A Crude Interest: Greg Sharenow on Structural Changes in the Commodity Complex

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GREG HALL: Hey everybody. Welcome to another episode of Accrued Interest, PIMCO's podcast dedicated to serving financial advisors and their clients. I'm your host, Greg Hall, as always. And I have with me today another Greg, Greg Sharenow, who you may remember from last year. We had Greg on. Greg heads our commodity and real asset investment area here at PIMCO.

And we had him on to discuss, amongst other things, gold in that run-up last year. And today we're gonna talk about the energy complex and some of the long-term structural forces influencing energy around the globe, but we might find our way into a few other areas of commodities. Greg, thanks for taking the time away from the desk to be with us and to speak to the folks who listen to us.

GREG SHARENOW: Thanks for inviting me. I always love our time together here, Greg.

GREG HALL: Yeah. Look, I know it's volatile, notwithstanding the MOU that's now in place between Iran and the US. Markets are still moving. And I know the headlines change by the minute, and so you're glued to your desk, to your screen, trying to stay on top of things. So, in that context, it's all the more appreciated that you would take a half hour here to speak to us. Maybe we start there, Greg, if that's all right.

I think that's what's on most advisors' minds right now, which is, you know, how do we interpret the MOU? What do we think the implications are in the near term for the normalization of oil traffic through the Straits of Hormuz? And then maybe we'll get into some longer-term impacts of what this is gonna mean, three, five, ten years down the road for energy traffic and energy trade.

GREG SHARENOW: Yeah. So, I think it's a great question, a great place to start because we are talking about the largest energy-producing region and not just energy. Big export of aluminum, big export of helium. You know, there's a variety of fertilizers. Like, this is a very important topic to discuss in part because of the relevance to the global supply chain.

When I look at where we are today, I describe it best as we are at the beginning of the end of this phase, right? We are in a point where there's an MOU in place that is, focused primarily initially on normalizing oil flows and energy flows out of the Strait of Hormuz.

Now, a 60-day window by itself is not enough time to normalize. Even if you just talk about repositioning the global tanker fleet, it's gonna take 60 days, and that's if everything goes smoothly. Restarting production, we're probably gonna be able to get 70, 75%, 80% restarted in that period of time.

But as we saw with QatarEnergy as recently as two days ago, where a massive explosion unfortunately claimed the lives of 13 employees in Qatar, it wasn't an LNG-focused problem. It was actually a gas plant that served the domestic market. You could see it highlights some of the challenges in restarting and getting all the production back onto normal.

And if that had happened to an LNG train instead of a domestic train, you would've seen a meaningful rally in global gas prices. So, we are really susceptible to how this unfolds. So, why is this the beginning of the end of this phase? Is that the next phase is what happens at the negotiating tables. And the negotiating table is one that would be challenged if historical precedent shows that JCPOA, as another moment in time, took two years to negotiate.

You know, we have a lot we're trying to accomplish in 60 days. With extensions, we'll probably be able to punt this back past the midterms. But the challenges in getting to an agreement are always gonna be very hard. There's a lot of economic inducements on the table right now to try to help facilitate it. But until we get to the end of this phase, it's hard to know exactly how much supply.

So, one would have to assume, there's still a non-trivial chance that we have supply disruptions, and there's incentives for spoilers to try to make this less easy to accomplish. So, in my mind, it's great to see energy supplies normalizing.

Exactly how fast will be a function of how long and how dependable the straits are open for, so that everyone can begin moving in the same direction and re-engaging all their employees and so for to get the strait and all the energy supplies reopened. But there's many challenges in the road ahead.

GREG HALL: Is the backdrop to this-because you mentioned the gas explosion in Qatar and just the tension in markets. Is the backdrop that inventories have been drawn down to a level where we just can't absorb dislocation without just much more price volatility than you would typically expect to see? Am I interpreting that correctly?

GREG SHARENOW: Right. So, whenever you're at really low inventories or really high, your system has a lot less flexibility. So, marginal changes have an exaggerated impact. Right now, we are at very low inventories. We've had some of the sharpest draws we've seen in history in inventories in the United States over the last two months.

