July 14, 2023 • 31 mins
US Federal Reserve officials have been adamant that they’re looking to get inflation levels back down to 2%. But the path to that goal could bring pain to millions of workers, a possible trade-off that “doesn’t make sense,” according to Rick Rieder, BlackRock Inc.’s chief investment officer of global fixed income.
“This whole idea of there’s a magic to 2% doesn’t make any sense to me. You just had immense stimulus—let it play out,” he says on this week’s episode of the What Goes Up podcast. “Interest rates—how much would you have to move them to get the unemployment rate to a level to slow wages? It’s not worth it. Why would you take millions of people out of work because you need to go from 2.7% to 2%?” He called the Fed goal a search for “mystical perfection.” BlackRock manages about $2.7 trillion in fixed-income assets for its clients.
Rieder adds that the segment of the population that gets hurt by higher inflation is the one that would bear the brunt of any potential layoffs. Meanwhile, raising rates creates an income benefit to wealthier people who tend to be savers, he says. “It’s illogical to me.”
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Episode Transcript
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Speaker 1 (00:15):
Welcome to What Goes Up a weekly markets podcast. Umbildana
a cross asset reporter with Bloomberg.
Speaker 2 (00:20):
And I'm Katie Greifeld, also a cross asset reporter.
Speaker 1 (00:24):
Federal Reserve officials spooked markets recently when they signaled they
were willing to hike interest rates a few more times
to get inflation under control. But a new data point
this week showed inflation decelerating to the slowest pace in
more than two years. So what does that mean for
the Fed's hiking path going forward? We're going to get
into it with the chief investment officer of fixed income
(00:46):
at the largest asset manager. I'm super excited for that conversation, Katie,
But first you're filling in for Mike Reagan.
Speaker 2 (00:53):
I am hopefully. We're going to talk about bonds. We're
going to talk about the FED, We're going to talk
about inflation. We're also going to talk about exchange traded funds. Yes,
I love ETF we all do.
Speaker 3 (01:03):
You love ETFs more than I do?
Speaker 1 (01:04):
Actually?
Speaker 2 (01:05):
Probably?
Speaker 1 (01:06):
Yeah? But this is like basically people getting a view
into mine and your daily conversations at our desks. This
is literally we sit around and these are the types
of things we chat about all day long.
Speaker 2 (01:18):
Just to put a visual in hear Vill Doon and
I sit back to back. We're constantly swinging around and saying,
holy moly.
Speaker 3 (01:24):
Holy moly, did you see this?
Speaker 2 (01:26):
What yields are doing right now? Have you taken a
look at the twos ten curve? Even today? This morning
we were talking about real yields. They are super high
right now.
Speaker 3 (01:35):
And I said how high?
Speaker 2 (01:37):
So high?
Speaker 3 (01:38):
And you said so high? Lol?
Speaker 2 (01:40):
Yeah.
Speaker 1 (01:42):
You know what else we should chat about? Tell me
other non market stuff theoretically, So I have a question
for you. Yeah, Barbie, I'm so Oppenheimer.
Speaker 2 (01:53):
I do love that. How do you pronounce it? Barbenheimer?
The double feature of people seeing both in the same day,
think that is, will you.
Speaker 3 (02:00):
Do that with me?
Speaker 2 (02:01):
I would love to.
Speaker 1 (02:02):
You have to say yes, I know, we'll plan it.
Maybe our guest wants to come with us too, let's
ask him. We can ask him. I'm so excited to
have him on. He has so many accolades, Like really,
we were so thrilled to be having this conversation. It's
Rick Reader black Rocks, chief investment Officer of Global Fixed Income.
Thank you so much for joining us. Thanks for having
(02:23):
me I'm looking forward to Barbie or Oppenheimer for you that.
Speaker 4 (02:27):
I don't know that the question is all going to
be this hard because that I can't.
Speaker 2 (02:32):
That was actually the softball question.
Speaker 3 (02:36):
Yeah, well, Katie. The reason I was asking is because
Katie sent me an.
Speaker 1 (02:40):
Article that said people are double booking and so they're
seeing both on the same day. But the Barbie ticket
sales have been much I mean.
Speaker 2 (02:48):
They've marketed the heck out of it. It's crazy.
Speaker 1 (02:50):
Oh, I see so many ads every single basically literally
every single day. Okay, just to start, like I said,
you have so many accolades. You have the morning Star
Award for Investing Excellence for Outstanding Portfolio Manager in twenty
twenty three. Just your fixed income group at black Rock
manages two point seven trillion with a T. So maybe
(03:10):
just to start, you can lay out your market views
for US.
Speaker 4 (03:15):
In my career, I've been doing US for over thirty years.
I've never seen inflation stay so persistently high. We've lived
in a world where technology aging population you've had, it's
been hard to keep prices high. You know, the last
couple of years post COVID posts, the dynamic around this
immense fiscal and monetary stimulus that we've had to deal with.
(03:35):
You know, this increasingly high levels of inflation. Listen, I
think we're getting on the other side of it. I
think we've got data on this, this recent CPI report
that suggests that we're getting on the other side of
this inflation trend and is throughout one stat that blew
me away. We actually break it down. You know, the
Fed is focused on core services X shelter for a
couple of reasons. Why One, core goods inflations come down,
(03:58):
but services have been sticky, and it's been sticky because
wages have been high, but core services has been high
X shelter And part of why they look at that
is shelter takes a while for the inflation to come down.
Rental prices take a while, but they are starting to
just But anyway, long with my long preamble, core services
X shelter three month annualized is now down to one
(04:18):
point seven percent, down from nine and a half percent
a couple of years ago. We're at one seven So
and you know, you break down the other numbers, it's
in core CPI still at four. It's still not at target,
but gosh, you look at the component parts and you
look at the trajectory of where we're going. That's a
really big deal. So so core thesis is listen. I
think I think we're on the backside of, you know,
(04:40):
as a Fedkinna hike one more time, you know, maybe
they try and get two hikes out of it. We're
on the backside of what has been a bludgeoning of
the interest rate market, a bludgeoning of people that have
held rate related products or interest rate sensitive and I
think that's a really big deal. Not that I think
they're going to sit there for a while, so rates
will stay stable for aeriod of time, but I think this, gosh,
(05:02):
get out of the way because rates are going higher.
I think we're on the backside of that, which is
a big deal, whether you're doing debt, equity, private equity, anything.
Speaker 1 (05:09):
Katie, I saw a funny tweet that said it's possible
services inflation stays high because of Barbie Oppenheimer.
Speaker 2 (05:15):
It could. That's quite a tie in. We'll see if
the data bears that out. But there's about five different
things I want to get to there, but I want
to start with just inflation overall. Because headline CPI fell
to three percent, which it feels like we haven't seen
in a while. And the story that ran on the
terminal immediately after the headline I thought was pretty bold.
Inflation at three percent flags end of emergency, and Rick,
(05:39):
you said, we're on the other side of it. Do
you think that we're out of crisis mode? When it
comes to inflation.
Speaker 4 (05:45):
Three percent is a very different paradigm than you know
when you're at four or five six percent. By the way,
not just quantitatively, but it's also been the case there's
a lot of academic thought about when you're a well
above three that your inflationary expectations in people and it's
hard to get out from under that. When you get
to three, you're at a place where you're close enough
(06:09):
to target and it's not that scary data a piece
of data, and that monetary policy doesn't have to be
that concerned about it. Listen, I think it's going to
You'll see inflation continue to come down. I'm much more
confident that inflation is going to come down that I am.
Unemployment rate is going to come up. You know, one
man's opinion. I don't think the FED needs to destroy
(06:32):
the employment paradigm today. In fact, I think it does
more harm than good to try and bring that inflation down.
I think there's a natural migration lower and once you
reach these levels. To your question, I did a piece
that I wrote about patients as a virtue, just let patients.
