BlackRock's Rick Rieder Talks Labor Market

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Rick Reader is black Rocks CIO of Global Fixed Income and it's widely considered to be one of five contenders to replace fetchad Jay Powell. He writes the following, moving interest rates slower is very much in line with what we do know today, which is that the labor market is clearly slowic to the point of potential still speed. Rick joins unaw for more. Rick and Monick, thanks thanks for having me. Good to see my friend. It's been

I do, I don't, and by the way, I don't think it's a sick local phenomenon.

I think there is the way least is.

I think we have a productivity revolution that is pretty extraordinary, and people point to AI as an exclusive driver of that.

Will be the challenge for the next couple of years.

So we mentioned the spread between Ernie's growth fantastic, employment growth terrible. How are we closing that gap?

If ever?

So, I think, by the way, I actually think there's not a coincident. Those aren't coincident factors. What's happening is companies literally the top line revenue was pretty good generally, But what's happening is they're cutting costs of good soul, they're cutting their SGNA costs, they're reducing their cost infrastructure. By the way, AI is a technology, there's historically been this dynamic of when you have new technology, it moves

And I think that is a challenge.

Economy is doing fine, divergent and quite frankly, only operating on a couple of cylinders, huge capex which we talk about from cloud, from infrastructure, from power. And you've got higher income, wealthy savers. They're doing great and supporting consumption in the economy. And then you have the part of the economy that's interest rates sensitive, that's really struggling. And that's part of why I think the interest rate tool

So we've got to talk about this from two perspectives, one as a policy maker, the other as an investor, and one of course informs the other. Let's just sit on policy for a moment. You're talking about maybe the needs cut interest rates, but also the fact that some of the pullback were sent in hiring is not cyclical. How can we address one with lower interest rates? Just explore that for us a little bit.

Yeah, So, first of all, if you came down from Mars and said, okay, so I've got five year inflation break even, so traded in the work at you buys many as you want a two point three five percent and you said okay, now set the price and you said, okay, two point three five percent inflation, and I clearly have a slowing labor market. You would say, gosh, I don't

And they're directly related to what you said.

Housing today it's three quarters of the wealth by people in the countries in housing. We have a housing market that you know, you look at the earnings into your horton, you look at Leonar. By the way, I just saw an ISI home builder survey that showed the softness. If you actually get the mortgage rate down a bit, then what happens is all of a sudden you get housing velocity. Why is housing velocity important because you get labor mobility today you can't move, you lose your.

Job, you got to go somewhere else. You can't move.

Secondly, and I've set up before for every home built in this country, we hire three point one people. It's pretty hard to AI building a house. So if you can get some real estate velocity. And by the way, it's a young people who are struggling today. Young people who aren't savers are borrowers. That's the way they build wealth. That's the way you put people to work. And so I think it is all a related concept. Point baying is.

Right, So, how willing are you to allow or how willing would you be to allow inflation to run above that two percent target in order to run the economy hut to allow for more job creation.

Listen, it's a great question.

And I think every time you think about these things, and I think about the same thing, we take risk. You sort of think about what are the quadrants of risk? What are you willing to underwrite? So today when I think about those quadrants, if you were willing to take some labor and some overall inflation thing, you think about, okay, what are the sticky drivers of inflation today? Healthcare, education, insurance. It's pretty hard using interest rate tool to get insurance

The rental inflation.

So you know, out there on one other thing, five year inflation expectations are two point three five percent if you were at two and three quarters And by the way, core PCEE the six month moving average core PC is two point five. Let's say we're probably closer to three. If you take the whole full construct of inflation. Three is not an infectious you know, you clearly don't see it in terms of where people anticipate inflation.

If you're running four or five, then I'd say, gosh.

Or if the three was trending higher on things that the interest rate tool impacted, then I think you'd have to address that just to sort.

Of build on that this idea that three is okay, but above that maybe not so much. There's a feeler that there is an asymmetry in the timeframe of AI that right now the buildout is going to be inflationary because of the inflationary inputs of commodity costs, of just how much lending and money this is generating on a broad scale. Ill the productivity gains that will cause disinflation will take a lot longer to come into play. So if you were the head of the FED, would you handle that?

So I'd take a bother thning.