If you look at the global supply chain, it's running very thin. So, any hiccups will lead to price volatility and price spikes. I was surprised, to be honest, that President Trump mentioned that we were three to four weeks away from critical problems in the energy supply as a reason to be excited about this MOU, which is truth. You know, I'm not disagreeing with it.

GREG HALL: Right.

GREG HALL: Yeah, yeah, yeah, yeah, yeah.

GREG SHARENOW: But it makes me wonder just how much managing the global economy and managing the global supply chain came to the forefront. And then it tells you, if you want to be a spoiler, how conceptually easy it is to find that pressure point when you're at a level where the inventories are so tight and your flexibility is so limited.

GREG HALL: Right. Well, and look, I think you're pointing out the fact that we'll all still be glued to the headlines and watching the developments of the ongoing talks with a lot of interest. It's not on autopilot.

GREG SHARENOW: Correct. But it's better than bombs dropping on a daily basis and threats of additional bombs. Hopefully, for the global markets, we can focus on a lot of other topics, understanding how corporate earnings are coming in, what the economic momentum is, like the stuff that we as economists and portfolio managers can have a more sane conversation about.

And I say sane in the same point that we're talking about 15 to 20% of global energy supply. It's not like we're talking about half of 1%, which is what I historically would be quibbling over.

GREG HALL: Well, yeah. I mean, and that's an interesting, I mean, you know, just in context, right? I think I've heard you say, and I have every reason to believe you're exactly right, that the portion of the energy market that's been disrupted over the last few months is unprecedented in its magnitude.

I mean, give people listening a sense of just the impact of what's happened. Because we've all lived through it. But I think that your historical perspective, and as you and I have talked over the last couple of months, I've seen how concerned you've been at times that maybe things wouldn't end up in the right place for long-term energy market stability and what that could have meant given the risks in that part of the world.

GREG SHARENOW: Yeah. So, for contextual color, in COVID, when everyone got locked down for a quarter, we lost about 8% to 9% of global demand.

At its peak, it was a little bit more, but you know, call it sub-10%. We, at our peak here, had lost about 15% to 17% of global oil supplies. Like the magnitude of adjustment, if you really had to think that through, if this sustained, if we didn't have the SPRs, because we drew them down, you know, if there wasn't any flexibility left in the system, it would've been very challenging to figure out how do you take that demand out.

And when you look at, frankly, a lot of the demand numbers that have come in, jet fuel demand globally stayed pretty resilient. You know, gasoline demand in Europe still expanding. Diesel definitely took a hit. But when I started looking around the world, yes, we definitely lost demand, particularly in lower-income countries.

You know, I don't think that as lost demand is never coming back. But certainly, if you didn't take your train trip or plane trip, you don't get a chance to do that again right away. But the point being is that we still had a pretty resilient global economy despite. And it would've been challenging in that backdrop to see how you cut out that much demand if we had to, if this went on another couple months.

So, we're in a much better position for the global economy right now to have oil supplies normalizing. Even if it's not back to 100%, 70% to 80% gives you enough leeway and runway here to see if we can get past that 60-day period and actually have more stability and more peace, or not.

GREG HALL: When Dan Ivascyn, our Group CIO, for those listening, he was on with us a couple of weeks ago, and we obviously didn't know the MOU was coming, but we did talk about the way he was in his own mind parsing out the scenarios around the conflict. And, you know, the base case, as he described it, was a steady reduction in hostilities over time leading to a normalization of oil prices.

The left-tail case, the worst-case outcome, was clearly a resumption of open hostilities and much deeper, more sustained damage to energy infrastructure. And then, depending on how you look at it, you call it a right-tail case, maybe from a financial markets’ perspective, putting aside any political objectives somebody might assign to the conflict, where you have a quick and easy resolution.

Either side is sort of willing to give in to the other on a unilateral basis, and then you move on. It sounds like we're pretty firmly in that base case still despite the MOU. Is that your interpretation?

GREG SHARENOW: Yeah. I think we're in the base case right now, romancing the right tail for the global economy and with less energy prices, without any certainty that we're gonna move sustainably to the right tail.