Just let time and a restrictive interest rate do its work,
and I think you'll find that it'll approach target over time.
Speaker 1 (06:54):
So over time approaching target, meaning by the end of
the year or early next year. And then we see
the very big question now is what does this mean
for the Fed's future path in terms of you know,
do we get a hike in July and then a
pause or another hike after that, what do you foresee?
Speaker 4 (07:14):
Yeah, it's a great question. We're not going to get
to target. By the way goods inflation we're getting to target,
but in services we're we're not going to get there.
We're not going to get there this year. You know,
could you get there next year? Don't know? But I
think you can get close, and you know, certainly within
spitting distance and certainly a place that you feel comfortable with.
You know, even with today's better data, you have to
(07:35):
marry yourself to the idea that the Fed's going to
hike in July. I think it would be a big credibility
problem if after they paused and the reason why they're
going to pause, and then everybody and then people in
the Fed committee have suggested we're going to get two
more hikes. He did you not go in July if
that were the case. So I think you have to
write that in stone that they're going to go in July.
But I think you've got to listen. I think they're
(07:55):
going to still try and get another hike done, probably
you know, November, but I think it's ambiguous now as
to whether you know, ah, are you going to do
any more hikes? And quite frankly, the people don't understand
these rates are restrictive. I think you talked about earlier
real rates at these levels like these are restrictive levels,
and if you know, let them marinate through the system,
you know, you see the impact that has in the
banking system, You see the impact that has on commercial
(08:17):
real estate. I think we're going to move to a
form which I think is right, a form of patients
versus impatience with how restrictive rates are to try and
achieve target.
Speaker 2 (08:27):
Well to the idea that we should just let things marinate.
Here in letting things marinate, should the conversation shift to
not how many more hikes are left, but how long
it takes them to cut how long they're on hold
for Listen.
Speaker 4 (08:40):
I think you know, we went through this period where
the market was anticipating, particularly around the banking crisis, that
you're going to have this cliff event, You're going to
hike and then you're going to have to ease quickly,
and that when the FED starts easing, when you have
a crisis, they don't move twenty five base one increments.
You move quickly. Listen, unless you have some form of crisis,
which are are hard to anticipate, and I don't see
(09:02):
one that's out there. You know, you have to assume
that this Fed stays on hold for at least the
year and then starts to bring it down. But I
think they have to bring these rates down. And you know,
we know the issue around it's not just the deposits
of the banks. It's a cost of funding those deposits
are so painful, but it's also people don't talk about
the debt burden on the country today. When you talk
(09:22):
about you know, we spend time on the debt ceiling.
But when you have an economy that's sitting with thirty
trillion of debt, the longer you keep that rate up,
the more you impair your fiscal flexibility. And you think
about debt to GDP, you know what happens is not
only is your debt service becoming expensive, but you want
to bring rate down so nominal GDP can can continue
(09:43):
to be high, so that your debt to GDP is
not that scary. So I think you got to bring
these rates down. I don't think you can sit here
for that long because of the damage it does to
the economy in multiple forms.
Speaker 1 (09:55):
Is there anything that could happen that would make the
Fed not hike at the end of July, or as
you say, is it more credibility issue where they would
just have.
Speaker 4 (10:03):
To go by the way, not a zero probability, but
the markets are pricing it as a remote probability. If
you had some of the bank earnings that were so
horrible that suggested that gosh, you know, the FED is
creating its own damage, not just the damage of raising rates,
but keeping rates too low for too long. Funding you know,
having banks fund purchase assets at aggressively low yields and
(10:27):
then all of a sudden shock interest rates higher. Boy,
it'd be pretty hard if those numbers, those bank earnings
numbers were dramatically worse than anticipated. You know. Other than that,
it's hard to see something else that would take them
off a trajectory that would be you know, I think
the more likely outcome is you get the July hike in,
but you do a quote unquote dubbish hike and suggests that, gosh,
(10:50):
we're nearing the end of what has been a long
and arduous period to get rates to a very restrictive level.
Speaker 2 (10:56):
So we would go from a hawkish hold to a
dubbish hike, which would be fun and find out pretty soon.
But to the idea of it being a credibility issue
if they didn't go in July, I mean, listening to you,
it kind of sounds like they've forced their own hand here.
Speaker 4 (11:11):
And by the way, I've throwing one other thing. They're
also reducing the size of the balance sheet training the
money supply, and so you know, the policy is not
just restrictive on the rate. We go back to what
the most popular with the popular thing to watch is.
But liquidity is a really big deal Uh huh, it doesn't.
It doesn't get enough airtime relative to rate. When you
bring down the money supply, you reduce the balance sheet.
(11:31):
It has a real impact. I mean, you track the
stock market over time relative to the growth or shrinkage
of the money supply. It is very sincere. So listen,
I think I think this idea of of you know,
you leave it there, let it marinate, reduce the balance sheet,
you know, just watch watch the system do what it's
going to do. On the back side of it.
Speaker 2 (11:58):
I want to go back to what you were saying.
That policy is restrictive right now. You can see that
in real rates and just the level of where we
are right now. So you have to bring rates down
at some point. But where do you think neutral is
after what we've been through.
Speaker 4 (12:14):
Wow, it's a great question. That is a great question.
Speaker 2 (12:17):
So that was the softball.
Speaker 4 (12:19):
Yeah, Oh my god, I would say, hopefully the question
is gonna get easier for that. Yeah. The uh so,
you know, it's real rates and nominal rates. And so
let me say, from a real rate perspective, and the
way you guys started this, some may not you know,
should real rates be closer to you know, depending on
where on the curve you think about it closer to
fifty base points to one hundred bases points. I think
(12:40):
that is. You know, we're way above that today, particularly
out you know, we think about where the ten yure
point is today, and so you know that I think
can come closer to what is the neutral long term rate.
And then if you said, and I have I have
a very non consensus view about this. I think the
FED should leave the funds rate at somewhere between two
(13:01):
and three percent for a long period of time. Once
you get on the other side of inflation, you know,
why not two percent? Think that? I think the idea
being that we're going to have because of deglobalization, you're
going to have because of the demographic you know, shortage
of labor, you're going to have a higher inflation, structurally
higher inflation. So should it be two and a half?
(13:24):
I don't know, should it be two? But I think
they should leave the funds right there for a long time.
I think the Fed, no, I know, I've talked about
it before. If you take the last seventy five meetings
of the Federal Reserve, sixty five of them, they've kept
rate successively low or changed it. I just don't think
you need to spend that much time tweaking it. I
think they should. They should leave it at a reasonable
level and that the system recalibrate because the system US
(13:47):
economy is the most flexible, adaptive, technology oriented economy in
the world, and it will adapt.
Speaker 1 (13:54):
What about their two percent inflation goal, because I think
one of the Fed officials this week was asked, like,
are you willing to sacrifice the economy just to stick
to that two percent goal? Like the alter of the
two percent? Is it worth sacrificing the economy just to
get to that point that you have been telling people
you would get.
Speaker 2 (14:14):
Is it a false god?
Speaker 3 (14:16):
Is it wow? A Taylor Swift reference.
Speaker 4 (14:18):
Yes, one man's opinion. I think there is. You just
had massive monetary and physical stimulus. You've got to give
it a little bit of time. Like this whole idea
like there's a magic to two doesn't make any sense
to me that you just had immense stimulus. Let it plan.
By the way, two percent over the intermediate term, I
get two percent over any short period of time. It
(14:41):
doesn't make any sense, particularly defense raise interest rates five
hunderd base once the unemployment rate is three point six percent.
How much do you have interest rates? How much would
you have to move them to get the unemployment rate
to a level to slow wages and get it to
a level that you're coming it's not worth it. Why
would you take why would you take millions of people
(15:01):
out of work because you need to go from two
point seven to two? It's like, why do it? And
I want to talk about this too much, but the
people that get hurt by the higher levels of inflation
are the people you're going to take out of work.
