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Speaker 1: Brings up to date on whether the current interest rate

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Speaker 1: policy is likely to give us a similar recession. Welcome

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Speaker 1: back to Rick Reader. He's Blackrock CIO for Global fixed

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Speaker 1: Income and head of its Global Allocation Investment team. Great

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Speaker 1: to have you back on Wall Street. Reach for me.

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Speaker 2: So where are we right now?

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Speaker 1: Not too long ago, a lot of economists, including FED

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Speaker 1: economists as well as Bank of America others were saying

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Speaker 1: We're going to recession. They've all changed their mind.

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Speaker 2: Where are you? So? I think?

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Speaker 3: And I did a presentation a while ago I'd called

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Speaker 3: the US economy the polyurethane economy because of how resilient

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Speaker 3: it is, like one of those temperpedic matches, and how

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Speaker 3: resilient it is that is very hard to dent it.

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Speaker 3: And you think about, I mean the economy today versus

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Speaker 3: twenty years ago, seventy percent consumption, seventy percent services. Think

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Speaker 3: about to create a recession. If you're seventy percent services,

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Speaker 3: which are amazingly stable, they don't go in the recession.

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Speaker 3: Your goods far to your economy, which now fractioning the

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Speaker 3: economy has to really become devastated the other side of it,

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Speaker 3: I think people misinterpret us economy is not as interest

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Speaker 3: rate sensitive as well as twenty thirty years ago. People

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Speaker 3: have locked in their mortgages already, the banking some runs differently,

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Speaker 3: commercial real estate gets hurt, companies have turned out their debt.

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Speaker 3: They don't rely on the front end of the yield

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Speaker 3: curve like they used to the Fed funds rate. And

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Speaker 3: then the last point is the big spenders on capaxin

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Speaker 3: US economy are companies tech companies. They're not big borrowers.

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Speaker 3: So I think people overestimate. When the Fed racers rates

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Speaker 3: this much, you hurt parts of the economy, the regional banks,

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Speaker 3: of small banks, your commercial real estate, but the rest

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Speaker 3: of the economy is amazingly resilient to it.

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Speaker 2: So it's fascinating.

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Speaker 1: I guess the answer is the question of why Sony

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Speaker 1: Peel got it wrong? Is they had the wrong model.

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Speaker 1: Do we have to revise our economic models going forward

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Speaker 1: for the reasons you just identified. It's a different economy

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Speaker 1: there was twenty years ago one.

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Speaker 3: Hundred percent by the way, now is it a different

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Speaker 3: economy today? So we try and model and project what

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Speaker 3: inflation is going to look like two three years, hence.

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Speaker 2: Let alone for the next year.

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Speaker 3: Think about now how the economy is evolving around AI

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Speaker 3: and productivity and how jobs.

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Speaker 2: Are going to evolve.

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Speaker 3: Very hard to think about economies. People look at the

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Speaker 3: analog from ten years ago, twenty years ago, and what

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Speaker 3: happens when rates move.

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Speaker 2: I think you have to look.

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Speaker 3: I mean, we're trying to spend more time on as

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Speaker 3: environmental conditions that you're operating within and what impacts it

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Speaker 3: in other Wise, you know, you talk about we have

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Speaker 3: a need for more people the unemployment rates is that

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Speaker 3: three and a half percent is a structural reason. You

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Speaker 3: look at and we've talked about on your show a

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Speaker 3: bunch of times, you look at the number of people

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Speaker 3: hired for healthcare, education, not interest rates sensitive. There's a

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Speaker 3: shortage leisure, hospitality, hotels, restaurants. There are shortage of people

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Speaker 3: when you have a three and a half percent unemployment.

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Speaker 2: Because it's structural, it's pretty hard.

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Speaker 3: For the economy at good wages, pretty hard for the

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Speaker 3: economy to go into a deep percession when so much

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Speaker 3: the economy's consumption.

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Speaker 1: So so let's take a look at the investment profile.

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Speaker 1: Given what you've just said, where does the ten year

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Speaker 1: want to be? Because so many investment decisions are really

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Speaker 1: keyed off of where the tenure yield is, what does

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Speaker 1: it want to be right now? Because I hear people

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Speaker 1: saying in the mid threes, low threes. I hear people

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Speaker 1: say in the mid fours.

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Speaker 3: So you know, I think, you know, around four percent

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Speaker 3: I think is a reasonable resting place.

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Speaker 2: You know. My sense says, there's.

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Speaker 3: A couple, a couple of factors that work against one another.

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Speaker 3: First one is treasury is issuing an amazing amount of supply.

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Speaker 3: We're going through the issues and the Treasuries just announced.

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Speaker 2: Are going to increase the supply.

