Podcast: Investing opportunities amid chaos with PIMCO's Greg Sharenow

This transcript has been automatically generated and may contain errors or inaccuracies. It is provided for reference only and should not be considered a fully accurate record of the conversation.

Amrita

Welcome, everybody, and welcome back Greg Sharenow. So excited to have you back. The first time we sat together, everything we talked about was hugely popular, not just because of what you have to say, but just the feedback we had from clients was that it was different. We talked about multiple different asset classes—well, sorry, different commodities, I should say, still within the commodities sphere. But it was very refreshing to not just talk about oil, is what a lot of people wrote to us about. I'm really hoping, Greg, now that you're back, you give us your perspective. Having you leading such a huge portfolio at Pimco, give us your objective, and give us your views, really, around what the last 100 days have been with a new president in the US, markets in really a place where it's very difficult to articulate where we are and where we are headed. I can't remember the last time we had such high volatility and uncertainty.

I think uncertainty for me is the biggest thing that I'm facing on a day-to-day basis, whether it be on the analysis side that we are doing or when I'm talking to clients, because no one knows what to expect. No one knows what's coming next. So for somebody who manages such a huge portfolio, what has it been like the last 100 days? Have you ever experienced something like this before, or has it been fine?

Greg

Well, I will say we're also talking today, not only on the 100-day anniversary of the start of this administration, but also the four-week anniversary of Liberation Day, which, frankly, feels more like four months to a year than four weeks in terms of the volatility we have seen. Now, when I take a step back and I think about being a commodity trader, which I've been now a PM for over 20 years, and before that as an economist for six, so I've seen a variety of market events and spikes in volatility like this.

One thing that makes today a little bit unique from, let's say, 2020 with Covid or 2022 invasion, or 2014 when OPEC changed their production policy, or the global financial crisis—those were all events where vol spiked because the economic backdrop and the fundamentals of the markets changed, and it changed from prior expectations and did so in a meaningful way.

As a result, the system had to adjust. That volatility, while challenging in some respects—some systematic strategies might work, some might not, some of your discretionary trades you had on before may or may not work because you weren't positioned for it—but in many respects, you had the ability to pivot and change because you knew a lot of information, maybe imperfect. You didn't know how long the Russian invasion would last for, you didn't know what the sanctions would possibly be, but the direction of travel was a little bit more transparent and clear.

Right now, over the last four weeks or even 100 days, the policy uncertainty really is tremendous. The implications for the forward outlook are very meaningful from different potential outcomes from these policy decisions. So it has been more interesting, to say the least. I would say probably more difficult, but also more rich in opportunities when you have a spike in volatility. So it's kind of like on the one hand, I enjoy it, and on the other hand, I kind of wish I had another profession—one that wouldn't have a truth bomb at 11:00 at night while I'm asleep.

Amrita

You should think about a time zone, then me, I will say that.

Greg

You get 24. Your morning, you wake up, your news flow in London doesn't end. But I think the stat that really hit me yesterday, and I think it really summarises some of the interesting things in oil, is if you look at the Dallas Fed survey that came out yesterday of manufacturing, it's at levels that you would typically find in economic distress—oil prices would be $15 or $20 lower than they are today.

But the concern, and I think that reflects really that uncertainty. So on the one hand, are the surveys that we're seeing presaging something that is really a problem in the economy, that we're going to see a meaningful slowdown? Our Pimco forecasts have come down over the last four months since the start of the administration.

If those surveys are really a forward indicator, then your outlook for commodities overall and energy in particular really has a different nature to it than if the hard data is a better indication and the surveys are really subject to the uncertainty, and as uncertainty resolves, things resolve. How exactly that shakes out will be interesting to see. But that's the opportunities.

Amrita

Yeah. I think that was my follow-up question because, generally speaking, everybody's been revising down the economic outlook. We've just put out our piece. We've just got our global GDP forecast. We're now at 2.5%, which is arguably—I mean, we would say it's a recessionary number, even calling for a couple of quarters of flat to slightly negative growth for the US. Commodities, which are clearly very leveraged to economic growth—then how does one invest in it? Is it an investable asset class still in times like this?

Greg

So the way in which our investors have approached it, I think right now actually the last month has been a little bit more paralysis than specific people making a lot of decisions. The best way to say that is our net flows, our net conversations with clients, haven't been truly tilted in one way or the other.

