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BlackRock Global Fixed Income CIO Rick Rieder Talks Growing Economy, Data Center Spending
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Let's get more on markets now. I'm so pleased to say that I'm joined by the BlackRock CIO of Global Fixed Income. Rick Re. Rick, great to see you. I know freshly back from Davos. Hopefully the jet lag hasn't got you. What was your take on this, on this jobs figure 115. Finally we got back to back gains for this jobs market.
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Yeah, I mean there's some good things going on. I mean it's healthy to see, you know, that sort of positive game you say back to back. I mean, listen, I, I think, I think the economy's growing. I think the economy is growing quite vigorously. I think you could hit 6% nominal GDP this year. But you know, I always think when we look at the top line number, it's not nearly as interesting as what's happened under the surface. Know the last six month moving average of jobs is pretty incredible, is 55,000 jobs, 54,000 are in health care. So meaning you don't really have any job crash. And if you go deeper into it, you have an economy that's doing really well, but the bifurcation is incredible. So you think about, you know, second numbers. Manufacturing as you said, is, is softer. Real estate is negative jobs. And so if you think about, gosh, the sectors that I think, and this is, you know, we get into the interest rate tool, the sectors that are sensitive to interest rates are still difficult. And actually, well, the one I also think is fascinating, we look at information hiring, so that's in and around technology. And you look at the last four months, it's negative.
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Yeah.
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Why is that happening? You actually have what is extraordinary capex by these companies that are spending on Capex but you don't need the people and, and you're seeing companies that are, that are, you know, spending huge amounts of capex and then they're announcing significant layoffs. So you have an economy that, you know, the top line is interesting. When you strip out health care, it's like, you know, we need to create a little bit more hiring. The supply is not that high so the unemployment rate doesn't move. But there's something underneath the surface. When you think about what's happening and how the economy is stratified, that I think is pretty fascinating.
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Today I think that is so interesting too, Rick, and this is something that I've been looking at over in the past week of okay, we have all this spending on data centers. What does that actually do to jobs? Here was kind of cobbling together various studies. The picture that I got. So for every $1 billion invested in data centers, it only creates features, 50 permanent jobs. If you were to compare that to something like a traditional automotive or pharmaceutical plant, that same spending would create 1500-2000 jobs. This idea that you build the plant that requires work, but the permanent people, it's like, you know, a few H Vacs running around trying to fix things. Is it dangerous that that's what we're spending on in this economy? Something that doesn't create as many permanent jobs that other types of capex would?
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And I mean that was pretty good describe and I could describe it better than that. Please think that's exactly right. I mean, I think, I think, I think we have a dynamic that we have a productivity revolution coming. And if you think about, you know, what's fantastic is you've got to get an aging demographic that supports health care jobs. You know, you've had job creation, education, that's great. But you know, you have a dynamic that if, you know, and I think from a Fed's perspective, otherwise if your perspective about where we're going, real productivity, real productivity means, gosh, you don't need to use as much labor. And today you look at, you know, you look at the average hourly earnings number today and like, you know, you know, there seems to be a bit more slack than that top line number would suggest. I think today numbers are pretty good. You would think you would. So I say the numbers are okay. If you think that, you know, the next month you could have also decent jobs because you're hiring some people in, in health care and maybe a little bit of infrastructure build. But the prospective I think is a bit more concerning. And you know, I think the training, the retraining, how the, how the economy transitions people, I think is going to be a really big deal going forward. Part of why I believe we got to get housing moving, you got to get real estate moving because it creates so much velocity in, in areas that are not as sensitive.
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What about beyond housing, Rick? And it's a point that you've made while on this program many times before on what's necessary to get this economy going. But I just wonder if this is the future that we're heading to. I mean, things are advanc so fast Anthropic growth is like bigger than zoom during the pandemic, bigger than Google during the dot com run up to the dot com bubble. I mean, what do we do when these things are growing so fast? I mean, part of me just being a pessimist and maybe a skeptical journalist just feels like we're in a world in an economy that's not fully prepared for that future.