And I think there is you know you think about
when you raise rates to these levels, you're actually creating
an income benefit to people. They're wealthier people who are savers,
(15:23):
and you're hurting the people that just love to borrow.
And I just don't think that trade off makes any sense.
You know, this too is some magical, mystical perfection. It
doesn't make it. It doesn't. It's illogical to me.
Speaker 2 (15:36):
I mean listening to you talk. And you also made
the point that the FED probably doesn't have to murder
the labor market here. Just to tie a bow on
that thought, do you need to get the unemployment rate
above four percent to get back to two percent or
can we have this sort of happy balance.
Speaker 4 (15:57):
So I think the system will reach calibrate itself, and
I think technology. I mean, first of all, we're about
to go through the most extraordinary productivity growth. I think,
you know, certainly since the Internet, and maybe even more so,
we really don't know how many job functions are going
to be eliminated through AI. We don't know how many
(16:18):
how much true efficiency is going to be created, and
so this whole concept of gosh, there's a number that
we need to get to in payroll. And I'm not
convinced that wages is that sincere to serve it to
service inflation. I think it's an indicator and I think
it can be representative. But you think about it, we
went for a long period of time where you had
(16:39):
low levels of inflation. I think it is it is
an academic exercise, and only that that suggests there's a
level of employment that creates this level of inflation. You know,
particularly when you don't know how much efficiency you're going
to get off of AI, how much technology, how much
substitution effect that you're going to see play through. I mean,
the world is changing so quickly, so many ways, But
(17:01):
I just think those historic calculations and what was a
simple economy, cyclical goods oriented economy, or do just don't
hold anymore?
Speaker 1 (17:10):
I want to ask you about that, broadly speaking, and
about what we've seen so far in twenty twenty three,
because everything has gone basically not in any way that
anybody predicted. Like the stuff that's up is stuff that
nobody thought would be up this year. What is it
about this year that's been so difficult to make sense of?
(17:30):
Or is it just the reality of the post pandemic
world where people are just having a more difficult time
making some of these forecasts.
Speaker 4 (17:39):
I mean, I'll go back to the first point on AI.
I mean seven stocks drive in the market. I mean,
if you take you eliminate those seven stocks of the
equity market and you look at it and saying, it
doesn't seem like a market's not up that much, it
doesn't seem that aberrational. And there by the way, there
are a lot of equities now they traded three, four
or five multiple of cash flow that are pretty reasonable.
(18:00):
So that is, but I think the advent of AI
coming in and the true explosive opportunity set on that
has certainly impacted a number of equities on the backside
of it. I think that has been a surprising dynamic.
Second being, you know, nobody in this generation has ever
seen inflation stay as high for as long as it
(18:21):
had and continue to surprise to the upside. And that
has been you know, has put the central banks. You know,
we've had these false starts of inflation, particularly in places
like the UK, that it feels like it's coming down
and then all of a sudden it is not, and
it is not. So I think I think those have
been the things that have been the most surprising. I
would say one thing I've learned over the years of investing,
(18:42):
too is the markets do what hurts the most people,
and the technicals. So I just give a presentation the
other day about, you know, some of the things I've
learned over the years and investing, which I feel like
I'm still learning more than I did when I first started.
But you know, one of them is the technicals are
more important than the fundamentals, and fundamentals win out over
long periods of time. The technicals went out much more
(19:04):
so in the short term. And you realize what happened
at the beginning of this year is people got out
of equities and had reduced some of it, you know,
for obviously the pressure that was on it. All of
a sudden you have this, you know, people need to
get in the tech stocks, they'd reduce a lot of it.
This year has been more than any of what I've seen,
has been driven by technicals in an incredible way, in
(19:24):
violent ways at times.
Speaker 2 (19:27):
That's interesting because a conversation I've had with a lot
of investors at this point is that you're just seeing
a massive gain game of catchup, particularly when it comes
to equities because coming into the year, you know, this
was the year of fixed income. Maybe it's still is
rick I don't know, but you had a lot of
people underweight. Now they've been forced to chase that rally
and now we are where we are. But bringing it
(19:49):
to fixed income, obviously you have a perch. You're looking
across all the different asset classes within fixed income, where
do you see the most opportunity right now?
Speaker 4 (20:00):
And I can said one last thing about course. The
other thing that the other thing that I think is
surprising and which is pretty profound statement. You know the
world has talked about like the federis rates. We got
to we have to go in a recession. I just
don't know why a modern financial economy like the US
goes in a recession anymore other than some quantitative can
you have a negative one percent in twenty twenty, nominal
(20:21):
GDP was twelve, and twenty one it was seven, nominal
GDP was seven. You know, these numbers are pretty impressive,
And unless you have a pandemic or unless you have
some exogyshock financial crisis, when you have a consumer oriented,
service oriented economy, it's much more stable than people give
credit to. And I think if we had a negative
one percent recession after these massive nominal GDP numbers, I
(20:44):
think you'd have to like wake people up to tell them, like,
you know, we're in a recession now. Like I think
it's a really different paradigm. China is different because it's
a debt finance. But I just think recession is grossly
overstated as a phenomena today without some massive shock to
the system. So it's just so different than when I
first started the business. Yeah, you had a recession, you
had food lines, you had gas line, mean, it was
(21:05):
like bad stuff.
Speaker 2 (21:22):
We've already seen a lot of these recession calls for
twenty twenty three get pushed into twenty twenty four. But
if we don't get a recession, I mean, how do
you invest along that. Are there any markets where you
can see that a recession is mistakenly priced in?
Speaker 4 (21:36):
Yeah? So by the way, it gets to this point
about you know why things have been surprising and why
the equity market. So, I mean people were like, get out.
You know, earnings estimates. You know, we saw earnings estements
that almost were quantitatively impossible to hit unless the big
tech stocks get devastated for some reason. And I think
now people are realizing it, even if you had a
(21:58):
moderate recession, if you had one of these two quarters
of negative small size, is it really going to change
you know, what your asset mix is going to be
in terms of your portfolio. And I think that's been
a big adjustment. So what do you do with that?
How do you invest around it? Listen, I still think
you got to own your own equities as part of
a bar bell and a portfolio. One of the beautiful
things today in investing you can own front end yielding assets.
(22:22):
I bought some commercial paper the other day at six
and a half percent one year CPE six and a
half percent. It's like, I don't I just want to
go home at six and a half. I just sit
and sit of saying to tell clients, sos, I'm going
to get you six and a half and I'll be
taking the rest of the year off. But that's pretty
I mean, that's pretty attractive. But if you ran let's
say you ran a lot of carry, a lot of
front end yield, you know, in high quality assets, investment
(22:43):
in great credit, maybe go a little longer, and some
things like agency mortgages. And then I'm going to own
some of these equities. And you know, we assume that
the equity market of companies can throw off ten twelve
percent return on equity. You could generate a nice return
in a portfolio and frankly more stable than you have
historically because you're getting a lot of carry from your
fixed income quality assets and fixing it doesn't mean you
(23:05):
have to stretch for fixed income.
Speaker 2 (23:07):
I thought you were a bond guy. Here you are talking.
Speaker 4 (23:10):
I move around global allocation, all right, all right?
Speaker 1 (23:14):
Fair?
Speaker 4 (23:15):
So no we do? We do all asset classes.
Speaker 3 (23:18):
Do you know what else he runs?
Speaker 2 (23:19):
I do, but tell me his own ETF launched in May.
We're talking about the ticker is bank. I believe it's
black Rock Flexible Income. Did I get that right?
Speaker 4 (23:30):
Right? Yeah? Yeah?
Speaker 2 (23:31):
What's about long lit?
