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Data and earnings are painting a mixed picture of the economy, ism, services, ADP employment. They come in solid challenger job cuts, those jump to one of the worst octobers on record, ruining these markets. Or the rally yesterday, let's try to get a sense of direction. Bringing us that now is Rick Reader, chief investment Officer of Global fixed Income.
At black Rock and Rick.
We always have you on a jobs day, and today is decidedly a jobs day that should have been.
Are you just flying blind? I mean, this data depends what you look at.
You can say the economy is great or things are falling apart.
Yeah, yeah, it's fine, Thanks for having me on. By the way, you know, it's a funny thing, you know. I found that the industry's obsession with these individual days the pay and by the way, pay reports a great, great economic indicator, the CPI report. There is so much information that comes through the system. By the way, my favorite, I read tons, maybe too many corporate earnings reports, and I look at what's happening with hiring, inventory management, receivables,
et cetera. So there's still I mean, you know, would i'd rather have the data for sure. By the way, I think the markets become hem strong, and I think part of why the markets are acting in this sort of paranoid you know, what, do people know? What's the information out there manner?
Today?
I think the But you know, I feel pretty good about knowing that the structural direction of travel. I think the economy is in good shape. They're parts of it. It's not operating on all its cylinders, which we're talking about. Capex is great, how income is doing well, low income in the in the consumer side not so much. But I feel pretty good about understanding. And listen, I think I think, I think we have a softening of the
labor market that is quite significant. And you see that as you mentioned the Challenger jobs report, you see that playing out. You certainly see that when I look at all the corporate earnings in terms of that, we have a softening labor market. And if we had the number today, I think it would have been reflective thereof.
Yeah, I mean, I'm flying blind. I couldn't agree with you more and no one cares what I think. But Bob Michael of JP Morgan has made this point. Rich Clarita, former vice chair of the FED confirmed they have like five hundred economists, they have twelve regional banks. They're talking to participants, to companies, to institutions every single day, so they have a pretty good handle on the economy even without it. I wonder about what you guys have at Blackrock.
I mean, you have ten trillion dollars of assets under management, right, what kind of signals are you looking at? What kind of proprietary information are you getting that helps you in your job?
Rick? You know, Matt, it's a great question.
By the way, this morning we went through credit card data, so you you know, it's all available information. So we end up we had a gentleman named Randy Burker with who drives every day. We look at what's happening in terms of you know, you go through the internet, you splice some of the credit card data that comes out, you get amazing amount of high frequency data.
So we'll use that.
We use a series of data assimilation tools, by the way, text mining.
Understand what companies are saying. So anyway, we're trying.
And by the way, we don't have figured it out yet, but you know, we're trying to be pretty cutting edge around the amount of tools we use and how AI is helping us, you know, by the way, also in things like how do you think about scenario analysis? How do you think about you know, the first derivative rate of change on inflation and growth?
So listen.
I think part of the why is most exciting times for investing ever is the amount of tools you can utilize that allow you to get more verse around what the direction to travel in is is pretty intense today. So you know, we're still working and trying to figure out more tools we could use, but there it's so much different than quite frankly five years ago, ten years ago.
I would be very interested to know if any of that data, any of the tools that you've been using and look and looked at, have changed some of your allocations or how you're thinking about BINK right now.
So it's great us, thanks for asking that man.
So Bink, you know, there is something that is I think pretty intense around so Bank you know.
Has had has had a good run.
We feel good about where it's going and more and more people coming into it. The thing that it's allowed us to think through is today you've got you've obviously got the way the Fed's going to interpret the data, which is not always what I agree with, but the Fed's going to interpret the data is you've got inflation that's a little sticky high, and then the employment that's moderating.
So we thank you you're in this and by the way, not just the FAT, the ECB, the Bank of England, the RBA, they're in this point of let's sit back and watch the data. So the way we move our positions around is we've reduced a little bit of our interest rate sensitivity. We've pulled some of our interest rate sensitivity out of the front end of the yield curve and say, gosh, let's just get carry. We can reduce
a little bit of our duration. We've reduced a little bit of our investment great more than a little bit of our investment great credit because quite frankly, today, where spreads are, it doesn't do a lot for us. And if rates are pretty stable, mortgages become agency. Org has become much more interesting in the low coupon agency mortgage has become much more interesting in the portfolio. So we've
been doing that. By the way we look at the data, including last night, you're seeing with the mortgage rate coming down a bit of prepayment faster PREVAIM, so we do some high coupon mortgages. We've had a lot of technical there, but some stuff moving on.
