Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Rick Reader is black Rocks CIO of Global Fixed Income
Speaker 2: and it's widely considered to be one of five contenders
Speaker 2: to replace fetchad Jay Powell. He writes the following, moving
Speaker 2: interest rates slower is very much in line with what
Speaker 2: we do know today, which is that the labor market
Speaker 2: is clearly slowic to the point of potential still speed.
Speaker 2: Rick joins unaw for more. Rick and Monick, thanks thanks
Speaker 2: for having me. Good to see my friend. It's been
Speaker 2: too long. Thank you, Welcome to the studio. Than we've
Speaker 2: got a labor market problem.
Speaker 3: I do, I don't, and by the way, I don't
Speaker 3: think it's a sick local phenomenon.
Speaker 4: I think there is the way least is.
Speaker 3: I think we have a productivity revolution that is pretty extraordinary,
Speaker 3: and people point to AI as an exclusive driver of that.
Speaker 3: If you look across what companies are doing, including second
Speaker 3: quarter earnings, their quarter earnings, if you lead dynamic around
Speaker 3: around how do you think about logistics, freight management, predictive maintenance,
Speaker 3: customer procurement, companies are doing more with less, and I
Speaker 3: think that is a secular dynamic that's going to be
Speaker 3: with us for a couple of years now I think,
Speaker 3: I mean, we can talk about there's a bit of
Speaker 3: elevated inflation because of terres, but I think we're going
Speaker 3: to be dealing with something. By the way, you also
Speaker 3: put robotics, automation. You know, this to me is a
Speaker 3: structural dynamic. I think full employment.
Speaker 4: Will be the challenge for the next couple of years.
Speaker 2: So we mentioned the spread between Ernie's growth fantastic, employment
Speaker 2: growth terrible. How are we closing that gap?
Speaker 4: If ever?
Speaker 3: So, I think, by the way, I actually think there's
Speaker 3: not a coincident. Those aren't coincident factors. What's happening is
Speaker 3: companies literally the top line revenue was pretty good generally,
Speaker 3: But what's happening is they're cutting costs of good soul,
Speaker 3: they're cutting their SGNA costs, they're reducing their cost infrastructure.
Speaker 3: By the way, AI is a technology, there's historically been
Speaker 3: this dynamic of when you have new technology, it moves
Speaker 3: people into other higher value jobs. This technology, by the way,
Speaker 3: I put robotics and automation on top of that, autonomous driving,
Speaker 3: et cetera, is literally designed to replace human input. You
Speaker 3: have a dynamic that is pretty extraordinary that I think
Speaker 3: you know, if you know, as a central banker or
Speaker 3: whatever is, you think about being anticipatory of where the
Speaker 3: world is going, that is where the world is going.
Speaker 4: And I think that is a challenge.
Speaker 3: Economy is doing fine, divergent and quite frankly, only operating
Speaker 3: on a couple of cylinders, huge capex which we talk
Speaker 3: about from cloud, from infrastructure, from power. And you've got
Speaker 3: higher income, wealthy savers. They're doing great and supporting consumption
Speaker 3: in the economy. And then you have the part of
Speaker 3: the economy that's interest rates sensitive, that's really struggling. And
Speaker 3: that's part of why I think the interest rate tool
Speaker 3: needs to address low income small business housing. And that's
Speaker 3: where I think you square the circle.
Speaker 2: So we've got to talk about this from two perspectives,
Speaker 2: one as a policy maker, the other as an investor,
Speaker 2: and one of course informs the other. Let's just sit
Speaker 2: on policy for a moment. You're talking about maybe the
Speaker 2: needs cut interest rates, but also the fact that some
Speaker 2: of the pullback were sent in hiring is not cyclical.
Speaker 2: How can we address one with lower interest rates? Just
Speaker 2: explore that for us a little bit.