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Speaker 3: Longer on the curve, they relied on immense amounts of

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Speaker 3: treasury bills. You're seeing this almost almost three hundred billion

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Speaker 3: a week gross supply, not net, but gross supply of

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Speaker 3: treasure bills. So you're gonna get more supply. So that

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Speaker 3: tends to push rates a bit higher. However, inflation is

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Speaker 3: coming down. You look at the CPI data, and I

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Speaker 3: was looking at the three month moving average of core CPI,

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Speaker 3: if you strip out some of the use this funky

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Speaker 3: used car stuff, is only one percent. So now you

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Speaker 3: take okay, so it's actually one point one percent three

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Speaker 3: month moving average, So you say, okay, A tenure.

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Speaker 2: Note now the real rate net of inflation, it's not bad.

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Speaker 3: I mean the level on tenure. So I don't think

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Speaker 3: we're going very far. I think the supply could push

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Speaker 3: ten years a bit higher. If you said to me

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Speaker 3: where we're going to be six months from now, nine months,

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Speaker 3: around a year from now, I think the ten yure

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Speaker 3: is going to migrate lower because if you believe that

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Speaker 3: inflation coming down, which I think is right, then the

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Speaker 3: ten years should start to move closer to three to

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Speaker 3: three and a quarter. And I think we'll see that

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Speaker 3: next year. But you know, for the next couple of months,

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Speaker 3: it's sticky at these levels.

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Speaker 1: We had so many debates about hard landing, soft landing.

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Speaker 1: What kind of landing you suggest me we may not

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Speaker 1: having landing at all. Yeah, So given that, does that

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Speaker 1: change your investment outlook?

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Speaker 2: Right now?

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Speaker 1: Does it change how you invest your money? So?

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Speaker 3: Did I say one thing about I mean, I think

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Speaker 3: the economy is moderating from extraordinary twelve point three percent

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Speaker 3: nomenal GDP and twenty one seven and change percent and

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Speaker 3: twenty two That is unbelievable.

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Speaker 2: I'm not saying we can't slow a bit. And you know,

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Speaker 2: even could.

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Speaker 3: You have a technical recession. I just think like you'd

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Speaker 3: have to wake people up and tell them because you're

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Speaker 3: operating at such a high level in the economy. So

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Speaker 3: how do we think about it? Listaid, I think there

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Speaker 3: are a lot of you know, equities that make sense today.

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Speaker 3: The equity markets had a really good run. Seven stocks,

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Speaker 3: eight stocks have driven it. There are a lot of

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Speaker 3: companies if you believe the economy is stable. You can buy

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Speaker 3: a lot of businesses that traded three four, five times

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Speaker 3: cash flow if you the economy stable, autos, airlines, home builders,

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Speaker 3: some of the energy.

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Speaker 2: Infrastructure traded pretty low multiple. So I like owning the

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Speaker 2: equity market. So I like running portfolios.

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Speaker 3: I think you have upside inequities and then you can

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Speaker 3: create amazing amounts of carry the front end.

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Speaker 2: I can talk about the front end the yield curve.

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Speaker 3: You can buy commercial paper pine six percent if you

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Speaker 3: can create a six and then own some equity. And

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Speaker 3: by the way, I guess your point about do I

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Speaker 3: need to own a lot of ten or thirty year

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Speaker 3: treasuries that at four I don't know, not that interesting.

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Speaker 3: But I can buy a lot of front end, a

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Speaker 3: lot of yield, and then buy some equity and so

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Speaker 3: get some upside with some real income and.

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Speaker 1: The equity front. Talk about the discount rate, because we're

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Speaker 1: up now north of five right. Some people think it's

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Speaker 1: going to come back down next year fairly quickly.

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Speaker 2: Other people think it.

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Speaker 1: May stay up there. That really affects the value of

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Speaker 1: those equities and the valuations you're talking about, doesn't it

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Speaker 1: one hundred percent?

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Speaker 3: And so, by the way, my base case is that

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Speaker 3: inflation is moderating, those real rates we talked about should

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Speaker 3: come down with a FED that's arts that is now stable,

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Speaker 3: and we'll start cutting rates. So I think the equity

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Speaker 3: market next year will get a nice boost from what

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Speaker 3: I think will be a.

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Speaker 2: Reduction of the interest rate. By the way, credit spreads

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Speaker 2: are also really tight. Companies don't borrow off.

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Speaker 3: They borrow off of their spread to treasuries and it's

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Speaker 3: they're pretty tight. So the discount rate is not bad

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Speaker 3: today for equities, but it is my senses, it's going

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Speaker 3: to come down from here.

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Speaker 1: So you went anticipating FED cutting rates next year, I

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Speaker 1: mean how early and how much?

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Speaker 3: I mean I think the FED would like to stay

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Speaker 3: on hold for a period of time, But I think

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Speaker 3: as you get into the second half of the year,

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Speaker 3: and you know, maybe earlier if inflation accelerates quicker, you know,

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Speaker 3: can you do start to do twenty five's a meeting.