We should point out for viewers who don't know, BINK is the I Shares Flexible Income ETF that Rick runs at Blackrock. Rick is going to stay with us through the opening bell into the equities trade next.
This is Bloomberg.
Let's bring back Blackrock Chief Investment Officer of Global Fixed Income Rick Reader and Rick.
Can I ask you about that?
I mean, is this market to frothy our valuations? Are we getting too far ahead of ourselves here? Because I was looking at the other day the Warren Buffett you know, valuation awe stocks, market capital versus GDP. It's at the highest level at least since two thousand and The same is true of the case the Shielder case cape ratio. Sorry, you can see this great chart here that shows you we're pretty highly valued on these two measures. Are you worried about the AI froth?
So you know there's something.
By the way, this is a time of year you tend to get momentum gets chased out of the markets, particularly today, we have ambiguity around some trends that are taking place. So, by the way, I know, I don't think it's an AI bubble, and I don't think there's too much froth.
And depending on.
Where you go, if you look at some of the big hyperscalers that trade a twenty to twenty five twenty six times earnings and they throw off roe return on equity of thirty thirty five forty percent, and you look at their free cash flow, I've never seen in my career free cash flow generation. We can talk about top
line revenue growth. When you can have that much free cash flow generation allows you to do your cap ax, which is extraordinary today, build R and D, which is your future cash flow, and then you can buy back your stock.
So it's happened. I you have an unbelievable dynamic. And by the way, we're now.
About to open the buyback window that you have this dynamic that you throw off immense amounts of free cash flow, and so there's multiples are not scary.
There are parts.
I see it in the private market, and I see it in some places where you're seeing businesses that have no cash flow for a number of years. How much would you finance those? So I do see froth in some areas, but in the traditional big market cap stuff. And I would say related to that in semis in healthcare technology, where you're seeing rapid change but real cash flow alongside of it. It is the exact dichotomy I think you saw in two.
Why then do you have these large cap giants tapping the bond market to the degree they are, and not just the broadly syndicate market, but also raising capital off balance sheet too. If they were so confident and have such robust cash flows, is that not a concerning turn of events that they're instead building up on debt piles.
So so, first of all, when you look at the when you look at any measure debty, but you look at their debt to book cap, debt to market cap, these companies are under geared or under levered. Their cap structure is so low in terms of leverage relative certainly
relevant their market cap, but relevan their book cap. If you were running a big mature company and you think about what does your normal cap structure look like, and if you're going to fund near term cap X over the next couple of years, if you can do it out the yields curve, which is where you see a lot of that financing take place to say, gosh, I am.
Throwing off a lot of cash flow.
But if I can lock in these rates, and if I'm as a shareholder of any of these companies, I say, why in a world would you fund everything with equity or why wouldn't we put a little bit of debt, get a little bit of gear, and get your ROE higher. So I just think it's a natural evolution of Gosh, this is how you run a big company, and this is what a normal cap structure looks like.
I mean, we were just talking about global bond sales hitting six trillion dollars, an all time record.
That's pretty incredible.
And the and the and the return on fixed income has been great this year as well.
Finally, how how.
Could we be in a world with tight financial conditions when this is happening. It just doesn't make any sense to me why the FED would want to be cutting into this.
So, uh so you got good, You've got I would argue, there's an immense amount of cash that came from certainly years ago at fiscal monetary stimulus. So you know, I don't think financial conditions drive financial business are great for older savers in the economy. The interest rate tool today is incredibly powerful on parts of the economy that are
really struggling, low income, small business, the housing market. By the way, the government debt since eighty nine percent of what the government funds is and zero a two year part of the yield curve, so it has a huge influence on what tax payers are paying for for debt today. So my view today, what the interest rate tool does. You know the idea it affects in place. I've been saying this for months. It's very hard for the Fed
to bring down sticky inflation. Healthcare, education, insurance not terribly robust, but you do Actually, if you bring the rate down, we'll bring down the mortgage rate, which you're seeing play out.