Speaker 3: Yeah, So, first of all, if you came down from
Speaker 3: Mars and said, okay, so I've got five year inflation
Speaker 3: break even, so traded in the work at you buys
Speaker 3: many as you want a two point three five percent
Speaker 3: and you said okay, now set the price and you said, okay,
Speaker 3: two point three five percent inflation, and I clearly have
Speaker 3: a slowing labor market. You would say, gosh, I don't
Speaker 3: know if I set the rate at three. And then
Speaker 3: I talked about okay, so now what's equilibrium on the
Speaker 3: mortgage rate to create velocity in housing?
Speaker 4: And they're directly related to what you said.
Speaker 3: Housing today it's three quarters of the wealth by people
Speaker 3: in the countries in housing. We have a housing market
Speaker 3: that you know, you look at the earnings into your horton,
Speaker 3: you look at Leonar. By the way, I just saw
Speaker 3: an ISI home builder survey that showed the softness. If
Speaker 3: you actually get the mortgage rate down a bit, then
Speaker 3: what happens is all of a sudden you get housing velocity.
Speaker 3: Why is housing velocity important because you get labor mobility
Speaker 3: today you can't move, you lose your.
Speaker 4: Job, you got to go somewhere else. You can't move.
Speaker 3: Secondly, and I've set up before for every home built
Speaker 3: in this country, we hire three point one people. It's
Speaker 3: pretty hard to AI building a house. So if you
Speaker 3: can get some real estate velocity. And by the way,
Speaker 3: it's a young people who are struggling today. Young people
Speaker 3: who aren't savers are borrowers. That's the way they build wealth.
Speaker 3: That's the way you put people to work. And so
Speaker 3: I think it is all a related concept. Point baying is.
Speaker 3: By the way, I mean, if we had to raise
Speaker 3: interest rates to where they were, but if you said
Speaker 3: to me today, what's equilibrium, I don't think it's where
Speaker 3: we sit today in the funds.
Speaker 1: Right, So, how willing are you to allow or how
Speaker 1: willing would you be to allow inflation to run above
Speaker 1: that two percent target in order to run the economy
Speaker 1: hut to allow for more job creation.
Speaker 4: Listen, it's a great question.
Speaker 3: And I think every time you think about these things,
Speaker 3: and I think about the same thing, we take risk.
Speaker 3: You sort of think about what are the quadrants of risk?
Speaker 3: What are you willing to underwrite? So today when I
Speaker 3: think about those quadrants, if you were willing to take
Speaker 3: some labor and some overall inflation thing, you think about, okay,
Speaker 3: what are the sticky drivers of inflation today? Healthcare, education, insurance.
Speaker 3: It's pretty hard using interest rate tool to get insurance
Speaker 3: costs down. It's pretty hard to get healthcare, so the
Speaker 3: tool is not that robust, and shelter is a sticky
Speaker 3: part of inflation that if I actually get the rate down,
Speaker 3: I actually mitigate some of that elevator, I'll mitigate.
Speaker 4: The rental inflation.
Speaker 3: So you know, out there on one other thing, five
Speaker 3: year inflation expectations are two point three five percent if
Speaker 3: you were at two and three quarters And by the way,
Speaker 3: core PCEE the six month moving average core PC is
Speaker 3: two point five. Let's say we're probably closer to three.
Speaker 3: If you take the whole full construct of inflation. Three
Speaker 3: is not an infectious you know, you clearly don't see
Speaker 3: it in terms of where people anticipate inflation.
Speaker 4: If you're running four or five, then I'd say, gosh.
Speaker 3: Or if the three was trending higher on things that
Speaker 3: the interest rate tool impacted, then I think you'd have
Speaker 3: to address that just to sort.
Speaker 1: Of build on that this idea that three is okay,
Speaker 1: but above that maybe not so much. There's a feeler
Speaker 1: that there is an asymmetry in the timeframe of AI
Speaker 1: that right now the buildout is going to be inflationary
Speaker 1: because of the inflationary inputs of commodity costs, of just
Speaker 1: how much lending and money this is generating on a
Speaker 1: broad scale. Ill the productivity gains that will cause disinflation
Speaker 1: will take a lot longer to come into play. So
Speaker 1: if you were the head of the FED, would you
Speaker 1: handle that?