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I'd say that's right as well. I think, I think the world, I mean I've, listen, I feel every day I come in and I think, okay, I'm prepared for the day. And then by the end of the day I feel like I'm behind because it's just happening so fast and the transition of things so fast. Listen, we're building and using a load of these tools and I think it's incredibly exciting. And then you look at the equity market, what's driving the equity and people say, gosh, there's a bubble in the equity market. It's actually not because you're seeing this sort of spend and expenditure and earnings growth and cash flow alongside of it. It's just happening so fast and quite frankly it's just creating a greater and greater stratification of the economy. It's, I mean it's, it's one of the most interesting times I've ever been around to try and think about investing relative this. But it's, it's not all good news. But in some areas it's, I mean it's explosive and from a growth perspective, true.
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Okay, so what is the positioning you do according to this, Rick? Because again, a lot of what we're talking about are longer term consequences. It's kind of the big left tail for now. As we were just talking, the jobs picture today is incredibly stable, if not strong.
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So you know, I still think the job market is okay. But, but the, so I mean I think my, my view is if you take today and say, gosh, what is more attractive, equities or interest rates? Listen, equities have, have upside to it. You're watching the convexity of equities and by the way, you don't create any new ones. Even though you get some IPO calendar, the buybacks are much, much, much bigger. So the technicals and equities are great. So I still like equities versus interest rates and I like equities married to income. And because you have an economy that's growing like this, you think about some of the yielding markets in securitization markets, high yield markets, pretty hard to have a default cycle of significance other than parts of the securitization market that are tethered to lower incomes. You think about subprime auto, you think about some parts of credit card. So I think this is like take income, take equities, marry them together, manage your volatility. And that's, you know, it's been working and I don't know why that would change, you know, to buy long term interest rates and say, gosh, you know, you know, let's see where rates go. I think you have a Fed that's unstable, that's, that's on hold, I should say. And by the way, there's some really interesting things to do around the world in fixed income as yields have gotten higher in places like Europe where growth is not nearly as robust and probably slows from here, Rick, I want to
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talk more about that, but just on the other side of this break because we have to talk about bank and we need a bigger chunk for that because it's the fastest growing fixed income ETF there is. But, but just before the open, I am curious, you talked about sort of bets that would be around the lower income stratum of the US Only a minute here, but there's been a lot of CEOs from Craft to McDonald's saying that confidence among shoppers and consumers is slipping. Is that just confined to the lower income stratum or is there anything in there that's making you worry for more widespread weakness?
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I mean, yesterday was incredible. I mean look at, you know, what were the, some of the stocks yesterday? Planet Fitness, Shake Shack. I mean, you know, it's incredible in terms of the divergence. It is generally not, not ubiquitous to, you know, broad consumption overall, but it tends to be very much lower to middle income. And I think there's a cumulative effect from the gas prices that you got to be sensitive to. Listen, the aggregate consumer is still spending, but it's largely older net savers, wealthier people that are keeping consumption in pretty good shape in aggregate.
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I'm going to be honest, my messages just blew up with questions from you. I've actually gotten multiple questions on this. So I just want to start with here on where on this curve you'd be positioning and in what geographies.
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So I mean, you know, quite frankly, recently I found Europe to be, to be pretty interesting. So, so just put in perspective. So today I was looking at if you're a dollar investor, you know, you could buy things like Spain and Italy. And I was looking at the, you know, if you assume you move on the yield curve not to get too technical, you get a cross currency swap, you get close to 7% in Italy, you know, mid sixes, Spain, Italy and you say gosh, I'm buying single be high yield at those levels like that seems okay to me. You know, is ECB going to, going to hike? Probably they' economy but then the economy is going to slow. That's been really interesting. So you know, do you go a bit further out the curve to take advantage of that? That's been pretty interesting, you know, today. Listen, I don't think, I don't think we're going to make any real money in interest rate exposure today, you know, so we're you know, hanging in the front to the belly of the curve generally in the US And I mean honestly what I'm trying to do today, you think about, you know, diversify, diversify, diversify. In equities you can't really diversify. Tech is just going to keep driving it high is, you know, driving higher. It's pretty unbelievable. I'm just trying to create diversification, stability income so people can marry it to their equity portfolio because equities are harder to diversify. If I can keep stable income using the securitization market, that to me is like I'm trying to do, you know, you know, what used to be 6040 just give me stability with, with volatility that's got some upside convexity to it and you know, and marry diversification to what is harder to diversify. And that's what, that's what I'm trying to create in fixed income today. Just keep clip and coupon and marry that to your equity beta.
