Is Rick Rieder a Bond King?

Summary

Podcast Title: The Compound and Friends
Host/Author: The Compound
Episode: Is Rick Rieder a Bond King?
Release Date: December 13, 2024
Guest: Rick Reeder, BlackRock's Chief Investment Officer of Global Fixed Income

---

Introduction and Opening Anecdotes

Josh Brown kicks off the episode with a personal story about narrowly missing his flight by 14 seconds, highlighting frustrations with airline policies:

[00:00] "So Rick, I just missed my flight by 14 seconds... She said, 'Go downstairs. You missed your flight.'"

Michael Batnick empathizes, sharing his own experience of flight delays and overnight stays due to similar issues:

[00:32] "And so nasty about same thing I had the... It's brutal. And I just stay overnight in Chicago, same time."

Rick Reeder contributes by recounting a similar incident where his airline was inflexible with boarding zones:

[01:38] "I've been here for six hours. Can I please just board with the fourth zone?"

The hosts use these anecdotes to segue into a light-hearted discussion about customer service frustrations.

---

Introducing Rick Reeder

After some light banter and technical setup for the podcast, Josh Brown formally introduces Rick Reeder:

[05:27] "Ladies and gentlemen, with us today is a very special guest... Rick Reeder is BlackRock's Chief Investment Officer of Global Fixed Income and Head of the Global Allocation Investment Team. He oversees roughly $2.4 trillion in assets... He received Morningstar's 2023 Investing X Excellence Outstanding Portfolio Manager Award."

Rick Reeder humbly acknowledges his first appearance on the show:

[07:11] "Thanks for having me. Not this year. Not this year."

---

Rick Reeder’s Career Journey

Michael Batnick delves into Rick Reeder's professional background:

[07:34] "Before joining BlackRock in 2009, Rick Reeder was President and CEO of R3 Partners and was at Lehman Brothers from 1987 to 2008."

Reeder shares insights about his early career at E.F. Hutton and the impact of the 1987 market crash on his trajectory:

[21:04] "I didn't have a relative in finance... I took a risk and I never looked back."

He discusses his rise through the ranks at Lehman Brothers, highlighting the firm's strong research culture and entrepreneurial spirit:

[23:06] "We were ranked number one in research for many years... Our business was built on research."

---

Fixed Income Expertise and Market Insights

Rick Reeder elaborates on his fixed income strategies and the complexities of global bond markets:

[46:22] "I run our Global Allocation Fund, which is an equity fund and it's a big fund. So I spend a ton of time in the equity market."

Michael Batnick discusses the challenges and opportunities in fixed income, emphasizing the difficulty of beating benchmarks in equities versus bonds:

[25:54] "I think the bond benchmarks are much easier to beat because there are so many inefficiencies... The S&P 500 is a pretty hard index to beat."

Reeder addresses the risks associated with long-term bonds and the importance of focusing on the front and belly of the yield curve:

[47:18] "There's a bond vigilante risk... Just hold the front end of the yield curve."

---

Monetary Policy and Inflation Discussion

The conversation shifts to the role of the Federal Reserve and its impact on markets:

[31:02] Batnick: "I don't think the US economy goes into recessions like... a pandemic or financial crisis."

Reeder critiques the Fed's delayed response to rising interest rates and the over-reliance on monetary policy:

[43:29] "Powell has to factor in the massive fiscal actions... They have to adapt based on what's happening."

Batnick shares his perspective on current inflation trends and the limitations of monetary policy:

[38:54] "I don't think you can count on much... We have inflation generally around here."

---

Private Credit and ETF Innovations

Rick Reeder and Michael Batnick explore the burgeoning field of private credit and the introduction of BlackRock's new ETF:

[50:19] Batnick: "In my unconstrained fixed income, I could do up to 15% less liquid bespoke financing."

Reeder highlights the success and innovation behind BlackRock's ETF, emphasizing its accessibility and attractive yields:

[53:58] "We've created six to six and a half percent yield and diversifying it around the world."

Batnick explains the strategic advantage of combining public and private credit to enhance portfolio returns:

[56:42] "The core of what we're doing is trying to provide yield above an index... We’re providing a product that’s stable with a lot of yield."

---

Future Market Outlook and Strategy

Michael Batnick shares his forward-looking views on compounding returns and the sustainable growth of private credit:

[58:09] "2025 is all going to be about compounding... can you finish the year with a blended return of eight or nine?"

Reeder and Batnick discuss the potential challenges and sustainability of current returns in private markets, emphasizing the importance of diversification and risk management:

[52:38] "The runway for private credit is probably two to three times bigger."

---

Personal Insights and Wrap-Up

The conversation concludes with Rick Reeder and Michael Batnick sharing personal interests and future plans:

[61:46] Batnick: "I enjoy what I do. I spend a lot of time with friends and family... I'm a crazy music person."

Josh Brown thanks Reeder for his insights and participation, encouraging listeners to follow BlackRock's commentary:

[63:53] "Please follow Rick Reeder and BlackRock's excellent commentary everywhere."

Reeder reflects on the fun and collaborative nature of the show, expressing interest in future appearances:

[62:05] "I had fun on the show today... I'll be here if you're."

---

Key Takeaways

1. Fixed Income Strategies: Rick Reeder emphasizes the importance of focusing on the front and belly of the yield curve to manage risk and optimize returns, cautioning against the volatility of long-term bonds.

2. Monetary Policy Critique: Both hosts critique the Federal Reserve's delayed response to interest rate hikes and its reliance on monetary policy without sufficient fiscal support, arguing that this has led to persistent inflation and market distortions.

3. Private Credit Growth: The discussion highlights the significant growth potential in private credit markets, driven by attractive yields and the ability to restructure loans efficiently.

4. ETF Innovation: BlackRock's introduction of the iShares Flexible Income Active ETF represents a major innovation in making fixed income strategies accessible to a broader range of investors, offering stable yields and diversification.

5. Market Outlook: The guests express cautious optimism about the future, focusing on compounding returns in both equities and fixed income, while acknowledging potential risks and the need for strategic diversification.

---

Notable Quotes

• Josh Brown [00:00]: "You can't, you're Vegas, but you gotta go check it."

• Michael Batnick [12:00]: "I read tons of earnings reports. I learn a ton from what's happening to margin."

• Rick Reeder [25:54]: "I think the bond benchmarks are much easier to beat because there are so many inefficiencies."

• Michael Batnick [38:54]: "I don't think you can count on much."

• Rick Reeder [53:58]: "We've created six to six and a half percent yield and diversifying it around the world."

• Michael Batnick [58:09]: "2025 is all going to be about compounding."

---

Conclusion

This episode of The Compound and Friends offers a deep dive into the complexities of fixed income markets, monetary policy, and the evolving landscape of private credit and ETFs. With insights from Rick Reeder, BlackRock's expert in global fixed income, listeners gain valuable perspectives on managing risks, optimizing returns, and navigating the challenges of today's economic environment. The candid discussions, enriched with personal anecdotes and professional expertise, make this episode a must-listen for business and investing enthusiasts seeking expert analysis and actionable insights.

Transcript

[Josh Brown]

So Rick, I just missed my flight by 14 seconds. On Monday after Vegas, I get to the airport and she said, you can't, you're Vegas, but you gotta go check it. Okay, no problem. I go to the line, she says, you have 45 minutes until the your flight. I said, good, my flight's at 7:30. At 6:44. She says, no, and now it's 6:45. I said, but it was just 6:44. She says, and now it's 6: 45. Go downstairs. You missed your flight.

[Michael Batnick]

Wait, but why would you miss your flight if.

[Josh Brown]

How crazy is that 45 minute cost?

[Rick Reeder]

They won't check your bag. They won't check the bag inside of 45 minutes.

[Josh Brown]

Can you imagine?

[Michael Batnick]

And so nasty about same thing I had the. It's brutal. And I just stay overnight in Chicago, same time.

[Josh Brown]

I'm a reasonable person. All I want was. Listen, I'm sorry, I know this sucks, but this is the policy. It was. And now it's 6:45 go downstairs.

[Rick Reeder]

Yeah, that happened to me with my son. We went downstairs, it was Florida. So it was another flight 20 minutes later. But I mean now the true.

[Michael Batnick]

If it's your life, future, last flight.

[Rick Reeder]

Or you have to get as the worst feel, that's the worst feeling.

[Josh Brown]

The reality is lounges are so good.

[Michael Batnick]

Yeah.

[Josh Brown]

That I, I had, I had five hours of work to do anyway. But it's just so frustrating.

[Michael Batnick]

They said to me, you can't go. I said, send. I. So I had to get back from Chicago. I said, send my bag to Phoenix. You do that anyway. So they said, no, you gotta fly with your bag. I was like, I gotta get back to New York was the last flight. I said, I gotta get back. And so you're not going anywhere. But they did the same thing though. They took the minutes because you. A woman said, you're in first class. Why are you in first class? I said, I don't know. So she said, well, I'm not sure why she's hitting all the numbers and went over the timeframe. I said, I'm over the time because you've been playing Nakaki on the, on the, on the screen.