Speaker 4: So I'd take a bother thning.
Speaker 3: So think about historically, the way the interest rate tool
Speaker 3: worked is it was a modulator of capac So you
Speaker 3: think about I go back sixties and seventies, the big
Speaker 3: spenders in manufacturing today. My guess is Open AI and Vidia, Google,
Speaker 3: et cetera. It's not the interest rate tool that is
Speaker 3: affecting capax. They are going to put that capex in
Speaker 3: because there is a long run benefit for doing it,
Speaker 3: meaning the interest rate tool doesn't really do a lot.
Speaker 3: So I think, at the end of the day, does
Speaker 3: that create a little bit of inflation in the areas
Speaker 3: you describe? I think so, But I think you have
Speaker 3: to say, you know where are we going? And I
Speaker 3: almost say being an investor for a long time, you
Speaker 3: know the concept of data dependence. If you were constantly
Speaker 3: in the rear view mirror trying to figure out how
Speaker 3: would you invest it is probably the wrong way to
Speaker 3: do it. We are going through something that's very different.
Speaker 3: We now are in a capex cycle. And then if
Speaker 3: you break down the economy and say, okay, what is
Speaker 3: driving GDP today, that's what's driving this compax and some
Speaker 3: consumption from high income people.
Speaker 2: The keypase of the inflation story, Shouter, you touched on it.
Speaker 2: He said something interesting. Interest rates down, shout costs down.
Speaker 2: Just explain that for us.
Speaker 3: Yeah, so we have an inventory problem in the country.
Speaker 3: By the way, I mean, look at every piece of data,
Speaker 3: it shows the same thing. And so, by the way,
Speaker 3: when the mortgage rate has come down a bit post
Speaker 3: this recent fed drop in interest rates, all of a
Speaker 3: sudden you're seeing existing home sales pickup. Saw we just
Speaker 3: saw the prepayment report for mortgages, and all of a
Speaker 3: sudden you're seeing some acceleration, meaning you don't have to
Speaker 3: get the interest rate tool down that much. If you
Speaker 3: got the mortgage rate into the fives I'd say mid
Speaker 3: to high fives, you would see some velocity of housing.
Speaker 3: If you saw velocity of housing today, I saw on
Speaker 3: deor Horton's numbers They talked about they're doing one percent
Speaker 3: first year mortgage, and then I think it's four point
Speaker 3: nine because they've got to subsidize the mortgage. Well, what
Speaker 3: after your horton didn't have to do that, and what
Speaker 3: if the actual organic the rate was lower, they'd build
Speaker 3: more houses. You create more inventory, You create more inventory,
Speaker 3: you took the pressure off of rental rates, and you
Speaker 3: start to bring inflation down. Plus the labor mobility that
Speaker 3: is not an insignificant part of that.
Speaker 2: Do you think the Fed needs to think how side
Speaker 2: of the box beyond just interest rates? Is this something
Speaker 2: else we can do?
Speaker 1: Hey?
Speaker 3: Yeah, I mean listen, I think there is. I think
Speaker 3: the FAT has a series of tools. The interest rate tool.
Speaker 3: By the way, today nobody really borrows off the overnight
Speaker 3: funding rate. The interest rate tool, it used to be
Speaker 3: they think about how banks borrow short, they lent long.
Speaker 3: We had a very different dynamic today, the way we
Speaker 3: trans the debt in the economy. Think about how we
Speaker 3: finance RESI, commercial asset backs, credit cards, auto loans, it's tranched.
Speaker 4: The front end of the yield curve doesn't really do
Speaker 4: a lot.
Speaker 3: How you think about you know, where is the ten
Speaker 3: year point how do you think about your balance sheet?
