Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's turn to our next guest. He's responsible for managing
Speaker 2: roughly two point seven trillion dollars in assets. His name
Speaker 2: is Rick Reader. He is BlackRock's Chief investment Officer of
Speaker 2: Global fixed Income, also the head of the firms a
Speaker 2: global allocation team. He joins us. Now, Rick, it's great
Speaker 2: to see you in LA.
Speaker 3: Thanks, thanks great for being here.
Speaker 2: Let's talk a little bit about this disconnect that seems
Speaker 2: to be forming that we've been talking about when it
Speaker 2: comes to the equity markets and the fixed income markets.
Speaker 2: Because you take a look at equities in a vacuum
Speaker 2: and it looks awesome, the S and P five hundred
Speaker 2: at record highs. We had a ten percent gain in
Speaker 2: April alone, and then you take a look at the
Speaker 2: treasury market and the oil markets and it's a little
Speaker 2: bit of a different story. There's a little bit more
Speaker 2: concern here. And I just wonder, you know, how we
Speaker 2: sort of see this come back together, whether or not
Speaker 2: that disconnect can persist and maybe get exacerbated, And.
Speaker 4: Then maybe I'll suff from the technical point of view,
Speaker 4: the difference in the technicals and the equity market and
Speaker 4: the bond market.
Speaker 3: Are as diverse as you can as you can imagine in.
Speaker 4: That we don't create enough stocks where you know, the
Speaker 4: buy back relative the issuance of equities people are the
Speaker 4: IPO market.
Speaker 3: It's tiny relative to the buy back market.
Speaker 4: We don't create enough equities and there's a huge amount
Speaker 4: of cash out there, so you just get this continued
Speaker 4: buying and then there's no stock. Now, if you have
Speaker 4: a bad piece of news, it can trend down for
Speaker 4: a day.
Speaker 3: A week.
Speaker 4: In bonds, we're getting five hundred and twenty billion a
Speaker 4: week of gross supply of treasuries. There's no dearth of supply,
Speaker 4: So you have that that is distinctly different. The other
Speaker 4: is we're witnessing a growth paradigm that is unbelievable. That is,
Speaker 4: I mean, I think this year you can grow six
Speaker 4: percent nominal GDP after are a number of years of
Speaker 4: significantly positive nominal growth, and then you see this in
Speaker 4: the earnings numbers that.
Speaker 3: Are coming out.
Speaker 4: I've been pretty blown away by not just that you
Speaker 4: have top line revenue that's impressive, but you have pricing power.
Speaker 4: Pricing power is the worst thing you could have for
Speaker 4: the market because obviously what it means from inflation side,
Speaker 4: so I think it can persist.
Speaker 3: You know, we think about.
Speaker 4: Portfolio allocation, and I know we've gone through this. You
Speaker 4: still have a lot of danger out there in terms
Speaker 4: of geopolitical risk.
Speaker 3: But if you said, what's my.
Speaker 4: Convex city of upside downside, if you know, you're going
Speaker 4: to have their good news or bad news, and they're
Speaker 4: going to correlate together oftentimes, right like, equities have a
Speaker 4: whole lot more upside than the than car frankly interest
Speaker 4: rates to today.
Speaker 2: Yeah, we'll bring this conversation to the corporate credit market
Speaker 2: because you know, the point has been made that spreads
Speaker 2: you've seen a little bit of widening, but you know,
Speaker 2: a pessimist might say that looks complacent, but when it
Speaker 2: comes to the strength that we're still seeing through in
Speaker 2: corporate earnings, when it comes to equities, I mean I
Speaker 2: have to imagine that translates to the performance of the
Speaker 2: credits as well.
Speaker 4: So I mean it's pretty hard and people' psych you know,
Speaker 4: I don't like these spreads at these levels. That being said,
Speaker 4: they yield fits portfolios, not just our portfolios, but whether
Speaker 4: your pension fund, life insurance, going to be any insurance company,
Speaker 4: et cetera. The yields are very attractive because a risk
Speaker 4: free rate is high because central banks are keeping it
Speaker 4: there for inflation.
