Surveillance: Bonds with Bill Gross

Bill Gross wrote over the years. Let's migrate on Thatch to a conversation with one William Gross, former PIMCO of co c i O that barely describes his contribution to bond investment. He's put out a book which is hugely readable. I wasn't sure what to expect from the stamp collector. I'm still standing has a lot of smart notes in it, in some extremely frank talk about his turmoil of the recent years. Bill Gross, Um, thank you so much. I love the idea in the beginning of the book there

never was a bond king. I met you the first time at the Waldorf Story, and you were almost in tears because you got the bond market wrong. I can't remember Bill if it was price up, yield down, or yields up, price down. But you blew it on a but at that at that time, you completely blew it. What did you get right that made you the so called bond king? Well, I think Tom that I from an early stage I wrote a book called the you know, the Long Term Secular View of Financial Markets and UM.

It seemed to me that if you know, you could eliminate human emotion, which is what you just talked about on a day to day basis that if you look three to five years out and had a intelligent forecast as to the direction of inflation, UM and the economy, than you have a better chance. Not not that you terribly succeed, but you'd have a better chance. And so I think the the secular outlook at PIMCO, which was three to five years was key going forward. You were

in Indian Wells. There's a small tennis tournament there UH this week which will be of great interest to those that follow tennis. And part of his getting the ball in play and putting the ball back and forth across the net. You started out in the mail room at PIMCO. How did you get the ball moving on the Pimco tennis court. Starting out in the mail room, well, we had a billion dollar portfolio. Pacific Mutual did. It wasn't

Pimco at the time. And Uh I just graduated from U C. L A. Anderson, I had a master's degree. I was clipping coupons, um, not exactly in the mail room, but clipping coupons. And uh I said to myself, wouldn't it be better to get out of the vault and into the chine and and maybe you could trade these bonds? Um. You know, back then there weren't computers, IBM at A three sixty, etcetera. But um, you couldn't really move them back and forth except physically. And so most banks and

most insurance companies didn't. And so I thought that if I could take five million of that one billion portfolio and traded and performed, then we could get some clients and grow a little investment company. Called a little investment company, they grew quite large. Bill. You talk also about your start just even with education, with two hundred dollars into your pants, going to Las Vegas gambling and getting ten

thousand dollars to pay for your college education. Partly that gambling to the markets and how the game has changed. How much has the game changed over your tenure? Those change a lot, you know since I when I started, UH, there weren't really liquid UH mortgage passed through certainly, wasn't interest in foreign bonds. There weren't any tips, inflation protected securities, etcetera, etcetera. And so that and the evolution of financial futures, which

is probably the biggest change. You introduced liquidity into the marketplace, and it allowed for even a small firm at the time like Pimco UH to to basically trade and to make money. UH. Financial futures back in the day were cheap, cheap, cheap, and we could buy a treasury bond through the financial futures market and turn a at the time ten percent yield into a twelve percent yield. And UH the first mover advantage for Pimco in terms of all of these

categories was quite critical as well. Bill. The reason why I ask is because we're in an era where a lot of people talk about the distortions in the de bond markets by the Federal Reserve, where the feed is prepared to start moving back from some of their support from their bond purchases. Today marks the last day of those pandemic era purchases, at least the expansion much. Can the bond market really give the same kinds of messages as it did back when you started out clipping coupons, Well,

certainly not as much. There's there's more involvement by almost all central banks, despite the pullback that you mentioned occurring today. And um, you know, interest rates are so artificially low that that it's hard for institutional investors or even individual and private investors too to make much of a difference. Central banks control the market. Um. I think they're terribly wrong in terms of what they've done, stayed so low

for so long. Uh, and now we have inflation, not necessarily because of those policies, but probably in a large part because of them. And so it's um, it's just a difficult market. You you try and anticipate the central banks, which has been relatively seen the past few years because they haven't done anything. But now they're about moving. It's simply a question of what Coal and others UM do