[Josh Brown]

So she said, don't worry, you'll still be in comfort plus. I get to the gate. What seat am I in? E 29. What zone is that? Zone 8.

[Rick Reeder]

I said, listen, finals.

[Josh Brown]

I've been here for six hours. Can I please just board with the fourth zone? Sir back on the line.

[Rick Reeder]

Yeah.

[Michael Batnick]

Really?

[Rick Reeder]

Yep. That's fun. They're not taking any more nonsense from You.

[Josh Brown]

That was fun.

[Rick Reeder]

All right, so we use. Use these. You're going to be able to hear the show and yourself in the. In the headphones. Now, I know you don't do a lot of media, Rick, so just hang tight. I'll guide you through it, okay?

[Michael Batnick]

Yeah. Does it matter which is right or left?

[Rick Reeder]

The cable comes down on the left.

[Josh Brown]

Rick, you're comfortable talking bonds?

[Michael Batnick]

I'm going to try. You be surprised. Equities are easier.

[Josh Brown]

See, Paige? We told you he'd have fun. Oh, well. What is this? Guys, hold on.

[Rick Reeder]

Paige, do you accompany Rick to most of his appearances? Okay. Did you ever hear the story about shofar knowledge? No. You've never heard this story? Do you know what I'm talking about?

[Michael Batnick]

No.

[Rick Reeder]

Okay, so there's a. I forget, who was this? There's a famous Swedish. Let's call it physicist, and he gives lectures all over the country. And everywhere he goes, he has the same chauffeur who drives him to all of these. And then one day, for fun, he says to the chauffeur, he says, let's try something different. How about today, you give the talk, and nobody there knows what he looks like. So the chauffeur gets up on stage and does the entire talk flawlessly, until someone in the audience asks a question.

[Michael Batnick]

That's awesome.

[Rick Reeder]

So that's.

[Josh Brown]

Wait, isn't there a punchline?

[Rick Reeder]

That is the punchline.

[Michael Batnick]

No.

[Josh Brown]

Does he say, that question is so dumb. I'm gonna let my chauffeur answer it.

[Rick Reeder]

Yeah, yeah, yeah. Ye.

[Michael Batnick]

Right.

[Rick Reeder]

So I'm not saying you have chauffeur knowledge, but it's not the worst thing to have.

[Michael Batnick]

No, Paige can definitely do it better than me.

[Rick Reeder]

I feel the same way about Michael. He could do my shtick if I ever lose my voice.

[Josh Brown]

Thank you, Josh. So, I like the new setup. I like it.

[Rick Reeder]

Oh, you got a different mic? Yeah.

[Josh Brown]

What do we think?

[Rick Reeder]

Yeah, it's way better.

[Josh Brown]

Way better.

[Rick Reeder]

What was it before, like, metal arm?

[Josh Brown]

It was. Yeah. Thank you, gentlemen.

[Rick Reeder]

You had to pay your dues to earn that. Mike Stanton.

[Josh Brown]

I feel good. I feel like I made it out for you, Mike.

[Michael Batnick]

All right.

[Rick Reeder]

How. How we looking, guys? Everything's okay. Is that parade outside going to affect the show or. No.

[Josh Brown]

All right, let's pod.

[Rick Reeder]

Yeah. Let's. Let's. Let's do this. Let's do this. Very, very important man here, guys.

[Michael Batnick]

Episode one.

[Josh Brown]

Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor.

[Michael Batnick]

Ho, ho, ho.

[Rick Reeder]

Merry Christmas. Lock in your [e-mail]. it is the reason for the season. You can lock in 6% or higher with a bond account at publicublic.com the Federal Reserve is probably going to cut this month. Maybe they'll cut next year. Maybe they'll cut as many as three times. Which means you will earn less on your cash. Public has a solution. It's bonds, corporate bonds, treasury bonds. You can learn a lot about it by going to public.compound this has been brought to you by Public Investing member FINRA and SIPC. As of 926 24, the average annualized yield to worst across the bond account is greater than 6%. Yield to worst is not guaranteed. Not an investment recommendation. All investing involves risk. Visit public.com disclosures bond account to learn more.

[Michael Batnick]

Welcome to the Compound and friends. All opinions expressed by Josh Brown, Michael Batnik and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

[Josh Brown]

Nice.

[Rick Reeder]

Episode 169 it's almost like it was meant to be. Ladies and gentlemen, with us today is a very special guest. His first time on the compound and friends but he says he will be back once. I like that, you guys. This man is. This man is, I would say a paragon of asset management and just market wisdom and trading expertise and analytics and everything that you could ask for in a guest. And we have been dying to have him on the show pretty much since we started. Finally got it together. Rick Reeder is BlackRock's chief investment officer of Global Fixed Income and head of the Global Allocation Investment team. He oversees roughly 2.4 trillion in assets. Before joining BlackRock in 2009, Rick Reeder was President and Chief Executive officer of our three capital partners and was at Lehman Brothers from 1987 to 2008. And then something happened. I don't know. I don't know what it was. Rick. Juan Morningstar's 2023 Investing X Excellence Outstanding Portfolio Manager Award and he has flown commercially more than 2 million miles this year. Ladies and gentlemen, give it up for Rick Weider.

[Michael Batnick]

Thanks for having me. Not this year. Not this year.

[Rick Reeder]

Not this year. Lifetime.

[Michael Batnick]

Yeah, lifetime.

[Josh Brown]

87 to 08. Those are some bookends, huh?

[Michael Batnick]

That was by the way, I started and I thought I started E.F. hutton and I thought I lost my job. We all thought we lost our job in the financial crisis and then a couple of us got super lucky and got adopted by Lehman and went over there. But, yeah, so that was a rough start. And then obviously the end was rough.

[Rick Reeder]

But before we go there, I have two questions for you. Why aren't you flying private?

[Michael Batnick]

So the.

[Rick Reeder]

So, by the way, do you know anything about this?

[Michael Batnick]

Do I fly? I don't know. I've been flying for a. It's just all over Europe, just all over Asia. There are some airlines better than others, and some airlines, by the way, it's pretty nice. Some others, I've had more bad food experiences than anybody. I get in trouble, but I just flew the one I hit 2 million miles on, served me a 2 million miler meal that was heinous. I don't know what. Yeah.

[Rick Reeder]

All right. Shout to Emirates Air. So my second question. Why don't they call you a Bond king? You are 2.4 trillion under your team. I know. It's not just you. Gunlock's a bond king. Bill Gross was a former Bond King.

[Josh Brown]

You're a sheik, You're a bond sheikh.

[Rick Reeder]

You're like almost a Bond sultan.

[Michael Batnick]

I don't know that I want the title. You don't want usually because they get overthrown. I don't know. I feel like I've said this my whole career. Once you think you've accomplished something, that's when I always think the taller you lift your head up, the better chance it's going to get taken off.

[Josh Brown]

I try to tell him this, he doesn't listen.

[Rick Reeder]

But Bond King is very apropos. We're going to talk a lot about the fixed income operations that you guys oversee at BlackRock. It's substantial money, of course, but it's not just the assets under management. When you guys speak, everybody listens. And that's very Bond King. Ish, from my perspective.

[Michael Batnick]

So, I don't know.

[Rick Reeder]

You don't think it's a habit? You don't want it?

[Michael Batnick]

Yeah, I don't think it's wisdom. I think, yeah, we run a lot of assets in the. Listen, I will say one thing about when we do speak. I mean, there is the amount of research and work I do, these monthly calls. I mean, I must have spent, I don't know, 80, 90 hours on, you know, it takes. Because you do the same thing. The amount of research. The amount of research.

[Rick Reeder]

I don't take 80 hours to start, but to get.

[Michael Batnick]

I mean, to really know what you're talking.

[Rick Reeder]

Yeah.

[Michael Batnick]

Like, it's. I just don't think he can wing it. I think you gotta Put an immense amount of time in it. So, you know, hopefully people should.

[Rick Reeder]

It shows without a doubt. And when you guys put research out, everybody wants to know what you think. And it's evident that obviously the success is self evident. But I think it's evident to people that you choose your words carefully and you do. You're not just doing vanilla, like, oh, here's our marketing content. You have opinions and I think that goes a long way.

[Michael Batnick]

Thanks. Yeah, no, we definitely listen and we try not to be. You know, sometimes, you know, I've learned in my career you got to, you got to be in the consensus and you got to be. I mean, I always said this expression that you got to ride the wave and you got to get off before it crashes into the shore. And you know, we try and be, you know, where it makes sense to be aligned with, with everybody else, but, but try and be a bit differentiated. You know, there's, you know, I have some pretty strong views about things that are, that are quite different.

[Rick Reeder]

Yeah. I want to quote a profile that was written about you in investor business. Investors visit daily. It says Data Reader says is his guiding light. Downtime for him is pouring through 1,000 market charts and tables on a Saturday morning. Fun is reading big picture market research published by Wall Street's smart money crowd. His goal, get a cohesive view of where the world is going and not get caught up in the story of the day. And you said, I just keep reading and reading and reading. It gives you the confidence to make decisions and that you're making the right call. This is like what all the great investors have in common. They're nonstop readers. I mean, pun intended, Rick Reader.