Speaker 3: How do you think about all the other tools that
Speaker 3: are at your disposal, I think are really important. Plus
Speaker 3: you got to think about what is the effect of
Speaker 3: the currency et cetera relative to that. So anyway, I
Speaker 3: think the construct is much more complex and much more
Speaker 3: quite frankly, you have a lot of tools that create
Speaker 3: much more effectiveness. Then we're just going to move the
Speaker 3: overnight funds right every six weeks.
Speaker 1: Like the balance sheet? How much would you be open
Speaker 1: to see the Fed use the balance sheet a little
Speaker 1: bit more?
Speaker 4: So?
Speaker 3: I think the construct of the balance sheet is important.
Speaker 3: So I think people don't realize there's a notional dynamic,
Speaker 3: and there's a DVO one, there's a duration dynamic.
Speaker 4: Further out the yield curve.
Speaker 3: I am sympathetic to should we keep the balance sheet
Speaker 3: around the same level, but you could be really effective.
Speaker 3: So today the US Treasury eighty nine percent of what
Speaker 3: the US Treasury finances is at the zero to.
Speaker 4: Two year point eight. Think about if you're a company,
Speaker 4: would you ever finance in the one year? Like it's crazy,
Speaker 4: but that's where we are today and it is what
Speaker 4: it is.
Speaker 3: So there's not that much float. Actually, longer on the curve.
Speaker 3: There's reason why people put on steepeners. I think it's
Speaker 3: squeezed out of steepeners because there's not that much float.
Speaker 3: You don't have to use that much balance sheet. But
Speaker 3: if you thought about, gosh, the construct of the balance sheet,
Speaker 3: if we used more of it further out the curve,
Speaker 3: we let runoff happen on the front if you can keep.
Speaker 4: The stability of the back end.
Speaker 3: So if you can keep the ten year, you know,
Speaker 3: we got to the tenure was three ninety. If the
Speaker 3: tenure was three and a half to four stable and
Speaker 3: rate vaul rate volatility came down all of a sudden,
Speaker 3: you'd see mortgage spreads could come in. Then you'd get
Speaker 3: and by the way, deregulation the banking system, then you
Speaker 3: get mortgage velocity moving.
Speaker 4: So, by the way, I don't think we're that far away.
Speaker 3: And by the way, you know this concept that you
Speaker 3: know we have to get the rate down hundreds of
Speaker 3: basis points, I just think we're not that far away.
Speaker 3: Just get it there, keep volatility of the rate market
Speaker 3: at a stable level, and then you'll see a system
Speaker 3: that will operate pretty well.
Speaker 2: Rick if Cinelot going back to the late eighties. How
Speaker 2: much fun you have in right now?
Speaker 3: I mean, I mean I said before, there's the best
Speaker 3: investment environment I've ever seen. I mean not because stocks
Speaker 3: are going to go straight out.
Speaker 4: I mean you have diversions that is great for investing.
Speaker 3: You have technology that's changing, and so the ability to
Speaker 3: look at tech stocks, healthcare tech, to look at you know,
Speaker 3: where some of the financials, how you create velocity in
Speaker 3: the system. And then you know the earlier conversation and
Speaker 3: we were talking about the break like now the income levels.
Speaker 3: As long as this interest rate stays here, you know
Speaker 3: what's ironic as commercially, you know, I prefer the interest
Speaker 3: rate to stay here because it's I mean, this is
Speaker 3: pretty good.
Speaker 4: We can create portfolios.
Speaker 3: We run the CTF called Bink, and you know, creating
Speaker 3: six six in a quarter, we're running almost six thirty.
Speaker 3: Now you don't have to take a lot of risk,
Speaker 3: you don't have to go out the yield curve. That's
Speaker 3: pretty good. So anyway, I think, and by the way,
Speaker 3: the options market, I think the best opportunities are in
Speaker 3: the options market. Rate options, equity options, and you could
Speaker 3: manage your convexi so you can be long equities and
Speaker 3: then buy a lot of you can overwrite your single
Speaker 3: name stocks, you.
Speaker 4: Can buy downside. It's a it's a fun environment.
