Loading summary
Transcript44 lines
- [00:00]
Indiana University Narrator
Old playbooks won't solve tomorrow's problems. Indiana University is proving how higher education can create solutions with industry. Our partnerships address future talent and workforce needs, support entrepreneurs and local businesses, and create solutions that turn discoveries into dollars. Together, we're building a model for industry partnerships that fuel economic growth. Explore IU's impact at iu.edu impact.
- [00:29]
Bloomberg Host
Bloomberg.
- [00:30]
Hiscox Insurance Announcer
Audio Studios Podcasts Radio news Rick Rita.
- [00:35]
Bloomberg Interviewer
Is BlackRock CIO of Global Fixed Income and it's widely considered to be one of five contenders to replace Fed Chair Jay Powell. He writes the following. Moving interest rates lower is very much in line with what we do know today, which is that the labor market is clearly slowing to the point of potential. Still speed. Rick joins us now for more. Rick and Mornick, thanks.
- [00:53]
Rick Rieder
Thanks for having me.
- [00:53]
Bloomberg Interviewer
Good to see you my friend. It's been too long.
- [00:55]
Rick Rieder
Thank you.
- [00:55]
Bloomberg Interviewer
Welcome to the studio. And we got a labor market problem.
- [00:58]
Rick Rieder
I do, I don't. And by the way, I don't think it's a cyclical phenomenon. I think there is, I think we have a productivity revolution that is pretty extraordinary. People point to AI as an exclusive driver of that. If you look across what companies are doing, including second quarter earnings, third quarter earnings. If you look at dynamic around, around how you think about logistics, freight management, predictive maintenance, customer procurement, companies are doing more with less. And I think that is a secular dynamic that's going to be with us for a couple of years now. I think, I mean we can talk about there's a bit of elevated inflation because of tariffs, but I think we're going to be dealing with some. By the way, you also put robotics, automation, you know, this to me is a structural dynamic. I think full employment will be the challenge for the next couple of years.
- [01:43]
Bloomberg Interviewer
So we mentioned the spread between earnings growth, fantastic. Employment growth, terrible. How are we closing that gap if ever.
- [01:51]
Rick Rieder
So I think, by the way, I actually think that's not a coincidence. Those aren't coincident factors. What's happening is companies literally the top line revenue is pretty good generally. But what's happening is they're cutting costs of goods sold, they're cutting their SG&A costs, they're reducing their cost infrastructure. By the way, AI is a technology. There's historically been this dynamic of when you have new technology, it moves people into other higher value jobs. This technology, by the way, I put robotics and automation on top of it, autonomous driving, etc. Is literally designed to run, replace human input. You have a dynamic that is pretty extraordinary that I think, you know, if you know As a central banker or whatever, as you think about being anticipatory of where the world is going, that is where the world is going. And I think that is a challenge. Economy is doing fine, divergent and quite frankly only operating on a couple of cylinders. Huge capex which we talk about from cloud, from infrastructure, from power. And you've got higher income, wealthy savers, they're doing great and in supporting consumption in the economy. And then you have the part of the economy that's interest rate sensitive that's really struggling. And that's part of why the interest rate tool needs to address low income small business housing. And that's where I think you square the circle.
- [03:04]
Bloomberg Interviewer
So we've got to talk about this from two perspectives. One as a policymaker, the other as an investor and one of course informs the other. Let's just sit on policy for a moment. You're talking about maybe the need to cut interest rates, but also the fact that some of the pullback we've seen in hiring is not cyclical. How can we address one on with lower interest rates? Just explore that for us a little bit.
- [03:22]
Rick Rieder
Yeah. So first of all, if you came down from Mars and said, okay, so I've got five year inflation breakevens a trade in the market. You buy as many as you want at 2.35% and you said okay, now set the price and you said okay, 2.35% inflation and I clearly have a slowing labor market, you would say gosh, I don't know if I set the rate at 3. And then I talked about okay, so now what's equilibrium on the mortgage rate to create velocity in housing. And directly related to what you said, housing today is three quarters of the wealth by people in the countries in housing. We have a housing market that, you know, you look at the earnings from Dr. Horton, you look at Lenore. By the way, I just saw an ISI homebuilder survey that showed the softness. If you actually get the mortgage rate down a bit, then what happens is all of a sudden you get housing velocity. Why is housing velocity important? Because you get labor mobility. So you can't move. You lose your job, you got to go somewhere else, you can't move. Secondly, and I've said it before, for every home built in this country, we hire 3.1 people. It's pretty hard to AI building a house. So if you can get some real estate velocity, and by the way, it's the way young people who are struggling today, young people who aren't savers, who are borrowers. That's the way they build wealth, that's the way you put people to work. And so I think it is all a related concept. Point being is, and by the way, I mean if you know, we had to raise interest rates to where they were. But if you said to me today what's equilibrium? I don't think it's where we sit today in the funds rate.