in terms of the policy rate. Bill Gross I've been out to Newport to see your Monroe trader on your desk of long ago and far away where you calculated convexity like no one that could do it. And part of the as you mentioned, the first mover advantage of PIMCO was intellect. I want you to speak about what you and Dr al Arian did when the two of you got together and put intellect first for a bye side house. Every single by side shop had to react

and pattern themselves against what you and Mohammed invented. Tell us how you put intellect first at your Pimco. Well, we we did build a small company than a larger company of very smart people. And um, it wasn't just myself and uh and Mohammed. Mommed came much later. PIMCO was very much of a success before Mohammed, but Paul mcculloy was very key in terms of FED policy and anticipating the Great Recession. Chris Dialmus was very important in

terms of bringing financial futures to the company. Um, there were lots of others that were innovators, that were mild risk takers, and um, you know, putting together a group of bond kings and later Queen's was quite important. Was the challenges that you had later in your career and I don't want to get into the soap opera of it, but Bill gross or the challenges that you had, like at so many other shops due to the decline and profitability of the Bye side. It used to be a

cozy job bill. You'd show up for two hours, then you'd go pay cof golf trying to get your handicap up and that bill the Bye side. You know, every single by side story is about lower and lower and lower reven new and squeezed margin. Is that what you ran into later in your career, Well, that's what I was advocating. In the von market. There was this um uh extension of trading into E T F s and too um vehicles that charged lower and lower and lower fees.

I sensed that as a trade, as a UM as a a sense, it as a trend because simply as interest rates themselves lowered went down to five four three to one, UM, you know, you couldn't charge fifty basis points on a one tenure treasure. That's half of the

half of the yield. And it was almost an egregious type of uh of situation, and so um, you know, fees became important, became important in terms of my leaving PIMCO because the the surviving contingent basically wanted higher yield products hedge fund types of products, and I wanted to stick to the old total return formula that had done so well. The total return formula is in a very tenuous moment simply because of where yields are and where

inflation is expected to be. Some people consider Jeff Gunlock your successor when it comes to the bond king moniker. You may disagree, others do. The question I have is do you agree with his prognostications of a ten percent inflation rate this year and the likelihood that the FED is vastly behind the curve? Well, the latter, yes, Uh, you know, a ten percent inflation rate is problematic. We'll

say a little bit of it tomorrow. And it depends a course on commodity prices, oil prices, and you know the wage follow on. But I do think inflation will be in a fort five percent category for the next several years. And and does that validated tenure at one eighty or eighty five It does not. Um does it mean that there will be a huge amount of sellers because of the lack of FED buying um, you know,

probably not. You know, as we've seen in the last few weeks, treasuries are a safe haven much like gold, and so investors that can hit to stick at one point eight percent until the coast clears. I do think though that uh, you know, bonds are risk investment here. Durations are very very very low, as low as almost they've ever been. And so when uh inflation is accepted in the marketplace at four to five percent, which I

think it might UM, then bonds are a sale. And you know, once we get above on the tenure, once we get above to fifteen UM, I think there's substantial risk. There's a if you give me just one second, there's a long term trend, a thirty five year downward trend in terms of the tenure and the third year UM that hasn't been broken. It's one of the most amazing

trend line that exist in financial markets. And right now, the tenure at two fifteen would break of the downward trend for thirty or five years, and so I think that's critical, but I think it will happen. So you do think that that trend will be broken. But do you think that we're going to escape the negative real yield vortex or do you think that that's going to persist well and might in certain areas. I mean they're

they're less fewer and fewer negative yielding bonds. I think we're down to four trillion as opposed to fifteen trillion and the German tenures of but a magnificent eight basis points this morning, um so UM. I think ultimately we have to as a finance based global economy. Negative interest rates are definitely a negative, a detriment to UH to economic growth because they encourage or discourage savers, which is

the thrust of investment. If you don't have I means you don't have an investment, and UM to a certain extent, if you stayed down there in negative territory, investors will put some of that money into a mattress and it doesn't do very well in terms of productivity in a mattress. We're going to continue with Bill Gross. He's gonna stay where this with his new e book out. I'm still standing right now and more timely, perhaps because of the invasion of Ukraine. It is a launch of SpaceX. They're

preparing uh that right now. This is SpaceX Falcon nine. It is a launch of forty eight Starlink satellites, and you've got to you've got to believe that it is somehow changed off of Cape Canaveral. Then it would have been Lisa thirteen or fourteen days ago. Well, and actually this is important because it comes at a time and we do have this dominance of the tracking of a lot of individuals through their phones, which is part of how Ukraine actually got ahead of Russia and even attract tanks.