So think about historically, the way the interest rate tool worked is it was a modulator of capac So you think about I go back sixties and seventies, the big spenders in manufacturing today. My guess is Open AI and Vidia, Google, et cetera. It's not the interest rate tool that is affecting capax. They are going to put that capex in because there is a long run benefit for doing it, meaning the interest rate tool doesn't really do a lot.

The keypase of the inflation story, Shouter, you touched on it. He said something interesting. Interest rates down, shout costs down. Just explain that for us.

Yeah, so we have an inventory problem in the country. By the way, I mean, look at every piece of data, it shows the same thing. And so, by the way, when the mortgage rate has come down a bit post this recent fed drop in interest rates, all of a sudden you're seeing existing home sales pickup. Saw we just saw the prepayment report for mortgages, and all of a sudden you're seeing some acceleration, meaning you don't have to

Do you think the Fed needs to think how side of the box beyond just interest rates? Is this something else we can do?

Hey?

Yeah, I mean listen, I think there is. I think the FAT has a series of tools. The interest rate tool. By the way, today nobody really borrows off the overnight funding rate. The interest rate tool, it used to be they think about how banks borrow short, they lent long. We had a very different dynamic today, the way we trans the debt in the economy. Think about how we finance RESI, commercial asset backs, credit cards, auto loans, it's tranched.

The front end of the yield curve doesn't really do a lot.

How you think about you know, where is the ten year point how do you think about your balance sheet? How do you think about all the other tools that are at your disposal, I think are really important. Plus you got to think about what is the effect of the currency et cetera relative to that. So anyway, I think the construct is much more complex and much more quite frankly, you have a lot of tools that create

Like the balance sheet? How much would you be open to see the Fed use the balance sheet a little bit more?

So?

I think the construct of the balance sheet is important. So I think people don't realize there's a notional dynamic, and there's a DVO one, there's a duration dynamic.

Further out the yield curve.

I am sympathetic to should we keep the balance sheet around the same level, but you could be really effective. So today the US Treasury eighty nine percent of what the US Treasury finances is at the zero to.

Two year point eight. Think about if you're a company, would you ever finance in the one year? Like it's crazy, but that's where we are today and it is what it is.

So there's not that much float. Actually, longer on the curve. There's reason why people put on steepeners. I think it's squeezed out of steepeners because there's not that much float. You don't have to use that much balance sheet. But if you thought about, gosh, the construct of the balance sheet, if we used more of it further out the curve, we let runoff happen on the front if you can keep.

The stability of the back end.

So if you can keep the ten year, you know, we got to the tenure was three ninety. If the tenure was three and a half to four stable and rate vaul rate volatility came down all of a sudden, you'd see mortgage spreads could come in. Then you'd get and by the way, deregulation the banking system, then you get mortgage velocity moving.

So, by the way, I don't think we're that far away.

And by the way, you know this concept that you know we have to get the rate down hundreds of basis points, I just think we're not that far away. Just get it there, keep volatility of the rate market at a stable level, and then you'll see a system that will operate pretty well.

Rick if Cinelot going back to the late eighties. How much fun you have in right now?

I mean, I mean I said before, there's the best investment environment I've ever seen. I mean not because stocks are going to go straight out.

I mean you have diversions that is great for investing.

You have technology that's changing, and so the ability to look at tech stocks, healthcare tech, to look at you know, where some of the financials, how you create velocity in the system. And then you know the earlier conversation and we were talking about the break like now the income levels. As long as this interest rate stays here, you know what's ironic as commercially, you know, I prefer the interest rate to stay here because it's I mean, this is pretty good.

We can create portfolios.

We run the CTF called Bink, and you know, creating six six in a quarter, we're running almost six thirty. Now you don't have to take a lot of risk, you don't have to go out the yield curve. That's pretty good. So anyway, I think, and by the way, the options market, I think the best opportunities are in the options market. Rate options, equity options, and you could manage your convexi so you can be long equities and then buy a lot of you can overwrite your single name stocks, you.

Can buy downside. It's a it's a fun environment.

Well, leth Lene into Bink. You mentioned the ices, flexpeleective income ETF. What kind of things have you been doing over the past six months.

You know, we've been you know, the cool thing about being active is you can move around because the regime shifts. And while you know, I was describing earlier like where do you think the interest rate should be?

The truth is the interest rates isn't going to move very far.