[Michael Batnick]

Okay. I mean, listen, the only thing I will say is I find, and I don't know if you agree with this, I find that the world has moved and I don't know if it's social media media. Much more to a momentum, the soup of the day. This is the hot thing and everybody's on that. And I feel like the real money is made getting deeper into the things that not everybody's focused on and understanding. Like, I read a lot of documents. Boring. 10k, 8k, man. I read and quite frankly, like economic data. I find the published economic data, everybody gets it. It's usually revised. Like, I read tons of earnings reports. Like, I learn a ton from what's happening to margin. Why are inventories growing? Why are people hiring? The payroll report is interesting, but you've learned a lot more if you read why are companies hiring? Why are they hiring in leisure, why are they not hiring in manufacturing? You get all that data from other sources.

[Rick Reeder]

You're on the fixed income side, but you're reading companies earnings reports as though like a stock analyst would.

[Michael Batnick]

Yeah, I just think I get way more out of that than anything else.

[Josh Brown]

So how do you separate? If you're reading so much, how do you separate? Because this is such a momentum driven news cycle, how do you separate noise from signal?

[Michael Batnick]

It's really hard and I would say some of it's old age and some of it is just literally seeing so many things over time. But I also. You get to learn over time like you all are great at. You get to learn over time who are there certain CEOs that are very thoughtful or very tuned in? You see that in retailing, you see it in others. So I like to follow. There are certain ones there. Commentary is interesting. I quite frankly get a lot out of. We use AI to figure out their trends in terms of verbiage and what they're saying. I read cash flow statements a lot and I think you learn like when we talk about a company you hear well, we like the momentum of this, we got this. And then you read the cash flow statement and it tells you way more than anything else you get. So I like to see what's driving why is EBITDA what it is, what's capex, what are they buying back in stock, et cetera?

[Rick Reeder]

Are these just for companies that you're investing in the debt side or these are like blue chip companies that you think are emblematic of the environment for corporates in general.

[Michael Batnick]

So first of all, I think the world has separated into. There are huge. I mean whether it's Mag7, but I think you go probably another 2030 companies beyond that that are big cap companies that are really driving capex R&D inventory build. And so I like reading many of those. So you can go beyond mag 7 to the Walmarts to the Exxon to big companies that are driving so much of the ecosystem today.

[Josh Brown]

Right. Can I show you a char that I made in 2018?

[Michael Batnick]

Yeah.

[Josh Brown]

So that's quite a while ago, right?

[Michael Batnick]

Yeah.

[Josh Brown]

And we're having the same conversation today. So in 2018 I made this pie chart and it shows Apple, Amazon, Alphabet, Microsoft and Facebook were equal. These stocks were equal to the bottom 282 companies in the S&P 500. What do you take a guess what you think it is today? I won't put you on the spot unless you want to take a guess.

[Michael Batnick]

What they're equally market cap.

[Josh Brown]

So the bottom how many stocks they used to be as big as the bottom 282 stocks of the S&P 500. Today we just updated this chart.

[Michael Batnick]

450.

[Josh Brown]

Very close. 407.

[Michael Batnick]

Yeah.

[Josh Brown]

So it was 282. And remember back in 2018 we were screaming how is this possible? How does it. And it's gotten even more extreme.

[Michael Batnick]

So it's pretty extraordinary. One of the things that I think is driving it, I think companies utilization of data is part of why we get in this dynamic. And I've talked about it and I don't always certainly have the right call on it. A small cap versus big cap. The companies that have the data, that can exploit the data. And it's so hard for any small business to compete. If you have the ability, I look at the big retailers, the Walmarts, the Amazons obviously if you know what price points are, you know how to drive what drives inventory versus what doesn't, who's.

[Rick Reeder]

Buying what at what time.

[Michael Batnick]

Yeah, it's all about the ability to utilize data. And I think that moat for those big companies keeps growing.

[Josh Brown]

So does the ability of companies to have real time data dampen the boom bust cycle that has the, that the economy has experienced over the last forever.

[Michael Batnick]

So I don't, you know I've done says before. I don't think the US economy goes in recessions like I don't unless it's a pandemic or financial crisis. I actually think I call it the satellite economy.

[Josh Brown]

Right. You know that we're being recorded, right?

[Michael Batnick]

Yes sir. And so I know it's a crazy statement but I have a very strong point of view that 70% of consumption in the United States driven by services today service economy has only gone in a recession twice in 75 years. Pandemic financial crisis. When you have a service oriented economy, what people spend on healthcare, education, what they spend on their phone bill, their cable, et cetera, it's incredibly constant. Unless you have some systemic shock. This whole idea of hard landing, soft landing, I just don't think it lands. And I'm not saying there's not iteration around a trend that generally is driven by the demographic. But I just don't believe in the cyclical. China is cyclical export manufacturing card.

[Rick Reeder]

That's gonna say when you understand the causes of previous recessions, it's like they raise interest rates, the banks charge more to lend money, all these industrial companies are able to borrow less and as a result they like start hiring less people. Or lay people off. Those people stop buying cars and refrigerators. And then in an industrial economy it's guaranteed, it's a recession. If we no longer have companies, public companies that require bank funding at prevailing rates, then what are we talking about?

[Michael Batnick]

So also you think about the free cash flow generation of these companies. Actually not only do they not borrow, they're long cash. And so actually if you raise interest rates and make more money, it's actually.

[Rick Reeder]

And their margins are up 30% interest expense went down.

[Josh Brown]

To me that was, that was the chart of corporate interest expense went down in 2023.

[Michael Batnick]

Totally agree. By the way. The other, the other side of it or the corollary to that is you think about the consumer today. So who's driving consumption in the economy? It's people 65 and above their net savers who don't have any debt. So what ends up happening is the more you actually raise the interest rate, the more they've got.

[Rick Reeder]

So you and I knew this and both very publicly said this. Yeah, over a year ago. Yeah, I think it was. You said something like I'm not completely convinced that raising overnight rates is not stimulus. I think you said it first.

[Josh Brown]

Can I give Josh some credit because.

[Michael Batnick]

I think he's probably right.

[Josh Brown]

He said this on TV with the Bond King and Jeff Gunloff.

[Rick Reeder]

Jeff didn't like it.

[Josh Brown]

He laughed and at the time it sounded true.

[Rick Reeder]

And that's not an original insight by me.

[Josh Brown]

Who do you steal it from?

[Rick Reeder]

My father in law is a CPA and he got his start in the early 1980s and he said in the early 1980s I knew older, richer people who did not have mortgages, were not paying for college tuitions. They were past that part of their life. And the cash in their accounts was like a geyser spitting out more cash which produced a wealth effect which is where eventually you get Lifestyles of the Rich and Famous. We had a boom in the early 80s for wealthy people, not for everyone for wealthy people. I think we just experienced another version of that.

[Michael Batnick]

So can I throw one other addendum to that? So you think about the housing market and so part of why I think the interest rate tool doesn't work today or it's not effective. There is, you look at the last CPI report, not as much in this one, but the last CPI report is shelter Inflation is still sticky. If you brought the interest rate down, you'd create more velocity of housing, you'd bring down affordability, you'd build more homes. We were looking today Dr. Horton Toll Brothers So you look at the dynamics and all they talk about is you got to use margin to stimulate. Well, what if we actually brought the rate down? You get more home building, you'd bring inflation down. It's counterintuitive.

[Rick Reeder]

Historically, it's counterintuitive because you think we're keeping rates high to stop the inflation. Actually, no, that's not the issue. The issue now is housing affordability and rents. Bring the rates down and maybe people will build more. It takes a long time, though. There's a lag. I want to bring you back a little bit. We're going to go a little bit into your career because I think for the listeners, one of the things they get out of the show when we bring on people like yourself who have truly succeeded in business, they want to have an idea of where it started and they want to hear about the road. We talked to your first high school girlfriend.

[Michael Batnick]

I didn't have one. You must have done quite a bit of research.

[Rick Reeder]

Okay, so you took a job right out of school as a financial analyst at Chemical Bank. But then right before you start, a recruiter for EF Hutton offers you a fixed income trading job instead. And you spend a day on the floor at E.F. hutton and you got hooked by the trading, you said. I fell in love with the concept of taking risk. After sitting with several of their traders, I completely reversed course that day and decided to pursue a career in trading. Talk, talk, talk about that.

[Michael Batnick]

Wow, that's good research. That is 100% right. So listen, my family didn't come. My parents were entrepreneurs. I didn't grow up around finance. You know, a lot of people come in the industry, finance.

[Josh Brown]

See, in this case, he's right.

[Rick Reeder]

Okay, well, he says finance you, and.

[Josh Brown]

I say, you finance a vehicle.

[Rick Reeder]

Rick Weeder, and I say finance. Yeah, I know you could argue with us if you want, but I don't.

[Michael Batnick]

So my parents, you know, my parents weren't in it. I didn't have a relative. My relatives were orthodontists and optometrists. So I don't. So I went there. I didn't know what. I couldn't understand a word they were saying. I didn't understand it, by the way. I didn't get a job when I was interviewing out of business school. Like, E.F. hutton thankfully hired me. And it was this one person who, you know, whatever. I played sports, you know, I was interested in. I gambled on sports, but I liked the competitive nature, what have you. But I wasn't offered a job other than I got this one at EF Hutton, other than being a strategist, because I, you know, I was pretty good at writing reports. And so anyway, I did it. So anyway, I took the risk and I never.