There was an anecdote that actually they could tell where the tanks were because Google Maps was saying that there was a lot of traffic there. So these satellites are integral in the way that we understand the world and they we're operating, and it is a new regime. This will be a number of minutes here of a launch and then fifty six minutes in is when we would see a deployment. Make that one hour, sixty five minutes in we'll see the deployment of the starlink at satellites.

We'll leave Cape Canado right now. For all of you on Bloomberg Radio and Bloomberg Television. Someone who's been of a great support to us over the years when William Gross always in forever of his Pimco and of course tenure at Janice as well. Out with a wonderful new book, Bill Gross. There is a hilarious moment in the book. And I'm not surprised because I've tried to fire you at least three times. Lu Roue Keiser went after you on Wall Street Week and said, who is this young turk?

Get rid of them? How did lu Roue Keiser fire Bill Gross? Well, we always had a question as panelist, and my question was about the fiscal deficit and UH expanding, And so I thought I'd be cute and bring a rubber band into the studio and fire it at lose ear when I talked about an expanding fiscal deficit. I did that. It was a good shot. Missed his ear. He smiled, and UH went on in the conversation, but clearly it was very miffed and at the end UH

he had his producer farming. It didn't take long. An important question. I know, Lisa and I've talked about this before, the parlor game of fed guessing. You've been a pinata on this. Sometimes you've got it right, sometimes you've got it wrong. Sometimes it's what you believe in and not so much what you think the FED will actually do. I get it is their value to the modern FED

watching what I call the FED parlor game. Well, I think there still is uh, you know, debating whether it's a quarter or fifty base points may not have been of or may not be too much value. But if you can analyze the fits rather longer term moves in terms of twelve, thirty six months, and that's the critical judgment, and that becomes very difficult politically and otherwise. So I still think since central banks control the market, do you want to try and guess um what Powell and others

are thinking in terms of interest rate hikes? And so yes, I'd say listen closely. Well, especially at a time when you think that the trend is going to be broken, the downward trend of yields that we had experienced for decades. At what point or do you think that investors should look to just break even on an inflation adjusted basis rather than actually get returns from financial instruments the way

they've become accustomed to. Well, if you're talking about tips or in general, because I think that there's been this feeling where you were talking about investing in risky your assets to try to get bigger returns for the likes of pension funds and foundations. And you have a lot of big investors coming out and saying, look, you've got to lower your expectations in order to not just lose

your shirt in really risky assets. What's your view? Yeah, correct, I think going forward, and I've said this for a few years now, and obviously not with the fangs and the high flyers that hasn't been the case. They've done very well until the last few months. But I think an investor can really only expect five to six percent going forward. Um. You know, these are days in which interest rates will be rising, They will be pressuring corporate

profit margins. They will be affecting the housing market and slowing the economy down. Um, there's less liquidity in the marketplace and and so UM, you know, a five to six percent return instead of a tin banger like Peter Lynch used to call it, or even ten to twenty,

which millennials um and new investors think they deserve. Um, it is probably a pretty good number, Bill if you're restarting a career now, which asset class would you choose as having the most promise, well, not bonds, um, you know, probably commodities, and not just because it's hot. Um. I wouldn't choose real because I think that's um been thwarted as well, because of the potential for higher indust rates.

