister of Egypt on on Thursday
Speaker 1: or Friday last week. The Egypt is a major importer
Speaker 1: from Ukraine. But fortunately they have storage and their crop
Speaker 1: will be coming in. So as you look around the world,
Speaker 1: the key variables here are how can global production be
Speaker 1: boosted outside of Ukraine and Russia. So that would and
Speaker 1: you know the US, UH and Canada and even Mexico
Speaker 1: are major potential suppliers both of agricultural products and of energy,
Speaker 1: so making it productively rapidly available is going to be
Speaker 1: one of the key the key responses of the world
Speaker 1: to this horrible situation that's hitting Ukraine. I have to
Speaker 1: say on efficiency there's lots of things that countries can
Speaker 1: do and we urge. For example, in the US, the
Speaker 1: the the efficiency is constrained greatly by the Jones Act,
Speaker 1: by the ethanol mandates that are hugely, hugely de productive.
Speaker 1: They cancel production UH and in Europe they they have
Speaker 1: restraints across their economy on what people can do and
Speaker 1: what they can produce. So lifting some of that would
Speaker 1: add to the global supplies and help respond to the crisis.
Speaker 1: When you talk about efficiencies, David how much you also
Speaker 1: talking about car free days or perhaps restrictions on how
Speaker 1: food is consumed in certain places. I think everyone can conserve.
Speaker 1: What we don't want to see is made is advanced
Speaker 1: countries cording things. You know, it's income, but on people
Speaker 1: to allow their supplies to go into the markets and
Speaker 1: that allows them to get to the people that need
Speaker 1: it the most. That's part of an efficiency gain. But
Speaker 1: so I think there are some cost savings that can
Speaker 1: be done. But as we look globally, the biggest issue
Speaker 1: is how do you really how do you really tackle
Speaker 1: UH the the output that can can be made available
Speaker 1: by each country. For example, there's nickel supply shortages, the
Speaker 1: London stock Exchange stopped its trading of nickel, but Indonesia
Speaker 1: is a big nickel producer, so there there are alternatives
Speaker 1: around the world, and those can be ramped up, ramped
Speaker 1: up as the world responds. The Russia situation right now
Speaker 1: doesn't look like it will be it will be. Oh,
Speaker 1: it will be a temporary When it's a it's a
Speaker 1: longer lasting UH set of problems for the world in
Speaker 1: interacting with Russia on oil, on wheat, on basic minerals,
Speaker 1: and there need to be supplies elsewhere. You just touched
Speaker 1: on a broader question, David, I wonder if we can
Speaker 1: finish that please, the risk of a increase, an escalation
Speaker 1: and increase in nationalism. How do we prevent that from happening.
Speaker 1: I don't think. I think it's very hard to do that.
Speaker 1: People live in nations and they feel nationalistic and they
Speaker 1: feel patriotic for their nation. What we need to do,
Speaker 1: I think, is have a rule of law that's really meaningful. UH.
Speaker 1: In the in the eighties and nineties, I talked a
Speaker 1: lot about constitutional law for Latin America. It was having
Speaker 1: severe problems forming democracies, and it matters a lot what
Speaker 1: your original statutes are and how you can implement those
Speaker 1: uh so worldwide. If we keep pushing on transparency, on
Speaker 1: rule of law, on on people finding ways to resolve
Speaker 1: disputes without fighting. Uh that I think is the way forward. Unfortunately,
Speaker 1: there arise authoritarian leaders that don't do that world because
Speaker 1: in the middle of trying to have good governance for
Speaker 1: countries as we work with them. Devin mount Pass always
Speaker 1: wonderful to catch out with you said, it's been so long,
Speaker 1: David mount Past, the President of the World Bank. Right
Speaker 1: now our interview of the day on the American response
Speaker 1: and particularly the American and NATO response to what we've
Speaker 1: seen with war in Ukraine. James Trevidis UH who has
Speaker 1: been a wonderful friend of the show, of course with
Speaker 1: his public services UH in the Navy as a European
Speaker 1: Commander and also at the same time NATO Supreme Allied Commander.
Speaker 1: Author is two thousand thirty four. I can't say enough
Speaker 1: how timely that frightening book is my book of the summer.