So you know, we're we're keeping our interest rate duration, you know, in and around four years. We've moved a little bit out of the very front end because it's pricing a lot now where this FED is going to go, then we've done. We've shifted some of our credit into mortgages quite frankly, if you believe rate volatility is going to be down, mortgages has become interesting and credit spreads have gotten pretty tight, particularly US investment grade has gotten pretty tight.

So we've rotated out of that.

We've bought a little bit of em recently, I would say recently, over the last six months, we haven't bought a m in a long time. You know, if you believe the dollar is contained, EM becomes pretty interesting. And the yields, you know, relative to high yield, the yields and EM are attractive. So we've cut a little bit of high yield, We've got a good amount of investment

You said something that was interesting there, which is you don't have to go very far out the risk curve in order to get income. Now, because yields are high, if the FED were to cut rates, does that make you more inclined to take more risk?

Yeah?

I mean I have to say, you know, for two decades part of why I'm so excited about where we are today. For two decades it was I gotta buy how I yield at three and a half and four and it doesn't feel natural. But now if you have the risk free rate, particularly in the front end here, gosh, I put a little bit of spread on it.

Now I get what is ample yield.

With default rates that are not that elevated, you are seeing some bubbling defaults in a couple of places. So you know, I think the thing that we would do is, you know, I know what we would do is if rates come down. You know, I'm not a believer, and this is what blows you up. I'm not a Believer's gosh, I got I gotta keep that yield. I gotta get my risk up. You just have to absorb it and say, you know what, I'm going to run. I can't run six twenty five or so. I'm going to run five

That's an you know, inflation. Even if inflation's three like, it's still pretty great.

Very few people on Wall Street door are saying, you know what, I can just live with less income.

It's okay, I won't stretch too far.

I'll be disciplined, and maybe I'll just take less cash and I'll commit to the economy. At what point can you imagine that things start to get a bit excessive, especially given the fact that there is a lot of cash right now looking for a home.

So by the way. It's a funny thing is you say that. You know, we live in a competitive environment. We can't just sit back. I mean, it is a tough business and we have competitors and people are out there say gosh, I can get you more yield, and listen.

I think one of the things you have.

To do is you have to keep your volatility as long as you always think about what's your yield per unit of volatility? Today equities, I think equities are still going up fifteen to twenty percent from where they are over the next year. So I'm just trying to keep our volatility at a reasonable place. What is excessive? You know, there's some things that are bubbling in the markets that are mostly in privates that are gosh, I don't get any cash.

Flow for two or three years. What's the multiple you put on that? Like?

That stuff is hard. There are some really good business models. You say, I see it and it's almost definitional.

You know.

You see some parts of it where people are stretched and in some of the credit markets where some of the levels get aggressive.

Part of why we've rotated some of the investment preate. It doesn't do that much for us anymore. At those spread levels.

But I don't, you know, I don't see like you you saw before the financial crisis, excessive low you know, low covenant or easy covenants, high LTV financing.

I don't.

I don't see that yet today at the around the edges a little bit, but not not really.

Fifteen to twenty percent on stocks, yeah, now the double digit yeah.

You know, I don't. I think.

I mean, I think we're living through history because if we're what you asked about before, because productivity and ROE is so spectacular. And by the way, I don't think it's five hundred stocks. I think it's by the way, we were a stat yesterday, if you take the S and P fifteen hundred, it's is this right that I heard? It was twenty two percent off the highs. I thought that number of rust constrat to work with Dogeleman. I

They're doing really well.

They throw off a lot of armings, their ROE is high, and they buy back huge amounts of stock. You know, small cap don't really know, but there's enough with enough market cap that I think will get you that sort of return.

Stay with market Wait on the s and P five hundred, where's the concentration?

I mean we're long, I mean we're you know, we're you know, we've reduced a little bit of beta. When when equity volatility picks up, I have to bring my beta down a little bit.

But I'm still running long.

And you know, days like yesterday, you know, and uh, you know, single name, you know.

We get these earnings reports and single name vault.

Is high because you know, if company does own hit these excessive numbers, they hit the stock. So you can still do some things to protect some downside. And by the way, interest rates, if you believe the Fed is moving, albeit deliberately, interest rates actually act as a reasonable hedge.

Again, so there's some correlation or rate that's allowed us to run a moderate long rick. It's going to see it. Thanks for having me banks so long.

We appreciate it. Set and best of luck with the process. I've done you a long time. Blackrock wins either way, thank you. So the country wins either way, thank you, sir. Black Cross rick rata