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Let's get more on markets now. I'm so pleased to say that. I'm joined by the black Rocks CIO of Global Fixed Income, Rick Reader.
Rick.
Great to see you, I know, freshly back from Davos. Hopefully the gent lag hasn't got yet. What was your take on this? On this job's figure one hundred and fifteen, finally we got back to back games for this jobs market.
Yeah, I mean there's some good things going on.
I mean it's healthy to see you know, that sort of poweritative game. And you say back to back, I mean, listen, I think I think the economy is growing. I think the economy is growing quite vigorously. I think you could hit six percent nomenal GDP this year. But you know, I always think when we look at the top line number, it's not nearly as interesting as what's happening on the surface. You know, the last six month moving average jobs is
pretty incredible. It's fifty five thousand jobs. Fifty four thousand are in healthcare, so meaning you don't really have any job creation. And if you go deeper into it, you have an economy that's doing really well. But the Buifer case is incredible. So you think about you know, I was looking at the numbers of manufacturing, as you said.
Is softer.
Real estate is negative jobs, and so if you think about, gosh, the sectors that I think and this is you know, we get into the interest rate tool, the sectors that are sensitive interest rates are still difficult today.
And actually, well, the one I also think is fascinating.
We look at information hiring, so that's in and around technology, and you look at the last four months, it's negative.
Why is that happening?
You actually have what is extraordinary capex by these companies that are spending.
On capex but you don't need the people.
And you're seeing companies that are that are you know, spending huge amounts of capacks and then they're announcing significant layoffs. So you have an economy that, you know, the top line is interesting. When you strip out healthcare, it's like, you know, we need to create a little bit more hiring. The supply is not that high, so the unemployment rate
doesn't move. But there's something underneath the surface when you think about what's happening and how the economy is stratified, that I think is pretty fascinating.
Today.
I think that is so interesting too, Rick.
And this is something that I've been looking at over in the past week of Okay, we have all this spending on data centers, what does that actually do to jobs? Here was kind of cobbling together various studies.
The picture that I.
Got so for every one billion dollars invested in data centers, it only creates fifty permanent jobs.
If you were to compare that to something.
Like a traditional automotive or pharmaceutical plant, that same spending would create fifteen hundred to two thousand jobs. This idea that you build the plant that requires work, but the permanent people it's like, you know, a few HVACX running around trying to fix things. Is it dangerous that that's what we're spending on in this economy, something that doesn't create as many permanent jobs that other types of CAPEX would.
I mean, that was pretty good describe, and I could describe it better than that.
I mean, I think that's exactly right.
I mean, I think I think I think we have a dynamic that we have a productivity revolution coming. And if you think about you know what's fantastic is you've got to get an aging demographic that supports healthcare jobs.
You know, you've had job creation education that's great, but you know, you have a dynamic that if you if you know, and I think from a fed's perspective, otherwise, if your perspective about where we're going, real productivity, Real productivity means gosh, you don't need to use as much labor.
And today you.
Look at you know, you look at the average hourly earnings number today and like, you know, you know, there seems to be a bit more slack than that top line number would suggest.
I think today numbers.
Are pretty good. You would think always I say, the numbers are okay. If you think that, you know, the next month you could have also decent jobs because you're hiring some people in healthcare, maybe a little bit of infrastructure build. But the perspective I think is a bit more concerning. And uh, you know, I think the training, the retraining, how the economy transitions people, I think is
going to be a really big deal going forward. As part of why I believe we got to get housing moving, You got to get real estate moving because it creates so much velocity in areas that are not AI as AI sensitive.
Well, what about beyond housing, Rick, And it's a point that you made while on this program any times before on what's necessary to get this economy going. But I just wonder if this is the future that we're heading to. I mean, things are advancing so fast. Anthropics growth is like bigger than Zoom during the pandemic, bigger than Google during the dot com run up to the dot com bubble. I mean, what do we do when these things are
growing so fast? I mean, part of me, just being a pessimist and maybe a skeptical journalist, just feels like we're in a world, in an economy that's not fully prepared for that future.
I say, that's right as well, I think the world.