- [04:45]
Bloomberg Host
So how willing are you to allow or how willing would you be to allow inflation to run above that 2% target in order to run the economy hot to allow for more job creation?
- [04:56]
Rick Rieder
Listen, that's a great question. And I think every time you think about these things and I think about same thing, we take risk, you sort of think about what are the quadrants of risk, what are you willing to underwrite? So today when I think about those quadrants, if you are willing to take some labor and some sort of overall inflation, then you think about what are the sticky drivers of inflation today. Health care, education, insurance. It's pretty hard using interest rate tool to get insurance costs down. It's pretty hard to get to health care. So the tool is not that robust. And health shelter is a sticky part of inflation that if I actually get the rate down, I actually mitigate some of that elevated, I'll mitigate the rental inflation. So you know, I'll throw one other thing. Five year inflation expectations are 2.35%. If you were at 2 and 3/4. And by the way, core PC, the six month moving average core PC is 2.5. Let's say we're probably closer to 3. If you take the whole full construct of inflation, 3 is not an infectious, you know, you clearly don't see it in terms of where people anticipate inflation. If you're running 4 or 5, then I'd say, Gosh, or if the 3 was trending higher on things that the interest rate tool impacted, then I think you'd have to address that just to.
- [06:09]
Bloomberg Host
Sort of build on that this idea that three is okay, but above that maybe not so much. There's a feel that there is an asymmetry in the time frame of AI, that right now the build out is going to be inflationary because of the inflationary inputs of commodity costs of just how much lending and money this is generating on a broad scale. The productivity gains that will cause disinflation will take a lot longer to come into play. So how, if you were the head of the Fed, would you handle that?
- [06:38]
Rick Rieder
So I take a couple things. So think about historically the Way the interest rate tool worked is it was a modulator of capex. So you think about go back 60s and 70s, the big spenders of manufacturing today, my guess is OpenAI, Nvidia, Google, etc. It's not the interest rate tool that is affecting capex. They are going to put that CAPEX in because there is a long run benefit for doing it. Meaning the interest rate tool doesn't really do a lot. So I think at the end of the day does that create a little bit of inflation in the areas you described? I think so, but I think you have to say, you know, where are we going? And I will say being an investor for a long time, you know the concept of data dependence, if you were constantly in the rearview mirror trying to figure out how would you invest? Is probably the wrong way to do it. We are going through something that's very different. We now are in a CAPEX cycle. And then if you break down the economy and say okay, what is driving GDP today? That's what's driving this capex and some consumption from higher income people.
- [07:34]
Bloomberg Interviewer
The key piece of the inflation story, Shelter, you touched on it and you said something interesting. Interest rates down, shelter costs down. Just explain that for us.
- [07:43]
Rick Rieder
Yeah, so we, we have an inventory problem in the country and by the way, you may look at every piece of data, it shows the same thing. And so by the way, when the mortgage rate has come down a bit, post this recent Fed drop in interest rates, all of a sudden you're seeing existing home sales pick up. We saw, we just saw the prepayment report for mortgages and all of a sudden you're seeing some acceleration meaning you don't have to get the interest rate tool down that much. If you got the mortgage rate into the fives, I'd say mid to high fives, you would see some velocity of housing. If you saw velocity of housing today I'm sort of in Dr. Horton's numbers. They talked about they're doing 1% first year mortgage and then I think it's 4.9 because they've got to subsidize the mortgage. Well, what if dear Horton didn't have to do that and what if the actual organically the rate was lower? They build more houses, you create more inventory, you create more inventory, you take the pressure off of rental rates and you start to bring inflation down. Plus the labor mobility. That is not an insignificant part of that.
- [08:39]
Bloomberg Interviewer
Do you think the Fed needs to think outside of the box beyond just interest rates? Is there something else we can do here?
- [08:44]
Rick Rieder
Yeah, I mean listen, I think there is. I think the Fed has a series of tools. The interest rate tool by the way today nobody really borrows off the overnight funding rate. The interest rate tool. It used to be that you think about how banks borrowed short, they let long. We had a very different dynamic today the way we tranch the debt in the economy. Think about how we finance resi, commercial asset backs, credit cards, auto loans. It's tranched. The front end of the yield curve doesn't really do a lot how you think about, you know, where is the 10 year point? How do you think about your balance sheet? How do you think about all the other tools that are at your disposal? I think are really important. Plus you got to think about what is the effect of the currency etc. Relative to that. So anyway I think the construct is much more complex and much more. Quite frankly you have a lot of tools that create much more effectiveness. And we're just going to move the overnight funds rate every six weeks like the balance sheet.