Speaker 3: So those yields are interesting.
Speaker 4: It keeps demand at a pretty at a great pace.
Speaker 4: The other thing that I think is significant is when
Speaker 4: you have you know, people talk like, could you have defaults?
Speaker 4: People have a private credit, they're stressed in private credit.
Speaker 4: When the economy is growing at six percent nominal, or
Speaker 4: let's say I'm wrong and it grows at low to
Speaker 4: mid five, it's pretty hard to have a default cycle
Speaker 4: of any significance. I've learned over my career cash flow
Speaker 4: makes up for a lot of mistakes, and as long
Speaker 4: as you have that sort of backbone of cash flow growth,
Speaker 4: you're not going to have any significant default cycle.
Speaker 1: I am curious that when we start talking about five
Speaker 1: even six percent nominal growth, I mean, where is that
Speaker 1: growth coming from. I know there's been a lot of
Speaker 1: discussion about kind of the accelerant that we've seen from
Speaker 1: AI and the technological spending.
Speaker 3: Is that it is that the thing?
Speaker 4: You know, you know, part of why you know, I've
Speaker 4: been pretty adamant about this. You have a lot of
Speaker 4: the US economy, it's actually in recession. And part of
Speaker 4: why I've been a believer that even if you grow
Speaker 4: this fast, fight can cut rates. The reason why I
Speaker 4: think that count is because what is rates sensitive in
Speaker 4: the economy today, it's actually in recession. So you think
Speaker 4: about traditional manufacturing, you think about housing, you think about
Speaker 4: where young people, low income people that are struggling, and
Speaker 4: that's where the interest rate tool is effective. But then
Speaker 4: you have two parts of the engine that are steaming ahead.
Speaker 4: You've got obviously AI and that number is so big,
Speaker 4: certainly on a short term basis.
Speaker 3: It's huge.
Speaker 4: And then you've got consumption that's coming from the higher
Speaker 4: income cohort generally that's keeping it up. So you've got
Speaker 4: an economy that's doing extremely well on two engines. And then,
Speaker 4: by the way, for a lot of people in the country,
Speaker 4: it's actually not going so well. And so that's part
Speaker 4: of why I know your question about the interest rate
Speaker 4: tool and how to think about it, I think you'll
Speaker 4: see a FED that will cut rates because of that
Speaker 4: part that's struggling.
Speaker 1: Well, I'm curious because this gets to the whole philosophical
Speaker 1: debate about monetary policy. And obviously you are rumored to
Speaker 1: be in the running for the pitch here. But I
Speaker 1: mean Kevin Watsh is coming in. He clearly has, at
Speaker 1: least if you take him at his word, is going
Speaker 1: to approach monetary policy in a much different way philosophically.
Speaker 1: And I asked this question of Alan Schwartz over at
Speaker 1: Googan earlier about this idea of the market also needing
Speaker 1: to change itself philosophically. If we are and you going
Speaker 1: to start looking at the economy and monetary policy in
Speaker 1: a different.
Speaker 4: Way, that is a long discussion, and I quite frankly,
Speaker 4: I think one of the most interesting discussions we have
Speaker 4: in the world today. I think we're seeing part of
Speaker 4: the derivative impact of this AI the technology boom is
Speaker 4: we're going to see a productivity revolution that nobody's ever
Speaker 4: seen before. I mean, how many companies, including yesterday are
Speaker 4: announcing growth, cappec spend And we don't need as many
Speaker 4: people sward to why I'm not that worked up about
Speaker 4: inflation over the intermediate term.
Speaker 3: Certainly over the near term we've got.
Speaker 4: A transmission from a variety of things, fuel being the
Speaker 4: number one.
Speaker 3: But I think productivity and employment are going to change, and.
Speaker 4: I worry about and I've not heard anybody give me
Speaker 4: a good reason why. In the short term, the transition
Speaker 4: in terms of employment is not a difficult one. The
Speaker 4: one thing that I think will be different in terms
Speaker 4: of fed perspective, I think you have to be more
Speaker 4: prospective about where the puck is going versus where we've
Speaker 4: been historic and historic analogs don't really work in what
Speaker 4: is a new era.
Speaker 1: I'm curious on that transition in terms of the labor market.
Speaker 1: Do you think that will be a short transition, because
Speaker 1: that matters. I mean, if we're talking about a prolonged
Speaker 1: displacement of folks for years, that's obviously a much bigger issue.
Speaker 1: But if we're talking about something's a little more truncated,
Speaker 1: is that something that everyone can live with?
Speaker 4: So listen, I think the transition, I think we're talking
Speaker 4: about it. It's certainly a couple of years. I mean,
Speaker 4: it's pretty hard to project how the world changes industries
Speaker 4: that grow relative to this, but for the next couple
Speaker 4: of years, some big industries I always talk about driving
Speaker 4: and some others that employ a lot of people. That
Speaker 4: transition that retraining is going to be, and the size
Speaker 4: that it's happening and the speed it's happening at We'll
Speaker 4: be dislocating certainly for a couple of years. By the way,
Speaker 4: I would argue, at the same time, we have a
Speaker 4: debt burden in the country that is compounding higher. So anyways, see,
Speaker 4: there's some of the things that I think, and I
Speaker 4: think this thread will do a great job.
Speaker 3: So I think the key is going to be are.
Speaker 4: They prospective about where we're going and about what the
Speaker 4: new challenges are versus the analogs from history that aren't
Speaker 4: as relevant.
Speaker 2: Well, we want to also talk about whether or not
Speaker 2: the market is ready for the idea that maybe we're
Speaker 2: going to get less communication from the FED. We know
Speaker 2: that the idea of maybe not having a press conference
Speaker 2: that every meeting has been floated, and you also have
Speaker 2: a FED makeup that looks like there's going to be
Speaker 2: more descents coming forward. I think you think about the
Speaker 2: last PED meeting for descents. We certainly haven't seen that
Speaker 2: for a couple of decades. So I mean, what does
Speaker 2: that potential adjustment period look like if you are getting
Speaker 2: less communication from the FED and you are seeing descents
Speaker 2: on the rise.
Speaker 4: The feds objective is to create full employment and price stability.
Speaker 4: It's not to make sure the markets feel good about
Speaker 4: what you're doing at every meeting. And I actually think
Speaker 4: having a lower level of forward guidance, particularly when you're easing,
Speaker 4: when you're easing to tell the world like we may
Speaker 4: go twenty five every six weeks, I don't think is
Speaker 4: actually that robust. If you kept your cards to your
Speaker 4: vest and said, okay, now I got to shock the
Speaker 4: system because I'm trying to execute change. I'm trying to
Speaker 4: get financial velocity moving. I actually think lower. And you
Speaker 4: know is do the markets feel like cash is a
Speaker 4: little bit more uncertain and the increased volve volatility and
Speaker 4: so maybe at the margin, but as long as you're
Speaker 4: effective on communication as to the metrics you're looking at,
Speaker 4: this is what we're pivoting off of. So the markets understand, Okay,
Speaker 4: I understand what the reaction function is going to be.
Speaker 4: I don't think you have to be that explicit. So know,
Speaker 4: I think I think it's super healthy to pair that
Speaker 4: back of it.
Speaker 2: Yeah, and it'll be interesting to see what that weaning
Speaker 2: process looks like, but in your view, a healthy one there.
Speaker 2: I do want to talk about how the shape of
Speaker 2: the yield curve might change going forward. We were having
Speaker 2: a great discussion with An Walsh of Guggenheim yesterday and
Speaker 2: she actually made the case that you could see a
Speaker 2: flattening come through. You know, the steepener has been breaking
Speaker 2: hearts for years now, and the logic made sense. If
Speaker 2: you had to cut cutting cycle come through, that would
Speaker 2: lower this short end. Maybe you see the long end rise.
Speaker 2: But she just saw about the issuance that she's expecting.
Speaker 2: Maybe you could actually see more of a flattening impulse
Speaker 2: come through. And I wonder where you land.
Speaker 4: You know, let's send them outue, do we run the
Speaker 4: seat you have go bink? As you know that's been yes, No,
Speaker 4: you've been very CONDI mentioned and so listen. I'm part
Speaker 4: of what it's been effective here to fore is to say, gosh,
Speaker 4: the long end of the yeld curve interesting, I'm getting
Speaker 4: my long derated assets through equities.
Speaker 3: There a lot of people are doing.
Speaker 4: That, and my other portfolios are doing a ton of that,
Speaker 4: and say, gosh, I don't need the thrill of the
Speaker 4: back end of the curve moving around. Yeah, so I'd
Speaker 4: rather stay in the front of the belly of the
Speaker 4: yield curve. So that's part of why you've created this
Speaker 4: natural steepening tendency because you get enough yield when you.
Speaker 3: Diversify in terms of different assets.
Speaker 4: I will say, people don't realize that eighty nine percent
Speaker 4: of the Treasury's debts and the zero to two year
Speaker 4: part of the curve, we don't actually have that much
Speaker 4: debt when you take what's net of the Fed's balance sheet.
Speaker 4: So the reason why people get in the steepener trades,
Speaker 4: and I actually think fundamentally the curve could steepen. The
Speaker 4: technicals are actually keep that from happening.
Speaker 3: So listen, I.
Speaker 4: Think if you said to me, where are we going
Speaker 4: in six months a year from now. We have to
Speaker 4: get the mortgage rate down in this country, and do
Speaker 4: I think the back end can stay contained?
Speaker 3: I think so.
Speaker 4: My view is like putting on steepeners and flatteners hard
Speaker 4: to make money on that. To your point, But listen,
Speaker 4: I think the ten year is going to get down
Speaker 4: to four percent. Okay, I think it's going to take
Speaker 4: a little bit of time.
Speaker 2: Can I just say, when you're ready to really step
Speaker 2: out the yield curve and go long duration, will you
Speaker 2: tell us? Because we've been talking for years and you've
Speaker 2: been in the belly for a long time.
Speaker 4: Yeah, yeah, yeah, so yeah, maybe if we get on
Speaker 4: and we can talk about on the show. But now
Speaker 4: I mean we're h and by the way, there's no
Speaker 4: like everybody says it's this yield that I'll jump in,
Speaker 4: I actually don't think. I think what will be the
Speaker 4: catalyzing influence is when you start to see real motivation
Speaker 4: around the mortgage rate coming down. And by the way,
Speaker 4: I think there's some fiscal initiatives that can bring rate
Speaker 4: down and mortgage rates down. But once you start to
Speaker 4: see that, then I think it's going to be that
Speaker 4: it's in place where would start about the Yeld curve.
Speaker 4: I will say, we run optimizers on our portfolios. These
Speaker 4: real rates out the curve are pretty attractive. I just
Speaker 4: think today you've got some inflation coursing its way through
Speaker 4: the system. You've got it more. You've got an alternative
Speaker 4: asset i e. Equities.
Speaker 3: It's a better long drated asset.
Speaker 4: But my sense is that we'll get a chance over
Speaker 4: the next few months to uh to start to start
Speaker 4: to go out to curve more aggressively.
Speaker 2: All right, well, keep in touch, it's always great to
Speaker 2: see you. That is Rick Reader. He is chief Investment
Speaker 2: Officer of Global Fixed Income over at black Rock