[Rick Reeder]

Where is their office? In 87.

[Michael Batnick]

Oh, my God. It was right here. It's 50 seconds and sixth.

[Rick Reeder]

Now, this is 1987. So it's like Gecko Times.

[Michael Batnick]

Yes, sir.

[Rick Reeder]

It's like the movie.

[Michael Batnick]

Yeah, definitely. It was definitely right. And by the way, I remember I called my dad and I said, I'm going to take this shot at trading. And he said, it's not a career. He said, you've got a business school degree. That's not a career. It's a hobby. And so I'm like, you know how much I still trade today? I'm like, I still am doing it so 37 years later.

[Rick Reeder]

So you like the competitive nature because there was an echo to the athletic stuff. There's a score, total scoreboard.

[Michael Batnick]

No, I, to this day, you know, I'm an investor, but I look at my numbers every single day. And it is, you know, you're trying to generate, you know, return every single day. And you can't really, if you have a bad day, you can't say, get out of your positions. But it allows me to look at, Gosh, I made a mistake here. My models are suggesting this. My correlations aren't working. But I, But I love every day knowing exactly what happened. And you have, you can, you can see it quantitatively.

[Rick Reeder]

So you're not there long before the crash of 87 happens. How long, how long are you in the seat at that point?

[Michael Batnick]

Four months.

[Rick Reeder]

Did they blame you for it?

[Michael Batnick]

He was sure I didn't get back. I didn't get blamed for that. I didn't understand any of it. All I do was we sat around playing liars poker for hoping we'd get jobs.

[Rick Reeder]

So black. All right, so Black Monday stock market, it's a 22% crash in the Dow in a single day. Didn't really end the world in the way that the great financial crisis did, but obviously it was international headlines. But some firms stumbled, and E.F. hutton gets absorbed into Lehman at that point.

[Michael Batnick]

Yeah.

[Rick Reeder]

Okay, so you just, like, came with the firm.

[Michael Batnick]

I got lucky. I mean, there were 34 of us, and somebody was kind enough to on the mortgage, in the mortgage business, decide we should hire this person. And so. And I got super lucky. And I got. And I was going to trade mortgages. I ended up trading corporate bonds just because I thought the people who were doing it were phenomenally talented, what have you. And so I ended up going there.

[Rick Reeder]

So you rose through the ranks of Lehman. You start on the corporate bond desk, then they make you the head of it, then you're the head of credit businesses, Then you're the head of Global Principal Strategies. So now you're doing global trading. Then you're the head of the firm's credit businesses. Then they make you chairman of the Corporate Bond and Loan Capital Committee, Loan Capital Commitment Committee, Then you're a member of the management committee, and then you're a member of the Board of trustees for the Lehman corporate pension fund. What is it about you in those years that enables you to keep getting promoted? And what was special about this is like Lehman's golden age, this period we're describing.

[Michael Batnick]

Yeah, I mean, so, you know, it was a pretty cool place. I mean, obviously, you know, the firm made mistakes and there were real estate that was purchased. And, you know, it's disappointing because there was a, you know, quite frankly, people were, you know, in the industry. It was a really good culture with a lot of good people. And it's very entrepreneurial in nature. You know, the great irony that people don't realize, like, when we ran. I worked in big part of Fixed income. I ran a part of Fixed Income, a gentleman named Bart McDade who was incredible. I learned a ton from. But our business was built on research. And it was. I don't know if you remember, we had the Lehman ag. So the Lehman AG people still call it the Lehman ag.

[Rick Reeder]

It's the Barclays AG now, but, yeah, Bloomberg AG now. And so did you guys invent. I was told that was invented to sell bonds.

[Michael Batnick]

So I'll tell you one thing about Lehman ag, which is literally, and I was thankful that I started there, like, our whole business was built on research. We were ranked number one in research for many, many straight years. But it was all about research and how do you beat an index? And so we had. Because we had the Lehman ag, so much of our business was working with clients and advising them around. This makes sense. The index has too much duration here or what have you, and it's been a huge help today. But anyway, it's a good culture. It was entrepreneurial and sorry to cut it.

[Josh Brown]

Was the index built to be beat?

[Michael Batnick]

I don't, I don't know what it was. I mean, it was built to be a benchmark. But listen, I still think today. I still think today it's.

[Rick Reeder]

Were you Water street or Madison Avenue?

[Michael Batnick]

Where did I Where did I work?

[Rick Reeder]

Which Lehman branch I was at?

[Michael Batnick]

I was down at the World Financial Center.

[Rick Reeder]

Oh, okay.

[Michael Batnick]

All right.

[Rick Reeder]

Because.

[Michael Batnick]

Right.

[Josh Brown]

The bond guys have a lot better time with their benchmark than the equity guys do with theirs.

[Michael Batnick]

I mean, I want man's opinion. I think the. I think the bond benchmarks are much easier to beat because there are so many inefficiencies. Too much, too much credit, too much duration in the long end of the yield curve. There's a lot of assets that trade at very tight spreads. Listen, I think the. I think it's a lot easier. The S&P 500 is a pretty hard index to beat, you know, particularly when you've got seven companies that drive so much return. And I also have 68,000 securities in fixed income. They're not enough stocks.

[Rick Reeder]

Yeah, there's 3,000 stocks as a bond.

[Michael Batnick]

But even the ones that, I mean, you know better than anybody in the world, the ones that trade are the ones that have real market cap. So it's. Yeah, I know. It's easier to beat, I think, a fixed income.

[Josh Brown]

So as a bond guy, how much attention do you pay to the stock market?

[Michael Batnick]

A ton. I mean, I run our Global Allocation Fund, which is an equity fund and it's a big fund. So I spend a ton of time in the equity market. And quite frankly, it helps me a huge amount in terms of looking at credit and looking at different companies. We talked about economic trends, regime identification, and I trade a tremendous amount of equity volatility. I think the equity. The options market is the most inefficient market in the world. And I manage a ton of my volatility, my beta, using the options market. So I spend a ton in equities.

[Rick Reeder]

Do you think that because you were at Lehman and It wasn't quite J.P. morgan or Goldman, you had more large opportunities and more ability to be promoted up. Did that help you? I wouldn't say they were second tier. I would just say they weren't Goldman.

[Michael Batnick]

So I would say I interviewed with all those other places, nobody offered me a job, so I didn't really have a choice to make anyway. But I don't know. I will say one thing I've learned over the years, I got really lucky because the culture was so good. And I will say there was always this sense of we're the underdog.

[Rick Reeder]

Yeah. And there was that too.

[Michael Batnick]

Yeah. And it was a sense of we had to work harder, we had to provide more research, we had to more. And you know, quite frankly, we couldn't compete based on tightest bid ask spread. And so we had to compete based on insight and analysis. And I liked. We had a great culture. I mean, I brought, you know, I've worked with people that I have now at Blackrock, a bunch of people. I've been with me for 30 over 30 years. It's unbelievable. But testimony. It was a good culture with a lot of good people. Listen, every firm has people that are not as good as others, but we had a lot of good people that allowed you to.

[Rick Reeder]

So when it all goes down the tubes, you spin your own group out and you call it R3 partners. And this is right before Blackrock.

[Josh Brown]

What was R3. What are the.

[Rick Reeder]

Is it Robert Griffith III?

[Michael Batnick]

No. So people think it's my initials. It's not. It is. So actually, I'm a big believer in urban education. I chair the board of for 20 years now. I charter schools in Newark, and I do have big programs in Atlanta. It stands for reading, writing, and arithmetic.

[Rick Reeder]

Oh, okay.

[Michael Batnick]

So the idea. Yeah. So our charter was that I think it was 15% or 20% of our top line was going to urban education.

[Josh Brown]

Top line. That's amazing.

[Michael Batnick]

Wow. So that was sort of. That was the idea.

[Rick Reeder]

So then BlackRock calls, and then we get to where we are now.

[Michael Batnick]

So we had a tough time in 08. And why?

[Josh Brown]

What happened?

[Michael Batnick]

So we were.

[Rick Reeder]

Well, they're giving 20% of the money away.

[Michael Batnick]

Yeah, well, we didn't have any money to give away at the end. So, you know, obviously we were a credit hedge fund. It wasn't exactly the perfect time to spend.

[Rick Reeder]

Oh, so you were like a 2 and 20 shop in the Baumer area.

[Michael Batnick]

Yeah. So this is May. So we spun out. May 08 crisis obviously hit. So it wasn't like I had any prescience about the financial crisis or leaving Lehman because I certainly wouldn't have started a hedge fund at that time. But we had a tough 08, and then we started doing really well in 09, and then we had a tough call. But I think being working at blackrock, and we thought at the time, this is a place that could be one of the epicenters of finance. We certainly had no idea.

[Rick Reeder]

Oh, you brought the crew in with you?

[Michael Batnick]

I brought 42 people.

[Rick Reeder]

That's incredible.