Speaker 2: Well, leth Lene into Bink. You mentioned the ices, flexpeleective
Speaker 2: income ETF. What kind of things have you been doing
Speaker 2: over the past six months.
Speaker 3: You know, we've been you know, the cool thing about
Speaker 3: being active is you can move around because the regime shifts.
Speaker 3: And while you know, I was describing earlier like where
Speaker 3: do you think the interest rate should be?
Speaker 4: The truth is the interest rates isn't going to move
Speaker 4: very far.
Speaker 3: So you know, we're we're keeping our interest rate duration,
Speaker 3: you know, in and around four years. We've moved a
Speaker 3: little bit out of the very front end because it's
Speaker 3: pricing a lot now where this FED is going to go,
Speaker 3: then we've done. We've shifted some of our credit into
Speaker 3: mortgages quite frankly, if you believe rate volatility is going
Speaker 3: to be down, mortgages has become interesting and credit spreads
Speaker 3: have gotten pretty tight, particularly US investment grade has gotten
Speaker 3: pretty tight.
Speaker 4: So we've rotated out of that.
Speaker 3: We've bought a little bit of em recently, I would
Speaker 3: say recently, over the last six months, we haven't bought
Speaker 3: a m in a long time. You know, if you
Speaker 3: believe the dollar is contained, EM becomes pretty interesting. And
Speaker 3: the yields, you know, relative to high yield, the yields
Speaker 3: and EM are attractive. So we've cut a little bit
Speaker 3: of high yield, We've got a good amount of investment
Speaker 3: grade credit, and we've rotated. So today I think our
Speaker 3: average rating is as it's pretty good, so it gives
Speaker 3: us a little bit of room to do some things
Speaker 3: like EM.
Speaker 1: You said something that was interesting there, which is you
Speaker 1: don't have to go very far out the risk curve
Speaker 1: in order to get income. Now, because yields are high,
Speaker 1: if the FED were to cut rates, does that make
Speaker 1: you more inclined to take more risk?
Speaker 4: Yeah?
Speaker 3: I mean I have to say, you know, for two
Speaker 3: decades part of why I'm so excited about where we
Speaker 3: are today. For two decades it was I gotta buy
Speaker 3: how I yield at three and a half and four
Speaker 3: and it doesn't feel natural. But now if you have
Speaker 3: the risk free rate, particularly in the front end here, gosh,
Speaker 3: I put a little bit of spread on it.
Speaker 4: Now I get what is ample yield.
Speaker 3: With default rates that are not that elevated, you are
Speaker 3: seeing some bubbling defaults in a couple of places. So
Speaker 3: you know, I think the thing that we would do is,
Speaker 3: you know, I know what we would do is if
Speaker 3: rates come down. You know, I'm not a believer, and
Speaker 3: this is what blows you up. I'm not a Believer's gosh,
Speaker 3: I got I gotta keep that yield. I gotta get
Speaker 3: my risk up. You just have to absorb it and say,
Speaker 3: you know what, I'm going to run. I can't run
Speaker 3: six twenty five or so. I'm going to run five
Speaker 3: and three quarters of six. But you know what'll happen
Speaker 3: is a cash rate will come down and people say, gosh,
Speaker 3: you know what cash is only get me two and
Speaker 3: a half to three.
Speaker 4: That's an you know, inflation. Even if inflation's three like,
Speaker 4: it's still pretty great.
Speaker 1: Very few people on Wall Street door are saying, you
Speaker 1: know what, I can just live with less income.
Speaker 4: It's okay, I won't stretch too far.
Speaker 1: I'll be disciplined, and maybe I'll just take less cash
Speaker 1: and I'll commit to the economy. At what point can
Speaker 1: you imagine that things start to get a bit excessive,
Speaker 1: especially given the fact that there is a lot of
Speaker 1: cash right now looking for a home.
Speaker 3: So by the way. It's a funny thing is you
Speaker 3: say that. You know, we live in a competitive environment.