Bonds stocks um, you know, stocks are stocks for me, would still be an exciting young person's type of asset class despite the lower returns going forward. There's lots to choose. Uh, there's lots of a difference to make in terms of analyzing various sectors. And so I don't know I pick stocks. I pick stocks in the beginning, but they wouldn't have me. So I I went down and clip coupons the girls. How do was our listeners and our viewers? And I love thank you for the mention of the Bloomberg in

your book. I'm still standing where you say you get up in the morning and look at the Bloomberg screen for five hours. I mean, you know that's a great retirement bill. But when you when you get up in the morning, and even with your caution over the years, you've never been associated with the gloom crew. How should our listeners and viewers respond to? Typically the Friday data and Internet dump of gloom out there on the markets.

Well should you should take it very carefully because you know, Tom, human emotion is is critical in terms of an investor and attitudes towards markets. Um, you know, I've been a glass half empty because that's what fund investors are. They have to protect capital. But at the same time, PIMCO and myself rode the bond bull market from all the way down to a few years ago, and that's a very bullish, optimistic type of attitude in terms of bond prices.

So I think an investor has to know who they are and then to to try and apply that servitablate to markets. You're more qualified on this and maybe five or ten guys in the world. I've been preaching for the last fifteen days that Ukraine is a crisis of tangible assets, commodities, things, as Gartman says, things that fall in your foot, like an oil drum, et cetera. You're

the king. Some would say, of financial instruments. What's different about the financial system now given tangible asset crisis versus intangible asset financial instrument crisis like what we saw. Well, I think certainly liquidity is different in terms of at least Russia's central bank reserves, and I think that begins to affect other countries as well, and then ultimately it effects investor's attitude. You know, UM momentum which is a

valid alpha generator meaning UM. Those that follow momentum types of trends have done very well over the past ten or twenty years. As markets have moved up UM. Momentum is now of course shifted the other way UM, and and so an investor has to be cautious of this ever increasing trend of higher and higher prices than buying the dips, because momentum is going the other way, and so I think financially that's a key consideration relative to what you mentioned with things, Bill, You've had a history

of bold bats throughout your career. What's your boldest bet right now at this moment? Oh? Um, very few. You know I'm doing UM. I'm doing arbitrage corporate buyouts by Microsoft and Google. You know Google announced one just the other day. I'm content to take four or five. Actually, my biggest bet has taken place over the last year.

I did very well and have done very well in gas pipelines partnerships, Uh, there aren't too many of them, but they yield eight to nine percent and their tax deferred. Check your tax consultant. But um, you know they've gone up as the fangs and high flighters have gone down. And so the last six to twelve months have been very good to my uh foundation. Girl. It's good to see you. Thank you so Mutching. Congratulations on the essays within your book, and of course of wonderful new text

as well from Bill Gross. I'm still standing. Let's get to the institutional conversation of the day. All institutions react. We wait on the international Monetary phone in Christiana, Gorgeva. But David mel Pass is at the World Bank. To his immense credit, they have not taken down World Bank research on the Russian Federation, but front and center on the front of the page of their website, the World Bank Group is taking quick action to support Ukraine. David

mel Pass, what do you do this morning? Hi, good morning Tom. Well, I'm grateful that our board on Monday passed a major package Monday afternoon, so that money becomes available right away, meaning I don't know today or tomorrow through means for Ukraine, and that helps them survive as there as they're fighting, uh, fighting back against the Russian invasion. UH. It goes for things like food and salaries and doctors

that they desperately need. So today now we look to build a bigger, a bigger, broader package that can begin to think about reconstruction as well. But right now we're focused on refugees, on the region, and on how do you how do you hold it together? Do you believe that you can have a relationship with Mr Putin the invader where you can go directly into these these ravaged cities and provide World Bank support, or you basically working

at the border like the Red Cross. Today we're working through the Ministry of Finance of Ukraine, which still exists and is operational, so they're they're supporting the basic services in Ukraine. We're not working with Russians in Ukraine or with Russians in Russia. We've suspended, we've stopped all of our operations in both Russia and Belarus. David, there's a lot of focus on Ukraine and helping the refugees, as

