WEBVTT - BlackRock's Rick Reider Talks Geopolitical Risks

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's turn to our next guest. He's responsible for managing

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<v Speaker 2>roughly two point seven trillion dollars in assets. His name

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<v Speaker 2>is Rick Reader. He is BlackRock's Chief investment Officer of

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<v Speaker 2>Global fixed Income, also the head of the firms a

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<v Speaker 2>global allocation team. He joins us. Now, Rick, it's great

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<v Speaker 2>to see you in LA.

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<v Speaker 3>Thanks, thanks great for being here.

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<v Speaker 2>Let's talk a little bit about this disconnect that seems

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<v Speaker 2>to be forming that we've been talking about when it

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<v Speaker 2>comes to the equity markets and the fixed income markets.

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<v Speaker 2>Because you take a look at equities in a vacuum

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<v Speaker 2>and it looks awesome, the S and P five hundred

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<v Speaker 2>at record highs. We had a ten percent gain in

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<v Speaker 2>April alone, and then you take a look at the

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<v Speaker 2>treasury market and the oil markets and it's a little

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<v Speaker 2>bit of a different story. There's a little bit more

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<v Speaker 2>concern here. And I just wonder, you know, how we

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<v Speaker 2>sort of see this come back together, whether or not

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<v Speaker 2>that disconnect can persist and maybe get exacerbated, And.

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<v Speaker 4>Then maybe I'll suff from the technical point of view,

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<v Speaker 4>the difference in the technicals and the equity market and

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<v Speaker 4>the bond market.

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<v Speaker 3>Are as diverse as you can as you can imagine in.

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<v Speaker 4>That we don't create enough stocks where you know, the

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<v Speaker 4>buy back relative the issuance of equities people are the

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<v Speaker 4>IPO market.

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<v Speaker 3>It's tiny relative to the buy back market.

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<v Speaker 4>We don't create enough equities and there's a huge amount

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<v Speaker 4>of cash out there, so you just get this continued

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<v Speaker 4>buying and then there's no stock. Now, if you have

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<v Speaker 4>a bad piece of news, it can trend down for

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<v Speaker 4>a day.

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<v Speaker 3>A week.

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<v Speaker 4>In bonds, we're getting five hundred and twenty billion a

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<v Speaker 4>week of gross supply of treasuries. There's no dearth of supply,

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<v Speaker 4>So you have that that is distinctly different. The other

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<v Speaker 4>is we're witnessing a growth paradigm that is unbelievable. That is,

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<v Speaker 4>I mean, I think this year you can grow six

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<v Speaker 4>percent nominal GDP after are a number of years of

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<v Speaker 4>significantly positive nominal growth, and then you see this in

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<v Speaker 4>the earnings numbers that.

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<v Speaker 3>Are coming out.

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<v Speaker 4>I've been pretty blown away by not just that you

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<v Speaker 4>have top line revenue that's impressive, but you have pricing power.

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<v Speaker 4>Pricing power is the worst thing you could have for

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<v Speaker 4>the market because obviously what it means from inflation side,

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<v Speaker 4>so I think it can persist.

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<v Speaker 3>You know, we think about.

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<v Speaker 4>Portfolio allocation, and I know we've gone through this. You

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<v Speaker 4>still have a lot of danger out there in terms

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<v Speaker 4>of geopolitical risk.

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<v Speaker 3>But if you said, what's my.

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<v Speaker 4>Convex city of upside downside, if you know, you're going

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<v Speaker 4>to have their good news or bad news, and they're

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<v Speaker 4>going to correlate together oftentimes, right like, equities have a

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<v Speaker 4>whole lot more upside than the than car frankly interest

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<v Speaker 4>rates to today.

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<v Speaker 2>Yeah, we'll bring this conversation to the corporate credit market

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<v Speaker 2>because you know, the point has been made that spreads

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<v Speaker 2>you've seen a little bit of widening, but you know,

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<v Speaker 2>a pessimist might say that looks complacent, but when it

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<v Speaker 2>comes to the strength that we're still seeing through in

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<v Speaker 2>corporate earnings, when it comes to equities, I mean I

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<v Speaker 2>have to imagine that translates to the performance of the

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<v Speaker 2>credits as well.

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<v Speaker 4>So I mean it's pretty hard and people' psych you know,

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<v Speaker 4>I don't like these spreads at these levels. That being said,

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<v Speaker 4>they yield fits portfolios, not just our portfolios, but whether

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<v Speaker 4>your pension fund, life insurance, going to be any insurance company,

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<v Speaker 4>et cetera. The yields are very attractive because a risk

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<v Speaker 4>free rate is high because central banks are keeping it

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<v Speaker 4>there for inflation.