So, I think there's still, you know, if you're putting probabilities, the right tail has gotten larger at the expense of the left tail, but the base case hasn't dramatically changed.

GREG HALL: Can we talk a little bit then about what in your mind has changed about the global energy system because of this conflict? And you pick anywhere you want to go, and I'll ask a few questions along the way, because I'm sure there's no shortage of topics to look at here.

GREG SHARENOW: Yeah. You know, I think there's a couple things that are really, without a doubt, going to be a driving force after this. This is the third major supply shock this decade.

GREG HALL: Hmm.

GREG SHARENOW: Right. Bounce back from COVID, Russian invasion, and now this year. So, security of supply, whether that is more nuclear, more oil and gas drilling, more renewables, which if you start looking back over the last 10 years, it's actually been the opposite of what you would expect.

Like a Republican president has maybe been less hospitable to renewables than a Democrat, and yet renewables performed horribly under the Biden administration to investors. And, you know, under Trump actually was much better. So, there's a bit of irony to all this, is that we're gonna see all energy higher and more invested, and it's gonna be security of supply and marginal safety. So, more storage holding around the world.

GREG HALL: So, kind of all of the above on energy production with an emphasis on what can I do in my country so that my access to energy is not subject to the decisions of another world leader.

GREG SHARENOW: Correct. I think the resiliency is absolutely important. And when other governments look at how China's managed to navigate this, large petroleum reserves were able to pull on those inventories. They've already bent the curve on transportation fuels on road, where they've seen a decline for the last four or five years between diesel and gasoline.

It's been on a trajectory. Their electrification has been a lot higher. So, in many respects, if you just take an example of a country that has done particularly well, who wasn't resource rich, right? Like the United States is an energy exporter and was able to, on net, even though consumers didn't get the benefits by itself, but the economy did.

You know, China is an example of a massive energy importer who managed to push its way through in a relatively strong position. And I think a lot of other countries are gonna try to look at that as a model and say, well, we want inventories, we want security of supply. Now you have to have the capital to do the inventories, by the way.

It's not like, poof, we just hold oil. There's money that has to go to it, and a lot of countries may not have the money. But those who do are gonna be really reevaluating. Companies are gonna be evaluating. And I think that does mean bigger supply chain resiliency closer to home.

GREG HALL: Yeah. So, China managed its energy portfolio adroitly through this crisis. The US, obviously, the shift to being a net exporter helped us at the national level. Gas prices painful to people for whom the marginal dollar really means a lot. But overall — and then you've got, obviously, other parts of the world, and we've talked about this in the context of rates, right, where we do feel like higher energy prices could result in slower economic growth.

Some of the developed economies that are net energy importers. Dan mentioned that on the last discussion as well. What about in the region, Greg? I'm embarrassed if this is overly naive, but it strikes me that if the Strait of Hormuz is such a dangerous place to take oil through, as cheap and efficient as that might be relative to other options. Are we not building pipelines across deserts to make sure that doesn't become such a leverage point in the future?

GREG SHARENOW: There's no doubt that there's gonna be more efforts made at bypass. The problem is if you put more into the Red Sea, you still have two pinch points in the north and the south, whether it be the Suez Canal or whether it be the area that goes around Yemen.

You know, if you go to Ceyhan in Turkey right now, where there is number of oils from Iraq flows through. You're not any closer to China and Asia, where your big consumers are. So, you know, the UAE has been very clear on their expectations to expand pipelines to the Gulf of Oman so they can avoid the strait.

But it's still a fairly challenging environment, particularly if you're Qatar, for example, talking about a country you already mentioned, or Bahrain. Where are you going with your energy supplies? You're gonna have to traverse someone else's property. And for the value chain of Qatar, who exports a lot of LNG, you would lose that upgrading value.

So, there's gonna be attempts to make it less dependent on the Strait and, sort of as a result, any one country's influence over the global energy markets should decline with that. But as we've seen, in wars stationary objects can get hit just as well as a ship. Pipelines can get hit across the whole region.

And, you know, whether it be in the Gulf of Oman, whether it be on the western side of Saudi Arabia, whether it be anywhere else in the region. So, it's not a panacea itself. But certainly, from an investment standpoint, you know, when you look at PIMCO and looking at opportunities in the region.