But as I mentioned the last time we talked, probably the biggest change still remains that the inflation sting from the last experience was very much supply in nature. A lot of the global investors found themselves short real assets when they needed them in their portfolio, whether it be gold or whether it be broad basket commodities. They found themselves in a situation where their model of strong emerging market growth, strengthening currencies, were not what was realised.

So they were less insulated. Even though our flows haven't really been particularly interesting, our conversations still very much lean into portfolio diversification and how do you construct it. Anybody who's trying to trade the cyclical, that's going to change their minds based on what the outcomes of some of these unfolding policies are.

But for those who are thinking longer term about how do they build a resilient portfolio, I think those conversations are still very salient. I had several this week with clients in Asia who were very much interested in making sure that they have better diversification in their portfolios, and they had, over the last couple of years, if they didn't have something like commodities, which ended up being an important driver of returns in 21 and 22 and even into 23.

Amrita

Yeah, I think we've seen some of that as well. We've definitely been talking to folks who—I wouldn't put them in the usual bucket of interested in energy or any of the other commodities that we are covering—and very much coming at it from, we've seen what equity markets have done, and we also want to make sure that we have, you know, we want to understand what's going on in other markets. I think it definitely resonates with what you're saying.

Have you seen a difference in what clients of yours are asking from Asia versus the West? Are you getting more interest in Asia because they're scared of what's going on, that this is an isolationist policy, they kind of have to diversify away from the US? Have you picked up on any of that?

Greg

It's an interesting question. It's a question I've asked our executive office and tried to prod. I would say in general—and this is not a commodity-specific answer—if you look at, I think Goldman Sachs put out a report recently about international selling of US assets in the equity market. That could have been just a short-term response.

In general, the best way I would think about it is there's more caution. There's more caution based on the policy. I don't think we've gotten into a period where there's meaningful divestment. But the questions are—my guess is incremental dollars are going to have to study.

We've seen, for example, one of the provincial wealth funds in Canada, two weeks ago, already stopped non-essential travel to the US. Now, if they have to be with the... I think that's probably, you know, it's an anecdote, it's not necessarily a summation of actual data, but I think that kind of points to probably going to be some challenges with the US being so clearly and easily as investable as it may have been a year or five years or ten years ago.

But I don't think you're at the point where you have to worry about it being a large-scale asset sale. But I think bringing it into commodities and where it matters is, I think that's one of the driving features behind gold. When we talk about Asia and Asian clients, you also have Central and South American clients and elsewhere who are thinking about gold as part of their diversifying basket in their reserves.

I don't think that conversation is going to go anywhere for a long time. The best way to end that is if gold prices fall for a while and then, if it goes back to 2000, then people maybe, in the pro-cyclical nature, be a little less interested. But I think right now, the concerns about the US as investable markets, whether it be Treasury or equities, I think is benefiting gold.

Amrita

I mean, you posted something not that long ago about gold. You asked what was the best performing commodity and it was gold and probably will be again this year at this rate. What is the other kind of commodity that's getting interest, or is it mainly just gold right now?

Greg

For transparency purposes, we have only broad commodity investment opportunities outside of carbon. So I don't see it directly in my business. The conversations tend to be more around multi-asset portfolio diversification, TIPS, or even REITs, for example, on how one soundly builds a portfolio, rather than thinking about, oh, I really want to own oil versus gold.

But if you take a step back, probably the most popular question that's asked on a single sector whenever I present is uranium. I think there's a tremendous amount of interest across the spectrum on thinking about how to play uranium long term. That's after gold. That's the number two question. I've been asked that for two years now, regularly: what do you think about uranium?

Other than that, oil is always a popular conversation, because of the impact to inflation, consumer sentiment, and the pocketbook. That's where probably the conversation is now. The other area in commodities where I would say most of our clients tend to be more constructive is copper, because of the secular story of the energy transition and military industrial build-out and so forth, and copper being invested. But I wouldn't be able to see what clients are doing with that.

Amrita

On energy transition, since you mentioned, have you seen any or sensed any change? Because again, the breadth of clients you are talking to is very large. We've definitely seen the pendulum swing a little bit towards, yes, there will be some transition, but not nearly as much on the renewable side. Any of those conversations highlighting that change?

Greg

Actually, to be honest, I think that's more likely to go in the opposite way from our clients. We have a lot of credit operations here at Pimco. As a result, if there is less interest in investors more broadly and the spreads start widening, the investment opportunity becomes more rich.