there should be. There's also growing focus on nations that rely on Ukraine and Russia for wheat, for a lot of the commodities and thinking of Egypt of their import parts of wheat come from Russia and Ukraine. How are you preparing a package to help some of those countries as they deal with the food inflation and a commodities inflation more broadly that they haven't seen before. Yeah, this is a huge problem for developing countries in general, and

especially the poorest ones. People at the that are that are inland from ports are having a great deal of trouble getting food because the supplies would cut off. I spoke with the Prime Minister of Egypt on on Thursday or Friday last week. The Egypt is a major importer from Ukraine. But fortunately they have storage and their crop will be coming in. So as you look around the world, the key variables here are how can global production be

boosted outside of Ukraine and Russia. So that would and you know the US, UH and Canada and even Mexico are major potential suppliers both of agricultural products and of energy, so making it productively rapidly available is going to be one of the key the key responses of the world to this horrible situation that's hitting Ukraine. I have to say on efficiency there's lots of things that countries can

do and we urge. For example, in the US, the the the efficiency is constrained greatly by the Jones Act, by the ethanol mandates that are hugely, hugely de productive. They cancel production UH and in Europe they they have restraints across their economy on what people can do and what they can produce. So lifting some of that would add to the global supplies and help respond to the crisis.

When you talk about efficiencies, David how much you also talking about car free days or perhaps restrictions on how food is consumed in certain places. I think everyone can conserve. What we don't want to see is made is advanced countries cording things. You know, it's income, but on people to allow their supplies to go into the markets and that allows them to get to the people that need it the most. That's part of an efficiency gain. But so I think there are some cost savings that can

be done. But as we look globally, the biggest issue is how do you really how do you really tackle UH the the output that can can be made available by each country. For example, there's nickel supply shortages, the London stock Exchange stopped its trading of nickel, but Indonesia is a big nickel producer, so there there are alternatives around the world, and those can be ramped up, ramped up as the world responds. The Russia situation right now

doesn't look like it will be it will be. Oh, it will be a temporary When it's a it's a longer lasting UH set of problems for the world in interacting with Russia on oil, on wheat, on basic minerals, and there need to be supplies elsewhere. You just touched on a broader question, David, I wonder if we can finish that please, the risk of a increase, an escalation and increase in nationalism. How do we prevent that from happening. I don't think. I think it's very hard to do that.

People live in nations and they feel nationalistic and they feel patriotic for their nation. What we need to do, I think, is have a rule of law that's really meaningful. UH. In the in the eighties and nineties, I talked a lot about constitutional law for Latin America. It was having severe problems forming democracies, and it matters a lot what your original statutes are and how you can implement those

uh so worldwide. If we keep pushing on transparency, on rule of law, on on people finding ways to resolve disputes without fighting. Uh that I think is the way forward. Unfortunately, there arise authoritarian leaders that don't do that world because in the middle of trying to have good governance for countries as we work with them. Devin mount Pass always wonderful to catch out with you said, it's been so long,

David mount Past, the President of the World Bank. Right now our interview of the day on the American response and particularly the American and NATO response to what we've seen with war in Ukraine. James Trevidis UH who has been a wonderful friend of the show, of course with his public services UH in the Navy as a European Commander and also at the same time NATO Supreme Allied Commander.

Author is two thousand thirty four. I can't say enough how timely that frightening book is my book of the summer. I believe it was a year ago. I can't remember. James. Now, James Trevidis, I'm gonna talk about Ben Hodges General, I'm gonna talk about Mark Kimmitt General. They have an urgency about urban warfare, give us the same urgency about able warfare. In the Black Sea. What does Ukraine Russia look like on water? Russia dominates the Black Sea and really has

for centuries. They've been the dominant power there. If you spin around the Black Sea tom you see Romania, Bulgaria, Turkey, Georgia, Ukraine, but it's Russia is the monster force there. They will continue to dominate it. Turkey has a choke hold on the Dark Knells, the Bosphorus, the strait that controls access to the Black Sea. But it's going to be Russia's game up there because that's where their Black Sea Fleet is located. Think having the U. S. Navy's seventh fleet

inside the Black Sea. That's the advantage that Russians have. And your important essay for Bloomer Opinion, the single money sentences that your time of duty. There were form in thousand Americans in service in Europe and that's been whittled down for whatever reason, to a hundred thousand. What is your timeline to see a rebuild of American military in Europe?