I expect infrastructure to be an area where there's gonna be an increasing amount of capital deployed over time. And not just there, but not just in that region, but everywhere.

GREG HALL: The UAE withdrawing from OPEC amidst everything else that's been going on. What do you think of the long-term consequence? One, do you attribute that to the conflict? Was that opportunistic on their part? And what do you think the downstream consequences of that are for the energy market?

GREG SHARENOW: I think it was very opportunistic. I think the tensions between UAE and OPEC, namely the big kahuna in OPEC, Saudi, over allocations and what they can produce. I think it’s been a simmering tension.

And UAE has really been highly focused, as well as Saudi and other countries, on all energy supplies need to be developed. So, I think from them, they've been traveling a different path for a while. And I think separating from OPEC today was in their interest, or was a chance for them to take something that they believe is in their interest.

I think on the long term, it's hard to know exactly what operable capacity they have. They claim north of 4 million barrels a day versus what they were at 3.4. So, let's just say it's half of that, they could be deployed it's 300,000 barrels a day of oil.

That's 0.3% of global supplies. Not trivial on the margin, but at the same token, it's not gonna massively change the global balance. It's just like Venezuela is not gonna massively change the global balances in the next few years. But I think from their standpoint, you know, they made a lot of investments.

They brought a lot of international companies into their supply chain across all the energy supplies. I think they want to be able to use it. So, from that standpoint, it is marginally depressant to prices on the medium term if they're willing to deploy and produce it.

GREG HALL: Okay. Of course, all of this is not happening against a sort of neutral backdrop of energy demand. We talked about this the last time you were on the podcast, but we didn't dwell on it. So, I'd love to go a little bit deeper.

The AI boom, the data center construction boom, the need for compute and to power more and more chips doing all of the training and inference for us in the AI space, that's a trend that appears to be alive and well. And so, you place that demand increase next to some of the other trends we've been discussing here on the supply side. And how do you think that influences your outlook for the energy complex or commodities generally over the next five or ten years?

GREG SHARENOW: Well, I think AI is one of the three major CapEx cycles that are gonna happen that are incredibly commodity intensive. Not just energy, but raw materials. You have the military-industrial CapEx cycle, you have the AI cycle, and you have the energy transition cycle, right? Of which now the challenges on the energy transition are higher because baseline power generation load or demand forecasts are meaningfully higher than they were three or five years ago, even two years ago.

So, the amount of infrastructure that needs to get built, the amount of green infrastructure, particularly if you want to have more supply chain resiliency onshore. Right? If you can't produce more oil and gas to supply your power grid, you're really down to renewables where possible plus batteries. I think all of these things are going to end up having a pretty high CapEx growth, of which commodities are distinct beneficiaries.

Now, once you're done with all the investment cycles, you can see that having a negative impact on marginal energy prices if we end up having a surplus of renewables, if we end up having a lot of battery buildout, more nuclear.

But we're not talking two or three years for this happening. You know, if you look at the outcome of the seventies, this really was a decade-plus long process. And it's much harder to build nuclear these days than it was then. And that was probably the biggest thing that chipped away at oil demand because it pushed it out of the power pool.

So, when I take a step back and I say, okay, yes, we definitely have a real CapEx demand cycle that we haven't really had supporting commodities pretty much since the ascension of China into the WTO and then what China's demand basically dragged up global commodities from 2000 until the global financial crisis.

GREG HALL: Tell me more about the seventies. What's the analogy you're looking at there? I love it when we can bring in a little bit more of a historical context, especially the commodities market that moves in such long-cycle waves, right? It's been so volatile of late.

We tend to forget that production takes a long time to build and takes a long time to destroy. And so, you know, you tend to think in 10, 20, 30 year timeframes in a way that, I think not all of us naturally do.

GREG SHARENOW: Yeah. So, I think the point that I always take away from the seventies is, it wasn't one shock that did it. It really had two major energy shocks basically buttressing the seventies. And, you know, early seventies with the Arab OPEC embargo, that led to not a massive shortfall of global supplies, but what the world discovered is that in Texas, where the Texas Railroad Commission had acted like OPEC with constraining supply, found out there was nothing left to be constrained. We had actually underinvested.