Speaker 4 (23:33):
I mean, I think the advent of ETFs has been
you know, largely, I mean, the size of the ETF
market has been in the passive space. I mean, I use,
I've been trading managing ETFs for years in some of
the big indices, and the advent of you know, running
now active ETFs, the growth of active ecfs is really accelerated,
and quite frankly, now the ability to use different tools
(23:57):
to run an active ETF in a sufficient way as
you can as a mutual fund is now there. So,
like I say, I use things like HyG or LQD
or obviously SBY or so many different tools that allow
me to run in an open architecture, transparent portfolio. You
can run it and create similar returns you run in
(24:19):
a mutual fund. And I feel like you've hit that
inflection point today around the scale of the ETF market.
They're running an active ETF, you can do it effectively.
So anyway, I'm super excited about it. Hey, it's been
a obviously well manage and traded gazillions of them for
years and be able to manage that type of portfolio
has been a lot of fun and it's been a
lot of excitement around it, which has been great.
Speaker 1 (24:41):
Well. I think the most interesting part to me is
that there's a person behind the ETF, like you're kicking
off this trend of people basically attaching their names to
the exchange traded fund. I really think you were the first,
and now we're seeing sort.
Speaker 2 (24:56):
Of Dan Iverson from Pimco launchuria first ETF this year
who was it. Ed Perks also came out with his
own ETF, So there's definitely a migration of some of
these star managers such as yourself coming over to the
wrapper officially, even though to your point you've been using
them for a while in portfolios.
Speaker 4 (25:15):
Yeah, I know it's been I don't know there's star category,
but I definitely humble.
Speaker 1 (25:20):
Yeah.
Speaker 4 (25:21):
I think it's you know, meeting with a lot of
clients which I haven't heretofore, who are in the ETF
that do models and what have you. You realize the
efficiency of the tax efficiency, the transparency, you can build
models around it. I mean, that's an innovation that's going
to be continue to grow and so it's been a
lot of fun. I've met a lot of new people
in new areas around doing it, so it'll be exciting.
(25:43):
But I say that technology allows you to do it
pretty efficiently.
Speaker 1 (25:46):
Today, Rick, I have a million more questions for you,
so we'll have to bring you back on. But Rick
Reader black Rocks, chief investment officer of Global Fixed Incomers,
so happy you could join us, we can't let you
go yet. Okay, we have to play a quick round
of craziest things we've all seen in markets this week,
and I think Katie promised me a really good one.
Speaker 2 (26:06):
I actually came completely unprepared.
Speaker 3 (26:10):
You'll have to do it on the fly.
Speaker 2 (26:12):
If I had to do it on the fly, I
have no idea. I would just say real rates at
a fifteen year high, that's pretty amazing. Real rates at
a fifteen year high, and equities don't care at all.
I remember, like two years ago, we were writing a
bunch of bearish takes about the equity market that once
real yield started to move significantly higher, it was going
to be lights out for risk assets and we were
(26:34):
completely wrong.
Speaker 3 (26:35):
So I was about to say we were so right, Rick,
what about you? Anything interesting? You've seen in markets anything crazy, crazy, weird.
Speaker 4 (26:45):
So similar thing the volatility equity markets. The price of
volatility is insane. We did the treade yesterday where I mean,
you know, people fall the VIX index, but you can
price option volatility at nine ten fold his crazy people
are giving. You can buy equities without paying for them
in terms of downside in terms of downside risk. We
(27:05):
did a one day which I don't do a lot of,
in fact very rarely in my portfolios. But you can
do a one day option for a one percent move
in the equity marketing get it? It was actually ten to
one odds. Like it's all because volatility is so low
in the equity market. People don't think the market can move.
But while rate volatility is really high. You know, it's
interesting my career, Like equity people in bond, people work
(27:28):
in different buildings, and so are times that there are
aberrations between the two of these. I still do both,
but most people work in different We're working different buildings,
and like this has been an amazing one, like equity
of all, Like I keep looking at those markets singing,
why are things why are they giving that nobody's buying
insurance to the downside to dias a vault trade super cheap.
Speaker 1 (27:47):
I saw a note that said, I forget how many
days we've gone, like weeks without even a three percent
drot bela stock market.
Speaker 4 (27:54):
So yeah, but a lot of updates. I mean you
buy Upside. I mean that's the beauty of it. You
can buy Upside convex to. They pretty cheap today.
Speaker 3 (28:01):
Okay, my craziest thing has nothing to do with any
of these things.
Speaker 2 (28:03):
Great, hit me.
Speaker 1 (28:06):
I'm going to tie it back to this. I promise
there's this Bloomberg story out that there's this new trend
of restaurants providing stools for people's purses.
Speaker 5 (28:16):
Okay, have you seen this? No, I don't go anywhere
me neither. I only go to the movie theater with you. Basically, yeah,
when I forced you to come with me. But if
you go to a fancy restaurant and you have a
super fancy purse, they'll bring you a little stool, huh,
and then you can like, your purse will sit there
with you and it will eat dinner with you.
Speaker 2 (28:34):
What a crazy thing in markets?
Speaker 3 (28:35):
What a crazy thing in markets? That's not it. I'm
tying it back.
Speaker 1 (28:38):
I promise there actually is a handbag that's sold for
a crazy amount of money in recent weeks. It is
so tiny that you need a microscope.
Speaker 2 (28:50):
To see it. I've seen this.
Speaker 1 (28:51):
It's a Louis Vuitton inspired Neon Green miniature purse created
by an arts collective in Brooklyn. It's smaller than a
grain of salt.
Speaker 2 (29:01):
Rick, have you seen this?
Speaker 3 (29:02):
Have you seen this story? Yes, it's cute. It's small.
It's so tiny, it's narrow enough to pass through the
eye of a needle. They used it.
Speaker 1 (29:12):
They made it using three D printing, and then the
person who won the auction got microscope for viewing it
because it's so small. Anyway, it's time to play. I
have so much trouble saying this. The price is precise.
I'm going to have you, guys, guess what the auction
went for.
Speaker 3 (29:29):
What was the winning bid?
Speaker 2 (29:32):
Okay, four hundred thousand dollars?
Speaker 4 (29:35):
Rick, come on, I med thirty thousand dollars.
Speaker 2 (29:41):
Wow. Wow, that's quite a spread, Delta. Who won?
Speaker 5 (29:45):
Not you? Oh?
Speaker 4 (29:46):
Really?
Speaker 2 (29:47):
What did it sell for?
Speaker 4 (29:48):
What was in the prices? Right? You're supposed to be
low anyway, so I forget right?
Speaker 3 (29:51):
Oh jeez, can't go over not the price is right?
We can't call it that. We can call it. The
price is precise, I understand. Okay.
Speaker 1 (30:00):
The winning bid for this tiny thing that nobody can
use or carry anywhere sixty three thousand, seven hundred and
fifty dollars.
Speaker 2 (30:08):
I'm really surprised.
Speaker 3 (30:09):
I got it for you for your birthday.
Speaker 2 (30:10):
Oh my god, thank you. Welcome so excessive, but thank you.
Speaker 3 (30:14):
You can bring it to the movie theater when we
go see Barbie.
Speaker 2 (30:16):
I don't like inhale it by when you eat popcorn.
Speaker 3 (30:22):
Rick Reader, thank you so so much for joining us. Katie.
I'm so happy to have you on the podcast too.
I don't miss Mike at all.
Speaker 2 (30:29):
Yeah, I don't even I don't even remember that man.
Speaker 3 (30:31):
What's his last name?
Speaker 4 (30:32):
Right?
Speaker 3 (30:33):
That was great though, Thank you, Rick, Thank you both
so much.
Speaker 4 (30:36):
Thanks for having Meil. That was awesome.
Speaker 3 (30:45):
What goes app We'll be back next week.
Speaker 1 (30:47):
Until then, you can find us on the Bloomberg Terminal
website and app, or wherever you get your podcasts. We'd
love it if you took the time to rate and
review the show so more listeners can find us.
Speaker 3 (30:59):
You can find us on Twitter, follow me at Wildona Hirich.
Mike Reagan is at Reaganonymous. You can also follow Bloomer
Podcasts at podcasts.
Speaker 1 (31:10):
What Goes Up is produced by Stacy Wong, and our
head of podcasts is Sage Pauman.
Speaker 3 (31:15):
Thanks for listening and we'll see you next week.
Welcome to What Goes Up a weekly markets podcast. Umbildana
a cross asset reporter with Bloomberg.
Speaker 2 (00:20):
And I'm Katie Greifeld, also a cross asset reporter.
Speaker 1 (00:24):
Federal Reserve officials spooked markets recently when they signaled they
were willing to hike interest rates a few more times
to get inflation under control. But a new data point
this week showed inflation decelerating to the slowest pace in
more than two years. So what does that mean for
the Fed's hiking path going forward? We're going to get
into it with the chief investment officer of fixed income
(00:46):
at the largest asset manager. I'm super excited for that conversation, Katie,
But first you're filling in for Mike Reagan.
Speaker 2 (00:53):
I am hopefully. We're going to talk about bonds. We're
going to talk about the FED, We're going to talk
about inflation. We're also going to talk about exchange traded funds. Yes,
I love ETF we all do.
Speaker 3 (01:03):
You love ETFs more than I do?
Speaker 1 (01:04):
Actually?
Speaker 2 (01:05):
Probably?
Speaker 1 (01:06):
Yeah? But this is like basically people getting a view
into mine and your daily conversations at our desks. This
is literally we sit around and these are the types
of things we chat about all day long.
Speaker 2 (01:18):
Just to put a visual in hear Vill Doon and
I sit back to back. We're constantly swinging around and saying,
holy moly.
Speaker 3 (01:24):
Holy moly, did you see this?
Speaker 2 (01:26):
What yields are doing right now? Have you taken a
look at the twos ten curve? Even today? This morning
we were talking about real yields. They are super high
right now.
Speaker 3 (01:35):
And I said how high?
Speaker 2 (01:37):
So high?
Speaker 3 (01:38):
And you said so high? Lol?
Speaker 2 (01:40):
Yeah.
Speaker 1 (01:42):
You know what else we should chat about? Tell me
other non market stuff theoretically, So I have a question
for you. Yeah, Barbie, I'm so Oppenheimer.
Speaker 2 (01:53):
I do love that. How do you pronounce it? Barbenheimer?
The double feature of people seeing both in the same day,
think that is, will you.
Speaker 3 (02:00):
Do that with me?
Speaker 2 (02:01):
I would love to.
Speaker 1 (02:02):
You have to say yes, I know, we'll plan it.
Maybe our guest wants to come with us too, let's
ask him. We can ask him. I'm so excited to
have him on. He has so many accolades, Like really,
we were so thrilled to be having this conversation. It's
Rick Reader black Rocks, chief investment Officer of Global Fixed Income.
Thank you so much for joining us. Thanks for having
(02:23):
me I'm looking forward to Barbie or Oppenheimer for you that.
Speaker 4 (02:27):
I don't know that the question is all going to
be this hard because that I can't.
Speaker 2 (02:32):
That was actually the softball question.
Speaker 3 (02:36):
Yeah, well, Katie. The reason I was asking is because
Katie sent me an.
Speaker 1 (02:40):
Article that said people are double booking and so they're
seeing both on the same day. But the Barbie ticket
sales have been much I mean.
Speaker 2 (02:48):
They've marketed the heck out of it. It's crazy.
Speaker 1 (02:50):
Oh, I see so many ads every single basically literally
every single day. Okay, just to start, like I said,
you have so many accolades. You have the morning Star
Award for Investing Excellence for Outstanding Portfolio Manager in twenty
twenty three. Just your fixed income group at black Rock
manages two point seven trillion with a T. So maybe
(03:10):
just to start, you can lay out your market views
for US.
Speaker 4 (03:15):
In my career, I've been doing US for over thirty years.
I've never seen inflation stay so persistently high. We've lived
in a world where technology aging population you've had, it's
been hard to keep prices high. You know, the last
couple of years post COVID posts, the dynamic around this
immense fiscal and monetary stimulus that we've had to deal with.
(03:35):
You know, this increasingly high levels of inflation. Listen, I
think we're getting on the other side of it. I
think we've got data on this, this recent CPI report
that suggests that we're getting on the other side of
this inflation trend and is throughout one stat that blew
me away. We actually break it down. You know, the
Fed is focused on core services X shelter for a
couple of reasons. Why One, core goods inflations come down,
(03:58):
but services have been sticky, and it's been sticky because
wages have been high, but core services has been high
X shelter And part of why they look at that
is shelter takes a while for the inflation to come down.
Rental prices take a while, but they are starting to
just But anyway, long with my long preamble, core services
X shelter three month annualized is now down to one
(04:18):
point seven percent, down from nine and a half percent
a couple of years ago. We're at one seven So
and you know, you break down the other numbers, it's
in core CPI still at four. It's still not at target,
but gosh, you look at the component parts and you
look at the trajectory of where we're going. That's a
really big deal. So so core thesis is listen. I
think I think we're on the backside of, you know,
(04:40):
as a Fedkinna hike one more time, you know, maybe
they try and get two hikes out of it. We're
on the backside of what has been a bludgeoning of
the interest rate market, a bludgeoning of people that have
held rate related products or interest rate sensitive and I
think that's a really big deal. Not that I think
they're going to sit there for a while, so rates
will stay stable for aeriod of time, but I think this, gosh,
(05:02):
get out of the way because rates are going higher.
I think we're on the backside of that, which is
a big deal, whether you're doing debt, equity, private equity, anything.
Speaker 1 (05:09):
Katie, I saw a funny tweet that said it's possible
services inflation stays high because of Barbie Oppenheimer.
Speaker 2 (05:15):
It could. That's quite a tie in. We'll see if
the data bears that out. But there's about five different
things I want to get to there, but I want
to start with just inflation overall. Because headline CPI fell
to three percent, which it feels like we haven't seen
in a while. And the story that ran on the
terminal immediately after the headline I thought was pretty bold.
Inflation at three percent flags end of emergency, and Rick,
(05:39):
you said, we're on the other side of it. Do
you think that we're out of crisis mode? When it
comes to inflation.
Speaker 4 (05:45):
Three percent is a very different paradigm than you know
when you're at four or five six percent. By the way,
not just quantitatively, but it's also been the case there's
a lot of academic thought about when you're a well
above three that your inflationary expectations in people and it's
hard to get out from under that. When you get
to three, you're at a place where you're close enough
(06:09):
to target and it's not that scary data a piece
of data, and that monetary policy doesn't have to be
that concerned about it. Listen, I think it's going to
You'll see inflation continue to come down. I'm much more
confident that inflation is going to come down that I am.
Unemployment rate is going to come up. You know, one
man's opinion. I don't think the FED needs to destroy
(06:32):
the employment paradigm today. In fact, I think it does
more harm than good to try and bring that inflation down.
I think there's a natural migration lower and once you
reach these levels. To your question, I did a piece
that I wrote about patients as a virtue, just let patients.
Just let time and a restrictive interest rate do its work,
and I think you'll find that it'll approach target over time.
Speaker 1 (06:54):
So over time approaching target, meaning by the end of
the year or early next year. And then we see
the very big question now is what does this mean
for the Fed's future path in terms of you know,
do we get a hike in July and then a
pause or another hike after that, what do you foresee?
Speaker 4 (07:14):
Yeah, it's a great question. We're not going to get
to target. By the way goods inflation we're getting to target,
but in services we're we're not going to get there.
We're not going to get there this year. You know,
could you get there next year? Don't know? But I
think you can get close, and you know, certainly within
spitting distance and certainly a place that you feel comfortable with.
You know, even with today's better data, you have to
(07:35):
marry yourself to the idea that the Fed's going to
hike in July. I think it would be a big credibility
problem if after they paused and the reason why they're
going to pause, and then everybody and then people in
the Fed committee have suggested we're going to get two
more hikes. He did you not go in July if
that were the case. So I think you have to
write that in stone that they're going to go in July.
But I think you've got to listen. I think they're
(07:55):
going to still try and get another hike done, probably
you know, November, but I think it's ambiguous now as
to whether you know, ah, are you going to do
any more hikes? And quite frankly, the people don't understand
these rates are restrictive. I think you talked about earlier
real rates at these levels like these are restrictive levels,
and if you know, let them marinate through the system,
you know, you see the impact that has in the
banking system, You see the impact that has on commercial
(08:17):
real estate. I think we're going to move to a
form which I think is right, a form of patients
versus impatience with how restrictive rates are to try and
achieve target.
Speaker 2 (08:27):
Well to the idea that we should just let things marinate.
Here in letting things marinate, should the conversation shift to
not how many more hikes are left, but how long
it takes them to cut how long they're on hold
for Listen.
Speaker 4 (08:40):
I think you know, we went through this period where
the market was anticipating, particularly around the banking crisis, that
you're going to have this cliff event, You're going to
hike and then you're going to have to ease quickly,
and that when the FED starts easing, when you have
a crisis, they don't move twenty five base one increments.
You move quickly. Listen, unless you have some form of crisis,
which are are hard to anticipate, and I don't see
(09:02):
one that's out there. You know, you have to assume
that this Fed stays on hold for at least the
year and then starts to bring it down. But I
think they have to bring these rates down. And you know,
we know the issue around it's not just the deposits
of the banks. It's a cost of funding those deposits
are so painful, but it's also people don't talk about
the debt burden on the country today. When you talk
(09:22):
about you know, we spend time on the debt ceiling.
But when you have an economy that's sitting with thirty
trillion of debt, the longer you keep that rate up,
the more you impair your fiscal flexibility. And you think
about debt to GDP, you know what happens is not
only is your debt service becoming expensive, but you want
to bring rate down so nominal GDP can can continue
(09:43):
to be high, so that your debt to GDP is
not that scary. So I think you got to bring
these rates down. I don't think you can sit here
for that long because of the damage it does to
the economy in multiple forms.
Speaker 1 (09:55):
Is there anything that could happen that would make the
Fed not hike at the end of July, or as
you say, is it more credibility issue where they would
just have.
Speaker 4 (10:03):
To go by the way, not a zero probability, but
the markets are pricing it as a remote probability. If
you had some of the bank earnings that were so
horrible that suggested that gosh, you know, the FED is
creating its own damage, not just the damage of raising rates,
but keeping rates too low for too long. Funding you know,
having banks fund purchase assets at aggressively low yields and
(10:27):
then all of a sudden shock interest rates higher. Boy,
it'd be pretty hard if those numbers, those bank earnings
numbers were dramatically worse than anticipated. You know. Other than that,
it's hard to see something else that would take them
off a trajectory that would be you know, I think
the more likely outcome is you get the July hike in,
but you do a quote unquote dubbish hike and suggests that, gosh,
(10:50):
we're nearing the end of what has been a long
and arduous period to get rates to a very restrictive level.
Speaker 2 (10:56):
So we would go from a hawkish hold to a
dubbish hike, which would be fun and find out pretty soon.
But to the idea of it being a credibility issue
if they didn't go in July, I mean, listening to you,
it kind of sounds like they've forced their own hand here.
Speaker 4 (11:11):
And by the way, I've throwing one other thing. They're
also reducing the size of the balance sheet training the
money supply, and so you know, the policy is not
just restrictive on the rate. We go back to what
the most popular with the popular thing to watch is.
But liquidity is a really big deal Uh huh, it doesn't.
It doesn't get enough airtime relative to rate. When you
bring down the money supply, you reduce the balance sheet.
(11:31):
It has a real impact. I mean, you track the
stock market over time relative to the growth or shrinkage
of the money supply. It is very sincere. So listen,
I think I think this idea of of you know,
you leave it there, let it marinate, reduce the balance sheet,
you know, just watch watch the system do what it's
going to do. On the back side of it.
Speaker 2 (11:58):
I want to go back to what you were saying.
That policy is restrictive right now. You can see that
in real rates and just the level of where we
are right now. So you have to bring rates down
at some point. But where do you think neutral is
after what we've been through.
Speaker 4 (12:14):
Wow, it's a great question. That is a great question.
Speaker 2 (12:17):
So that was the softball.
Speaker 4 (12:19):
Yeah, Oh my god, I would say, hopefully the question
is gonna get easier for that. Yeah. The uh so,
you know, it's real rates and nominal rates. And so
let me say, from a real rate perspective, and the
way you guys started this, some may not you know,
should real rates be closer to you know, depending on
where on the curve you think about it closer to
fifty base points to one hundred bases points. I think
(12:40):
that is. You know, we're way above that today, particularly
out you know, we think about where the ten yure
point is today, and so you know that I think
can come closer to what is the neutral long term rate.
And then if you said, and I have I have
a very non consensus view about this. I think the
FED should leave the funds rate at somewhere between two
(13:01):
and three percent for a long period of time. Once
you get on the other side of inflation, you know,
why not two percent? Think that? I think the idea
being that we're going to have because of deglobalization, you're
going to have because of the demographic you know, shortage
of labor, you're going to have a higher inflation, structurally
higher inflation. So should it be two and a half?
(13:24):
I don't know, should it be two? But I think
they should leave the funds right there for a long time.
I think the Fed, no, I know, I've talked about
it before. If you take the last seventy five meetings
of the Federal Reserve, sixty five of them, they've kept
rate successively low or changed it. I just don't think
you need to spend that much time tweaking it. I
think they should. They should leave it at a reasonable
level and that the system recalibrate because the system US
(13:47):
economy is the most flexible, adaptive, technology oriented economy in
the world, and it will adapt.
Speaker 1 (13:54):
What about their two percent inflation goal, because I think
one of the Fed officials this week was asked, like,
are you willing to sacrifice the economy just to stick
to that two percent goal? Like the alter of the
two percent? Is it worth sacrificing the economy just to
get to that point that you have been telling people
you would get.
Speaker 2 (14:14):
Is it a false god?
Speaker 3 (14:16):
Is it wow? A Taylor Swift reference.
Speaker 4 (14:18):
Yes, one man's opinion. I think there is. You just
had massive monetary and physical stimulus. You've got to give
it a little bit of time. Like this whole idea
like there's a magic to two doesn't make any sense
to me that you just had immense stimulus. Let it plan.
By the way, two percent over the intermediate term, I
get two percent over any short period of time. It
(14:41):
doesn't make any sense, particularly defense raise interest rates five
hunderd base once the unemployment rate is three point six percent.
How much do you have interest rates? How much would
you have to move them to get the unemployment rate
to a level to slow wages and get it to
a level that you're coming it's not worth it. Why
would you take why would you take millions of people
(15:01):
out of work because you need to go from two
point seven to two? It's like, why do it? And
I want to talk about this too much, but the
people that get hurt by the higher levels of inflation
are the people you're going to take out of work.
And I think there is you know you think about
when you raise rates to these levels, you're actually creating
an income benefit to people. They're wealthier people who are savers,
(15:23):
and you're hurting the people that just love to borrow.
And I just don't think that trade off makes any sense.
You know, this too is some magical, mystical perfection. It
doesn't make it. It doesn't. It's illogical to me.
Speaker 2 (15:36):
I mean listening to you talk. And you also made
the point that the FED probably doesn't have to murder
the labor market here. Just to tie a bow on
that thought, do you need to get the unemployment rate
above four percent to get back to two percent or
can we have this sort of happy balance.
Speaker 4 (15:57):
So I think the system will reach calibrate itself, and
I think technology. I mean, first of all, we're about
to go through the most extraordinary productivity growth. I think,
you know, certainly since the Internet, and maybe even more so,
we really don't know how many job functions are going
to be eliminated through AI. We don't know how many
(16:18):
how much true efficiency is going to be created, and
so this whole concept of gosh, there's a number that
we need to get to in payroll. And I'm not
convinced that wages is that sincere to serve it to
service inflation. I think it's an indicator and I think
it can be representative. But you think about it, we
went for a long period of time where you had
(16:39):
low levels of inflation. I think it is it is
an academic exercise, and only that that suggests there's a
level of employment that creates this level of inflation. You know,
particularly when you don't know how much efficiency you're going
to get off of AI, how much technology, how much
substitution effect that you're going to see play through. I mean,
the world is changing so quickly, so many ways, But
(17:01):
I just think those historic calculations and what was a
simple economy, cyclical goods oriented economy, or do just don't
hold anymore?
Speaker 1 (17:10):
I want to ask you about that, broadly speaking, and
about what we've seen so far in twenty twenty three,
because everything has gone basically not in any way that
anybody predicted. Like the stuff that's up is stuff that
nobody thought would be up this year. What is it
about this year that's been so difficult to make sense of?
(17:30):
Or is it just the reality of the post pandemic
world where people are just having a more difficult time
making some of these forecasts.
Speaker 4 (17:39):
I mean, I'll go back to the first point on AI.
I mean seven stocks drive in the market. I mean,
if you take you eliminate those seven stocks of the
equity market and you look at it and saying, it
doesn't seem like a market's not up that much, it
doesn't seem that aberrational. And there by the way, there
are a lot of equities now they traded three, four
or five multiple of cash flow that are pretty reasonable.
(18:00):
So that is, but I think the advent of AI
coming in and the true explosive opportunity set on that
has certainly impacted a number of equities on the backside
of it. I think that has been a surprising dynamic.
Second being, you know, nobody in this generation has ever
seen inflation stay as high for as long as it
(18:21):
had and continue to surprise to the upside. And that
has been you know, has put the central banks. You know,
we've had these false starts of inflation, particularly in places
like the UK, that it feels like it's coming down
and then all of a sudden it is not, and
it is not. So I think I think those have
been the things that have been the most surprising. I
would say one thing I've learned over the years of investing,
(18:42):
too is the markets do what hurts the most people,
and the technicals. So I just give a presentation the
other day about, you know, some of the things I've
learned over the years and investing, which I feel like
I'm still learning more than I did when I first started.
But you know, one of them is the technicals are
more important than the fundamentals, and fundamentals win out over
long periods of time. The technicals went out much more
(19:04):
so in the short term. And you realize what happened
at the beginning of this year is people got out
of equities and had reduced some of it, you know,
for obviously the pressure that was on it. All of
a sudden you have this, you know, people need to
get in the tech stocks, they'd reduce a lot of it.
This year has been more than any of what I've seen,
has been driven by technicals in an incredible way, in
(19:24):
violent ways at times.
Speaker 2 (19:27):
That's interesting because a conversation I've had with a lot
of investors at this point is that you're just seeing
a massive gain game of catchup, particularly when it comes
to equities because coming into the year, you know, this
was the year of fixed income. Maybe it's still is
rick I don't know, but you had a lot of
people underweight. Now they've been forced to chase that rally
and now we are where we are. But bringing it
(19:49):
to fixed income, obviously you have a perch. You're looking
across all the different asset classes within fixed income, where
do you see the most opportunity right now?
Speaker 4 (20:00):
And I can said one last thing about course. The
other thing that the other thing that I think is
surprising and which is pretty profound statement. You know the
world has talked about like the federis rates. We got
to we have to go in a recession. I just
don't know why a modern financial economy like the US
goes in a recession anymore other than some quantitative can
you have a negative one percent in twenty twenty, nominal
(20:21):
GDP was twelve, and twenty one it was seven, nominal
GDP was seven. You know, these numbers are pretty impressive,
And unless you have a pandemic or unless you have
some exogyshock financial crisis, when you have a consumer oriented,
service oriented economy, it's much more stable than people give
credit to. And I think if we had a negative
one percent recession after these massive nominal GDP numbers, I
(20:44):
think you'd have to like wake people up to tell them, like,
you know, we're in a recession now. Like I think
it's a really different paradigm. China is different because it's
a debt finance. But I just think recession is grossly
overstated as a phenomena today without some massive shock to
the system. So it's just so different than when I
first started the business. Yeah, you had a recession, you
had food lines, you had gas line, mean, it was
(21:05):
like bad stuff.
Speaker 2 (21:22):
We've already seen a lot of these recession calls for
twenty twenty three get pushed into twenty twenty four. But
if we don't get a recession, I mean, how do
you invest along that. Are there any markets where you
can see that a recession is mistakenly priced in?
Speaker 4 (21:36):
Yeah? So by the way, it gets to this point
about you know why things have been surprising and why
the equity market. So, I mean people were like, get out.
You know, earnings estimates. You know, we saw earnings estements
that almost were quantitatively impossible to hit unless the big
tech stocks get devastated for some reason. And I think
now people are realizing it, even if you had a
(21:58):
moderate recession, if you had one of these two quarters
of negative small size, is it really going to change
you know, what your asset mix is going to be
in terms of your portfolio. And I think that's been
a big adjustment. So what do you do with that?
How do you invest around it? Listen, I still think
you got to own your own equities as part of
a bar bell and a portfolio. One of the beautiful
things today in investing you can own front end yielding assets.
(22:22):
I bought some commercial paper the other day at six
and a half percent one year CPE six and a
half percent. It's like, I don't I just want to
go home at six and a half. I just sit
and sit of saying to tell clients, sos, I'm going
to get you six and a half and I'll be
taking the rest of the year off. But that's pretty
I mean, that's pretty attractive. But if you ran let's
say you ran a lot of carry, a lot of
front end yield, you know, in high quality assets, investment
(22:43):
in great credit, maybe go a little longer, and some
things like agency mortgages. And then I'm going to own
some of these equities. And you know, we assume that
the equity market of companies can throw off ten twelve
percent return on equity. You could generate a nice return
in a portfolio and frankly more stable than you have
historically because you're getting a lot of carry from your
fixed income quality assets and fixing it doesn't mean you
(23:05):
have to stretch for fixed income.
Speaker 2 (23:07):
I thought you were a bond guy. Here you are talking.
Speaker 4 (23:10):
I move around global allocation, all right, all right?
Speaker 1 (23:14):
Fair?
Speaker 4 (23:15):
So no we do? We do all asset classes.
Speaker 3 (23:18):
Do you know what else he runs?
Speaker 2 (23:19):
I do, but tell me his own ETF launched in May.
We're talking about the ticker is bank. I believe it's
black Rock Flexible Income. Did I get that right?
Speaker 4 (23:30):
Right? Yeah? Yeah?
Speaker 2 (23:31):
What's about long lit?
Speaker 4 (23:33):
I mean, I think the advent of ETFs has been
you know, largely, I mean, the size of the ETF
market has been in the passive space. I mean, I use,
I've been trading managing ETFs for years in some of
the big indices, and the advent of you know, running
now active ETFs, the growth of active ecfs is really accelerated,
and quite frankly, now the ability to use different tools
(23:57):
to run an active ETF in a sufficient way as
you can as a mutual fund is now there. So,
like I say, I use things like HyG or LQD
or obviously SBY or so many different tools that allow
me to run in an open architecture, transparent portfolio. You
can run it and create similar returns you run in
(24:19):
a mutual fund. And I feel like you've hit that
inflection point today around the scale of the ETF market.
