Rick Rieder on Fixed Income Investments

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I can keep babbling about how fascinating I found this discussion, but instead I will say, with no further ado, my conversation with Black Rocks Rick Reader, you have a fascinating background, and let's go all the way back to the beginning. You graduate Emory University with a degree in finance, you get an MBA from Wharton. Was fixed income always in the cards? I think it was ever in the cards? Actually? Yeah,

So when I graduated Wharton. You know, I wasn't one of those people who had you know, my family was in Wall was on Wall Street, and I didn't really know what direction I was going in. And actually I was going to go and do something different. In fact, I was going to be a strategist financial analyst, to work for a bank and write research reports. And I was somebody convinced me to go into sales and trading,

and I decided to do that. And I loved you know, they talked to me about I love sports, and you know, I love Mark Gets and anyway, I got into fixed income and I and I really liked the macro element to it. I really liked you know, how you think about big picture. And you know, one thing led to another.

There was a job opening, and uh, like I said, I graduated, went to EF Hutton and nobody remembers anymore, which because were the greatest commercials of all time and people, yes, people are still remember them, and and then which was absorbed into Lehman, and I got lucky to go there and got a job in fixed income and and then the ball started rolling. But I probably two years prior to that or three years, probably didn't even know what fixed income was. So you spend what seven to oh

eight at Lehman Brothers. That has to be one of the most exciting two decades at a specific place and a specific time anywhere on Wall Street. Tell us a little bit about that history. So, first of all, when I started, I mean I started this, it was the July market crashes. Nothing was going on that. Yeah, so market crashes, and then you know, we don't think that, you know, it doesn't look like if Hutton is gonna make it, potentially he's going to go out of business.

They get absorbed. Lehman buys them as acquisition. It was so a Lehman paid a billion dollars free f Utton and m and they took I was very lucky. There were thirty five of us in the training program and it looked like we all were gonna get fired, and they took two of us. And I'm not sure how I made it through the strainer, but I um, I found somebody who I really liked on the mortgage department and the mortgage agency mortgage business and took a liking

to me, and they went into the training program. And then you know, and then by the way it wasn't like the crises ended between and the recession on the SNL dynamics and then and and you know, all had a different stream to two thousand and two. By the way, team like every four years there was um and then

you know, punctuating with obviously two thousand and eight. But boy, I mean I went through and I think I still have the scar tissue to this day of you know, all of these And by the way, I think it's an interesting cyclicality to markets that every four years you need to recalibrate. You know, people are comfortable, leverage builds and then and then and then all of a sudden,

sometimes violently, it recalibrates. But I'll tell you, you know, going through it again in twenty two, you know, you just know that the next couple of years are going to be pretty good because you just reprice things again. But I'll tell you, going through those years, I'd love to skip those in my career. Mark your calendars. And also maybe we should rename hundred year floods because every time someone goes on this is a hundred year flood

until four years or years. By the way, it's interesting that O two. You know why I didn't happen to know six, and so you think about what happened, Well, monetary policies stayed too easy. While I thought Jaron Greensman was incredible, you know, he kept policy too easy. Remember the housing market was starting a bubble. They should have started tightening and oh six, and we should have had the recalibration of six, and the fact that it didn't

probably created more pressure two years. Hence for sure that we can spend a lot of time talking about seven. Oh wait, we'll get to that later. So what departments did you work in at Lehman Brothers. You were there long enough. Eventually when you leave there, you're running the firm's global principal strategies team. So clearly that was quite a successful career path. Tell us about the different departments

you are. So, I mean I started and while I was going to go into mortgages, and that was where I was taken out of the place from the training program. I went into a six month training program and Lehman and I found um the corporate bond business to be incredibly interesting and uh and I got to meet two people and you know how you learn in life that it's and I've learned over the years. It's all about the people and and gosh, I found two people who

were extraordinarily uh. I mean, I thought smart, capable. I love their business. And so I started in corporate bonds, and then UM, I started trading international Yankee bonds, so foreign bonds denominating dollars. Did that for a while. Then I did crossover between investment grade and high yield, and then I ran UM. Then I round the corporate bond trading desk, and then uh did that for a while,

I run right. Then I ran our credit business across emerging markets, money markets, UM, loans prefers, and then uh, and then I went to the principal strategies area before before I left in MAYO eight and uh, yeah, you hit the bid. Yes, everything blew up, yeah, which you know, yeah, which seemed depression, but it actually wasn't. Yeah, it was definitely dumb luck. And in fact it wasn't even luck because I left in O eight and I started my

hedge fund. And if somebody said what would be the worst month in history to start a credit hedge fund, May of oh eight may have been the one, or certainly closer. You know, part of why you know, I laughed. I brought my team with me. You know, this was an exciting point in time. The markets were bubbling and there and there were gonna be some opportunities and then

it would turned out to be calamitous. And um I saw by the part of part of what we merged into black Rock in Mayo nine was we did you know we had a tough go in O eight but then started to do well in oh nine, But we have an opportunity to move to black Rock. You mentioned, um luck, you very easily could have ended up in the NBS mortgage department at Lehman you were, you had half a foot there. How did you escape a fate worse than that? Well, I mean it was I mean,

you think about that, that that was eighty seven. It probably you know, it probably was a good twenty year runway after that. But I jokingly said, you could set the record on the on the racetrack, but if you don't make the turn at the end, if you hit the wall, it doesn't that is right. But I don't I found you know, I was a financial analyst and I was literally per you know where we talked about I was going to go and do that again. I loved looking

at companies, both my parents who entrepreneurs. I loved how business has worked and to think in in you know, for some reason, naturally in school, I had a really tough go early in my school career because I didn't really I didn't understand philosophy or psychology. But business always made a lot of sense to me. And looking at companies, analyzing them, figuring out how they drive cash flow and the amount or liquidity was I mean, I found it

phenomenally exciting. So anyway, so I did it. I did it for for a long time, and you know I still do this day, you know, being a being in credit, I think people underestimate like I don't. I don't really think top down analysis works. Like trying to analyze the

economy from the top. I think it's too hard to do being understanding how companies drive inventory, hiring, capex, spend, and to this day, you know, when I have a view on the economy or usually a view on the economy or inflation, it's usually driven because I read so many corporate earnings reports and understand trying to understand why

they why they're cutting inventory, why are they laying off people? Anyway, So it's been Having a credit corporate background has been hugely powerful because I tend every analysis we do big picture starts, bottoms up and uh, and that's what informs I find that's the most effective way to inform your views. Is that how you ran our three? Was? That? Was that? Yeah? So the idea of being, you know that we could analyze um dissect companies anywhere from senior securities secured down

to down a distress. And we had we had a great team many many of which are still with me today that I'm super honored by. I have a lot of us who worked together for twenty thirty years, a couple of over thirty years. But the idea being, you know, we were good at analyzing companies and could do it across cap stock, different sectors, it's and globally and we

have a great team in Asia and Europe. So yeah, I mean that was the idea and uh and I say that's port of White's translated to a number of people coming to black Rock and uh and being with me today. So let's talk a little bit about black Rock. You said black Rock absorbed our three. Tell us a little bit about how did that come about? Was that something you were planning on doing, or the right opportunity just came along and you said, I think I can

hang with you, fellas so um so. I had known Larry Fink and Robed Computer, our CEO and president for a number of years. In fact, the only other place that I almost u most left Leman to go work for was black Rock, and because I had such great respect for the people running it, and there were actually more people than that, but but Larry and the and

Rob being the the main drivers of the company. And then uh, you know, after you know, I would say the fall of oh nine, you know, going through that darress around around Hedge, fond of being in uh you know, it was a tough spot around the markets, coming under pressure. You know. We started talking and we were back and forth having a conversation about coming to black Rock, and and I remember Rob and Larry saying, we've been talking

about for years, why don't you do it now? And I had a big team with me and and whatever reason, I having worked at places for a long time, very loyal, and I said, but I gotta bring my whole team, and uh away I get. I was a massive honor they you know, took forty two people and um, you know, like I say, many of whom are are still with

us today. So yeah, the fact they were willing to do that, and quite frankly, even at the time before black Rock was this big, I felt like it was much the episode or a finance and I thought I wouldn't have gone to and you know, our hedgephone started to do well again, and I wouldn't have done it anywhere else because I thought this was a place that, like, how could you turn down the ability to be at a place that was if you liked finance and you liked what we did, this was a chance to work

somewhere that was you know, the epicenter is before it got to be the size and scale it did. So you've been at black Rock for well over a decade um you're running fixed income for them, Essentially, tell us about what the process was from bringing over a team from your hedge fund to Okay, now we're just gonna talk into black Rock and see what we can do here. Yeah.