Then you get back and then you have the Iranian Revolution, the Iran-Iraq War. We ended up having a second real big supply concern, and that led to a meaningful investment cycle, bringing more nuclear forward. We had more coal plants being built. We had a lot of different energy. The difference though, I think today versus then, is that I think it's much harder to build in many places around the world.

The NIMBYism is a real opposing force. You know, Germany was just recently shutting down their nuclear plants. Like, the tide in many places is going the wrong way, not even in the right direction. And if you look at AI, one of the big questions is where do you get your power from? Do you have to put it behind the gates and generate your power yourself? These are real challenging issues that I would love to say. And we've been now talking about permitting reform in the United States for what, a decade?

GREG HALL: Sure. Yeah.

GREG SHARENOW: And we've made very little progress. So, places like China, who have the ability to build, have really seen an outpacing of the rest of the world in the energy evolution, while US, Europe, and some of these older established economies are struggling to keep pace.

So, I think we need to build it all. I think we're gonna have challenges building it all, which means I think we're gonna have a hard time supplying all the energy that is needed to fulfill the AI boom and cycle that's coming.

GREG HALL: Right. What’s bullish for power pricing, bullish near term, I mean, for commodity demand? How much of that do you think is sort of priced into the complex at this point? How well appreciated is that demand curve right now?

GREG SHARENOW: I think it's highly focused in the metal space, for example.

GREG HALL: Okay.

GREG SHARENOW: In the sense that there's a lot of attention to the growth trends because metals in particular have a problem, which is the CapEx reinvestment per dollar of free cash flow is at 40-year lows. There's just not a lot of CapEx. The pipeline is really thin.

Even small marginal changes of late are still like a drop in the bucket relative to the expected CapEx cycle. So, there's a market where it's getting a lot of attention, but if we have some economic growth and stability, it could really assert itself. That's an area where you could see even more attention given to the demand cycles and the challenges in supply.

In terms of the energy markets, you know, US gas has the benefit of growing LNG exports, but we also have the benefits of relatively cheap natural gas that continues to be brought to the market year after year after year. So, you know, there's not a massive premium out there. But if we ever run into a situation where the incremental growth is challenged, the US is still massively discounted to the rest of the world and could see some price appreciation.

In terms of the globe and oil specifically, there's a lot of competing forces, in the sense that, you know, how many energy shocks do you want to have without changing your long-term trajectory in oil demand?

Like China did it. Electric vehicles are penetrating around the world and growing. You know, and I think that also has been impacting diesel. So, you do have a growth in alternate energy supplies that yet another shock is certainly helpful for.

But at the end of the day, global oil demand still continues to grow. Not right this moment in the middle of this energy environment, but we still are growing every year, just at a slower rate. So given that as a backdrop, we need prices to continue to incentivize investments in order to meet that future growth.

So, it's not a dire scenario. Even if we're at a slower growth trajectory, we haven't fully bent the arc down. I think I was looking recently at an IEA forecast where only like two years ago, 2025 demand came in higher than their 2030 demand forecast. Like we're just continuing to exceed expectations on global demand.

GREG HALL: Yeah. And it's interesting to hear you say it's not the failure of renewables to come online, because they have been. And maybe less so on the margin in the US, but electric vehicle conversion in the rest of the world has continued to be healthy. It's just, I think it's a product of economic growth around the world.

GREG SHARENOW: Absolutely.

GREG HALL: And hopefully, like a dynamic, robust economy helping people out of lower levels of income into higher levels of income. I would imagine they become bigger energy consumers.

GREG SHARENOW: Yeah. And before this war, jet fuel demand was chugging along every year, obviously controlling for the recovery from COVID. You know, there's some meaningful growth. I've been shocked with how strong jet travel and jet demand have been this last couple of months and expected to be this summer. I would've thought a much bigger backup would've happened than ended up happening.

GREG HALL: Yeah. I mean, we did talk about that in our economic outlook piece that we published a few weeks ago, just the prospect for demand destruction elsewhere in the economy. If gas prices stay too high, you drive your car less, you go to fewer restaurants—that's been a predictable outcome of shocks like this.