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<v Speaker 3>So those yields are interesting.

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<v Speaker 4>It keeps demand at a pretty at a great pace.

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<v Speaker 4>The other thing that I think is significant is when

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<v Speaker 4>you have you know, people talk like, could you have defaults?

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<v Speaker 4>People have a private credit, they're stressed in private credit.

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<v Speaker 4>When the economy is growing at six percent nominal, or

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<v Speaker 4>let's say I'm wrong and it grows at low to

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<v Speaker 4>mid five, it's pretty hard to have a default cycle

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<v Speaker 4>of any significance. I've learned over my career cash flow

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<v Speaker 4>makes up for a lot of mistakes, and as long

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<v Speaker 4>as you have that sort of backbone of cash flow growth,

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<v Speaker 4>you're not going to have any significant default cycle.

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<v Speaker 1>I am curious that when we start talking about five

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<v Speaker 1>even six percent nominal growth, I mean, where is that

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<v Speaker 1>growth coming from. I know there's been a lot of

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<v Speaker 1>discussion about kind of the accelerant that we've seen from

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<v Speaker 1>AI and the technological spending.

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<v Speaker 3>Is that it is that the thing?

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<v Speaker 4>You know, you know, part of why you know, I've

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<v Speaker 4>been pretty adamant about this. You have a lot of

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<v Speaker 4>the US economy, it's actually in recession. And part of

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<v Speaker 4>why I've been a believer that even if you grow

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<v Speaker 4>this fast, fight can cut rates. The reason why I

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<v Speaker 4>think that count is because what is rates sensitive in

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<v Speaker 4>the economy today, it's actually in recession. So you think

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<v Speaker 4>about traditional manufacturing, you think about housing, you think about

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<v Speaker 4>where young people, low income people that are struggling, and

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<v Speaker 4>that's where the interest rate tool is effective. But then

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<v Speaker 4>you have two parts of the engine that are steaming ahead.

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<v Speaker 4>You've got obviously AI and that number is so big,

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<v Speaker 4>certainly on a short term basis.

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<v Speaker 3>It's huge.

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<v Speaker 4>And then you've got consumption that's coming from the higher

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<v Speaker 4>income cohort generally that's keeping it up. So you've got

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<v Speaker 4>an economy that's doing extremely well on two engines. And then,

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<v Speaker 4>by the way, for a lot of people in the country,

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<v Speaker 4>it's actually not going so well. And so that's part

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<v Speaker 4>of why I know your question about the interest rate

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<v Speaker 4>tool and how to think about it, I think you'll

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<v Speaker 4>see a FED that will cut rates because of that

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<v Speaker 4>part that's struggling.

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<v Speaker 1>Well, I'm curious because this gets to the whole philosophical

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<v Speaker 1>debate about monetary policy. And obviously you are rumored to

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<v Speaker 1>be in the running for the pitch here. But I

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<v Speaker 1>mean Kevin Watsh is coming in. He clearly has, at

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<v Speaker 1>least if you take him at his word, is going

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<v Speaker 1>to approach monetary policy in a much different way philosophically.

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<v Speaker 1>And I asked this question of Alan Schwartz over at

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<v Speaker 1>Googan earlier about this idea of the market also needing

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<v Speaker 1>to change itself philosophically. If we are and you going

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<v Speaker 1>to start looking at the economy and monetary policy in

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<v Speaker 1>a different.

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<v Speaker 4>Way, that is a long discussion, and I quite frankly,

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<v Speaker 4>I think one of the most interesting discussions we have

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<v Speaker 4>in the world today. I think we're seeing part of

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<v Speaker 4>the derivative impact of this AI the technology boom is

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<v Speaker 4>we're going to see a productivity revolution that nobody's ever

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<v Speaker 4>seen before. I mean, how many companies, including yesterday are

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<v Speaker 4>announcing growth, cappec spend And we don't need as many

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<v Speaker 4>people sward to why I'm not that worked up about

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<v Speaker 4>inflation over the intermediate term.

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<v Speaker 3>Certainly over the near term we've got.

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<v Speaker 4>A transmission from a variety of things, fuel being the

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<v Speaker 4>number one.

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<v Speaker 3>But I think productivity and employment are going to change, and.

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<v Speaker 4>I worry about and I've not heard anybody give me

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<v Speaker 4>a good reason why. In the short term, the transition

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<v Speaker 4>in terms of employment is not a difficult one. The

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<v Speaker 4>one thing that I think will be different in terms

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<v Speaker 4>of fed perspective, I think you have to be more

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<v Speaker 4>prospective about where the puck is going versus where we've

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<v Speaker 4>been historic and historic analogs don't really work in what

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<v Speaker 4>is a new era.

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<v Speaker 1>I'm curious on that transition in terms of the labor market.

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<v Speaker 1>Do you think that will be a short transition, because

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<v Speaker 1>that matters. I mean, if we're talking about a prolonged

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<v Speaker 1>displacement of folks for years, that's obviously a much bigger issue.

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<v Speaker 1>But if we're talking about something's a little more truncated,

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<v Speaker 1>is that something that everyone can live with?

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<v Speaker 4>So listen, I think the transition, I think we're talking

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<v Speaker 4>about it. It's certainly a couple of years. I mean,

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<v Speaker 4>it's pretty hard to project how the world changes industries

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<v Speaker 4>that grow relative to this, but for the next couple

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<v Speaker 4>of years, some big industries I always talk about driving

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<v Speaker 4>and some others that employ a lot of people. That

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<v Speaker 4>transition that retraining is going to be, and the size

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<v Speaker 4>that it's happening and the speed it's happening at We'll

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<v Speaker 4>be dislocating certainly for a couple of years. By the way,

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<v Speaker 4>I would argue, at the same time, we have a

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<v Speaker 4>debt burden in the country that is compounding higher. So anyways, see,

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<v Speaker 4>there's some of the things that I think, and I

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<v Speaker 4>think this thread will do a great job.

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<v Speaker 3>So I think the key is going to be are.

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<v Speaker 4>They prospective about where we're going and about what the

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<v Speaker 4>new challenges are versus the analogs from history that aren't

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<v Speaker 4>as relevant.

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<v Speaker 2>Well, we want to also talk about whether or not

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<v Speaker 2>the market is ready for the idea that maybe we're

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<v Speaker 2>going to get less communication from the FED. We know

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<v Speaker 2>that the idea of maybe not having a press conference

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<v Speaker 2>that every meeting has been floated, and you also have

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<v Speaker 2>a FED makeup that looks like there's going to be

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<v Speaker 2>more descents coming forward. I think you think about the

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<v Speaker 2>last PED meeting for descents. We certainly haven't seen that

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<v Speaker 2>for a couple of decades. So I mean, what does

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<v Speaker 2>that potential adjustment period look like if you are getting

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<v Speaker 2>less communication from the FED and you are seeing descents

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<v Speaker 2>on the rise.

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<v Speaker 4>The feds objective is to create full employment and price stability.

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<v Speaker 4>It's not to make sure the markets feel good about

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<v Speaker 4>what you're doing at every meeting. And I actually think

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<v Speaker 4>having a lower level of forward guidance, particularly when you're easing,

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<v Speaker 4>when you're easing to tell the world like we may

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<v Speaker 4>go twenty five every six weeks, I don't think is

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<v Speaker 4>actually that robust. If you kept your cards to your

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<v Speaker 4>vest and said, okay, now I got to shock the

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<v Speaker 4>system because I'm trying to execute change. I'm trying to

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<v Speaker 4>get financial velocity moving. I actually think lower. And you

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<v Speaker 4>know is do the markets feel like cash is a

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<v Speaker 4>little bit more uncertain and the increased volve volatility and

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<v Speaker 4>so maybe at the margin, but as long as you're

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<v Speaker 4>effective on communication as to the metrics you're looking at,

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<v Speaker 4>this is what we're pivoting off of. So the markets understand, Okay,

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<v Speaker 4>I understand what the reaction function is going to be.

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<v Speaker 4>I don't think you have to be that explicit. So know,

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<v Speaker 4>I think I think it's super healthy to pair that

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<v Speaker 4>back of it.

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<v Speaker 2>Yeah, and it'll be interesting to see what that weaning

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<v Speaker 2>process looks like, but in your view, a healthy one there.

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<v Speaker 2>I do want to talk about how the shape of

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<v Speaker 2>the yield curve might change going forward. We were having

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<v Speaker 2>a great discussion with An Walsh of Guggenheim yesterday and

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<v Speaker 2>she actually made the case that you could see a

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<v Speaker 2>flattening come through. You know, the steepener has been breaking

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<v Speaker 2>hearts for years now, and the logic made sense. If

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<v Speaker 2>you had to cut cutting cycle come through, that would

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<v Speaker 2>lower this short end. Maybe you see the long end rise.

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<v Speaker 2>But she just saw about the issuance that she's expecting.

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<v Speaker 2>Maybe you could actually see more of a flattening impulse

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<v Speaker 2>come through. And I wonder where you land.

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<v Speaker 4>You know, let's send them outue, do we run the

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<v Speaker 4>seat you have go bink? As you know that's been yes, No,

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<v Speaker 4>you've been very CONDI mentioned and so listen. I'm part

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<v Speaker 4>of what it's been effective here to fore is to say, gosh,

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<v Speaker 4>the long end of the yeld curve interesting, I'm getting

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<v Speaker 4>my long derated assets through equities.

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<v Speaker 3>There a lot of people are doing.

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<v Speaker 4>That, and my other portfolios are doing a ton of that,

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<v Speaker 4>and say, gosh, I don't need the thrill of the

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<v Speaker 4>back end of the curve moving around. Yeah, so I'd

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<v Speaker 4>rather stay in the front of the belly of the

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<v Speaker 4>yield curve. So that's part of why you've created this

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<v Speaker 4>natural steepening tendency because you get enough yield when you.

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<v Speaker 3>Diversify in terms of different assets.

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<v Speaker 4>I will say, people don't realize that eighty nine percent

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<v Speaker 4>of the Treasury's debts and the zero to two year

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<v Speaker 4>part of the curve, we don't actually have that much

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<v Speaker 4>debt when you take what's net of the Fed's balance sheet.

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<v Speaker 4>So the reason why people get in the steepener trades,

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<v Speaker 4>and I actually think fundamentally the curve could steepen. The

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<v Speaker 4>technicals are actually keep that from happening.

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<v Speaker 3>So listen, I.

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<v Speaker 4>Think if you said to me, where are we going

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<v Speaker 4>in six months a year from now. We have to

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<v Speaker 4>get the mortgage rate down in this country, and do

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<v Speaker 4>I think the back end can stay contained?

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<v Speaker 3>I think so.

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<v Speaker 4>My view is like putting on steepeners and flatteners hard

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<v Speaker 4>to make money on that. To your point, But listen,

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<v Speaker 4>I think the ten year is going to get down

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<v Speaker 4>to four percent. Okay, I think it's going to take

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<v Speaker 4>a little bit of time.

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<v Speaker 2>Can I just say, when you're ready to really step

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<v Speaker 2>out the yield curve and go long duration, will you

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<v Speaker 2>tell us? Because we've been talking for years and you've

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<v Speaker 2>been in the belly for a long time.

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<v Speaker 4>Yeah, yeah, yeah, so yeah, maybe if we get on

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<v Speaker 4>and we can talk about on the show. But now

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<v Speaker 4>I mean we're h and by the way, there's no

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<v Speaker 4>like everybody says it's this yield that I'll jump in,

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<v Speaker 4>I actually don't think. I think what will be the

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<v Speaker 4>catalyzing influence is when you start to see real motivation

0:10:31.600 --> 0:10:33.880
<v Speaker 4>around the mortgage rate coming down. And by the way,

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<v Speaker 4>I think there's some fiscal initiatives that can bring rate

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<v Speaker 4>down and mortgage rates down. But once you start to

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<v Speaker 4>see that, then I think it's going to be that

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<v Speaker 4>it's in place where would start about the Yeld curve.

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<v Speaker 4>I will say, we run optimizers on our portfolios. These

0:10:46.760 --> 0:10:50.480
<v Speaker 4>real rates out the curve are pretty attractive. I just

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<v Speaker 4>think today you've got some inflation coursing its way through

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<v Speaker 4>the system. You've got it more. You've got an alternative

0:10:55.600 --> 0:10:56.720
<v Speaker 4>asset i e. Equities.

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<v Speaker 3>It's a better long drated asset.

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<v Speaker 4>But my sense is that we'll get a chance over

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<v Speaker 4>the next few months to uh to start to start

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<v Speaker 4>to go out to curve more aggressively.

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<v Speaker 2>All right, well, keep in touch, it's always great to

0:11:07.920 --> 0:11:10.959
<v Speaker 2>see you. That is Rick Reader. He is chief Investment

0:11:11.000 --> 0:11:14.600
<v Speaker 2>Officer of Global Fixed Income over at black Rock