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Mint Mobile Advertiser
Indiana University is shaping the future of healthcare advancing discoveries that become treatments for.
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Matt Miller
Alzheimer's, obesity and cancer and training the providers trusted to deliver them.
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Rick Reeder
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Mint Mobile Advertiser
Bloomberg Audio Studios podcasts, radio.
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Matt Miller
News.
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Bloomberg Host
Data and earnings are painting a mixed picture. The economy, economy, ISM services, ADP employment they come in solid Challenger job cuts those jump to one of the worst October's on record ruining these markets or the rally yesterday. Let's try to get a sense of direction bringing bringing us that now is Rick Reeder chief investment officer of Global fixed income at BlackRock. And Rick, we always have you on a jobs day and today is decidedly a jobs day that should have been. Are you just flying blind? I mean this data depends what you look at. You can say the economy is great or things are falling apart.
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Rick Reeder
You know it's funny. Thanks for having me on by the way. You know it's a funny thing, you know I found that the industry's obsession with these individual days the by the payroll reports a great, great economic indicator CPI report there is so much information that comes through the system by the way my favorite I read tons, maybe too many corporate earnings reports and I look at what's happening with hiring, inventory management, receivables, etc. So there's still I mean you know, would I rather have the data for sure by the way I think the markets become hamstrung and I think part of why the markets are acting in this sort of paranoid, you know, what do people know? What's the information out there matter today? I think the. But you know, I feel pretty good about knowing the structural direction of travel. I think the economy's in good shape, there are parts of it it's not operating on all its cylinders which is talking about Capex is great. High income is doing well. Low income in the, in the consumer side, not so much but I feel pretty good about understanding and listen I think, I think, I think we have a softening of the labor market that is quite significant and you see that as you mentioned the challenger jobs report, you see that playing out. You certainly see that when I look at all the corporate earnings in terms of that we have a softening labor market and if we had the number today I think it would have been reflective thereof.
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Matt Miller
Yeah I mean on flying blind I couldn't agree with you more and no one cares what I think but Bob Michael of JP Morgan has made this point. Rich Clarita, former vice chair of the Fed confirmed they have like 500 economists, they have 12 regional banks, they're talking to participants, to companies, to institutions every single day. So they have a pretty good handle on the economy even without it. I wonder about what you guys have at BlackRock. I mean you have $10 trillion of assets under management, right? What kind of signals are you looking at? What kind of proprietary information are you getting that helps you in your job? Rick?
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Rick Reeder
You know, Matt, it's a great question. By the way, this morning we went through credit card data. So you, you know, it's, it's all available information. So we end up, we had a gentleman named Randy Berkowitz who drives every day we look at what's happening in terms of if you go through the Internet, you splice some of the credit card data that comes out, you get an amazing amount of high frequency data. So we'll use that, we use a series of data assimilation tools by the way, text mining to understand what companies are saying. So anyway, we're trying and by the way, we don't have figure it out yet, but you know, we're trying to be pretty cutting edge around the amount of tools we use and how AI is helping us, you know, by the way, also in things like how do you think about scenario analysis, how do you think about, you know, the first derivative rate of change on inflation and growth? So listen, I think part of the why is most exciting times for investing ever is the amount of tools you can utilize that allow you to get more verse around what the direction of travel in is. Is, is, is pretty intense today. So you know, we're still working and trying to figure out more tools we could use. But there it's, it's so much different than quite frankly five years ago, ten years ago.
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Bloomberg Host
Rick, I would be very interested to know if any of that data, any of the tools that you've been using and look and looked at have changed some of your allocations or how you're thinking about bank right now.
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Rick Reeder
So it's great question, thanks for asking. I mean, so, so bank, you know, there is something that is, I think pretty intense around. So bank, you know, has had a, has had a good run. We feel good about where it's going and more and more people coming into it. The thing that it's allowed us to think through is today you've got, you've obviously got the way the Fed's going to interpret the data, which is not always what I agree with, but the Fed's going to interpret the data as you've got inflation. That's a little sticky high and then employment that's moderating. So we thank you. You're in this and by the way not just the Fed, the ecb, the bank of England, the rba, they're in this point of let's sit back and watch the data. So the way we move our positions around is we've reduced a little bit of our interest rate sensitivity. We pulled some of our interest rates sensitivity out of the front end of the yield curve and said gosh, let's just get carry we can reduce a little bit of our duration. We've reduced a little bit of our investment grade more than a little bit of our investment grade credit because quite frankly today where spreads are it doesn't do a lot for us. And if rates are pretty stable mortgages become agency mortgages become much more interesting and low coupon agency mortgages become much more interesting in the portfolio. So we've been doing that. We by the way we look at the data including last night, you're seeing with the mortgage rate coming down a bit of prepayment faster prepayment. So we've reduced some high coupon mortgages and a lot of technical there but some stuff moving on we should point.