So I mean the idea coming over is we're gonna we're gonna work operate our hedgephone and work and work within the credit business at black Rock and somebody ended up leaving the firm. Who was the who was the c i O. And UH anyway opened up opened up a spot for me, and you know, I was huge on it to be chosen to do it. So that was that twelve thirteen years ago, and uh, which was mine ten. So you're there for six months and Larry says, hey, I think it was. It must have been. It's been

August of thinking through it, August at ten. And I know it was a little bit of trepidation I was at the time. It was still a big place, and it was a little bit of trepidation. But it's been incredibly exciting, and like I said, I have so many of the team had come with me, and I got to know some really great people across the organization. So

you know, I was honored to do it. And you know, I've always been investing in different parts of fixed income, and the heritage of Black Rock was in the mortgage business, but I was my background was in credit, but we had so many talented people in mortgages and that obviously a huge part of the fixed income market that I felt like that team, you know, could take my shallow

knowledge to the hopefully to the next level. And um, so then I became I became c I O then and uh yeah, I guess I've been doing it for over a decade now. It was pretty unbelievable. So let's go over all your titles. Your Chief and Stment Officer, you run global fixed Income, your head of the Global Allocation Investment team. Um, you're also on one of the executive management teams and some sudden they on the Global

Executive Committee. Alright, so it sounds like you have a busy, uh busy day, Like how do you spend your time? What takes up the most hours during the day? And is it I know a lot of these things meet once a week or months once a month. It's not like they're eighty hour week jobs. But it sounds like a lot's on your plate. We haven't even talked about the various funds you run. So I mean, I got up at three forty five in the morning, Is that true? Yeah?

I thought I was earlier. You know, I think you know, people always set of young people are coming to the business. You know, why are you coming in a finance You gotta really love it, And you know, I love the business and I love. You know, it's dynamic. So I get up at three forty five. Uh, you work out and but but I literally the first thing I do is I check every market around the world and see where things are. And you know, I pretty much go

you know, whether it's dinners or what have you. I'm I go to uh, you know, pretty late in the evening. But I'm I'm pretty turned on by the markets. And you know, obviously, our business so in depends on the meeting you're in. Obviously, people drive what we do. I mean it's not we're not running an industrial company. I mean it's people drive what we do. So a lot of those meetings are talking to people, you know, strategy meetings, who are we hiring, what businesses do we need to grow?

You know, where what do you think the next opportunity is? And markets. Much of how Black Rock evolved is, you know, trying to be pressent about what is the next evolution of what clients are looking for. So a lot of those meetings are about, you know, trying to anticipate where things going. I mean, I have to say the first thing.

Then maybe I wasn't very good at it earlier in my career, but you start to think about, particularly on the asset management side, like you know, you gotta you know, take in what you're getting today, but you've gotta have one eye on where we're going. And I think in all those meetings, just trying to think through get in front of where we're going, whether that's markets, positioning, our

business people, strategies, etcetera. So you've been with black Rock since the financial crisis back in oh nine, did you ever stop and think, oh, yeah, in a decade or so, will be eight nine, ten trillion dollars. Was that ever in the realm of possibilities? No. I mean at the time, I remember when I came over, and then soon there after the firm bought b G I and the I shares business. But gosh, the the thought that you know, grow into the scale that we've grown and grown into

never would have even been a consideration. You know. I will say, you know, Larry and and Rob and the whole operating committee and the executive committee, the firm are very thoughtful about where opportunities are and they've they've built the business piece by piece over the years, you know, And I think there's something that's really important about you know, we run our franchise around a what is the client

look more of be the risk systems. So the Laddin risk system is when I remember when I which is unique and specific to black Rock and not an off the shelf piece of software totally, which is run by many insurance going engine funds who use the Laddin and it's a it's a commercial enterprise for the firm. But I remember when I came to black Rock and I got to you, and I knew about a Laddin when I was when a Krafrankla was on the sell side and because remember the Lehman had the Lehman Act and