If anything, we see there being a counter-cyclical conversation that ends up coming in. When everything is being crowded in is where we have the greatest problem deploying capital. When there's less capital coming in, then it actually gets more appealing to a broader number of clients, particularly if they have return thresholds in the upper single digits, low double digits.

I would say that our international client base, large US pension plans, are really—the ones who are interested are largely undeterred and if anything, are looking for opportunities. So from our standpoint, it's still very popular.

Now, the question is, when you think about long-term natural gas, for example, the ideas are going to change around how green it is or brown it is, whether the US is going to be in front of Qatar and other places in terms of investment, how much LNG for the balance is, those are going to be conversations that are related to the transition but are more specific to an individual commodity and its balance, of course.

Amrita

Yeah, for sure. So in terms of your favourite strategies, because we talked quite a bit last time as well about this. We talked about volatility. Where do you stand now in terms of what should clients really be looking at? Because I've heard from ample different sides how it's untradable, every day there's a different headline. Someone even told me today, you're actually better off going on holiday and making money because you won't lose money, right? I think that's kind of the sentiment. And you're saying that no, actually, you can still make money and you can still get good returns in an environment like this.

Greg

I just want to push back on the idea that holidays are cost free. All the holidays—coming to the office and drinking the coffee out of the machine is less expensive than many holidays I do. I don't think I've ever heard a time where this is easy.

When you look back at the year-to-date returns, I don't think it makes a big leap of faith to say a lot of the quantitative-driven strategies, after having several particularly good years, have struggled this year. Your short vol strategies have obviously struggled. But I think broad basket, a lot of the quantitative strategy—and you can see it in the returns announced already year-to-date for many of the big quant hedge funds—have not been ideal.

The trend following momentum has had a problem this year. So if you're asking me where there's opportunities besides looking at relative value or discretion, typically I think if you believe that the quantitative strategies are experiencing a drawdown not atypical in history—trend tends to lose money 50% of the time, if not more—these are opportunities where I think, if you don't think the world broke or the system broke or the reason why you like them, I think that it's pretty attractive to deploy capital.

Historically, when you've had big drawdowns in vol, their vols re-rate and as a result, you tend to be able to recuperate a lot of those returns over the next three and six months. I just think you have to keep investing through this. Maybe the best way to say it is, at any time I have guessed that in history, and I've either reduced the strategy in terms of risk allocation, it always preceded the best period.

So if you take a 30-year approach and you back-tested your strategies and you really understand them, I just think you have to keep plugging away. One other benefit of being today than maybe, let's say, 2022 or 2020—any strategy at that period of time that thought it was ten vol became 20 vol overnight.

Because a lot of the events are a little more idiosyncratic, I think vol is probably for most of these have gone from 10 to 12. It's a little bit different in that standpoint. I don't feel like you end up being mechanically forced to reduce them if you have some sort of vol targeting or if you have some risk limit.

So I think it's a good time to continue to work. It may not be the best for vacation—in the opposite of this environment means vacationing is that much harder.

Amrita

But I think the point you're making is very valid, because just I remember 2020, the volumes you were—or even 22—or the drawdowns we were hearing off in different people, right? Because people just got stopped out a lot of times as well. Whereas now it is a bit more contained in terms of how this is kind of panning out.

But going back to something you said right at the start, that even Pimco, you've reduced your outlook for global growth. So what is your outlook currently for global growth, commodity demand? And what are the risks? I think that's kind of what's worth talking about here as well.

Greg

One of the things that we are trying to get our head around is how much have we frontloaded demand this year in preparation for the tariffs. Anybody who's read the FT or Wall Street Journal, seen the articles about the freight arriving in the West Coast or the United States, the drop in container ships, the cancellation of ships out of China.

When we start thinking about some commodities like energy, which is very freight and transportation heavy in its composition, and then particularly in the US, when you start adding in what I think is going to be a pretty poor tourism season, I think one has to be pretty cautious on the outlook for refined product demand.

I think that's a pretty big issue. Things like freight, air freight, which you can try to keep things moving underneath the deadlines for tariffs, has also been supported. When you look at some of the people—just for whatever it's worth, if we look at something like the headlines about the drop in freight, the base effects were pretty powerful.

So the percentages, of course, and whether it be sequential or even year over year, the first part of last year was a little bit better than maybe it would have been otherwise, relative to the year before. So some of the headline numbers, I think, are a little bit exaggerated.

But if I start looking at overseas travellers into the United States, which we have through March, outside of Canada and Mexico, which has some delays in data, we took a pretty big step down in March. Maybe the timing of Easter's impact. But if all of a sudden we're at 2022 level of travel and we're starting to shock some of the trade.