I mean, I listen, I feel every day I come in and I like, Okay, I'm prepared for the day, and then by the end of the day, I feel like I'm behind because it's just happening so fast, in the transition of things so fast. Listen, we're building and using a load of these tools, and I think it's incredibly exciting. And then you look at the equity market, what's driving the equity and people say, gosh, there's a
bubble in the equity market. It's actually not because you're seeing this sort of spend and expenditure and earnings growth and cash flow alongside of it.
It's just happening so fast.
Frankly, it's just creating a greater and greater stratification of the economy's I mean, it's it's one of the most interesting times I've ever been around to try and think about investing relative this. But it's not all good news, but in some areas it's I mean, it's explosive and from a growth perspective.
True.
Okay, So what is the positioning you do according to this rick, Because again, a lot of what we're talking about our longer term consequences. It's kind of the big left tail for now. As we were just talking, the jobs picture today is incredibly stable, if not strong, So.
You know, I still think of the job market is okay, But so I mean, I think my view is if you take today and say, gosh, what is more attractive equities or interest rates? Listen, equities have upside to it, and you're watching the convexity of equities, and by the way, you don't create any new ones, even though you get some IPO calendar. The buybacks are much much, much bigger, so the technicals and equities are great. So I still like equities versus interest rates, and I like equities married
to income. And because you have an economy that's growing like this, and you think about some of the yielding markets, in securitization markets, high yield markets pretty hard to have a default cycle of significance other than parts of the securitization market that are tethered to lower income. So you think about subprime auto, you think about some parts of credit card. So I think this is like take income tech equities, marry in together, manage your volatility, and that's
you know, it's been working. And I don't know why that would change, you know, to buy long term interest rates and say, gosh, you know, you know, let's see where rates go. I think you have a FED that's Unstable's.
That's on hold, I should say.
And then, by the way, there's some really interesting things to do around the world in fixed income as yields have gotten higher in place like Europe where growth is not nearly as robusts and probably slows from here.
Rick, I want to talk more about that, but just on the other side of this break, because we have to talk about bink and we need a bigger chunk for that because it is the fastest growing fixed income easy if there is. But just before the Open Eye, am curious you talked about sort of bets that be around the lower income stratum of the US. Only a minute here, but there's been a lot of CEUs from Craft and Whirlpool to McDonald saying that can confidence among shoppers.
And consumers is slipping.
Is that just confined to the lower income stratum or is there anything in there that's making you worry for more widespread weakness.
I mean, yesterday was incredible.
I mean, look at you know, what were some of the stocks at a client fit and shakeshat. I mean, you know, it's incredible. In terms of the divergence. It is generally not ubiquitous to broad consumption overall, but it tends to be very much lower to middle income. And I think there's a cumulative effect from the gas prices that.
You got to be sensitive to.
Listen, the aggregate consumer is still spending, but it's largely older net savers, wealthier people that are keeping consumption and pretty good shape in aggregate.
I'm going to be honest. My message is just blew up with questions from you. I've actually gotten multiple questions on this, So I just want to start with here on where on this curve you'd be position and in what geographies.
So I mean, I you know, quite frankly recently I found Europe to be to be pretty interesting.
So so just put in perspective.
So today I was looking at if you're a dollar investor, you know, you could buy things like Spain and Italy, and I was looking at the cave. You know, if you assume you move on the yield curve, not to get too technical, you get a cross currency swap, you get close to seven percent in Italy. You know, mid six is Spain Italy, and you say, gosh, I'm buying single be high yield at those levels like that seems
okay to me. You know, it is ECB going to hike probably they'll try, but then the economy is going to slow. That's been really interesting. So you know, do you go a bit further out the curve to take advantage of that? That's been pretty interesting. You know today listen, I don't think I don't think we're gonna make any real money an interest rate exposure.
Today.
You know, so we're you know, hanging in the front to the belly of the curve generally in the US. And I mean, honestly, what I'm trying to do today. You think about, you know, diversify, diversified, diversifying equities, you can't really diverse like tech is just going to keep driving it high, is you know, driving high, It's pretty unbelievable. I'm just trying to create diversification stability income so people can marry it to their equity portfolio because equities are
harder to diversify. If I can keep stable income using the securitization market, that to me is like I'm trying to do, you know, you know what it used to be sixty forty. Just give me stability with volatility that's got some upside convexity to it, and you know, and marry diversification to what is harder to diversify. And that's what that's what I'm trying to create in fixed income today. Just keep clipping coupon and marry that to your equity beta.