that was the benchmark. But but but what happened. A Laddin was able to take it and bring it alive in terms of how do you manage money? And you know, it's really been extraordinary around if you if you can analyze your risk and you think about optimizing your return, you could build you know, how do you look at correlations diversification? And I remember I was like a kid in a candic store when I first started, and I said, wow,

this isn't this is powerful? I mean if and I said, it's the clients all the time, we could make you know, the wrong decision on markets, But it's never that we don't know what we own or what that decision, the implications of that decision given our risk system, and that's been a unique benefit to the firm, and I think that's part of how we've grown so much. Is gosh, if if you can make good you know, hopefully more good calls than not, but you know exactly how they're

going to interplay within a portfolio, hugely powerful. So no one bats a thousand. But what you're saying is the process and managing the information flow is every bit as important as the decision process itself a d I mean a hundred percent. And you know, when clients invests with you or rating agencies or consultants evaluate your business, it's all about what is your process? Is it repeatable and you're not gonna embarrass them or cost them or coross

the money. And you know, we built the franchise around thoughtful investing. You know we're you know, we don't swing for the fences on one uh investment theme. It's always try and build diversification, try and do it thoughtfully, and try and be consistent return without creating real pressure on the downside, and I you know, I think that's particularly fixed income. You know, it's not the equity market. And I run you know, some big equity portfolios. You know

different fixed income is convex to the downside. You either get part and either pay you back or they don't return of capital. And so along the way, are you clipping enough coupon to get their equities? You're trying to get convexity to the upside. But to have have risk system and a process, a repeatable process, you know, particularly my business, I don't fixed income. I say it in my funds, a lot of my funds. It's make a

little bit of money a lot of times. And as opposed to let's swing for the fences, let's just do it, use relative value, use all your tools, use your tools around the world, do it over and over and over again. And I think that that models repeatable and and uh, you know, people aren't shocked to the downside, which I think, particularly fixed income is the key. So let's talk a

little bit about that. I think most public investors know about Black Rock from an equity perspective, but the company's history is deeply rooted and fixed docom didn't it start as a bomb shop catering to pension funds and foundations. Isn't that the genesis it is? I mean it started as largely mortgages, fixed income bond shop and uh, you know,

created closed end funds. And by it's very much, I mean Larry and Rob and the and the management seems origin was in fixed income and I'm sorry Larry and Rob, Larry Fink and Rob Compito. It's our CEO and president

and there. But then over the years, you know, through an acquisition and their merger with Meryll Lynch Investment Management, all of a sudden became a big equity house and to this stay where equities are bigger than the than fixed income today and uh, and some of that is is equities appreciate over over time and the end compounded return works in the in the equity market. But now you know, our equity business is UM is larger than our fixed income while both are are pretty good scale.

I mean, in fact, one of the business I run our Global Allocation fund that is more of an equity fund UM. You know, again with a with a bit of different the way you run that different than you run a bond fund. So academically we know that the passive side of equities over long periods of time tends to be a lot of people's best bet, but that

isn't true. And fixed income there is alpha, There is above benchmark returns to be generated by active selection of credit quality, duration and specific bonds tell us a little bit about how you approach fixed income investing and given the massive scale of black rock, how do you take advantage of that? So not many people know that that most firms actually outperform in fixed income, and really that's

not widely known. No, I don't think so. And but it's because the passive equity side, there's just so much academic literature, and as soon as you dip your toe into the research on fixed income side, because if you think about a fixed income passive index, you own everything, and a lot of it is not necessarily great. So getting rid of the junk, focusing on duration and credit quality right away, you're ahead of the game. Well that's my pitch. So yeah, it's yeah, I know it's so.