[Michael Batnick]

To Blackrock. And so a lot of these people, frankly. So it was a good. I mean, the firm was. BlackRock was really good about. You know, these people have been with me for 20 years, and so, you know, a bunch of them. So to this day, I'm super proud Of I think we have 25 people that are still including running a lot of businesses. So I'm pumped about that.

[Josh Brown]

That's an incredible story. So before we get to the story of today and what's going on in your world, I'm curious. You must be thrilled to not have to invest billions of dollars in a world with trillions of dollars of negative yielding bonds.

[Michael Batnick]

So I don't understand negative interest rates. I think it's the craziest. I don't understand why it doesn't create. I get crazy when people talk about negative interest rates. The fact that, I mean you think about how much of the last decade were spent negative interest rates doesn't create any velocity. It doesn't create. It destroys your pension system, it destroys your banking system. It doesn't create the impact you want. And I've always said so you think about a normal capital structure. If the debt people are going to get paid negative interest rates and the equity people require a return on equity of 12 to 14%. Everybody will sign up for the equity, nobody signs up for the debt. So what happens is actually you increase the cost of capital. It doesn't work like aggressive monetary policy. Same thing we were talking about. Once you get interest rates out of a zone of we could argue 0 to 4% it doesn't help to be.

[Rick Reeder]

At 5 and a half and it's not stimulative.

[Michael Batnick]

And it's not stimulative at all.

[Rick Reeder]

And that was the original intent is let's support the economy with low rates. How low is too low? Who cares? Take them negative. No, it doesn't work that way.

[Michael Batnick]

I mean I think it destroys velocity. You look at the European bank stocks over that period of time and how much capital was destroyed. Think about pension, insurance company. It doesn't stimulate investment.

[Josh Brown]

So we know ever is a long time. You think we'll ever see that again?

[Michael Batnick]

Never.

[Rick Reeder]

It's a failed experiment.

[Michael Batnick]

But it would be zero should be the lower bound. And then by the way, QE works like providing liquidity to the system, creating gearing in the system, creating more velocity. That works.

[Rick Reeder]

But the main offender is look at Japan, they have rising yields and a 33 year record high in the stock market. Agree that should be the takeaway. I hope that's right for everyone else watching.

[Michael Batnick]

I think that's right. I think that's right. I think monetary policy can only do so much. I mean the way monetary policy was supposed to work is it's supposed to work with fiscal. There's a time and you talk about the housing market. Like, what would drive the housing market? It's not cutting, it's not interest rate, doesn't do a lot. If you did subsidies, if you created incentives, if you created home builder incentives, that stuff works. But, you know, to the detriment of society, the central banks have had to carry the load entirely because of fiscal. Hasn't worked.

[Josh Brown]

So the road between negative interest rates and where we are today, we had been telling clients for years, we need, if you want to get some income from your fixed income, we need the interest rates to go up. We need to take one step back, to take two steps forward. Unfortunately, it didn't work out that way. We took like 19 steps backwards.

[Michael Batnick]

Yes.

[Josh Brown]

So what was 22 like for you?

[Michael Batnick]

22 is painful, I think, for everybody, because what ends up happening in those environments. So I said painful.

[Rick Reeder]

How much was the ag down? 17% to end the year 13.

[Michael Batnick]

Yeah, I thought it was 15 and a half cents.

[Josh Brown]

And treasuries were down more than junk bonds.

[Michael Batnick]

So, by the way, wild that was. And so if you think about what is the normal hedging and how do you manage your risk? You know, we ran, I think, you know, while it was painful in terms of negative return, I think we did it. You know, our funds did okay. You know, it's always hard telling clients, well, we outperformed by 800 basis points. Like, great, you're negative. Thanks for helping. How much did you lose there, exactly? Thanks for helping. But it's, you know, so what happens is your hedges go away. The only thing that. The only thing you use as a hedge is cash. So what we ended up doing is we got lucky. We just, we built a ton of cash into the portfolio. But it's, you know, I'm a big believer. Like, the reason why I think now is nirvana. Like, all of a sudden, equity volume goes to, like we're, you know, including today, buying equity volume at eight and a half. And you can run an equity portfolio. You can manage your beta, you can trade around. You don't need the market to move much, to move your deltas around, to move your exposure around when volatility spikes. And then you get everything moving together in correlations, bonds and stocks selling off together. It's just cash.

[Josh Brown]

A dangerous thing to say, but it does feel like today it won't last forever. It does feel like a golden age of investing.

[Michael Batnick]

Yeah. It's like, I never want to say that.

[Rick Reeder]

I know, I know, I know.

[Michael Batnick]

So, I mean, I think there is, by the way, part of why that Is a. Because I love volume when it's this low. Because you can really do a lot of things. The other thing is, listen, I think technology and the change and innovation and like, boy, oh boy, the next two, three years could be really different than we are today, let alone political change, let alone. There's some really cool things to think about and invest around and knowing you're not going to get them.

[Rick Reeder]

All right, I want to get into some of your economics takes because we've had a bunch of data in the last two weeks, as we always do. You reacted to the December 6th employment report and you said, broadly speaking, we think labor markets remain solid. But this month's strong non farm payroll gains of 227,000 jobs in November largely represented a reversal of the hurricane and labor strike effects of prior months, which subsequently boosted hiring last month. And then. Yeah, it's not accelerating or anything like that. It's a little bit of a reversal. We got a higher than expected unemployment number today. But I think the shifts are so minor relative to the bigger picture, which is that for most people, if they want to work, they can work. There are still wage gains all over the economy. They're moderating somewhat. The jolts is moderating. You don't have as many people quitting. It's a super conducive environment now for both employers and employees. It feels more balanced today than it has in a long time. What do you think about that?

[Michael Batnick]

I agree with everything you said. Actually. If you look at the beverage curve, you're actually at a place where you look at vacancies to the unemployment rate. It's actually at the perfect spot. But there are some. There was massive hiring. Leisure, hospitality, nurses, teachers, healthcare, education. Unbelievable amount. Some of it was post Covid. You had this incredible need. Now it's much more normalized. You're not seeing that significant pressure on wages. You know, we're going from maybe an overheating labor market to something that is just normalized. There's some parts of it, by the way. If you look at hires, job hiring, it's definitely come off a lot. You look at temporary hiring, but normalized. Normalized.

[Josh Brown]

Remember that chart? The biggest team of 20. I don't know, 20, 21 was the best way to get a raise is to leave your job.

[Michael Batnick]

That's right.

[Josh Brown]

Right. And that environment, thank goodness as well, well passed.

[Michael Batnick]

Yeah. There's something really interesting where companies are holding on to workers. And so what you're seeing is warehousing.

[Rick Reeder]

They're calling.

[Michael Batnick]

Totally.

[Rick Reeder]

Yeah.

[Michael Batnick]

And I think That's. I think that's right. But I think, like I say, I think that's pretty healthy. And then you don't see as much transitional labor.

[Rick Reeder]

The CFO calls down and says, hey, we need you to cut 20 people. And the phone call in return is, you know what, actually I really can only cut 15. These five. If I let them go now, I'll never be able to replace them. I can't find another one. And that's the warehousing effect. And it's good for labor, I think.

[Michael Batnick]

So the other thing, that's immigration. And where does immigration go? There's a lot of particularly in tech companies and otherwise, if you lose people and you think about can you bring them back? There's a lot of issues around greed, card and otherwise. So I think it's a pretty healthy labor market. And quite frankly it allows the Fed. The fact that it is softening somewhat allows the Fed to get the rate to where they need to get it to.

[Rick Reeder]

We got another CPI print today, or was it yesterday? And today was ppi. Okay. You said the Federal Reserve can feel largely pleased with the progress made on lowering high levels of inflation. There's progress, but it may remain stubbornly sticky near current levels for a time. I think a lot of people are saying the report that we just got cements the December cut but then maybe lessens the amount of cuts we'll get next year. Our friend Neil Dutta is saying now it's probably three cuts next year and December locked in. You said Indeed headline CPI increased 0.31% month over month greater than its gains from last month as both food and energy prices gained. That Resulted in headline CPI rising from to 275 from 260 on a year over year basis amid unfavorable base effects. The market didn't really seem to react too much to this though. I think the yield trade is maybe like dividend stocks came in. Oh, here's the Fed fund's expectations as a result of the report.

[Michael Batnick]

So I'd say a couple things. One, listen, I think inflation coming down is over. I think we have seen shelter is still coming down. What do you mean shelter is coming? We got this tremendous impact from goods inflation coming down. So you had what was functionally deflation from goods for a long period of time after Covid logistics, et cetera. You're not going to get. We don't think you're going to get anything real benefit from goods inflation going forward. I agree with shelters coming down, but now we're entering this period of which is hard to predict. Tariffs, deglobalization. What does strategic decoupling mean globally? That maybe you're going to get a bit more inflation into it and I just don't think you can count on much. So we have inflation generally when we look at, we model it about being here. So we could do core PCE.

[Rick Reeder]

We're stuck at 3.3 for the last six months.

[Michael Batnick]

Sorry. I would say the run rate core PCE 2.3 to 2.5 in that zone. We don't think it can come down of any significance from there. And maybe you drift up a little.

[Josh Brown]

Bit again, why can't it come down?

[Rick Reeder]

So my core CPI is still over three.

[Michael Batnick]

Correct.

[Josh Brown]

The services part.

[Michael Batnick]

So, so there's two parts of that. One, because you've got this big benefit from goods that's probably you're not going to see going forward and two, it is so hard to get service level inflation with the demand for services. It's so hard to get it significantly lower from here and then you build into it the near term effect from what's going to happen to potentially the tariffs, etc. So by the way, I don't think you're going to see a spike in inflation of any significance. But I just think the improvement part of why I don't think anybody's going to make any real money on interest rates next year. I think it'll be on income.

[Josh Brown]

You mean on a real basis?

[Michael Batnick]

On a real basis, I think real rates. So where you can buy fixed income today at six, six and a half yield is pretty attractive. Even if inflation runs two and a.

[Rick Reeder]

Half real rates though, it's like half of that the return, correct? Yeah, correct. So you just have to get accustomed to. That's the new situation.

[Michael Batnick]

Correct.

[Josh Brown]

Okay, so where does the Fed fit into how you think about markets today? Obviously they were front and center for the last couple of years but so.

[Michael Batnick]

I mean I agree with what you were saying that listen, I think they gotta go in December and I've said for a long time get the funds rate to 4, get it to 4, you're killing lower income people. We talked about the housing market. Get it to four and then look around to see where you are. You're gonna get pretty darn close to four. I'm just not sure. I think they're gonna sit back and watch the data from here, see what policy looks like, see what growth. If you take the phenomena today, we're gonna print this year nominal GDP of 5 again pretty close to 5, not 5 again. It's pretty good. You could see a dynamic next year where we grow real two, two and a half. Inflation runs two, two and a half. And then you got financial conditions arguably as easy as they've ever been for the Fed to ease aggressively into that. Pretty hard.

[Josh Brown]

So Josh and I were discussing last night Jerome Powell's legacy. What do you think?

[Michael Batnick]

That's a long discussion.

[Rick Reeder]

Paige, please leave the room.

[Michael Batnick]

I think that's a long discussion. I think the Fed.

[Rick Reeder]

Hold on, hold on, hold on. I want to hear your response, but let's be clear.

[Josh Brown]

We were not disagreeing.

[Rick Reeder]

I said as a student of history, Powell would not himself give himself an A. You would have to agree with that.

[Michael Batnick]

Yes, sir.

[Rick Reeder]

Okay. All right, Now I want to hear what you have to say.

[Michael Batnick]

So first of all, I think it's a hard job. And so I give some credit to that. I think they did a spectacular job at Covid. And I think they waited way too long on the QE dynamic and getting starting to move the rate up. I think that created more inflation, that created excess in the system that you shouldn't have had.

[Josh Brown]

So way too late to identify that they need to raise rates. What about on the other side?

[Michael Batnick]

So then I think they, quite frankly, I think they've been slow to get them back down. And I think per the comments, we talked about sitting at a 5 and 3 funds rate for that long, it was creating no good. And you were creating arguably more stimulus. So I think creating more millionaires.

[Josh Brown]

So, Rick, it sounds like.

[Michael Batnick]

So can I say one thing that I think is really important? Listen, I think it's a hard job. I think I agree with you. I think they did a great job during COVID So do I. And so, you know, now I think they're managing it. They're doing an okay job managing. I think they're gonna take the sidelines. I think there's a lot of credit given for who made the US economy into what it has been, what it's showing today. And I just think it's consumers, it's us. That's what I think. And by the way, there's still a ton of fiscal that's still coursing its way because this massive transformation.

[Rick Reeder]

Well, this is what I wanna ask you. Powell comes into the job with Trump in 17 and he's in an environment where Congress can't agree to do anything and nobody has a big majority. And so it's just gridlock, gridlock, gridlock on the fiscal side. And then something changes during the Pandemic where all of a sudden there's huge fiscal action. A Fed chair has to understand that the backdrop is now different. Everything in the post financial crisis was on the Fed's back because fiscal couldn't agree if it was Monday or Tuesday.

[Michael Batnick]

Yes, agreed.

[Rick Reeder]

Okay. This is not the environment anymore.

[Michael Batnick]

Agree.

[Rick Reeder]

So in the pandemic, everyone agreed. The government, the Treasury. Trump is going to do things that historically only Democrats did. Almost like a new deal spun up overnight. The Fed has to factor that in to what they're doing on their side. They did not.

[Josh Brown]

They did not.

[Rick Reeder]

And then Biden comes in and he has. It's not a mandate, but he has the ability to pass a massive infrastructure package. The Fed has to say, okay, I can't talk them out of doing that. What I can do on my end is maybe make it less easy credit, easy money. Maybe I could shrink my balance sheet faster. He does not do that either.

[Josh Brown]

Maybe stop buying mortgage bonds.

[Rick Reeder]

And they have this whites of their eyes mentality where they want to wait till it's 11:59. And I think when there is fiscal action to the extent. And wait till you see what Trump does on the fiscal side. He's got both houses of Congress, he has a Supreme Court, he do whatever he wants. So I think that's the Fed chair's job not to interfere with fiscal. To recalibrate based on what's happening. And so that's my critique of the Fed. It's like, dude, are you not listening to what they're saying they're about to do?

[Michael Batnick]

So I would say one thing, one you have to give. The Fed has been the only engine, like you say, for a long time. So that's a hard thing. And I think too much is on their back. I think 50 years from now, though, people will look back and say, the US Economy, no matter what you did, it would be pretty hard to hurt. You have energy independence, you have extraordinary innovation, technology, pretty good demographic immigration, US Economy, bad policy has a hard time hurting it.

[Josh Brown]

They tried to crash the car and they couldn't.

[Michael Batnick]

I think that's right.

[Rick Reeder]

They said recession may be necessary for multiple people.

[Josh Brown]

We said, oh, yeah, watch this.

[Michael Batnick]

No, I think in history we'll go down as well. Like a pretty extraordinary. And you think about it, it's the only one in the world that really has all those tools. That's pretty incredible. You watch Europe today, and I just spent the last week in Europe, and they're going to go down a path of austerity to bring the debt down.

[Josh Brown]

It's like, have they learned nothing?

[Michael Batnick]

It's just, it's unbelievable. It's like what Trump will do and I think what this administration will do is and we have a debt problem in the United States, but if we can, we can outrun the only way to really get it. You got to outrun it and you gotta grow your way out.

[Rick Reeder]

I just heard Jeff Bezos say that on stage last week. That seems to be the consensus.

[Michael Batnick]

Now.

[Rick Reeder]

Let's, let's out, let's, let's focus more on outgrowing the debt versus austerity programs. And Trump doesn't do austerity. So I think it's obvious that that's the direction we're gonna go.

[Michael Batnick]

Austerity has no velocity to it. So you think about if you grow and you know, I always say if you put money into things like infrastructure, you build ports, chip factories, et cetera, you put people to work, the vendors end up. It's got a durable tale to it. That created austerity does not.

[Rick Reeder]

Let's talk fixed income and private credit and all the things that are hot in the street right now. You said we are underweight long term US Treasuries on both a tactical and strategic horizon. You also said combining public and private credit.

[Josh Brown]

No, no, no. The CFO said this.

[Rick Reeder]

BlackRock said this. Sorry, this is Martin Small. I don't know if you have lunch with him. Combining public and private credit is the future of fixed income in those two statements. I think there's a lot to unpack. Why don't we start with the underweight long term bonds. You think there's a lot of risk there or just you're not getting paid for the amount of risk you're taking?

[Michael Batnick]

I mean, if you're a life insurance company pension fund, I get why you have to own it. If you're not, I don't know why. You've got a pretty flat yield curve, the volatility in the back end of the yield curve. So there's two forms of long durated assets in the public markets, equities and long bonds. Equities create 18% return on equity. Your book value goes up. Bonds, you create nothing off of inflation. And it's not a hedge. It doesn't hedge your equity portfolio. Inflation is higher. Your bonds are going to get killed like 2022.

[Rick Reeder]

The TLT hedge was not a hedge. It's not helpful.

[Michael Batnick]

And so I don't really understand if I get all the yield I need in the front to the belly of the yield curve and you Know, you know, the biggest risk. And people say I get all the time, what keeps you up at night? Listen, I mean we, you know, these auctions, every, you know, we had a 30 year auction. Every auction that goes by, I'm like, whew, we got through another one. We're issuing on average almost 600 billion a week of Treasuries. The total debt of Australia is 600 billion. The total Mexico, 700 billion. There's some weeks we're getting 700 billion a week.

[Rick Reeder]

But your release, this is where the stimulus.

[Josh Brown]

But is this part of where the stimulus is coming because we're paying ourselves. Are we not the biggest buyers of our own Treasuries right now?

[Michael Batnick]

Well, we better be because China's selling them and Japan's not buying them. Point being, we are, we, the U.S. households are buying the, buying the debt. We've got to keep showing up for the debt. And it's the biggest risk that we have today is that you're going to have auctions that people don't show up for the auctions.

[Rick Reeder]

It's a bond vigilante risk.

[Michael Batnick]

Yeah. And I think it's a, and by the way, I don't think it's, I don't think it's your base case, but I think there is a tail risk that, by the way, I'm going to sit in the long end of the yield curve and if I'm wrong and rates move up 50, 100 base points, I'm going to lose 10, 15 points.

[Josh Brown]

But if you're worried about that, what do you do? Because that seems to me we're all in big trouble.

[Rick Reeder]

Meteor.

[Michael Batnick]

So I think there's only one thing to do. Playing in that part of the yield curve, it's like somebody else can have that fun. It's not worth it. Just hold the front end of the yield curve, buy a lot of assets in the front of the belly and then manage your equity. Like I always, you know, I learned, I think it was from Comanski and who said this years ago is like the best hedge is to own less of less of the asset you're trying to hedge. It's exactly.

[Rick Reeder]

Joshua says that that's my, Is that right? My, well, my hedge is like, if you're worried about it, own less. Just don't just have cash instead.

[Michael Batnick]

That's what I think.

[Rick Reeder]

And. Or it's like, what are we hedging for? Just sell some.

[Michael Batnick]

Yeah. Now. Or like if you're long equities, you can use the fall market. So it's a much better hedge because it's a direct relationship as opposed to something that I hope works.

[Rick Reeder]

Okay, I want to talk about private market assets because in wealth management in our world, this is now all the rage. We're like the last category. We're the final frontier for private equity, private credit. They've discovered wealth management is a really fertile field for raising money, bringing products. I think it makes sense when you think about just how much money there is. Like there's a limit to how much investors can do in public markets especially you talk about an S and P at 22 times earnings. Should we take it up to 25 or should we look at something else? Okay, so I understand the popularity of it. I also understand that a lot of asset managers need to replace actively managed stock mutual funds, which people will no longer pay for private assets they will pay for management of because they can't do it themselves. How do you see this ecosystem developing? Are you surprised at all by it? Do you think it goes much further next year? Have we hit a moment?

[Michael Batnick]

I do a lot of my funds. I have a bucket that I can do private. So in my unconstrained fixed income, I could do up to 15% less liquid bespoke financing. I will say today the ability to provide financing in real estate, in bilateral credit, the terms you get. So when people say it's a bubble, if you can. Actually, if you're lending and you're Getting collateral low LTVs, cash flow sweeps, like the terms you get today are outstanding to that point that you can get 10 to 12 to 14% IRRs, that's pretty darn good.

[Rick Reeder]

And what you're giving up in exchange is illiquidity, which everyone understands.

[Michael Batnick]

Yes, but if I know my irr and it's different, think about the growth of Venture or SPACs or what have you, that speculative cash flow, as long as you're buttoned up in terms of gosh, I know what my LTV is, I know what my collateral is. Hard for it to blow up. What I think happens is the opportunity set becomes de minimis over time because.

[Rick Reeder]

Everyone'S investing in the same place.

[Michael Batnick]

And by the way, I also think the banking system will deregulate to some extent.

[Josh Brown]

So they're coming.

[Michael Batnick]

So what I think happens is the companies that are really good at privates will continue to grow. I think the merger of public and private is real, particularly in the credit markets. And so I think that will be a trend.

[Rick Reeder]

It becomes like a sleeve for not just family offices, but now for regular wealth Management, it's maybe not a huge sleeve. I know the expectations on the private market side is everyone will get to about 20%, which is where institutions are. Let's say it gets to 10. That's still huge growth from here.

[Josh Brown]

So you guys have a chart from pre Quinn, who you acquired earlier in the year, and it's showing the rise of private markets from private equity to real estate to venture capital, infrastructure and private debt, which as Josh mentioned, is all the rage these days. And Rick, you mentioned a 12 to 14% IRR which is the target. But at least for today, I'm sure it's a moving target and no guarantees and there's a compliance person probably having a heart attack.

[Rick Reeder]

But $22 trillion in private market assets.

[Josh Brown]

It'S a big opportunity. So I guess the question that I would have is at what point do those returns become unsustainable from the point of view of the borrower? How are they able to deliver that sort of rate of return back to the lender of capital?

[Michael Batnick]

So it's a great question. So by the way, the thing that's really cool about that chart as well, if you take private equity and the years of growth of private equity as a percentage of the public equity market and you look at where private credit is as a percentage of the public credit markets, the Runway for private credit is probably two to three times bigger. Wow. So that.

[Rick Reeder]

Just to catch up.

[Michael Batnick]

Just to catch up. And so I know, I do think that will manifest itself. Your point is well taken. The reason why private equity is so hard today, if you're getting 12% IRR or 12% lending, you got to get on the equity. You got to get 20% plus to make the equity worthwhile.

[Josh Brown]

So how does the math. Math, right?

[Michael Batnick]

So do you run out of opportunity in real estate today? You know, given, you know, we could talk about different areas of whether it's data center logistics, some parts of multifamily hotel hospitality. You still got to have IRRs on the equity that are really good. But your point is well taken, that you'll run out of the ability to be on the equity side to create equity.

[Rick Reeder]

I want to spend the time that we have remaining on bicycle, which is your active ETF. It's called the iShares Flexible Income Active ETF. And it's Bink or B Inc. How do you refer to it?

[Michael Batnick]

Bink.

[Rick Reeder]

So it's not like B cred or it's like it's all right, Bink, wrong company. Okay, when did you guys launch this and what are you trying to accomplish with the flexible income active etf?

[Michael Batnick]

So we launched it in May of last year. May of 23.

[Rick Reeder]

The idea still has that new ETF smell.

[Michael Batnick]

Yes. So but it's grown. I mean we're almost about 7 billion now.

[Rick Reeder]

Has BlackRock ever done any ETFs before this one?

[Michael Batnick]

No, it's the first one ever. So we've tried. So I mean the cool thing we talked about, the bond indices, the neat thing about this is we're creating six to six and a half percent yield and diversifying it around the world. And why I personally and why fixed income is really hard to do figuring out I going to buy a single a tranche of a clo from this manager. The attachment points here, the collateral is here is too hard. We've got teams around the world that do it. You can diversify it like crazy. So Bink today is a high BBB rated two and a half year duration. So we're not taking interest rate exposure of any significance and we're diversifying it. So what happens when you get drawdowns? Rates move higher. We don't really draw down that much.

[Rick Reeder]

High yield because the maturities are so near term.

[Michael Batnick]

Correct.

[Rick Reeder]

Okay.

[Michael Batnick]

And then so what we're doing is just you're providing a product that's stable with a lot of yield. The beauty of it, I think why it's getting into all these models today is it's stable yield and if you marry it to equity, particularly to high velocity equity, you create what is the right amount of growth potential with income and you keep your volatility in a resale flexible.

[Rick Reeder]

Meaning you can change your posture on where you want to take risk or you can change how much corporate, how much sovereign you can make all those decisions.

[Michael Batnick]

The core of what we're doing is we're trying to provide yield above an index so about 150 off of.

[Rick Reeder]

So you're targeting the yield and then the holdings will flow from that decision.

[Michael Batnick]

Correct. Okay, correct. And so there are times we're going to use more liquidity and use agency mortgages and then try and keep that yield up, but then manage the risk around it.

[Rick Reeder]

Can I tell you something amazing? Like what a world we live in. Somebody that wants to have fixed income in their portfolio could have literally Rick Reeder managing the portfolio. No, because in another era this might have been like something only available in a hedge fund structure or only available as an SMA with a million dollar minimum. This is an etf. A dentist could wake up tomorrow and buy this in A Robinhood account.

[Michael Batnick]

I mean, the neat thing about the growth of ETNY, active ETFs will keep growing. One, we talk about fixed income. You know, I think most managers over time, I think it's some crazy number outperform the benchmark over time.

[Josh Brown]

Thanks to you.

[Michael Batnick]

Not all about thanks to me. I know all managers in fixed income in aggregate. But it's because the index A is inefficient and B, there's so much yield available in different parts of the world. I'm buying European credit. I like buying credit in Europe. I like buying equities in the U.S. like, can you optimize where you have your fixed income and then to be able to buy it and sell it constantly?

[Rick Reeder]

So, so let me, let me give you some laudatory facts about Bink, named one of the best new ETFs of 2023 by Morningstar, was the top active ETF flow gatherer in the third quarter of 2024. You guys took in $2.2 billion in 90 days. The fund has amassed 6.7 billion in AUM since launch in May of 2023. For an active product equity or fixed income, that's a pretty big launch. That's like a pretty big year and a half.

[Michael Batnick]

Yeah. Not because of our returns are good. They're consistent. Sure. And equities up 28% is pretty good.

[Josh Brown]

Not a bad environment. And to that point, let me ask you, are you at all concerned about how tight credit spreads are? About how consensus, the good times ahead are? There is nothing that's not priced for the good times to remain?

[Michael Batnick]

Yes, sir. So funny. My presentation today, I do these monthly calls and it was talking about how to get comfortable with being uncomfortable because multiples are high. Like Josh was saying, inequities spreads are super tight.

[Rick Reeder]

The capital market, capital, it all rhymes.

[Josh Brown]

Where's the value?

[Michael Batnick]

It all rhymes, right? So my whole presentation today was, I think 2025 is all going to be about compounding. Like, are you compounding in the right places? Meaning are equities. I think equities can get you 15 next year without a lot of. If you think the economy's growing at nominal GDP of four and a half is like, I don't think it's that hard to get 15 in equity. But compound in the right parts of equity. Where are you going to get tech? We talk about financials and some other places and then can I. In fixed income, the yields are super attractive. The spreads are not. But companies aren't going to default because they term their debt out. So it's like, can you diversify it and just compound? If I can compound a six, six and a half and I get 15 in equity, you know, can I finish the year with a blended return of eight or nine? It's pretty good. It's not going to be as good as 23, 24, but it doesn't stink. With inflation running at, you know, just under three.

[Josh Brown]

I know, I know. We're almost done. And I just, I'm curious to ask you this. And you can punt if it's not for you. With private credit, there's all these payment and kinds going on and back in the day, and you can explain this better than I can back in the day. The way that these loans used to work is the bank would make them and syndicate them and distribute them. And it was every man for himself and every man and woman from himself in terms of if something went bad, that. And take it to court or good luck finding somebody to take it off your hands today, it's one of your competitors or you making the loan and you're able to work directly with the company. If there is any distress and you're able to term it out or do a payment in kinds or whatever, is that good? Is it too much?

[Rick Reeder]

Payment in kind for the listener, the payment in kind is we don't have the cash to make this quarterly interest payment. We're just going to give you more of the debt and we'll stack it on top. And it's almost like a restaurant owes money.

[Josh Brown]

That's it.

[Rick Reeder]

It's an IOU now you own more of the restaurant.

[Josh Brown]

I'm sure it's a black or white, but where do you come down on this?

[Michael Batnick]

So there are certain things that are barometers of, gosh, you gotta. Your eyes have to be a little more open. The growth, the payment in kind is one of those things you gotta be. And you know, quite frankly, you see a lot of deals that come to market and then all of a sudden they get oversubscribed and, you know, nobody's doing the work. Nobody's reading a document.

[Rick Reeder]

No, they have money to burn and if they don't put it to work, they have to return it.

[Michael Batnick]

So some of those things make me a bit nervous and valuations, like you said, make me a bit nervous. The one thing that gives me some comfort today is, like you were saying, the growth of private credit. You're able to restructure and there's so much money to restructure, so you won't see A lot of defaults. You'll see a lot of restructured transactions. And because you can monetize the assets effectively, you can gear the assets.

[Josh Brown]

Am I crazy in saying that's not a terrible thing?

[Rick Reeder]

I think it's a good thing because it's hedge funds. Let them work it. This is not pension fund money. This is Aries and Apollo.

[Josh Brown]

Maybe returns come down, but it's not defaulting because.

[Michael Batnick]

Yeah, no, it's not. And we talked about, as long as you believe if you were in a very cyclical economy that was subject to some significant swings, that would be different. By the way, you think about how much risk you want to take in emerging markets when you've got. It's pretty hard to do some of these things. So today, public markets, developed markets, US Pretty good place to do that financing today. And you feel pretty good about the durability of it.

[Rick Reeder]

Rick, did you have fun on the show today?

[Michael Batnick]

Yeah, it was a lot.

[Rick Reeder]

Is that it? I had to prom. Nope. I had to promise, like 10 different people at Block Rep that you would have a good time on the show.

[Michael Batnick]

All right.

[Rick Reeder]

I want to get that on the record. We always end the show. I wanted to ask you what you do for fun. By the way, when you're not reading thousands of pieces of research on a Saturday morning, what does Rick Reeder do?

[Michael Batnick]

I have, like, a very simple, boring life. I mean, I. So I do. I, you know, I enjoy what I do. So I work a lot, I think.

[Rick Reeder]

You don't. You're not looking to travel more?

[Michael Batnick]

It sounds like travel. So anyway, I mean, I spend a lot of time with friends and family. I mean, I'm a crazy music person. I listen to tons and tons of music.

[Josh Brown]

Did you watch the yacht rock documentary on Max? There's the yacht rock documentary on Max.

[Michael Batnick]

Really? I watch that.

[Josh Brown]

A lot of fun.

[Michael Batnick]

Watch it. So I'm crazy music and then sports. And I am. Who do you like so many, by the way? I was thinking about it today. The Orioles, the Dolphins and the Devils, which is kind of odd.

[Josh Brown]

Excuse me?

[Michael Batnick]

When I think about Orioles, Dolphins. It's kind of odd.

[Rick Reeder]

How. How did that happen?

[Michael Batnick]

That's all. Since a little kid, I'm a big Orioles fan. I've gotten involved in the.

[Rick Reeder]

Cal Ripken Jr.

[Michael Batnick]

He was a hero. My daughter's name Kelly.

[Rick Reeder]

So, Gotcha.

[Josh Brown]

What do we think of Hawk? Tua. You like Tua?

[Michael Batnick]

I do. I think he's good. He's not great.

[Josh Brown]

Okay. He's not great.

[Michael Batnick]

He's not great. And then so yeah. So I. Because I live in Florida some of the year. Oh.

[Rick Reeder]

So your. I. I got it now. Your. Your era is like Dan Marino, Cal Rin Jr. Yeah. What was the other team? Devils.

[Michael Batnick]

The Devils Aror. Yeah, he was a friend of mine. What? So. Yeah.

[Rick Reeder]

Look at that.

[Michael Batnick]

Yeah. So, no, I mean, I'm pretty maniacal about. So that's my whole life, like, you know.

[Rick Reeder]

Okay.

[Michael Batnick]

I'm not. You know, I don't spend a lot of time in art museums, so, you know, I got a pretty simple life.

[Josh Brown]

Will you come back on?

[Michael Batnick]

Yeah. No. This is awesome. I still can't believe.

[Rick Reeder]

What are you doing tomorrow?

[Michael Batnick]

I'll be here if you're.

[Rick Reeder]

So we're going to ask you a. We're going to ask you a final question that I'd love to get your answer to, and I have. But before I ask it, I have a gift for you. Can I give you a gift?

[Michael Batnick]

Yeah. That's awesome. I didn't think that was. Again, this.

[Rick Reeder]

This is. This is for you.

[Michael Batnick]

This is.

[Rick Reeder]

Look, we know your schedule is. Please, you can open it.

[Michael Batnick]

Okay.

[Rick Reeder]

We know your schedule is insane, and we know you have a lot of people to see when you're out and about. We just wanted to say thank you so much for spending this time with us. He can't get. It's a trick.

[Michael Batnick]

Is it literally a trick?

[Rick Reeder]

Do we have a way to help him?

[Michael Batnick]

Is there a scissors or something that. Allow me to. It's a trap, by the way. This is sort of explains my life. Like, I can't screw in a light bulb, but I'm pretty good at understanding.

[Rick Reeder]

Hey, guys. He's a bond manager. Get him something to cut this.

[Michael Batnick]

Hold on. I think I got it. I think I've severed it somehow.

[Rick Reeder]

So that's a. That we. We could. You may not be a bond king, but we continue to be peerless.

[Josh Brown]

Peerless.

[Rick Reeder]

That is the peerless bourbon.

[Michael Batnick]

I like it.

[Rick Reeder]

All right.

[Michael Batnick]

Thank you so much, Bourbon guy.

[Rick Reeder]

Bourbon guy.

[Michael Batnick]

I am. More tequila, but more tequila.

[Rick Reeder]

Same with me. Oh, you're going to drink bourbon later.

[Michael Batnick]

There you go.

[Rick Reeder]

What. What is the thing you are most.

[Michael Batnick]

Looking forward to in markets or in.

[Rick Reeder]

That's. That's our parting question. You can answer it any way you want to. Marcus, Honestly, life.

[Michael Batnick]

The end of the year, this has been. I'm exhausted.

[Rick Reeder]

Oh, I feel the same way.

[Michael Batnick]

I just want to get to. I just want to get to the.

[Rick Reeder]

How many Christmas parties do you have to go to the next week?

[Michael Batnick]

So I'm hosting one tonight and a few more and then, I don't know. The idea of playing golf and just relaxing for a bit for a week will be great.

[Rick Reeder]

You're going to take a week off at the end of the year?

[Michael Batnick]

Yeah, that's my visibility is beyond.

[Rick Reeder]

I'm going to do the same thing.

[Michael Batnick]

Yeah, that'll be good.

[Rick Reeder]

All right. I think we're all feeling it this time of year. Ladies and gentlemen, Mr. Rick Reeder. Thank you so much for coming, guys. Please, if you enjoyed the show, please follow Rick Weeder and BlackRock's excellent commentary everywhere. Rick is on LinkedIn, RickReader. He's on Twitter ickReader. Very easy to do. Thank you so much to Rick. Thank you to blackrock. Great job this week, everybody. John, Duncan, Rob, Shark Kid, Matt. Great job. Sean, Nicole, Daniel, all the people that help us put together Sean, all the people that help us put together the show, we appreciate you and thank you all compound listeners. Thank you, Rick Leader. We'll talk to you soon, man.

[Josh Brown]

We're just getting started.

[Rick Reeder]

That's the warmups.