- [09:33]
Bloomberg Host
How much would you be open to see the Fed use the balance sheet A little bit more.
- [09:37]
Rick Rieder
So I think the construct of the balance sheet is important. So I think people don't realize there's a notional dynamic and there's a DVO one there's a duration dynamic further out the yield curve. I am sympathetic to should we keep the balance sheet around the same level. But you could be really effective. So today the US Treasury 89% of what the US treasury finances is at the zero to two year point. 89. Think about if you're a company, would you ever finance in the one year? It's crazy but that's where we are today and it is what it is. So there's not that much float actually longer on the curve. There's a reason why people put on steepness and they get squeezed out of steepness because there's not that much float. You don't have to use that much balance sheet. But if you thought about gosh the construct of the balance sheet if we used more of it further out the curve we let runoff happen on the front. If you can keep the stability of the back end. So if you can keep the 10 year, you know we got to the tenure was 390. If the 10 year was three and a half to four stable and rate volume rate volatility came down all of a sudden you'd see mortgage spreads could come in. Then you get and by the way deregulation the banking system then you get Mortgage velocity moving. So by the way, I don't think we're that far away. And by the way, you know this concept, you know we have to get the rate down hundreds of basis points. I just think we're not that far away. Just get it there, keep volatility of the rate market at a stable level and then you'll see a system that will operate pretty well.
- [10:57]
Bloomberg Interviewer
Rick, you've seen a lot going back to the late 80s. How much fun you having right now?
- [11:01]
Rick Rieder
I mean, I mean I said before this is the best investment environment I've ever seen. I mean not because stocks are going to go straight up. I mean you have divergence that is great for investing. You have technology that's changing and so the ability to look at tech stocks, health care tech, to look at you know, where some of the financials, how you create velocity in the system. And then you know the earlier conversation we were talking about the break like now you, the income levels. As long as this interest rate stays here, which you know, it's ironic is commercially, you know, I prefer the interest rate to stay here because it's, I mean this is pretty good. We can create portfolios. We run this ETF called bank and you know creating six, six and a quarter. We're running almost 630 now. You don't have to take a lot of risk, you don't have to go out the yield curve. That's pretty good. So I know, I think, and by the way the options market, I think the best opportunities are in the options market. Rate, options, equity options and you could manage your convexity so you can be long equities and then buy a lot of, you can overwrite your single name stocks, you can buy downside. It's a, it's a fun environment.
- [11:59]
Bloomberg Interviewer
Well, let's lean into bank. You mentioned the iShares Flexible Active Income ETF. What kind of things have you been doing over the past six months?
- [12:06]
Rick Rieder
You know we've been, you know the cool thing about being active is you can move around because the regime shifts. And while you know I was describing earlier like where do you think the interest rate should be? The truth is the interest rate isn't going to move very far. So you know we're, we're keeping our interest rate duration, you know, in and around four years. We've moved a little bit out of the very front end because it's pricing a lot now in terms of where this Fed is going to go. Then we've done, we've shifted some of our credit into Mortgages, quite frankly, if you believe rate volatility is going to be down, mortgages have become interesting and credit spreads have gotten pretty tight. Particularly you US investment grade has gotten pretty tight. So we've rotated out of that. We've bought a little bit of em recently. I would say recently, over the last six months. We haven't bought a yam in a long time. You know, if you believe the dollar is contained, becomes pretty interesting. And the yields, you know, relative to high yield, the yields in em are attractive. So we've got a little bit of high yield, we've got a good amount of investment grade credit and we've rotated. So today I think our average rating is 8 minus, which is pretty good. So it gives us a little bit of room to do some things.
- [13:08]
Bloomberg Host
Like you said something that was interesting there, which is you don't have to go very far out the risk curve in order to get income. Now because yields are high. If the Fed were to cut rates, does that make you more inclined to take more risk?
- [13:21]
Rick Rieder
Yeah, I mean, I have to say, you know, for two decades, part of why I'm so excited about where we are today, for two decades it was like I got to buy high yield at three and a half and four and it doesn't feel natural. But now if you have the risk free rate, particularly in the front end here, gosh, I put a little bit of spread on it now I get what is ample yield with default rates that are not that elevated. You are seeing some bubbling defaults in a couple of places. So, you know, I think the thing that we would do is, you know, I know what we would do is if rates come down, you know, I'm not a believer, and this is what blows you up, I'm not a believer is, gosh, I got to, I got to keep that yield. I got to get my risk up. You just have to absorb it and say, you know what I'm going to run, I can't run 625 or so. I'm going to run five and three quarters of six. But you know what will happen is the cash rate will come down and people say, gosh, you know what? Cash is only get me two and a half to three. That's any inflation. Even if inflation's 3 like, it's still pretty good.