First of all, that is exactly right. I mean, I'll start with thing and equities. There are I think the number is in the hundred equities different different securities globally, I think there's forty five thousand in fixed income. So your point about the ability to write and the ability to say, gosh, you know, there's a lot of stuff in fixed income that for a variety of reasons, central bank owns it, a pension fund owns it, insurance companies

own it. It has no value and but it's you know, it's been in a in a portfolio for a long time. It's stuck there. So so one of the beauties of fixed income is a finding one of the forty x thousand securities using your tools, by the way, times using your liquidity, being able to buy mes, you know, being you know, buying subordinated debt, buying uh, you know what are functionally capital notes. But there are so many tools

at your disposal. And let alone how much duration you're taking, how much interest, how much, how much credit rate you're taking, illiquidity, etcetera. There are so many tools to try and outperform and listen. One of the one of the secrets of fixed income is you generally try and area more than the index. You generally want your income in a fund to be

above the index. Can you manage that through downturns and so when you get a downturn like twenty two or oh eight or what have you, it is you know, can you manage the downside because it's it's generally if you can get more yield than the benchmark, you're gonna

outperform over time. And so managing that risk and making sure by the way, you know, they're they're crises and individual companies there is exhaugen, a shock that hits, but managing that downside so that one expression doesn't hurt you. You know, you can run a good a good business that outperforms um, you know, almost every year. So let's delve into that a little more deeply. It can't be just as simple as let me buy the highest yielding stuff, because there's a lot of They used to call them

junk bonds, now we call them high yield bonds. How do you decide what is a high quality high yield and how do you make the decision I'm not comfortable with this credit risk rail lative to the return it's gonna throw off. What's that process like? You know, it's funny because today is an interesting you don't see this very often, but much of the double B high yield market is better quality the triple B investment grade market, and that is because companies have been operating as double

bees for a long time. A number of them are moving up to investment grade or are inspired to move up to investment grade. Where a number of companies and triple B that are at the lowest end of investment grade and maybe on the deceleration. So that's an odd institutional corek tour that higher quality, higher yieldings stuff has a lower rating. That's at the end of the day, there's so many metrics. You know, debt de but your interest coverage, there's so many metrics that we dig in.

What industry you're in, what's your liquidity, You've got to really dig in. I mean, if you're a double A rated company, I generally don't do a lot of you know, thorough analysis. But if it's single B, I'm doing we're

doing an awful lot of work. So you know, when we look across fixed income and you know, beauty of having big teams around the world, you know, I tend to say, okay, I want be an X amount mortgages on a the X amount credit and then let the teams dig in and then you know, think about I'll give a good example. Today the high yield market has because people need the yield, are looking for the yield. The high yield market is compressed to the investment grade market.

I don't want to take the beta risk in a lot of high yield today. If I get functionallycent return investment grade, I can sleep a whole lot better at night. And then maybe I take some risk in emerging market. So what have you? So it's all about relative value. Are you getting paid for the risk today? So think about you know, where's a stress and fix in commercial real estate is tricky today? Do I want to go

and get that yield today? Probably not? You know, whereas you know, parts of credit card um auto finance are more attractive. So it is constantly trying to think about where do you want to be in the capital stack, Where do you want to be in sector? Where you wanna be in the world, Like last year, did you want to hang out in Europe? Probably not this year. You know, fuel prices are lower, the economy stabilizing, China's growing,

you know, we're liifting money internationally. So every year, it's part of why the business so fun is every year, every month, every week, you know, the menu changes and the opportunity set changes. We'll talk a little bit about the inverted yield curve later, but since you mentioned getting return on the risk you take, how do you think about duration when the three month treasury is more or less the same or better than the tenure. So you know,

think about last year. I mean I know, every every media event or any any thing we did externally, I talked about how much and it was always people said, how much cash you running? And we're running a lot of cash in my career on meaning non investment but literally keeping a point oh five. Well, but as as a year ago, right, as right. But then you know, the front of the yeel curve started to move up, and it became pretty clear all the central banks in

the developed markets were behind the curve. They're gonna have to start raising Your pricer term is going to be negative. Stay as short as possible, hold as much cash as possible. And by the way, zero was a pretty good answer for your for your return in twenty two. So if we were getting zero or care or getting our income at the short end of the Yelk curve, that was

nirvana because we weren't taking such interest rate risk. Today it's a little bit different because now we're approaching the end of by the way, it's not definitive, but we're probably approaching a point where that's central, where the Fed's gonna pause. Europe still got a bit more to go. Um, So now we can take a little bit more risk, you know, push it a bit further out the yel curve, because now our aspiration is, gosh, these yields they think about.

You know, today the one to three year part of the act, the short end of the yield curve gets you four and a half percent. The average for the last ten years was one, and that was one point four. We're getting we can allow lock in four and a half and maybe the economy is coming off the central bank not in twenty three, but we'll start to ease.