If you look at the oil patch, we start seeing a drastic decline in there, given how diesel intensive it is. You could easily see yourself in a situation where you're looking at demand growth, quite reasonably, some million barrels a day. If that's the case, and given the fact that a lot of that demand growth is liquids-heavy, LPG, it's not great for the barrel.

If we do see a meaningful manufacturing hit from these trades, that will spill over into other commodities, obviously, that are tied to it. Now, anything I want to say on ags is going to be a function of weather from Kansas to Iowa City to Illinois over the course of the next three or four months—that'll be the dominant factor, and same with weather in Europe and so forth.

But in terms of the industrial-linked commodities and the travel-linked ones, they're the most susceptible.

Amrita

And I think to your point earlier as well, it's so difficult because, I mean, we've seen that in our data—we have a kind of nowcasting on jet, you can see genuinely the drop off in US demand, you can see it in ticket prices. I come over to the US a lot to know that the drop off is significant and you've really seen that over the course of April.

So I think it is happening. Our view as well is we're going to see the hit in H2. We're not seeing it now because it's front loaded. But that's also why, if you look at the crude curve, it's super backward—the front, but you are seeing the contango at the back because people are starting to price that in, which in itself is kind of interesting to watch.

In the interest of time, we did the same thing last time as well—your final thoughts. I wouldn't say trade recommendations per se, but what is it that from an investing point of view, because this has been such an enriching conversation around this, what are—if you were to say, highlight criteria, saying, look, these are the things to watch out for, and these are the things that either make a better outlook, like a more optimistic outlook, or even a more bearish outlook? Because to your point, it doesn't matter if it's bullish or bearish. It's about if you've got a medium-term or long-term view on things, this is a good time to invest because you just have to keep going with it. Because ultimately, again, these are the times which create the best opportunities. We see that in oil with the kind of price levels and/or the price levels we are projecting—shale is going to become a problem, right? It won't be able to grow, then that creates opportunities, potentially for next year. So there's a whole host of things. How would you think about framing it to the investors out there in terms of whether it be things to watch out for or reasons to invest and where?

Greg

To me, I think probably the most important part to track over the next three months is simply going to be how much do we front load demand. You can see it in your diesel numbers. You're going to see it in your jet, as we were just talking about. That's an area I would pay a lot of attention to.

A lot of times in the past we've had economic shocks, you look at weather-adjusted power demand, weather-adjusted gas demand. I just think that's going to be slower as an indicator than it may have been other times. If you look at some of the demand for LNG in the summer in China, in Asia Pacific region as well as coal, it's been in the doldrums.

Typically, the way I think about a lot of commodity demand, particularly in a place like China, and this is relevant for how I think about gold, is how I model imports of crude oil into China. If you look at a six-month exponentially weighted moving average and you adjust for vol, when prices are one standard deviation rich, you see them backing off price buying, and then when you get back to the moving average or even underneath it, you start seeing a pickup in activity. It's part of the reason why we saw a pause in central bank buying of gold in the early part of last year. Prices went up, they came back down, but it was at a higher level than before. They saw the behaviour increase. I think you're seeing some pretty strong demand now in crude oil with the sell off.

What does that mean? The concern I have is that you haven't really seen that in LNG yet, but you should, and coal you haven't really seen it yet, I think you should. But if you don't, I think that's a pretty bad harbinger for economic activity. Granted, there's more renewables and so forth in China, so it's not just so simple, but there is a price sensitivity and we haven't really seen it come back in the region as prices have come down in TTF and JKM. That's another area where I'd be watching.

For investors who are real money, pension funds, endowments, who are thinking about their asset allocations over a long time, the reality is still inflation is going to determine a lot what happens there. Nominal bond portfolio, it's going to determine a lot of the equity outlook. We do believe we are still in a rate cutting cycle or two more cuts this year. We think we will in the US, we've seen an else breakouts. Inflation is how you change that. If that happens, then you end up getting into a situation where most nominal assets probably end up rerating again, lower. That would be one reason why a lot of the investors who are taking a longer-term outlook are thinking about commodities.

Amrita

Yeah. No. Exactly. Well thank you, Greg, so much. This was amazing. And again, I think you've talked about a lot of factors which people are looking at and looking to get guidance on. So this was fantastic. Thank you for joining us again and I hope we'll bring you back soon.

Greg

I would love that. Thank you for having me.