Is it a question of weeks and months or is this going to be long drawn out extended process depends on Vladimir Putin, and so far he is certainly giving us plenty of reason to think we are going to increase our troop levels in Europe. I don't think we're going back to four hundred thousand, the way we were during the Cold War, but look for the US presence to go from around fifty thousand and perhaps seventy thousand

permanently based forward if Putin continues. And more importantly, Tom, you're seeing the Germans and others increasing their defense spending extremely quickly. All of that will move troops to the borders of NATO. The NATO alliance will keep Russia out. When you say the borders of NATO, Admiral, are you talking about Poland? Most importantly, I think it's Poland, but also all around the eastern eastern Europe, So I think Estonia, Latvia, Lithuania, Romania, Bulgaria.

They have either borders on Russia or borders on Russia client states like Belarus, or as to the conversation, Tom and I just had borders on the Black Sea. There's going to have to be an upgrade, if you will, in troops forward. That alliance realizes that it's in progress now. Admiral, there's a story today on a Bloomberg terminal that Putin's endgame sorry to look more and more like simply reducing

Ukraine to rubble. What do you suggest are the next steps, since the sanctions have gone almost as far as they can go at this point, the next steps to try to bring a swift end to this conflict. First, unfortunately,

I agree. When you're the Russian military and you have performed as badly as they have with poor logistics, poor command and control, war criminal behavior, at some point your only tool left is a big hammer, and they're starting to swing that thing hard through Ukraine Indian cities, trying to make Ukraine look like Syria on the Dnieper River. That's a terrible outcome for everybody, and its war criminal behavior. What we should do about it is continue the massive

sanctions they will bite, that will take time. On the military front, continue to supply the Ukrainians with absolutely everything they need short of our troops going in boots on the ground and fighting. That's a path to World War three level confrontation. But that's more material going into Ukraine. And above all, let's get these mid twenty nine fighters from Poland into the hands of the Ukrainians. It's complicated, I get that, but that could be a game change.

We've gotta stop to show your general Adam, excuse me, I got the wrong service there. Almost Venus is really important. The images right now are the opera House of seven in Odessa. This isn't Normandy where the Germans are shooting from the lifts. This is Odessa with sandbags and a bunch of Ukrainians. How do we get those jets from Poland to Odessa to defend against a well equipped Russian navy. The polls have said they're willing to turn them over

to the NATO Alliance flyman Ramstein Air Base in Germany. Tom, I think the next stop for them would be put them in Leviv. Um. Lviv is gonna stand for a long time. Uh, the Russians are not on some effective high speed blitz cried across Ukraine. Put them in Lviv. Build your defense from their turn them over to the Ukrainians. Let the Ukrainians do what they want to do, Let them create a Ukrainian no flies on. What does that do to NATO and NATO being independent? I mean if

we go into western Ukraine and Leviv, that's fine. But the zeitgeis this morning is this is hugely problematic for the NATO. You're experienced with the answer tom is turned them over to the Ukrainians, do not operate them with NATO pilots. When they are turned over to the Ukrainians, they become Ukrainian jets operating out of Ukrainian bases in western Ukraine. UM, NATO can correctly say it is not

a belligerent in the combat. Is it somewhat risky? Absolutely, but at this point go back to those images you were showing a minute ago about two million refugees. We're gonna have to take some risk to solve this problem. Meanwhile, on the Russian side, Admiral, how much are they running out of the fuel? And I mean this in every meaning of the word, to continue with this battle. And I'm talking about this with parts that are getting stalled out as some of these sanctions bites that they need