Speaker 3: We can't just sit back. I mean, it is a
Speaker 3: tough business and we have competitors and people are out
Speaker 3: there say gosh, I can get you more yield, and listen.
Speaker 4: I think one of the things you have.
Speaker 3: To do is you have to keep your volatility as
Speaker 3: long as you always think about what's your yield per
Speaker 3: unit of volatility? Today equities, I think equities are still
Speaker 3: going up fifteen to twenty percent from where they are
Speaker 3: over the next year. So I'm just trying to keep
Speaker 3: our volatility at a reasonable place. What is excessive? You know,
Speaker 3: there's some things that are bubbling in the markets that
Speaker 3: are mostly in privates that are gosh, I don't get
Speaker 3: any cash.
Speaker 4: Flow for two or three years. What's the multiple you
Speaker 4: put on that? Like?
Speaker 3: That stuff is hard. There are some really good business models.
Speaker 3: You say, I see it and it's almost definitional.
Speaker 4: You know.
Speaker 3: You see some parts of it where people are stretched
Speaker 3: and in some of the credit markets where some of
Speaker 3: the levels get aggressive.
Speaker 4: Part of why we've rotated some of the investment preate.
Speaker 4: It doesn't do that much for us anymore. At those
Speaker 4: spread levels.
Speaker 3: But I don't, you know, I don't see like you
Speaker 3: you saw before the financial crisis, excessive low you know,
Speaker 3: low covenant or easy covenants, high LTV financing.
Speaker 4: I don't.
Speaker 3: I don't see that yet today at the around the
Speaker 3: edges a little bit, but not not really.
Speaker 2: Fifteen to twenty percent on stocks, yeah, now the double
Speaker 2: digit yeah.
Speaker 4: You know, I don't. I think.
Speaker 3: I mean, I think we're living through history because if
Speaker 3: we're what you asked about before, because productivity and ROE
Speaker 3: is so spectacular. And by the way, I don't think
Speaker 3: it's five hundred stocks. I think it's by the way,
Speaker 3: we were a stat yesterday, if you take the S
Speaker 3: and P fifteen hundred, it's is this right that I heard?
Speaker 3: It was twenty two percent off the highs. I thought
Speaker 3: that number of rust constrat to work with Dogeleman. I
Speaker 3: thought that was extraordinary. If you take the highest ROE businesses,
Speaker 3: you know, let's say it's thirty stocks, fifty stocks, tech, healthcare,
Speaker 3: attach some of the financials.
Speaker 4: They're doing really well.
Speaker 3: They throw off a lot of armings, their ROE is high,
Speaker 3: and they buy back huge amounts of stock. You know,
Speaker 3: small cap don't really know, but there's enough with enough
Speaker 3: market cap that I think will get you that sort
Speaker 3: of return.
Speaker 2: Stay with market Wait on the s and P five hundred,
Speaker 2: where's the concentration?
Speaker 3: I mean we're long, I mean we're you know, we're
Speaker 3: you know, we've reduced a little bit of beta. When
Speaker 3: when equity volatility picks up, I have to bring my
Speaker 3: beta down a little bit.
Speaker 4: But I'm still running long.
Speaker 3: And you know, days like yesterday, you know, and uh,
Speaker 3: you know, single name, you know.
Speaker 4: We get these earnings reports and single name vault.
Speaker 3: Is high because you know, if company does own hit
Speaker 3: these excessive numbers, they hit the stock. So you can
Speaker 3: still do some things to protect some downside. And by
Speaker 3: the way, interest rates, if you believe the Fed is moving,
Speaker 3: albeit deliberately, interest rates actually act as a reasonable hedge.
Speaker 4: Again, so there's some correlation or rate that's allowed us
Speaker 4: to run a moderate long rick. It's going to see it.
Speaker 4: Thanks for having me banks so long.
Speaker 2: We appreciate it. Set and best of luck with the process.
Speaker 2: I've done you a long time. Blackrock wins either way,
Speaker 2: thank you. So the country wins either way, thank you, sir.
Speaker 2: Black Cross rick rata