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Rick Reeder
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Narrator/Announcer
Bloomberg Audio Studios Podcasts Radio News let's turn to our next guest.
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Interviewer/Host
He's responsible for managing roughly $2.7 trillion in assets. His Rick Reeder. He is BlackRock's chief investment officer of Global Fixed Income, also the head of the firm's global allocation team. He joins us now. Rick, it's great to see you in L. A.
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Rick Reeder
Thanks. Thanks. Great being here.
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Interviewer/Host
Let's talk a little bit about this disconnect that seems to be forming that we've been talking about when it comes to the equity markets and the fixed income markets. Because you take a look at equities in a vacuum and it looks awesome. The S&P 500 at record highs. We had a 10% gain in April alone. And then you take a look at the treasury market and, and the oil markets and it's a little bit of a different story. There's a little bit more concern here and I just wonder, you know, how we sort of see this come back together, whether or not that disconnect can persist and maybe get exacerbated.
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Rick Reeder
So, so maybe I'll start from the technical point of view. The difference in the technicals in the equity market and the bond market are as diverse as you can, as you can imagine in that we don't create enough stocks where, you know, the buyback relative, the issuance of equities people are the IPO market, it's tiny relative to the buyback market. We don't create enough equities and there's a huge AM of cash out there. So you just get this continued buying and then there's no stock. Now if you have a bad piece of news, it can trend down for a day, a week in bonds. We're getting 520 billion a week of gross supply of Treasuries. There's no dearth of supply. So you have that. That is distinctly different. The other is we're witnessing a growth paradigm that is unbelievable. That is, I mean, I think this year you could grow 6% nominal GDP after a number of years of significantly positive nominal growth. And then you in the earnings numbers that are coming out, I've been pretty blown away by not just that you have top line revenue that's impressive, but you have pricing power. Pricing power is the worst thing you can have for the bond market because obviously what it means from inflation side. So I think it can persist. You know, we think about portfolio allocation and you know, we've gone through this, you still have a lot of danger out there in terms of geopolitical risk. But if you said, what's my convexity of upside downside? If you know you're going to have either good news or bad news and they're going to correlate together oftentimes.
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Interviewer/Host
Right.
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Rick Reeder
Like equities have a whole lot more upside than quite frankly interest rates do today.
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Interviewer/Host
Yeah. We'll bring this conversation to the corporate credit market because you know, the point has been made that spreads you've seen a little bit of widening but you know, a pessimist might say that looks complacent. But when it comes to the strength that we're still seeing through in corporate earnings, when it comes to equities, I mean I have to imagine that translates to the performance of the credits as well.
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Rick Reeder
So I mean it's pretty hard. And people say, you know, I don't like these spreads at these levels. That being said, the yield fits portfolios, not just our portfolios, but with your pension fund, life insurance company, any insurance company, etc. The yields are very attractive because the risk free rate is high because central banks are keeping it there for, for inflation. So those yields are interesting. It keeps demand at a pretty, at a, at a great pace. The other thing that I think is significant is when you have, you know, people talk about, could you have defaults? People talk about private credit distress in private credit. When the economy is growing at 6% nominal, or let's say I'm wrong and it grows at low to mid fives, it's pretty hard to have a default cycle of any significance. I've learned over my career cash flow makes up for a lot of mist. And as long as you have that sort of backbone of cash flow growth, you're not going to have any significant defaults.
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Guest or Panelist
I am curious that when we start talking about 5, even 6% nominal growth, I mean where is that growth coming from? I know there's been a lot of discussion about kind of the accelerant that we've seen from AI and the technological spending. Is that it? Is that the, you know, you know,
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Rick Reeder
part of why, you know, I've been pretty adamant about this. You have a lot of the US economy, it's actually in recession. Yeah. Part of why I've been a believer that even if you grow this fast, Fed can cut rates. The reason why I think that count is because what is rate sensitive in the economy today is actually recession. So you think about traditional manufacturing, you think about housing, you think about where young people, low income people that are struggling and that's where the interest rate tool is effective. But then you have to two parts of the engine that are steaming ahead. You've got obviously AI and that number is so big, certainly on a short term basis it's huge. And then you've got consumption that's coming from the higher income cohort generally that's keeping it up. So you've got an economy that's doing extremely well on two engines. And then by the way, for a lot of people in the country, yeah, it's actually not going so well. And so that's, that's part of why any of your question about, you know, the interest rate tool and how to think about it. I think, I think you'll see a Fed that will cut rates because of that part.
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Guest or Panelist
That's certainly I'm curious because this gets to the whole philosophical debate about monetary policy and obviously you are rumored to be in the running for the Fed chair but I mean Kevin Wash is coming in, he clearly has, at least if you take him at his word, is going to approach monetary policy in a much different way philosophically. And I asked this question to Alan Schwartz over at Gugaon earlier about this idea of the market also needing to change itself philosophically if we are indeed going to start looking at the economy and monetary policy in a different way.
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Rick Reeder
That is a long discussion and I quite frankly, I think one of the most interesting discussions we have in the world today, I think we're seeing part of the derivative impact of this, the technology boom is we're going to see a productivity revolution that nobody's ever seen before. I mean how many companies, including yesterday are announcing growth capex spend and we don't need as many people. Part of why I'm not that worked up about inflation over the, over the intermediate term, certainly over the near term we've got a transmission from a variety of things, fuel being the number one. But I think productivity and employment are going to change and I worry about, and I've not heard anybody give me a good reason why in the short term the transition in terms of employment is not a difficult one. The one thing that I think will be different in terms of Fed perspective, I think you have to be more prospective about where the puck is going right versus where we've been historic and the historic analogs don't really work in what is a new Era.
