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Let's turn to our next guest. He's responsible for managing roughly two point seven trillion dollars in assets. His name is Rick Reader. He is BlackRock's Chief investment Officer of Global fixed Income, also the head of the firms a global allocation team. He joins us. Now, Rick, it's great to see you in LA.
Thanks, thanks great for being here.
Let's talk a little bit about this disconnect that seems to be forming that we've been talking about when it comes to the equity markets and the fixed income markets. Because you take a look at equities in a vacuum and it looks awesome, the S and P five hundred at record highs. We had a ten percent gain in April alone, and then you take a look at the treasury market and the oil markets and it's a little bit of a different story. There's a little bit more
concern here. And I just wonder, you know, how we sort of see this come back together, whether or not that disconnect can persist and maybe get exacerbated, And.
Then maybe I'll suff from the technical point of view, the difference in the technicals and the equity market and the bond market.
Are as diverse as you can as you can imagine in.
That we don't create enough stocks where you know, the buy back relative the issuance of equities people are the IPO market.
It's tiny relative to the buy back market.
We don't create enough equities and there's a huge amount of cash out there, so you just get this continued buying and then there's no stock. Now, if you have a bad piece of news, it can trend down for a day.
A week.
In bonds, we're getting five hundred and twenty billion a week of gross supply of treasuries. There's no dearth of supply, So you have that that is distinctly different. The other is we're witnessing a growth paradigm that is unbelievable. That is, I mean, I think this year you can grow six percent nominal GDP after are a number of years of significantly positive nominal growth, and then you see this in the earnings numbers that.
Are coming out.
I've been pretty blown away by not just that you have top line revenue that's impressive, but you have pricing power. Pricing power is the worst thing you could have for the market because obviously what it means from inflation side, so I think it can persist.
You know, we think about.
Portfolio allocation, and I know we've gone through this. You still have a lot of danger out there in terms of geopolitical risk.
But if you said, what's my.
Convex city of upside downside, if you know, you're going to have their good news or bad news, and they're going to correlate together oftentimes, right like, equities have a whole lot more upside than the than car frankly interest rates to today.
Yeah, we'll bring this conversation to the corporate credit market because you know, the point has been made that spreads you've seen a little bit of widening, but you know, a pessimist might say that looks complacent, but when it comes to the strength that we're still seeing through in corporate earnings, when it comes to equities, I mean I have to imagine that translates to the performance of the credits as well.
So I mean it's pretty hard and people' psych you know, I don't like these spreads at these levels. That being said, they yield fits portfolios, not just our portfolios, but whether your pension fund, life insurance, going to be any insurance company, et cetera. The yields are very attractive because a risk free rate is high because central banks are keeping it there for inflation.
So those yields are interesting.
It keeps demand at a pretty at a great pace. The other thing that I think is significant is when you have you know, people talk like, could you have defaults? People have a private credit, they're stressed in private credit. When the economy is growing at six percent nominal, or let's say I'm wrong and it grows at low to mid five, it's pretty hard to have a default cycle
of any significance. I've learned over my career cash flow makes up for a lot of mistakes, and as long as you have that sort of backbone of cash flow growth, you're not going to have any significant default cycle.
I am curious that when we start talking about five even six percent nominal growth, I mean, where is that growth coming from. I know there's been a lot of discussion about kind of the accelerant that we've seen from AI and the technological spending.
Is that it is that the thing?
You know, you know, part of why you know, I've been pretty adamant about this. You have a lot of the US economy, it's actually in recession. And part of why I've been a believer that even if you grow this fast, fight can cut rates. The reason why I think that count is because what is rates sensitive in the economy today, it's actually in recession. So you think about traditional manufacturing, you think about housing, you think about where young people, low income people that are struggling, and
that's where the interest rate tool is effective. But then you have two parts of the engine that are steaming ahead. You've got obviously AI and that number is so big, certainly on a short term basis.
It's huge.
And then you've got consumption that's coming from the higher income cohort generally that's keeping it up. So you've got an economy that's doing extremely well on two engines. And then, by the way, for a lot of people in the country, it's actually not going so well. And so that's part of why I know your question about the interest rate tool and how to think about it, I think you'll see a FED that will cut rates because of that part that's struggling.
Well, I'm curious because this gets to the whole philosophical debate about monetary policy. And obviously you are rumored to be in the running for the pitch here. But I mean Kevin Watsh is coming in. He clearly has, at least if you take him at his word, is going to approach monetary policy in a much different way philosophically. And I asked this question of Alan Schwartz over at Googan earlier about this idea of the market also needing
to change itself philosophically. If we are and you going to start looking at the economy and monetary policy in a different.
Way, that is a long discussion, and I quite frankly, I think one of the most interesting discussions we have in the world today. I think we're seeing part of the derivative impact of this AI the technology boom is we're going to see a productivity revolution that nobody's ever seen before. I mean, how many companies, including yesterday are announcing growth, cappec spend And we don't need as many people sward to why I'm not that worked up about inflation over the intermediate term.
Certainly over the near term we've got.
A transmission from a variety of things, fuel being the number one.