Well, but for more Americans.
Rick Diane Swank has said, you know, bringing down these rates is not going to affect subprime rates, and twenty five percent of the country is below six ninety with a credit score. Also, I don't see how a lower rate adds jobs in an environment where companies are cutting headcount to try and offset higher tariffs to their margins.
So you know, I've said this for months now. I would say one thing The FED doesn't create jobs directly, but you think about what happens small business does forty four percent of the hiring in.
The US a small business. The rate's too high for small business.
Second, you think about what happens in the housing market. We put three point one people to work for every home built in this country. If you get the mortgage rate, by the way, you don't have to get it down that much. But if you've got it down twenty five to fifty basis points, you increase labor mobility. Your point is right, companies, we are in a productivity revolution. Companies
are going to cut jobs. But if you increase labor mobility because people can sell our house, move to another state where.
They get a job.
If we actually put people to work in building houses, you bring down shelter inflation. The FED can't create jobs, but you can ameliorate some of the stress that's happening because of productivity. And people talk about productivity is like AI. It is happening everywhere. We talk about freight, how we do logistics, how we do inventory management, how we do
customer procurement. Productivity is exploding. We don't need as much labor collectively in the country, you know, bringing that rate down in the places that can actually help will actually at the margin help help a labor dynamic. I think today you'll see not just where you're seeing in the last four months, what you're going to see for the next couple of years.
And with these conversations and especially your viewpoint is made all the more important. We have to ask because last week, the beginning of last week, Secretary of Scott Besson confirmed his list for FED picks, your name among them. How have those conversations gone?
No, I can't, you know, I can't really comment. I wake up in the morning and I try to figure out the supline of the yield curve and what your comments about fast food versus FED like, should we be buying this stock or that stock?
That's what I got to focus on.
That and so anyway, that's uh, that's what I'm doing today, the most.
Exciting time to do it.
Rick, Even if.
You're not confirmed his FED chair, everybody has a view about what they would do differently at the FED.
What what what are some of the changes that you would make?
You know, I'm a listen.
I mean, I'll all point to is what I've said for many months now is I think there are some things too that you can do that to create velocity in the system. You know, nobody borrows off the overnight funds right anymore. Velocity happens where financing happens out the yield curve. Things you could do to keep that stability of the back end of the yield curve, to keep the mortgage rate in a place where we get real
velocity existing home sales moving. So I think there's some things that are that are that can be done, that are that are that are interesting and listen, mat I mean, you know, I've said it publicly for many months now. I think if we're running break even, you can buy in the market that a five year inflation break evens a two point three five percent. I think the funds rate should be a three and I just think you could move it there and then you don't have to
go much further. I just think the price. You know, in markets, if something's price wrong, you get it there. I just think we can get it there and then and then look at when then take another view on where are we today and do you have to move higher or lower? But anyway I would I think we could move right a bit lower.
Well, you know, it does have this feeling that whoever is next and whoever's next leading the FED, that there will be this difference in tone when we have the scenario where Chair Powell's term is up and we have our next chair and waiting, whoever that might be. How should that person hand that kind of lame duck gray period.
From an investor point of view or just communication.
To the markets, how should that look when Shairpala's term is over and we're waiting for the newly confirmed FED chair.
Listen, I think it's trick, Jim, And you know, I have incredible sympathy for and frankly, you know the sanctity of what that institution is. I think what they will continue to do and I think what they do today is they make judgment based on here's the data that we have to interpret, what is the right thing for the population at large in terms of managing that policy.
And you know, I really believe in this, and I certainly believe in this Fed, Shair and this FED committee that I think they're going to make the decision based on let's evaluate the data, interpret the data and make a decision based on that. And I don't think there's any reasonab believe that happens any other way than that.
Well, Rick, you certainly do that for us, and we are very appreciated, appreciative of it to get all of your thoughts from what's going on with Bink to the labor market and beyond, Rick Reader, thank you so much for joining us.