Rick.
I have heard the argument that a thirty year you'll just hovering under five percent is an attractive level, that it's cheap it looks good with a FED that for structural reasons won't see sustained inflation and we'll need to continue to cut.
What are you thinking about duration at this point?
So I think it matters who you are a lot today.
So if I was a pension fund, if I was a life insurance company, I had a lot ability, and I say, gus, this real rate over time, particularly if you're a pension If you think, gosh, that real rate is pretty darn attractive. And equities have carried me to a full funded status. Boy, you know, maybe I take some long end at these levels, and five seems.
Like a pretty good level. The real rate particularly seems like a.
Good level if I am, if I am not, if I don't have a liability against me, I'm an individual or an endowment, et cetera. And I said, okay, I can buy two long derated assets that have some volatility, and by the way, they seem to correlate exactly one for one these days based on inflation. If I could buy a long duration asset that's a treasury getting me, you know, what's my return going to be? Yes, I think you can have some positive return and will when when inflation comes down, or.
I could buy a long rated asset.
It's equities and that's that's compounding return on equity of over twenty percent. It's like a no I mean to me, it's a no brainer, Like why would I take the volatility out in the back end of the curve if don't make any sense?
Just right, equities?
You think about since the blow in the you know, since the war. You know the bottom mar it's not okay, But you know, what's your return in the back end? Not really much of anything. Equities have killed it for you. I mean, what was it?
Low mid teens type of return?
So I can if I can own two assets as an individual agnostic to a liability like I think it's I think the answer becomes pretty pretty pretty clear.
Well, just on the stellar run for equities, Rick looking at earnings has been remarkable, despite again some of those wabbles we talked about, the shakeshack the planet, fitnesses of the world.
Just looking at where earnings.
Growth is projected to go, it's projected to accelerate to twenty four point six percent in the fourth quarter. That is a four year high, and it's a level that's rarely seen.
Out of post shock recoveries. I had a viewer right.
In and I think this is relevant, especially just given that acceleration that we've seen, is just where are we in this overall cycle right now?
Rick?
So I think today, I mean, if you've got an economy that's going well, and you've got cap I suspended here, so one person's cap X is another person's revenues and another person since cash flow. So you got a lot of cap acts flowing in the revenues, earnings cash flow, and you've got an economy with it that's promoting a top line revenue. So I mean, this is pretty much nirvana in terms of where you are. I think as you get in the back half of the year, you'll
probably start moderating a bit. You got a big fiscal tail wind that it becomes obviously less intense and with transitions to a bit of a headwind. So I think you got a pretty good environment today. My sense is this is this is as good as it gets. But I don't you know, I don't think it's you know, people love to say, including last year, including of the war, we're going to recession. I still think you get real rate of growth. It's still for the year mid to
high twos. So it's still pretty good. My sense is the trajectory of that euphoria is probably cresting here, but not like it's got to turn.
It's got to turn grossly the other way.
Right, So is that kind of just like a muddling along type of economy then, Rick, what does that look like?
It's I mean, it's good, it's still pretty good. I mean, it's still pretty good. At the cap is still going to be robust. You know, got a high end consumer that's in pretty good shape. You know, I would argue they are parts of the economy though that you could argue are in recession. You know, we talked about traditional manufacturing, we talked about housing, we talked about small business, lower income, so,
you know, but in aggregate, it's still pretty good. It's just you know what what I think, and we go back to the interest rate tool. The interestrate tool doesn't really work on you know, it doesn't cut capex for the big you know, the big hyperscalers. But you know, they're parts of the economy. They just aren't great, but they're not large enough and impactful enough today to really create an economy. That's that's anywhere close to talking about recession.
But I would argue with you know today it's very good, maybe transitioning to good.
Hey Rick, it is always such a pleasure to have you. Thank you for joining us on another jobs today that is a black Rocks CIO of Global Fixed Income RIC reader