to repair their planes. I'm talking about the fact that we have not seen the full air power of the Russian Army despite Vladimir Putin's resolution. UM, all of the logistic failures are coming home to rust Um, Russia does not have the kind of twenty one century military that NATO does that the United States has. And you see always and this is true in business as it is

in war. Logistics eat strategy for lunch um professionals. No logistics are what drive wars, and so we ought to capitalize on that at the back office end, crushing them with the sanctions, and at the front office end, if you will, the client facing into this, by giving the Ukrainians the tools to take apart what they can put on the battlefield. Admiral A clinic as always James tur Vedas that the fullness premount on Commander and nights South.

Let us go to an important conversation. She has been fabulous on the microeconomics of oil, and we're gonna pause with them. Rita send chief oil analyst Energy aspects here with the tour de force. Coming out of the financial crisis, which was my great mentor Magdan Desis of the London School of Economics and Amrita. Professor Desig got so upset and a misunderstanding of general equilibrium theory that he wrote a book about it. Tell us about the new oil

economics given this jump condition in price. Is there an oil equilibrium out there this morning, right now, Tom, And it's it's a fantastic question that you've asked. There is no equilibrium in the market, and that's why you've seen prices, not just the level, but the volatility that you're seeing. We've moved up ten dollars down, ten dollars up, ten dollars in a day. I mean, these kind of numbers very much tell you that the market is struggling to

find what the true prices. These are incredibly complex things. Don't give us the math of an emerita, But which part of our disequilibrium given massive jump conditions is the disequilibrium we should focus on. The dissequilibrium is originating from the supply side. Obviously, because Russia is unable to sell production, you are going to see some shot ins. But the reason you see these jumps is absolutely on the demand side.

You and I both know that demand is very in the last thing, it takes a long time to react to such prices, especially by the way governments around the world are reintroducing subsidies. So now suddenly consumers are not even fully exposed to the true price of oil. But that's precisely why you're going to get these big discrete jumps and prices until you get to that point where okay, demand really starts to hurt and you get back to that equilibrium. The problem is it's searching for that price.

It's in the price discovery mode this market, and whenever it's in price discovery mode, which is very rare, you are going to get huge volatility. Well I'm ready. Let's sit on that point for a moment, especially because the kind of Phillips CEO came out yesterday and said he does think that prices are getting to a place where we are starting to see demand destruction. You do see

airlines actually curtailing their schedules to preserve capital. Considering that some of the less flown or less popular routes are consuming a lot out of expensive fuel. How much will this make a difference on the margins? How how big is that imbalance so that little moves can actually have a big impact. I think the important thing to bear in mind is that we started this year with nearly record low inventories, and that's why we don't really have

a cushion right. So now, if we're talking about losing to three million barrels per day of Russian production. That's how much demand will need to come off. So to your point, yes, we are seeing airlines at the margin curtailing some routes. That's going to help. You are going to lose some demand in Russia as well in parts of Europe as well, But it's not big enough, especially if you think about Asia not exposed fully because subsidies

are coming back. B they are in a post pandemic recovery where people are very very keen to travel both by car and by a s. So that's the problem in this cycle where we are in anything but the recessionary environment. We are actually in a very it's it's a recovery environment. And then we've hated with a supply shock and we are given that back trap. How high could oil prices go based on the sanctions that we've seen already put into effect. I mean, I would say

prices can easily go above hundred and fifty. Now beyond that honestly does become a number. And this is where elasticity has become very difficult to a certain as well. Every retail prices different people. The government's put on taxes, they put on subsidies, so the exposure is not going to be the same. The oil burden, as we call on GDP, is going to be very, very different. But the reason I say it's above hundred and fifty and not like two hundred or even higher is unlike in

the past, isn't just oil that's rising. It's natural gas, it's food, it's metal. So it's a very inflationary environment overall, which is why oil doesn't need to do all the work right to kind of curtail demand. Um, there are other factors that are really pushing consumers to spend less and rita as always, thank you, I'm ready to send that of energy aspects. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg