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We begin this hour with stock sitting of record highs as investors are potential us around Truce Rick, reader of black Rock righting the immense disruption of trade and global supply conditions will be what truly influences market price. Sick Rick joins us now for more. Rick, Welcome to the program, buddy. Always a privilege, a pleasure to catch up with you, sir.
This move that we've seen in this equity market, we've thrown so much of the stock market over the last several months AI disruption, private market, jitters and now the straight and form most remaining closed for almost two months now, Rick, and here we are at all time highs. Does that bring you comfort or make you nervous?
Good question, So i'd I'd say a couple of things. First of all, I think what it tells you is the technicals in the equity market are extraordinary, and the earning numbers that are coming through are pretty powerful. And so you know, if you look at the US economy and you look at what's you know, I heard to begin the show time about the economies weak countmies is strong. Actually the parts of the economy and the primary drivers are doing quite well.
You look at tech.
I mean, you look at some of the numbers yesterday that you cited, and you look at these earnings growth and I was looking at some of the semies. You took about ninety seven percent earnings.
Growth year on here.
I mean, like unbelievably powerful numbers. And then you look at you know, the high end consumer, that consumption. You look at retail sales when you break it down, pretty darn good. So you've got an economy and by the way, you've got housing's not in good shape, lower income's not in good shape.
So that is is what it is.
But what drives the equity market is in pretty good shape. And the technical So you had this period of time that nobody wanted to buy stocks, and then you realize, you know, I've said it before. You you know you're gonna have an IPO calendar this year that maybe's a couple hundred billion, Maybe we're gonna buy back a trillion of stock this year, so we're actually there's not enough stock to buy. So it's just a pretty you talk about how explosive this is, you realize people sit on
their hands. I don't want to do anything, particularly in tech, and then all of a sudden, you know, maybe a little bit of better news, the earnings come in, and then you create this the technicals and equities, by the way, it's a completely different And when you think about the treasury market, et cetera, because we're getting do we get five hundred and twenty billion a week of supply, it's I mean, it's amazing. In the equity market, how good the technicals are.
Rick, is there a contradiction in the fact that we're seeing such explosive confidence in equities.
You're seeing so much cash.
Out there that are looking for places to go, and at the same time, people are expecting inflation to come back down to two percent over the next five to ten years. Does that seem contradictory?
No, man, listen, I think, I think, and I've been doing this for many, many, few decades. I've never seen a productivity revolution like this before. I mean, so you go through I mean almost every company I look at, you see a similar dynamic and grow my top line revenue. Let's say it's four to ten percent. Obviously techts significantly more significant that.
But then if I.
Keep my labor static to down. And then if I can get my costs of good soul and you see this in M and I, if I can create synergies, I can run a higher operating margin. If you could run a higher operating margin, then my roees is significantly higher. And so then it just keeps driving this dynamic. So thinking about what And by the way, we haven't really seen automation AI really kick in yet, so I think
you know, there's this transmission. Part of why I think big cap stocks are so powerful is you're building a mode because you utilize data so effectively. We're seeing productivity take place in Buoye's earnings.
Companies do great.
By the way, the counter of that, it's not great from an employee point of view. You're seeing that playout, which you know is part of what you know what affects the interest rate transmission. So it's a really good story from a productivity and a corporate earnings point of view, not so much for the.
Broad world population.
So Raquel bullish are you right now? It sounds like you're incredibly bullish on big claps. I mean, are you essentially going all in? Do you think it is a time to go into equities over bonds, to go into equities over cash, to go into equities over commodities.
I'm not that bullish, but I listen. I think, you know, we are long the equity market. You know. One of the things that happens when you know you had what happened a.
Few weeks ago, when volatility spikes, you can't really it's hard to have a very long equity position because you can't manage your risk using the volatility markets. Now vall has come down, it allows you to run a bit longer equity disposition.
And so, yeah, I like equities.
If you said to me, let's look at the credit markets, he say, gosh, where is high yield?
Where's investment grade credit?
And I say, okay, I've got some beta that I could put in a portfolio. Look at where spreads are. Investment grade credit not interesting. High yield you know it carries well, spreads are not that interesting. So I said, gosh, I'm going to take my beta and orient it a bit more towards the equity market, or more towards the equity market where the earnings growth is explosive. I got convexity of the upside, and I can manage the risk
that's a better in a portfolio construct. That's a better disposition than I think than you know, parts of the credit market are today.
K How do you think the Federal Reserve is thinking about all of this, especially given the fact that we are seeing higher energy costs in the United States's not as high as Asian Europe, but they are.
Still taking higher.
You know, I'll tell you there's a pretty extraordinary point in time. And you know part of what I'm talking about productivity and the employment dynamic. Listen, I think the Fed you will be on hold and watch the data and you'll see it by the way you're going to see and we are seeing some what will be some particularly at headline inflation, some heavier numbers on inflation. I think what the FED has to do and the ECB has to do is think about you having a supply shock.
This is not a demand driven inflation. By the way you think about what's happening to lower income, middle income people. You're getting hurt on food costs, fuel costs. You know, why do we raise interest rates to raise your mortgage? It doesn't make any many sense. So I think what what your synopsis is around that is gosh, I'll stay on hold for a bit. I'll watch the data. I think the ECB should do the same. Maybe they get ahead of it and hike a couple of times, but
I listen. I think you know, when we've talked about before, how's it look at the housing numbers this week, you look at existing home sales, when the mortgage race shifts up, home sales come down, and then you look at the breakdown or retail sales. You know what's happening. And I mean, is the dispersion keeps growing. Lower income, middle income having a hard time. That's where the interest sensitivity is. So listen, I think they still the Fed has to get the rate down.
I still think you'll get a couple of cuts. Do you push it back a little bit?
Yeah, maybe, but you're talking about a very two speed economy where interest rates really affects things housing, small business, lower income, and it's part of what I think the rate can come down.
So reck, let's look across the curve right now. If the Fed's going to stand hold, that's going to anchor the front end. We've seen a lot of that in the performance of fixed incoming treasury yields over the past few weeks. If you go further out along the curve, it just feels like the ten year is anchored around four thirty, which was the upper end of the pre
wall range. How does your thinking sort of a just when you talk about what's going to happen with FED funds and the relationship between that, and how it informs your view of how we'll get some performance further out along the curve.
You know, I had to tell you, Jonathan a minute when you know, I hear people come on and say, I think rates are going higher, things are going I think rates are going lower. I actually find the turn year part of the curve from an acid.
Allocation point of view, not interesting, as you said. But by the way, my colleague Rus Brownback talks about your.
Show all the time. If you go back over the last year or so and you look at the end of every quarter, you look at the end of the year, we've made pretty much hover around four twenty five, maybe maybe four thirty, but it's pretty unbelievably stable. There's a lot of discussion about what do you do with the
with the with the ten year point. I do think there'll be initiatives, and I do think what you know, when Kevin Wursh is confirmed, I do think you'll see a dynamic where can you contain the ten year point of the curve? Can you keep mortgage rates down? Are there initiatives to actually pull that mortgage rate down that you can have through fiscal stimulus.
That's really powerful.
My sense is that ten year note will drift lower over the through this year as you get maybe you get the funds rate down a bit. Can you keep the ten year alongside of it? But I will tell you, Jonathan, in our portfolios, I say, look, you know, particularly the
back end not interesting. I just want to, you know, try and do is keep my front to the belly yield curve exposure, and I just clip coupon like a year, like if we can just keep giving clients six and a quarter type of coupon, type of yield, which you could do without without compromising rating. I'm just going to keep staying there and then, you know, let people get excited about where we're going in the back end of the curve.
Rick had got to ask you what kind of initiatives would bring down rights yields at the long end of the curve.
So so, by by the way, a bunch of things from the FED. From the FED point of.
View, you can use your balance sheet effectively. We have eighty nine percent of the debt of the treasury markets in the zero to two year part of the yeld curve. It's actually not that much out in the back end. The FED can actually be very very effective and how you manage the back end.
Of the yield curve. Second thing you do.
You see the administration through the GSC program is actually buying a huge amount of mortgages, a couple hundred billion mortgages. You can actually do a bit more with regard to that. There are things you can do in terms of creating initiatives to stimulate housing, home builder incentives, et cetera that pull out mortgage rate down.
There's a whole series of things.
Listen. I mean you look at existing home sales WHI should talk about. You look at how there's not enough inventory of houses today. It influences labor mobility to the negative. Because we don't have enough inventory, people can't move. It influences we don't build enough houses. We don't put enough people to work in shelter. And by the way, you can't bring down shelter inflation because we don't have enough houses.
There's tremendous motivation and quite frankly the initiative to actually bring down housing costs and to bring or to build more inventory, to bring down that mortgage rate. You know, I think it has much more, much more benefit than people give credit to.
Rick. Appreciate your time, so always good to hear from you. That'd be a stranger. Ricreate it there of black crop. Thank you, sir, Thank you very much