- [14:13]
Bloomberg Host
Very few people on Wall street though are saying, you know what, I can just live with less income, it's okay, I won't stretch too far, I'll be disciplined and maybe I'll just take less Cash now commit to the economy. What point can you imagine that things start to get a bit excessive, Especially given the fact that there is a lot of cash right now looking for a home.
- [14:30]
Rick Rieder
So by the way, it's a funny thing as you say that, you know, we live in a competitive environment. We can't just sit back. I mean it is a tough business and we have competitors and people that are out there say, gosh, I can get you more yield. Listen, I think one of the things you have to do is you got to keep your volatility as long as you always think about what's your yield per unit of volatility. Today equities, I think equities are, are still going up 15 to 20% from where they are over the next year. So I'm just trying to keep our volatility at a reasonable place. What is excessive? You know, there's some things that are bubbling in the markets that are mostly in privates that are, gosh, I don't, I don't get any cash flow for two or three years. What's the multiple you put on that? Like that stuff is hard. There are some really good business models. You say I see it and it's almost definitional. You know, you see some parts of it where people have stretched and in some of the credit markets where some of the levels get aggressive. Part of why we've rotated some of the investment rate, it doesn't do that much for us anymore at those spread levels. But I don't, you know, I don't see like, you know, so before the financial crisis, excessive low, you know, low covenant or easy covenants high LTV financing, I don't see that yet today at the around the edges a little bit.
- [15:41]
Bloomberg Interviewer
But not, not really 15 to 20% on stocks, another double digit year.
- [15:46]
Rick Rieder
You know, I don't, I think, I mean I think we're living through history because what you asked about before because productivity and roe is so spectacular. And by the way, I don't think it's 500 stocks. I think it's. By the way, we were a stat yesterday. If you take the s and P 1500, it's. Is this right that I heard it was 22% off the highs. I thought that number rest castrate to work with. I thought that was extraordinary. If you take the highest row businesses, you know, let's say it's 30 stocks, 50 stocks, tech, health care, tech. Some of the financials, they're doing really well. They throw off a lot of earnings, their ROE is high and they buy back huge amounts of stock. You know, small cap, don't really know, but. But there's enough stocks with enough market cap that I think will get you that sort of return.
- [16:30]
Bloomberg Interviewer
Stay with market weight on the s and P500. No, raise the concentration.
- [16:35]
Rick Rieder
I mean, we're long. I mean, we're, you know, we're, you know, we've reduced a little bit of beta when, when equity volatility picks up, I have to bring my beta down a little bit. But I'm still running long and you know, days like yesterday, you know, and you know, single name, you know, we get these earnings reports and single name volume is high because, you know, if company does own hit these excessive numbers, they hit the stock.
- [16:56]
Bloomberg Interviewer
Yeah.
- [16:57]
Rick Rieder
So you can still do some things to protect some downside. And by the way, interest rates, if you believe the Fed is moving, albeit deliberately, interest rates actually act as a reasonable hedge again, so there's some correlation. A rate that's allowed us to run a moderate long.
- [17:13]
Bloomberg Interviewer
Rick, it's good to see you.
- [17:14]
Rick Rieder
Thanks for having me.
- [17:15]
Bloomberg Interviewer
We appreciate it, sir. And best of luck with the process. I've known you a long time. Blackrock wins either way.
- [17:20]
Rick Rieder
Thank you.
- [17:21]
Bloomberg Interviewer
The country wins either way. Thank you, sir.
- [17:22]
Indiana University Narrator
BlackRock's Rick Rita Old playbooks won't solve tomorrow's problems. Indiana University is redefining the relationship between higher education and industry. We're addressing future talent and workforce needs through more than 10,000 industry partnerships, supporting and investing in young entrepreneurs and businesses that create jobs and grow the economy, and facilitating the research and development that lead to breakthrough solutions. This isn't business as usual. Indiana University Plus Industry is a partnership that fuels economic growth. Explore IU's impact at IU. Edu impact.
- [17:59]
Hiscox Insurance Announcer
Hiscox Small Business Insurance knows there is no business like your business. Across America, over 600,000 small businesses, from accountants and architects to photographers and yoga instructors, look to Hiscox Insurance for protection. Find flexible coverage that adapts to the needs of your small business. With a fast, easy online'@hiscox.com that's his. There's no business like small business. Hiscox Small Business Insurance.