Doesn't seem like we've seen evidence of that yet. What do you think is the prospect for seeing lagged evidence of that? That we just haven't seen the numbers at this point? Or did we just never get quite high enough in energy prices to kind of create those impacts?

GREG SHARENOW: So, I think in the US, we've definitely saw some drag in gasoline demand. We saw some small decline in jet. But these things are on the order of magnitude that are pretty small compared to the oil balance shock that we were having.

Like I would've expected meaningfully higher. I think a lot of what you said about we didn't experience the worst of prices that could have happened, or could still yet happen—but obviously it's not the baseline anymore. I think you would've had to see bigger losses than what was imposed.

GREG SHARENOW: I think the government refunds certainly helped fatten wallets at just the right time.

GREG HALL: Sure.

GREG SHARENOW: You know, the timing there was about as good as you could have gotten. So, I think that helped keep the demand going. And the fact that if you look at the last couple employment reports, we were adding jobs, we're not losing jobs. Like there's still economic momentum that is evident, and not just a phenomenon in the stock market, but in real data as well.

So, I think that what it comes down to is that even though you had high prices and you had some discretionary changes on the margin, you didn't have an economic problem that was overwhelmed from the energy shock or something else that really overwhelmed demand and drove it lower.

GREG HALL: Yeah. I keep referencing other podcasts. Sorry, Greg. I've kind of gone down my own little trip of memory lane. But we did have Libby and Rich and Libby had mentioned the tax refunds, which were meant to be a nice dividend, a nice benefit of the One Big Beautiful Bill Act.

And I guess depending on your perspective, they either came in at exactly the right time and they offset higher gas prices for folks, or they came in at exactly the wrong time and they were completely lost as a political weapon in the backdrop of the conflict with Iran. But either way, kind of netted economically for a lot of people.

GREG SHARENOW: You know, one of the things I like about referencing prior podcasts, as long as you also point out the things I've made wrong and keep me honest, then I like it a lot even more.

GREG HALL: Yeah. we do try to do that. I go through transcripts before we do these and try to keep us, and keep people who join us, honest about prior claims. And one of the things actually, speaking of which, you and I talked about the last time you were on, and I think this is a pretty confusing picture actually if you look at the last couple of months.

So, we talked about gold when you were on last, and we talked about its inflation-hedging properties and the way that central banks around the world have moved their reserves in that direction.

But if you look at gold, if you look at Bitcoin, you know, another little-c commodity that the people point to as a store of value and an inflation hedge. Amidst all the inflation scares that we've encountered over the last few months, you wouldn't immediately look at their price charts and say, "Aha, people think of those as inflation hedges."

So, what do you think is going on in the price action of maybe gold in particular, but feel free to venture viewpoints on Bitcoin as well?

GREG SHARENOW: You know, if you look at 2022, gold did the same thing. It anticipated problems way better than it performed during. And a colleague here said that gold is what you own when you're afraid of something. Gold is what you sell when that thing is happening. And in many respects, it's exhibited that again this year. But also, gold had a really rough year. It's done 9% after, what, 67% last year? This decade, it's up 15.5% per year.

GREG HALL: Yeah.

GREG SHARENOW: I mean, these are pretty meaningful returns in an inflationary environment where gold did actually perform pretty well. I think there was a little bit of exuberance over the fourth quarter and into the start of the year that really sort of elevated those values and made today feel weak relative. But I mean, if we were talking 4,400 gold 18 months ago, people would've said, "Wow, that's really aggressive."

You know, that's a pretty big rally that you had. My family was on 47th Street and find jewellers, and my dad, who's with me right now, was complaining about how he didn't sell all the remaining gold he had at 5,400. I'm like, "Did you ever think you could sell at 4,400?"

GREG HALL: Yeah.

GREG SHARENOW: And I think in those environments, it's never gonna be a perfect hedge. There's no—if you want to own perfect hedges, you can have breakevens on the short end of the curve or one-year TIPS, and you'll capture a lot of that inflation accrual. Outside of that, everything else is gonna have its own path and destination.