But I think productivity and employment are going to change, and.
I worry about and I've not heard anybody give me a good reason why. In the short term, the transition in terms of employment is not a difficult one. The one thing that I think will be different in terms of fed perspective, I think you have to be more prospective about where the puck is going versus where we've been historic and historic analogs don't really work in what is a new era.
I'm curious on that transition in terms of the labor market. Do you think that will be a short transition, because that matters. I mean, if we're talking about a prolonged displacement of folks for years, that's obviously a much bigger issue. But if we're talking about something's a little more truncated, is that something that everyone can live with?
So listen, I think the transition, I think we're talking about it. It's certainly a couple of years. I mean, it's pretty hard to project how the world changes industries that grow relative to this, but for the next couple of years, some big industries I always talk about driving and some others that employ a lot of people. That transition that retraining is going to be, and the size that it's happening and the speed it's happening at We'll
be dislocating certainly for a couple of years. By the way, I would argue, at the same time, we have a debt burden in the country that is compounding higher. So anyways, see, there's some of the things that I think, and I think this thread will do a great job.
So I think the key is going to be are.
They prospective about where we're going and about what the new challenges are versus the analogs from history that aren't as relevant.
Well, we want to also talk about whether or not the market is ready for the idea that maybe we're going to get less communication from the FED. We know that the idea of maybe not having a press conference that every meeting has been floated, and you also have a FED makeup that looks like there's going to be more descents coming forward. I think you think about the last PED meeting for descents. We certainly haven't seen that
for a couple of decades. So I mean, what does that potential adjustment period look like if you are getting less communication from the FED and you are seeing descents on the rise.
The feds objective is to create full employment and price stability. It's not to make sure the markets feel good about what you're doing at every meeting. And I actually think having a lower level of forward guidance, particularly when you're easing, when you're easing to tell the world like we may go twenty five every six weeks, I don't think is actually that robust. If you kept your cards to your vest and said, okay, now I got to shock the
system because I'm trying to execute change. I'm trying to get financial velocity moving. I actually think lower. And you know is do the markets feel like cash is a little bit more uncertain and the increased volve volatility and so maybe at the margin, but as long as you're effective on communication as to the metrics you're looking at, this is what we're pivoting off of. So the markets understand, Okay, I understand what the reaction function is going to be.
I don't think you have to be that explicit. So know, I think I think it's super healthy to pair that back of it.
Yeah, and it'll be interesting to see what that weaning process looks like, but in your view, a healthy one there. I do want to talk about how the shape of the yield curve might change going forward. We were having a great discussion with An Walsh of Guggenheim yesterday and she actually made the case that you could see a flattening come through. You know, the steepener has been breaking hearts for years now, and the logic made sense. If you had to cut cutting cycle come through, that would
lower this short end. Maybe you see the long end rise. But she just saw about the issuance that she's expecting. Maybe you could actually see more of a flattening impulse come through. And I wonder where you land.
You know, let's send them outue, do we run the seat you have go bink? As you know that's been yes, No, you've been very CONDI mentioned and so listen. I'm part of what it's been effective here to fore is to say, gosh, the long end of the yeld curve interesting, I'm getting my long derated assets through equities.
There a lot of people are doing.
That, and my other portfolios are doing a ton of that, and say, gosh, I don't need the thrill of the back end of the curve moving around. Yeah, so I'd rather stay in the front of the belly of the yield curve. So that's part of why you've created this natural steepening tendency because you get enough yield when you.
Diversify in terms of different assets.
I will say, people don't realize that eighty nine percent of the Treasury's debts and the zero to two year part of the curve, we don't actually have that much debt when you take what's net of the Fed's balance sheet. So the reason why people get in the steepener trades, and I actually think fundamentally the curve could steepen. The technicals are actually keep that from happening.
So listen, I.
Think if you said to me, where are we going in six months a year from now. We have to get the mortgage rate down in this country, and do I think the back end can stay contained?
I think so.
My view is like putting on steepeners and flatteners hard to make money on that. To your point, But listen, I think the ten year is going to get down to four percent. Okay, I think it's going to take a little bit of time.
Can I just say, when you're ready to really step out the yield curve and go long duration, will you tell us? Because we've been talking for years and you've been in the belly for a long time.
Yeah, yeah, yeah, so yeah, maybe if we get on and we can talk about on the show. But now I mean we're h and by the way, there's no like everybody says it's this yield that I'll jump in, I actually don't think. I think what will be the catalyzing influence is when you start to see real motivation around the mortgage rate coming down. And by the way, I think there's some fiscal initiatives that can bring rate
down and mortgage rates down. But once you start to see that, then I think it's going to be that it's in place where would start about the Yeld curve. I will say, we run optimizers on our portfolios. These real rates out the curve are pretty attractive. I just think today you've got some inflation coursing its way through the system. You've got it more. You've got an alternative asset i e. Equities.
It's a better long drated asset.
But my sense is that we'll get a chance over the next few months to uh to start to start to go out to curve more aggressively.
All right, well, keep in touch, it's always great to see you. That is Rick Reader. He is chief Investment Officer of Global Fixed Income over at black Rock