And now there's a discussion about, gosh, maybe I can lock these yields in for longer, and so maybe I'll take a little bit of downside and push my maturities a bit further on the yolker. We've been out from one to three. You don't mean ten, you mean so three, four, five? Correct? I mean, that's that's been to me that's the sweet spot and the biggest I think the biggest opportunity today is sell interest rate volatility. You think about in my career,

I've never seen this before. We had a FED that moved four seventy five basis point moves in a row. Interest rate volatility. You had to go back to Vulka to see that, right, Yes, but but I was still in college, so I wasn't. But but now, I mean this massive move and now what's gonna happen is we're gonna pause. Interest rate volatili can come down things like mortgages, Like we didn't own many mortgages last year. Is in our tactical portfolios? You know, why would you own negative

interest rate shock, negative conduction? So now FED coming into a pause, interest rate volatility comes down things like agency mortgages fit a portfolio that gets you a little bit longer on the yield curve. So let's think about that that we spiked up to about seven percent, it's pulled back to about us and a half more or less. Mortgage are the expectations that, hey, that's when mortgage rates are going to be for a long time. So mbs

are starting to get attractive. Yeah, I mean, now you can buy assets that are like mortgages, but first of all, they're extremely liquid, and so whenever we build a portfolio, we think about every security has a tail to it, So you think about what what is it doing for you? How much yield is it getting you, how much risk, how much beta, how much illiquidity, And so you try and take all those tails and say, okay, which ones why am I willing to take? And which ones do

I want to extract? Mortgages today last year, I don't want to take that interest rate volatility. Now, boy, if I think rate volatility can come down, I'll take some mortgage risk. Their super liquid um. They fit the portfolio nicely because you know, having such liquidity through those assets. Now I can buy a little bit of emerging markets which are less liquid and more vulatable, but you also get me more yield. So it's very very different portfolio

positioning today than than quite frankly three months ago. Before we eve the subject of black Rock, I feel like we have to talk about the funds you manage on their behalf, many of which have been awarded morning Star Gold Medals, as well as you've received a number of recognitions about your funds. Let's talk a little bit about strategic income Global opportunity total return and strategic global Opportunity totally return. I'm messing up those names. Tell us about

your funds. Yeah, I mean, you know about honored to run some some pretty great funds in our strategic income opportunities is a flexible unconstrained funds, so unconstrained. You know, when you think about fixing them, when you say they're unconstrained, it sounds like you're hanging from the chandeliers. Taken risk, unconstrained, unconstrained. This means I can take less risk because you know the point you made earlier about gosh, I don't have to be tethered to an index on what you want.

I can hedge. I can hedge my portfolio freely. Like last year. You can use the dollar, I can use I can get short in in some areas. So unconstrained. What we're trying to do is create insistent return over time and so regardless of of the exterior market. Yeah we did. We didn't make money last year. We were down, but we beat the aggregate index I think seven under a fifty basis points. You know, years like that, if

you recognize the regime and you lose less. What was the act down last year, Yeah, that's the worst year in forty years. Yeah, And so you know, being able to recognize that use some hedges run a lot of cash um and then you know, stay in the short end of the yield curve. And then today it's a little different. So the ability to be flexible and tactical

is unbelievable in fixing them. And I think much of the future fixed income is can you marry to you know, think about the growth of ice shares and passive can you marry an opportunistic tactical portfolio? By the way, lets us invest around the world when things like emerging markets become a truck. So anyway, s i AL has grown quite a bit over the years, and uh, you know, it's been honored to to uh have a number of awards to it. But I think it's just creating consistent return.