Speaker 1: I believe it was a year ago. I can't remember. James. Now,
Speaker 1: James Trevidis, I'm gonna talk about Ben Hodges General, I'm
Speaker 1: gonna talk about Mark Kimmitt General. They have an urgency
Speaker 1: about urban warfare, give us the same urgency about able warfare.
Speaker 1: In the Black Sea. What does Ukraine Russia look like
Speaker 1: on water? Russia dominates the Black Sea and really has
Speaker 1: for centuries. They've been the dominant power there. If you
Speaker 1: spin around the Black Sea tom you see Romania, Bulgaria, Turkey, Georgia, Ukraine,
Speaker 1: but it's Russia is the monster force there. They will
Speaker 1: continue to dominate it. Turkey has a choke hold on
Speaker 1: the Dark Knells, the Bosphorus, the strait that controls access
Speaker 1: to the Black Sea. But it's going to be Russia's
Speaker 1: game up there because that's where their Black Sea Fleet
Speaker 1: is located. Think having the U. S. Navy's seventh fleet
Speaker 1: inside the Black Sea. That's the advantage that Russians have.
Speaker 1: And your important essay for Bloomer Opinion, the single money
Speaker 1: sentences that your time of duty. There were form in
Speaker 1: thousand Americans in service in Europe and that's been whittled
Speaker 1: down for whatever reason, to a hundred thousand. What is
Speaker 1: your timeline to see a rebuild of American military in Europe?
Speaker 1: Is it a question of weeks and months or is
Speaker 1: this going to be long drawn out extended process depends
Speaker 1: on Vladimir Putin, and so far he is certainly giving
Speaker 1: us plenty of reason to think we are going to
Speaker 1: increase our troop levels in Europe. I don't think we're
Speaker 1: going back to four hundred thousand, the way we were
Speaker 1: during the Cold War, but look for the US presence
Speaker 1: to go from around fifty thousand and perhaps seventy thousand
Speaker 1: permanently based forward if Putin continues. And more importantly, Tom,
Speaker 1: you're seeing the Germans and others increasing their defense spending
Speaker 1: extremely quickly. All of that will move troops to the
Speaker 1: borders of NATO. The NATO alliance will keep Russia out.
Speaker 1: When you say the borders of NATO, Admiral, are you
Speaker 1: talking about Poland? Most importantly, I think it's Poland, but
Speaker 1: also all around the eastern eastern Europe, So I think Estonia, Latvia, Lithuania, Romania, Bulgaria.
Speaker 1: They have either borders on Russia or borders on Russia
Speaker 1: client states like Belarus, or as to the conversation, Tom
Speaker 1: and I just had borders on the Black Sea. There's
Speaker 1: going to have to be an upgrade, if you will,
Speaker 1: in troops forward. That alliance realizes that it's in progress now. Admiral,
Speaker 1: there's a story today on a Bloomberg terminal that Putin's
Speaker 1: endgame sorry to look more and more like simply reducing
Speaker 1: Ukraine to rubble. What do you suggest are the next steps,
Speaker 1: since the sanctions have gone almost as far as they
Speaker 1: can go at this point, the next steps to try
Speaker 1: to bring a swift end to this conflict. First, unfortunately,
Speaker 1: I agree. When you're the Russian military and you have
Speaker 1: performed as badly as they have with poor logistics, poor
Speaker 1: command and control, war criminal behavior, at some point your
Speaker 1: only tool left is a big hammer, and they're starting
Speaker 1: to swing that thing hard through Ukraine Indian cities, trying
Speaker 1: to make Ukraine look like Syria on the Dnieper River.
Speaker 1: That's a terrible outcome for everybody, and its war criminal behavior.
Speaker 1: What we should do about it is continue the massive
Speaker 1: sanctions they will bite, that will take time. On the
Speaker 1: military front, continue to supply the Ukrainians with absolutely everything
Speaker 1: they need short of our troops going in boots on
Speaker 1: the ground and fighting. That's a path to World War
Speaker 1: three level confrontation. But that's more material going into Ukraine.
Speaker 1: And above all, let's get these mid twenty nine fighters
Speaker 1: from Poland into the hands of the Ukrainians. It's complicated,
Speaker 1: I get that, but that could be a game change.