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Speaker 3: I think so, I think so. I think these are

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Speaker 3: I think these restrictive rates.

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Speaker 2: You know my senses.

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Speaker 3: I talk about your show a lot there because of the

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Speaker 3: economy is not as interest rates sense have used to be.

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Speaker 3: Those restrictive interest rates really hurt small banks, They really

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Speaker 3: hurt commercial real estate, They hurt targeted parts of the

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Speaker 3: economy which quite frankly, I think have been over done.

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Speaker 3: And the other thing they really heard is the US

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Speaker 3: government is running over thirty trillion a debt. The Treasury

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Speaker 3: has usually borrowed its treasury bills at zero with a

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Speaker 3: huge part of their of their borrowing scheme is at zero.

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Speaker 2: Now it's at five and a half percent.

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Speaker 3: The debt service in this country will choke the amount

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Speaker 3: of fiscal spend that we can have in the country.

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Speaker 2: The Fed needs to.

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Speaker 3: Bring the raid down so that we don't create too

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Speaker 3: onerous a problem in terms of debt service in the country.

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Speaker 1: Since we last got to talk to you on Wall

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Speaker 1: Street week, you've got a new gig. It's an etfeh

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Speaker 1: tell us about ETF and why you're doing. What's the

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Speaker 1: itch that you're trying to scratch that hasn't been scratched.

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Speaker 3: So there is I mean explosion of ETFs. People use

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Speaker 3: them in so many different ways. You can trade them

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Speaker 3: all day. They're tax efficient money ways.

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Speaker 2: People like to put them in models.

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Speaker 3: They said, I've got this ETF, they can they buy

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Speaker 3: and sell anyway. So we've been asked to do an

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Speaker 3: active ETF, and so there's been a tremendous growth of

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Speaker 3: passive ETFs, both in credit and rates, et cetera.

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Speaker 2: And now you're seeing more than people want act.

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Speaker 3: So give me in fixed income, most managers outperform indices

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Speaker 3: consistently over time for a variety of reasons. There's sixty

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Speaker 3: eight thousand fixed income securities. Compare that to the SMP

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Speaker 3: five hundred. There's so many tools we have, and so

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Speaker 3: people have asked for gosh, I'd love to get the

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Speaker 3: exposure in an ETF form. Give me something that can

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Speaker 3: get me a little bit more juice. And so in

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Speaker 3: this new one we're doing called Bink, you know we've

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Speaker 3: got it's a seven percent yield. You know, we manage

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Speaker 3: you know, sometimes we're in securitized assets. Sometimes we're in

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Speaker 3: high yield, were moving around tactically credit, investment grade credit,

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Speaker 3: and to get that sort of yield and then have

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Speaker 3: somebody it's hard as an individual to buy securitized assets.

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Speaker 3: You can buy clos or commercial mortgages to many people

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Speaker 3: like evaluating the collaterals hard and so you know, we've

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Speaker 3: been doing it for a million years, and so anyway,

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Speaker 3: it's becoming really attractive and there's a lot of excitement

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Speaker 3: around it.

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Speaker 1: So Rick explaining the mechanics of this. We hear so

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Speaker 1: much about private credit and the growth of private credit.

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Speaker 1: How does something like your ETF interact with the big

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Speaker 1: private credit.

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Speaker 2: Guys, Oh, that's a great question.

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Speaker 3: So private credit today and you think about how the

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Speaker 3: world is evolved. We talk about carry and we talk

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Speaker 3: about income you get today. Private credit now, you know,

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Speaker 3: versus private equity. Private equity is hard because you can't

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Speaker 3: with rates where they are with the public market rates.

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Speaker 3: Because we can create a seven in liquid markets, we

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Speaker 3: talk about do the CTF. Now, private credit's got a

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Speaker 3: price behind that. And by the way, private credit incorporates

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Speaker 3: also real estate financing, et cetera. You can get private

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Speaker 3: credit at ten eleven twelve percent with real collateral, real covenants,

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Speaker 3: and create a.

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Speaker 2: Really nice structure.

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Speaker 3: So I think private credit is going to grow the

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Speaker 3: next few years. Harder for private equity when you have

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Speaker 3: to finance at twelve then when you financed that mids

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Speaker 3: mid to mid single digits, mid to high single digits.

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Speaker 2: So it's a really big deal. I think private credit

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Speaker 2: will be.

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Speaker 3: You'll see a lot of people, you know, buy things

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Speaker 3: like you know, the v ETF where you can come

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Speaker 3: in and out of it, get them real yield, and

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Speaker 3: then also say, you know, private credit gonna own that

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Speaker 3: for three years, five years longer.

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Speaker 1: Okay, Oh, it's such a treat to have you on.

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Speaker 1: Thanks you so much. That is Rick Reader of Blackrock