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Rick, I have heard the argument that a 30 year yield just hovering under 5% is an attractive level. That it's cheap, it looks good with the Fed, that for structural reasons won't see sustained inflation and will need to continue to cut. What do you think, thinking about duration at this point?
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So I think it matters who you are a lot today. So if I was a pension fund, if I was a life insurance company, I had a liability and I said, gosh, this real rate over time, particularly if you're a pension, if they, gosh, that real rate is pretty darn attractive and equities have carried me to a full funded status, boy, you know, maybe I take some long end at these levels and 5 seems like a pretty good level. The real rate particularly seems like a good level if I am, if I am not, if I don't have a Liability against me, I'm an individual or an endowment, etc. And I said okay, I can buy two long durated assets that have some volatility and by the way they seem to correlate exactly one for one these days based on inflation. If I could buy a long duration asset that's a Treasury getting me, you know, what's my return going to be? Yes, I think you can have some positive return and will when, when inflation comes down or I could buy a long durated asset as equities and that's, that's compounding return on equity of over 20%. It's like a no, I mean to me it's a no brainer, like why would I take the volatility out in the back end of the curve? It doesn't make any sense, just right equities you think about since the blow in the, you know, since the war, you know, the bond market's done okay, but you know, what's your return in the back end? Not really much of anything. Equities have killed it for you. I mean where was it low mid teens type of return. So I can, if I can own two assets as an individual agnostic to a liability like I think, I think the answer becomes pretty, pretty, pretty clear
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just, just on the stellar run for equities. Rick, looking at earnings has been remarkable despite again some of those wobbles we talked about. The shake shack, the Planet Fitness is of the world. Just looking at where earnings growth is projected to go. It's projected to accelerate to 24.6% in the fourth quarter quarter that is a four year high and it's a level that's rarely seen out of post shock recoveries. I had a viewer write in and I think this is relevant especially just given that acceleration that we've seen is just where are we in this overall cycle right now Rick?
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So I think today, I mean if you got an economy that's going well and you've got capex expenditure, so so one person's capex is another person's revenues and another person's cash flow. So you got a lot of capex flowing in the revenues, earnings, cash flow and you got an economy with it that's promoting a top line revenue. So I mean this is pretty much nirvana in terms of where you are. I think as you get in the back half of the year you'll probably start moderating a bit. You got a big fiscal tailwind that, that becomes obviously less intense and with transitions to a bit of a headwind. So I think you got a pretty good environment today. My sense is this, is, this is as good as it gets. But, but I don't, you know, I don't think it's, you know, people love to say including last year, including the war, we're going to recession. I still think you get real rate of growth that's still for the year, mid to high two. So it's still pretty good. My sense is the trajectory of that euphoria is probably cresting here, but, but not like it's got to turn, that's going to turn grossly the other way.
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Right. So is that kind of just like a muddling along type of economy then Rick? What does that look like?
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No, it's, I mean it's good. Still pretty good. I mean it's still pretty good. The capex is still going to be robust. You got a high end consumer that's in pretty good shape. You know, I would argue that parts of the economy though that you could argue are in recession. You know, we talked about traditional manufacturing, we talked about housing, we talk about small business, lower income. So, you know, but in aggregate it's still pretty good. It's just, you know what I, what I think, I mean we go back to the interest rate tool. The interest rate tool doesn't really work on, you know, it doesn't cut capex for the big, you know, the big hyperscalers. But you know, there are parts of the economy, they just aren't great, but they're not large enough and impactful enough today to really create an economy that's, that's anywhere close to talking about recession. But I would argue, you know, today it's very good, maybe transitioning to good.
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Hey Rick, it is always such a pleasure to have you. Thank you for joining us on another jobs day that is a BlackRock CIO of Global Fixed income. Rick Reeder.
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