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Matt Miller
Out for viewers who don't know bank is the iShares Flexible Income ETF that Rick runs at BlackRock. Rick is going to stay with us through the opening bell into the equities trade. Next this week is Bloomberg. Let's bring back BlackRock Chief Investment Officer of Global Fixed Income, Rick Reeder. And Rick, can I ask you about that? I mean is this market too frothy? Our valuations, are we getting too far ahead of ourselves here? Because I was looking at the other day the Warren Buffett, you know, valuation stocks market capital versus GDP, it's at the end highest level at least since 2000. And the same is true of the case, the Shiller case Cape ratio. Sorry, you can see this great chart here that shows you we're pretty highly valued on these two measures. Are you worried about the froth?
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Rick Reeder
So you know there's something by the way this time of year you tend to get momentum gets chased out of the markets. Particularly today we have ambiguity around some trends that are taking place. So by the way, I know I don't think it's an AI bubble and I don't think there's too much froth. And depending on where you go, if you look at some of the big hyperscalers that trade at 2020-25, 26 times earnings and they throw Off ROE return on equity of 30, 35, 40% and you look at their free cash flow, I've never seen in my career free cash flow generation, we can talk about top line revenue growth. When you can have that much free cash flow generation allows you to do your capex, which is extraordinary today, build our R and D which, which is your, your future cash flow and they can buy back your stock. So what's happening? You have an unbelievable dynamic and by the way, we're now about to open the buyback window that you have this dynamic. You throw off immense amounts of free cash flow. And so there's multiples are not scary, there are parts. I see it in the private market and I see it in some places where you're seeing businesses that have no cash flow for a number of years, how much would you finance those? So I do see froth in some areas, but in the traditional big market cap stuff, and I would say related to that in semis in health care technology where you're seeing rapid change but real cash flow alongside of it, it is the exact dichotomy of what you saw in 2002.
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Bloomberg Host
Why do you have these large cap giants tapping the bond market to the degree they are, and not just the broadly syndicate market, but also raising capital off balance sheet too. If they were so confident and have such robust cash flows, is that not a concerning turn of events that they're instead building up on debt piles?
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Rick Reeder
So, so first of all, when you look at the, when you look at any measure debt to ebitda, you look at their debt to book cap, debt to market cap. These companies are under geared or under levered. Their cap structure is so low in terms of leverage relative to certainly relative their market cap, but relative their book cap. If you were running a big mature company, you think about what is your normal cap structure look like. And if you're going to fund near term capex over the next couple of years, if you can do it out the yields curve, which is where you see a lot of that financing take place to say gosh, I am throwing off a lot of cash flow, but if I can lock in these rates and if I'm as a shareholder of any of these companies, I say why in the world would you fund everything with equity? Or why wouldn't we put a little bit of debt, get a little bit of gear and get your ROE higher? So I just think it's a natural evolution of gosh, this is how you run a big company and this is what a normal cap structure Looks like.
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Matt Miller
I mean we were just talking about global bond sales hitting $6 trillion, an all time record. That's pretty incredible. And the, and the, and the return on fixed income has been great this year as well. Finally, how, how could we be in a world with tight financial conditions when this is happening? It just doesn't make any sense to me why the Fed would want to be cutting into this.
- [09:37]
Rick Reeder
So, so you got good, you've got what are, I would argue there's an immense amount of cash that came from certainly years ago at fiscal monetary stimulus. So you know, I don't think financial conditions drive, Financial conditions are great for older savers in the economy. The interest rate tool today is incredibly powerful on parts of the economy that are really struggling. Low income, small business, the housing market, by the way, the government debts since 89% of what the government funds is in 0 to 2 year part of the yield curve. So it has a huge influence on what taxpayers are paying for, for debt today. So my view today, what the interest rate tool does, you know, the idea it affects inflation, I've been saying this for months. It's very hard for the Fed to bring down sticky inflation. Health care, education, insurance, not terribly robust. But you do actually, if you bring the rate down, you will bring down the mortgage rate which you're seeing play out well, but not for more Americans.