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Guest or Panelist
I'm curious on that transition in terms of the labor market, do you think that will be a short transition? Because that matters? I mean, if we're talking about a prolonged displacement of folks for years, that's obviously a much bigger issue. But if we're talking about something that's a little more truncated, is that something that everyone can live with?
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Rick Reeder
So, so listen, I think the transit I think we're talking about, it's certainly a couple of years. I mean, it's pretty hard to project how the world changes, industries that grow relative to this. But for the next couple of years, some big industries, I always talk about driving and some others that employ a lot of people, that transition that retraining is going to be and the size that it's happening and the speed it's happening at will be dislocating certainly for a couple of years. By the way, I would argue at the same time we have a debt burden in the country that that is compounding higher. So anyway, see, there's some of the things that I think, and I think this Fed will do a great job, but I think the key is going to be are they prospective about where we're going and about what the new challenges are versus the analogs from history that aren't as relevant.
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Interviewer/Host
We want to also talk about whether or not the, the market is ready for the idea that maybe we're going to get less communication from the Fed. We know that, you know, the idea of maybe not having a press conference at every meeting has been floated and you also have a Fed makeup that looks like there's going to be more dissents coming forward. I think you think about the last Fed meeting, four dissents. We certainly haven't seen that for a couple of decades. So, I mean, what does that potential adjustment period look like if you are getting less communication from the Fed and you are seeing dissents on the rise?
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Rick Reeder
The Fed's objective is to create full employment and price stability. It's not to make sure the markets feel good about what you're doing at every meeting. And, and I actually think having a lower level of forward guidance, particularly when you're easing, when you're easing to tell the world like we may go 25 every six weeks, I don't think is actually that robust. If you, if you kept your cards to your vest and said, okay, now I got to shock the system because I'm trying to execute change, I'm trying to get financial velocity moving. I actually think lower. And you know, is do the markets feel like Costs a little bit more uncertain and to increase volume, volatility and so on, maybe at the margin. But as long as you're effective on communication as to the metrics you're looking at, this is what we're pivoting off of. So the markets understand. Okay, I understand what the reaction function is going to be. I don't think you have to be that explicit. So anyway, I think, I think it's super healthy to, to pare that back a bit.
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Interviewer/Host
Yeah. And it'll be interesting to see what that weaning process looks like. But in your view, a healthy one there. I do want to talk about how the shape of the yield curve might change going forward. We were having a great discussion with Ann Walsh of Guggenheim yesterday and she actually made the case that you could see a flattening come through. You know, the steepenor has been breaking hearts for years now and the logic made sense if you had a cut cutting cycle come through that would lower the short end. Maybe you see the long end rise. But she's talking about the issuance that she's expecting. Maybe you could actually see more of a flattening impulse come through. And I wonder where you land.
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Rick Reeder
You know, listen, I'm out. You know, we run the CTF Gold bank, as you know.
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Guest or Panelist
That's been heard about it.
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Rick Reeder
Yes. No, you've been very kind to mention we. And so listen, I'm part of what has been effective heretofore is to say, gosh, the long end of the yield curve. Interesting. I'm getting my long durated assets through equities or a lot of people are doing that. In my other portfolios we're doing a ton of that and say gosh, I don't need the thrill of the back end of the curve moving around. Yeah. So I'd rather stay in the front of the belly of the yield curve. So that's part of why you've created this natural steepening tendency because you get enough yield when you, when you diversify in terms of different assets. I will say people don't realize that 89% of the Treasury's debts in the zero to two year part of the curve. We don't actually have that much debt when you take what's net of the Fed's balance sheet. So the reason why people get in the steepner trades and I actually think fundamentally the curve could steepen. The technicals are actually keep that from happening. So listen, I think if you said to me, where are we going in six months, a year from now we have to get the mortgage rate down in this country. And do I think the back end can stay contained? I think so. My view is like putting on steepness and flatteners. Hard to make money on that. To your point. But listen, I think the 10 year is going to get down to 4% but I think it's going to take a little bit of time.
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Interviewer/Host
Can I just say when you're ready to really step out the yield curve and go long duration, will you tell us because we've been talking for years and you've been in the belly for a long time.
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Rick Reeder
Yeah, yeah. So now maybe if we get on we could talk about on the show. But no, I mean we're. And by the way there's no like every says it's this yield that I'll jump in. I actually don't think, I think what will be the catalyzing influence is when you start to see real motivation around the mortgage rate coming down. And some by the way I think there's some fiscal initiatives that can bring rate down and mortgage rates down but once you start to see that then I think it's going to be that it's in place where we start got the yield curve. I will say we run optimizers on our portfolios. These real rates out the curve are pretty attractive. I just think today you've got some inflation coursing its way through the system. You've got a more, you've got an alternative asset that is equities, that's a better, longer rated asset. But my sense is that we'll get a chance over the next few months to start to start to go out the curve more aggressively.
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Interviewer/Host
All right, well keep in touch. It's always great to see you. That is Rick Reeder. He is chief investment officer of Global Fixed Income over at blackrock.
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Narrator/Announcer
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