Speaker 1: We've gotta stop to show your general Adam, excuse me,
Speaker 1: I got the wrong service there. Almost Venus is really important.
Speaker 1: The images right now are the opera House of seven
Speaker 1: in Odessa. This isn't Normandy where the Germans are shooting
Speaker 1: from the lifts. This is Odessa with sandbags and a
Speaker 1: bunch of Ukrainians. How do we get those jets from
Speaker 1: Poland to Odessa to defend against a well equipped Russian navy.
Speaker 1: The polls have said they're willing to turn them over
Speaker 1: to the NATO Alliance flyman Ramstein Air Base in Germany. Tom,
Speaker 1: I think the next stop for them would be put
Speaker 1: them in Leviv. Um. Lviv is gonna stand for a
Speaker 1: long time. Uh, the Russians are not on some effective
Speaker 1: high speed blitz cried across Ukraine. Put them in Lviv.
Speaker 1: Build your defense from their turn them over to the Ukrainians.
Speaker 1: Let the Ukrainians do what they want to do, Let
Speaker 1: them create a Ukrainian no flies on. What does that
Speaker 1: do to NATO and NATO being independent? I mean if
Speaker 1: we go into western Ukraine and Leviv, that's fine. But
Speaker 1: the zeitgeis this morning is this is hugely problematic for
Speaker 1: the NATO. You're experienced with the answer tom is turned
Speaker 1: them over to the Ukrainians, do not operate them with
Speaker 1: NATO pilots. When they are turned over to the Ukrainians,
Speaker 1: they become Ukrainian jets operating out of Ukrainian bases in
Speaker 1: western Ukraine. UM, NATO can correctly say it is not
Speaker 1: a belligerent in the combat. Is it somewhat risky? Absolutely,
Speaker 1: but at this point go back to those images you
Speaker 1: were showing a minute ago about two million refugees. We're
Speaker 1: gonna have to take some risk to solve this problem. Meanwhile,
Speaker 1: on the Russian side, Admiral, how much are they running
Speaker 1: out of the fuel? And I mean this in every
Speaker 1: meaning of the word, to continue with this battle. And
Speaker 1: I'm talking about this with parts that are getting stalled
Speaker 1: out as some of these sanctions bites that they need
Speaker 1: to repair their planes. I'm talking about the fact that
Speaker 1: we have not seen the full air power of the
Speaker 1: Russian Army despite Vladimir Putin's resolution. UM, all of the
Speaker 1: logistic failures are coming home to rust Um, Russia does
Speaker 1: not have the kind of twenty one century military that
Speaker 1: NATO does that the United States has. And you see
Speaker 1: always and this is true in business as it is
Speaker 1: in war. Logistics eat strategy for lunch um professionals. No
Speaker 1: logistics are what drive wars, and so we ought to
Speaker 1: capitalize on that at the back office end, crushing them
Speaker 1: with the sanctions, and at the front office end, if
Speaker 1: you will, the client facing into this, by giving the
Speaker 1: Ukrainians the tools to take apart what they can put
Speaker 1: on the battlefield. Admiral A clinic as always James tur
Speaker 1: Vedas that the fullness premount on Commander and nights South.
Speaker 1: Let us go to an important conversation. She has been
Speaker 1: fabulous on the microeconomics of oil, and we're gonna pause
Speaker 1: with them. Rita send chief oil analyst Energy aspects here
Speaker 1: with the tour de force. Coming out of the financial crisis,
Speaker 1: which was my great mentor Magdan Desis of the London
Speaker 1: School of Economics and Amrita. Professor Desig got so upset
Speaker 1: and a misunderstanding of general equilibrium theory that he wrote
Speaker 1: a book about it. Tell us about the new oil
Speaker 1: economics given this jump condition in price. Is there an
Speaker 1: oil equilibrium out there this morning, right now, Tom, And
Speaker 1: it's it's a fantastic question that you've asked. There is
Speaker 1: no equilibrium in the market, and that's why you've seen prices,
Speaker 1: not just the level, but the volatility that you're seeing.
Speaker 1: We've moved up ten dollars down, ten dollars up, ten
Speaker 1: dollars in a day. I mean, these kind of numbers
Speaker 1: very much tell you that the market is struggling to
Speaker 1: find what the true prices. These are incredibly complex things.