But if I take a step back and say what drove gold was a global fragmentation, which was a key part of our secular outlook. And if you look at the World Gold Council, they did a survey of central bank intentions, and the highest in history of respondents said that they intend to continue to accumulate gold reserves.

So, I think there is still a tremendous impetus. Maybe some of the memification and some of the short-term exuberance has been cooled, which I think is just really healthy for the market. So, I think in general, the story behind gold is still very much intact. But yes, you know, if the statement only shows you year to date, it's down 10% and we had more inflation, it's—

GREG HALL: No, it's a good reminder. And I'm a little embarrassed that I fell victim to the short-termism that drives so many bad decisions. But again, that's why I like talking to you, Greg, because you really don't tend to live in the last 30 days. You take a more expansive view.

I think a lot of what we talked about today sort of a structural position for commodities in portfolios, but also highlights the volatility that's possible in your space, especially at a time when we're running light inventories and we've got such sort of unprecedented demand coming through in different areas.

So, for advisors listening, what counsel would you give them on how to use commodities to create good results for their clients right now?

GREG SHARENOW: Sure. You know, I look back and I say, do we have an out-of-sample period where commodities performed how they were supposed to for portfolios? The research I wrote at Goldman Sachs Commodity Research Group back in the early 2000s would've said that during this period of high inflation and highly volatile inflation, commodities play incredibly important roles in portfolios.

This decade, the BCOM, which is the hallmark index, is up 10%. Gold is up 15.5%. While gold hasn't perfectly [UNCLEAR] inflation, commodities have, and it's been the one liquid real asset that those who were invested in had the ability to use as an offensive tool to rebalance their portfolio, buy what's out of favor, meet capital calls.

Real estate didn't do that. Infrastructure didn't do that. The illiquidity in those is ill-suited for being able to rebalance portfolios in any short-term horizon. And particularly, they trade with long duration, which commodities don't do.

So, I think from that standpoint, we've had a textbook. We've gotten inflation, we've gotten good commodity returns, and they've been lowly correlated. So, over the course of this decade, gold and BCOM separately, have been correlated to the S&P by about 0.15. Hard to find another asset class out there that has that low of a correlation over this period of time.

And I think that really speaks to the attributes of the asset class. Now the other thing to say is that commodities right now, the standard index has a positive carry of about 5% right now.

So, if you're looking at your inflation hedge, it's got a positive carry, so if the vol normalizes back to like 15% to 18%, you're looking at a third of your annual vol in terms of positive carry in the index.

GREG HALL: Right.

GREG SHARENOW: There’s not often—certainly in the decade before when interest rates were at zero—commodity carry was negative when we were dealing with the surpluses. Now, at 5%, and it's been as high as 8% or 10% until the most recent selloff. That's a very good starting point for an investor who wants diversification. And I think that's where commodities have demonstrated its capability to serve an investor well.

GREG HALL: Alright, perfect. This is great, Greg. Thanks for taking the time. Maybe we'll check in with you over the course of the balance of the year and see how things are working their way through. Obviously, I think we're all hopeful for resolution of hostilities, and then we will see how the trade deals and the politics of it are worked out along the way. And we know that you and the team will be working hard to make sense of it every day and do your best for our clients.

For advisors listening, if you enjoyed today's conversation, if you want to go a little deeper on any of these topics, I would really encourage you to visit us at PIMCO.com in the United States, or your country's local website. If you identify yourself as a financial advisor, you'll be taken to Advisor Forum. That's our one-stop shop for you to find whatever you need from PIMCO to get studied up on the topics that interest you, prepare for your next big client meeting.

We'll try and get that information for you quickly and practically so that you can read it between meetings as you go around to help your clients make sense of a volatile world. Please don't be shy. Hit like, hit subscribe. Let us know you're out there. It helps us keep bringing content like this to you.

And we will be back in front of you with another podcast in the next couple of weeks. Thanks so much for listening. Greg, thanks again.

GREG SHARENOW: Thanks for the time, and I hope everyone has a happy summer and is enjoying the World Cup.

GREG HALL: Excellent. Alright, see you. Bye.