They're running an active ETF, you can do it effectively.
So anyway, I'm super excited about it. Hey, it's been
a obviously well manage and traded gazillions of them for
years and be able to manage that type of portfolio
has been a lot of fun and it's been a
lot of excitement around it, which has been great.
Speaker 1 (24:41):
Well. I think the most interesting part to me is
that there's a person behind the ETF, like you're kicking
off this trend of people basically attaching their names to
the exchange traded fund. I really think you were the first,
and now we're seeing sort.
Speaker 2 (24:56):
Of Dan Iverson from Pimco launchuria first ETF this year
who was it. Ed Perks also came out with his
own ETF, So there's definitely a migration of some of
these star managers such as yourself coming over to the
wrapper officially, even though to your point you've been using
them for a while in portfolios.
Speaker 4 (25:15):
Yeah, I know it's been I don't know there's star category,
but I definitely humble.
Speaker 1 (25:20):
Yeah.
Speaker 4 (25:21):
I think it's you know, meeting with a lot of
clients which I haven't heretofore, who are in the ETF
that do models and what have you. You realize the
efficiency of the tax efficiency, the transparency, you can build
models around it. I mean, that's an innovation that's going
to be continue to grow and so it's been a
lot of fun. I've met a lot of new people
in new areas around doing it, so it'll be exciting.
(25:43):
But I say that technology allows you to do it
pretty efficiently.
Speaker 1 (25:46):
Today, Rick, I have a million more questions for you,
so we'll have to bring you back on. But Rick
Reader black Rocks, chief investment officer of Global Fixed Incomers,
so happy you could join us, we can't let you
go yet. Okay, we have to play a quick round
of craziest things we've all seen in markets this week,
and I think Katie promised me a really good one.
Speaker 2 (26:06):
I actually came completely unprepared.
Speaker 3 (26:10):
You'll have to do it on the fly.
Speaker 2 (26:12):
If I had to do it on the fly, I
have no idea. I would just say real rates at
a fifteen year high, that's pretty amazing. Real rates at
a fifteen year high, and equities don't care at all.
I remember, like two years ago, we were writing a
bunch of bearish takes about the equity market that once
real yield started to move significantly higher, it was going
to be lights out for risk assets and we were
(26:34):
completely wrong.
Speaker 3 (26:35):
So I was about to say we were so right, Rick,
what about you? Anything interesting? You've seen in markets anything crazy, crazy, weird.
Speaker 4 (26:45):
So similar thing the volatility equity markets. The price of
volatility is insane. We did the treade yesterday where I mean,
you know, people fall the VIX index, but you can
price option volatility at nine ten fold his crazy people
are giving. You can buy equities without paying for them
in terms of downside in terms of downside risk. We
(27:05):
did a one day which I don't do a lot of,
in fact very rarely in my portfolios. But you can
do a one day option for a one percent move
in the equity marketing get it? It was actually ten to
one odds. Like it's all because volatility is so low
in the equity market. People don't think the market can move.
But while rate volatility is really high. You know, it's
interesting my career, Like equity people in bond, people work
(27:28):
in different buildings, and so are times that there are
aberrations between the two of these. I still do both,
but most people work in different We're working different buildings,
and like this has been an amazing one, like equity
of all, Like I keep looking at those markets singing,
why are things why are they giving that nobody's buying
insurance to the downside to dias a vault trade super cheap.
Speaker 1 (27:47):
I saw a note that said, I forget how many
days we've gone, like weeks without even a three percent
drot bela stock market.
Speaker 4 (27:54):
So yeah, but a lot of updates. I mean you
buy Upside. I mean that's the beauty of it. You
can buy Upside convex to. They pretty cheap today.
Speaker 3 (28:01):
Okay, my craziest thing has nothing to do with any
of these things.
Speaker 2 (28:03):
Great, hit me.
Speaker 1 (28:06):
I'm going to tie it back to this. I promise
there's this Bloomberg story out that there's this new trend
of restaurants providing stools for people's purses.
Speaker 5 (28:16):
Okay, have you seen this? No, I don't go anywhere
me neither. I only go to the movie theater with you. Basically, yeah,
when I forced you to come with me. But if
you go to a fancy restaurant and you have a
super fancy purse, they'll bring you a little stool, huh,
and then you can like, your purse will sit there
with you and it will eat dinner with you.
Speaker 2 (28:34):
What a crazy thing in markets?
Speaker 3 (28:35):
What a crazy thing in markets? That's not it. I'm
tying it back.
Speaker 1 (28:38):
I promise there actually is a handbag that's sold for
a crazy amount of money in recent weeks. It is
so tiny that you need a microscope.
Speaker 2 (28:50):
To see it. I've seen this.
Speaker 1 (28:51):
It's a Louis Vuitton inspired Neon Green miniature purse created
by an arts collective in Brooklyn. It's smaller than a
grain of salt.
Speaker 2 (29:01):
Rick, have you seen this?
Speaker 3 (29:02):
Have you seen this story? Yes, it's cute. It's small.
It's so tiny, it's narrow enough to pass through the
eye of a needle. They used it.
Speaker 1 (29:12):
They made it using three D printing, and then the
person who won the auction got microscope for viewing it
because it's so small. Anyway, it's time to play. I
have so much trouble saying this. The price is precise.
I'm going to have you, guys, guess what the auction
went for.
Speaker 3 (29:29):
What was the winning bid?
Speaker 2 (29:32):
Okay, four hundred thousand dollars?
Speaker 4 (29:35):
Rick, come on, I med thirty thousand dollars.
Speaker 2 (29:41):
Wow. Wow, that's quite a spread, Delta. Who won?
Speaker 5 (29:45):
Not you? Oh?
Speaker 4 (29:46):
Really?
Speaker 2 (29:47):
What did it sell for?
Speaker 4 (29:48):
What was in the prices? Right? You're supposed to be
low anyway, so I forget right?
Speaker 3 (29:51):
Oh jeez, can't go over not the price is right?
We can't call it that. We can call it. The
price is precise, I understand. Okay.
Speaker 1 (30:00):
The winning bid for this tiny thing that nobody can
use or carry anywhere sixty three thousand, seven hundred and
fifty dollars.
Speaker 2 (30:08):
I'm really surprised.
Speaker 3 (30:09):
I got it for you for your birthday.
Speaker 2 (30:10):
Oh my god, thank you. Welcome so excessive, but thank you.
Speaker 3 (30:14):
You can bring it to the movie theater when we
go see Barbie.
Speaker 2 (30:16):
I don't like inhale it by when you eat popcorn.
Speaker 3 (30:22):
Rick Reader, thank you so so much for joining us. Katie.
I'm so happy to have you on the podcast too.
I don't miss Mike at all.
Speaker 2 (30:29):
Yeah, I don't even I don't even remember that man.
Speaker 3 (30:31):
What's his last name?
Speaker 4 (30:32):
Right?
Speaker 3 (30:33):
That was great though, Thank you, Rick, Thank you both
so much.
Speaker 4 (30:36):
Thanks for having Meil. That was awesome.
Speaker 3 (30:45):
What goes app We'll be back next week.
Speaker 1 (30:47):
Until then, you can find us on the Bloomberg Terminal
website and app, or wherever you get your podcasts. We'd
love it if you took the time to rate and
review the show so more listeners can find us.
Speaker 3 (30:59):
You can find us on Twitter, follow me at Wildona Hirich.
Mike Reagan is at Reaganonymous. You can also follow Bloomer
Podcasts at podcasts.
Speaker 1 (31:10):
What Goes Up is produced by Stacy Wong, and our
head of podcasts is Sage Pauman.
Speaker 3 (31:15):
Thanks for listening and we'll see you next week.
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