Speaker 1: Don't give us the math of an emerita, But which
Speaker 1: part of our disequilibrium given massive jump conditions is the
Speaker 1: disequilibrium we should focus on. The dissequilibrium is originating from
Speaker 1: the supply side. Obviously, because Russia is unable to sell production,
Speaker 1: you are going to see some shot ins. But the
Speaker 1: reason you see these jumps is absolutely on the demand side.
Speaker 1: You and I both know that demand is very in
Speaker 1: the last thing, it takes a long time to react
Speaker 1: to such prices, especially by the way governments around the
Speaker 1: world are reintroducing subsidies. So now suddenly consumers are not
Speaker 1: even fully exposed to the true price of oil. But
Speaker 1: that's precisely why you're going to get these big discrete
Speaker 1: jumps and prices until you get to that point where okay,
Speaker 1: demand really starts to hurt and you get back to
Speaker 1: that equilibrium. The problem is it's searching for that price.
Speaker 1: It's in the price discovery mode this market, and whenever
Speaker 1: it's in price discovery mode, which is very rare, you
Speaker 1: are going to get huge volatility. Well I'm ready. Let's
Speaker 1: sit on that point for a moment, especially because the
Speaker 1: kind of Phillips CEO came out yesterday and said he
Speaker 1: does think that prices are getting to a place where
Speaker 1: we are starting to see demand destruction. You do see
Speaker 1: airlines actually curtailing their schedules to preserve capital. Considering that
Speaker 1: some of the less flown or less popular routes are
Speaker 1: consuming a lot out of expensive fuel. How much will
Speaker 1: this make a difference on the margins? How how big
Speaker 1: is that imbalance so that little moves can actually have
Speaker 1: a big impact. I think the important thing to bear
Speaker 1: in mind is that we started this year with nearly
Speaker 1: record low inventories, and that's why we don't really have
Speaker 1: a cushion right. So now, if we're talking about losing
Speaker 1: to three million barrels per day of Russian production. That's
Speaker 1: how much demand will need to come off. So to
Speaker 1: your point, yes, we are seeing airlines at the margin
Speaker 1: curtailing some routes. That's going to help. You are going
Speaker 1: to lose some demand in Russia as well in parts
Speaker 1: of Europe as well, But it's not big enough, especially
Speaker 1: if you think about Asia not exposed fully because subsidies
Speaker 1: are coming back. B they are in a post pandemic
Speaker 1: recovery where people are very very keen to travel both
Speaker 1: by car and by a s. So that's the problem
Speaker 1: in this cycle where we are in anything but the
Speaker 1: recessionary environment. We are actually in a very it's it's
Speaker 1: a recovery environment. And then we've hated with a supply
Speaker 1: shock and we are given that back trap. How high
Speaker 1: could oil prices go based on the sanctions that we've
Speaker 1: seen already put into effect. I mean, I would say
Speaker 1: prices can easily go above hundred and fifty. Now beyond
Speaker 1: that honestly does become a number. And this is where
Speaker 1: elasticity has become very difficult to a certain as well.
Speaker 1: Every retail prices different people. The government's put on taxes,
Speaker 1: they put on subsidies, so the exposure is not going
Speaker 1: to be the same. The oil burden, as we call
Speaker 1: on GDP, is going to be very, very different. But
Speaker 1: the reason I say it's above hundred and fifty and
Speaker 1: not like two hundred or even higher is unlike in
Speaker 1: the past, isn't just oil that's rising. It's natural gas,
Speaker 1: it's food, it's metal. So it's a very inflationary environment overall,
Speaker 1: which is why oil doesn't need to do all the
Speaker 1: work right to kind of curtail demand. Um, there are
Speaker 1: other factors that are really pushing consumers to spend less
Speaker 1: and rita as always, thank you, I'm ready to send
Speaker 1: that of energy aspects. This is the Bloomberg Surveillance Podcast.
Speaker 1: Thanks for listening. Join us live weekdays from seven to
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Speaker 1: subscribe to the Surveillance Podcast on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot com, and of course on the terminal. I'm Tom
Speaker 1: keene In. This is Bloomberg