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Matt Miller
Rick, Diane Swonk has said, you know, bringing down these rates is not going to affect subprime rates. And 25% of the country is below 690 with a credit score. Also, I don't see how a lower rate adds jobs in an environment where companies are cutting headcount to try and offset higher tariffs to their margins.
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Rick Reeder
So you know, I would have said this for months now. I will say one thing. The Fed doesn't create jobs directly, but you think about what happens. Small business does. 44% of the hiring in the US is small business. The rate's too high for small business. Second, you think about what happens in the housing market. We put 3.1 people to work for every home built in this country. If you get the mortgage rate, by the way, you don't have to get it down that much, but if you got it down 25, 50 basis points, you increase labor mobility. Your point is right. Companies, we are in a productivity revolution. Companies are going to cut jobs. But if you increase labor mobility because people can sell their house, move to another state where they get a job, if we actually put people to work in building houses, you bring down shelter inflation. The Fed can't create jobs, but you can ameliorate some of the stress that's happening because of productivity. And people talk about productivity is like I, it is happening everywhere. We talk about freight, how we do logistics, how we do inventory management, how we do customer procurement. Productivity is exploding. We don't need as much labor collectively in the country. You know, bringing that rate down in the places that can actually help will actually at the margin help help a labor dynamic that I think today you'll see see not just what you're seeing in the last four months, but what you're going to see for the next couple of years.
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Bloomberg Host
And Rick, these conversations and especially your viewpoint is made all the more important. We have to ask because last week, the beginning of last week, Secretary Scott Benson confirmed his list for Fed picks, your name among them. How have those conversations gone?
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Rick Reeder
No, I can't, you know, I can't really comment. I wake up in the morning and I try to figure out the spline of the yield curve and what your comments about fast food versus Fed like should we be buying this stock or that stock? That's what I got to focus on that. And so anyway that, that's, that's what I'm doing today. Even exciting time to do it.
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Matt Miller
Rick, even if you're not confirmed as Fed chair, everybody has a view about what they would do differently at the Fed. What, what are some of the changes that you would make?
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Rick Reeder
You know, I've, listen, I mean I, all I'll point to is what I've said for many months now is, is I think there are some things too that you can do that, that to create velocity in the system. Nobody borrows off the overnight funds rate anymore. Velocity happens where financing happens out the yield curve. Things you could do to keep that stability of the back end of the yield curve, to keep the mortgage rate in a place where we get real velocity, existing home sales moving. So I think there are some things that are, that are, that can be done, that are, that are, that are interesting. And listen Matt, I mean, you know, I've said it publicly for many months now. I think if we're running break even, you could buy in the market today, five year inflation breakevens at 2.35%. I think the funds rate should be a 3 and I just think you could move it there and then you don't have to go much further. I just think the price, you know, in markets if something's priced wrong, you get it there. I just think we can get it there and Then, and then look at when, then take another view on where are we today and do you have to move higher or lower? But anyway, I would, I think we could move right a bit lower.
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Bloomberg Host
Well, Rick, you know it's, it does have this feeling that whoever is next and whoever's next leading the Fed that there will be this difference in tone when we have this scenario where Chair Powell's term is up and we have our next chair in waiting, whoever that might be, how should that person handle that kind of lame duck gray, period.
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Rick Reeder
From an investor point of view or.
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Bloomberg Host
Just communication to the markets, how should that look when Chair Powell's term is over and we're waiting for the newly confirmed Fed chair?
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Rick Reeder
Listen, I think it's tricky. I mean, you know, I have incredible sympathy for and quite frankly, you know, the sanctity of what that institution is. I think what they will continue to do and I think what they do today is they make judgment based on here's the data that we have to interpret what is the right thing for the population at large in terms of managing that policy. And you know, I really believe in this and I certainly believe in this Fed chair and this Fed committee that I think they're going to make the decision based on, let's evaluate the data, interpret the data and make a decision based on that. And I don't think there's any reason to believe that happens any, any other way than that.
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Bloomberg Host
Well, Rick, you certainly do that for us and we are very appreciative, appreciative of it. To get all of your thoughts from what's going on with bank to the labor market and beyond. Rick Reeder, thank you so much for joining us.
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Bloomberg Host
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