So quite frankly, people can get yield and then focus on the other areas where to take risk, equities, etcetera private equity venture. You know, our Global Allocation Fund is more of an unconstrained but more with an equity tilt and that's been super fun to run that. That's a blended portfolio stocks and yeah. So so traditionally would be sixty forty equity debt, but with an eye towards you

can be international, you can be domestic. Last few years we've run global allocation much more with the U S bend. You think about the incredible growth of US technology that was something to to ride for a while. Now we're shifting at more international places like China, Europe, etcetera, that are really growing and that valuations are cheaper. So that the thing about that fund a we could toggle from equity to debt. We could use a little bit of

illiquidity around some privates. You know, now we're doing something in global alm that it's hard to do in other funds. Building up our carrying income. You can use that use fixed income to get their use quality assets, but then take some risk in in equities to try and beat the index in UM in a fur globolication. And then you know the other funds on to take too long

on them. But total return gives you more of You know that if you were building a sixty forty portfolio, they should get you the forty and get you the the fixed income. You know, try and outperform the egg every year, but closer to the egg. And then our strategic global fund allows us to use the international markets more aggressively. Last black Rock question before I jump to uh talking about interest rates and the FED and the economy. At Rick reader on Twitter, you have your own Twitter feed.

That is really unusual for a person with your role in a firm as large and buttoned down as black Rock. Tell us a little bit about what you do on Twitter and how is it getting that through legal and compliance? So well, first of all, anything I tweetd goes through legal and compliance before it gets out there. The first part. Second part, So I use an incredible amount. I do these monthly calls, I do these write ups. I use

immense amount of data and analysis. And you know, when I do my monthly calls, I literally locked myself literally in a room for for one weekend a month, and it's brutal putting those together. I do a quarterly and it's just a solid fifty hours of work to get But you know, I've learned in my career that you've got to take a step back and think about, you know, instead of following dollar yen. Every second you gotta think about why is dollar yen doing it's doing, try and

assimilate it all into a cogent set of thoughts. So I need a weekend to do it. My wife hates it, but the it's not the most socially ingratiating weekend of my of my life. But I have to do it, and and I go through and I put it all together. I use immense amounts of data and analysis, stare at graphs, tables, and then all of a sudden you get these aha moments. Literally, you know, I could sit there for six hours, like

now I get it. Now, I get why high yield trades here in Europe and it doesn't in the U S and what what cross currency basis, et cetera. Takes a while to assimilate it all. The reason why Twitter, and maybe I'm not the perfect specimen for for Twitter is you know, my tweets tend to be have five or six a long thread to them with graphs, and it's not a perfect you know in the world that

wants now, they're very useful. It's it's a rare insight to somebody in your role as to what you're thinking, um strong recommend Rick Reader at Rick Reader on Twitter if you're interested in fixed income and want to get a sense of a person's Even though it goes through compliance, it all looks like real time. It doesn't look like it's been massage to death by legal you've said, in fact, some of my questions will come up with a pretty blunts and they're just your tweets asking you what you

were thinking. So I find that fascinating that you're able to Was there any pushback when you first said, Hey, I want to go on Twitter and do this? So my biggest reservation is, you know, I think the world. You know, it's pretty hard to think about. You know, what are you doing with duration? Oh, here's a hundred and forty character whatever, the number of characters right to eighty. Now so now, so how do you do that effectively?

And I've never been able to do it effectively. I always want to here's my hypothesis, here's my ultimate thesis around what we're doing with it. But you can do it if as long as you can get a few thoughts out there and then maybe people look deeper into what you're thinking, it can be a really effective mechanism to here's my conclusion. And it's different because usually you build up the conclusion there. I tend to find here's my conclusion, and maybe I can give you a couple

of snippets to how to do it. But it's a super effective mechanism to get out there. And um so I read a lot on Twitter. I find it's because, like you say, it's instantaneous opinion and the new tape, I think so so I spent a lot of time, so it's been effective to be out there with it. So let's talk a little bit about where we are today. I mentioned previously Vulcar taking rates up in two from two, we've pretty much enjoyed a spectacular forty year bullmarket in bonds.

Is that bullmarket over so? I mean, it certainly didn't work last year? The uh so, I think, you know, I think we are. I mean I was looking at it that how the rates market, the Fed funds rate looks like a mountain range over time, you know, it spikes higher and then it comes to come down the other side. Economy slows, then you come down the other side, and then a couple of years goes by you start to move up again. And then you come down the other side. I don't think we're coming down the other

side today. Of so, I don't think usually when rates move up this much, economy slows and we're coming I think this is gonna be We're gonna stay on the top of the mountain range for a while. And I think the FED is going to let this this restricted policy percolate through the system. And I think people underestimate US economy is the most adaptive, reflective, and it will adjust and you're seeing it in the interest rate parts

of the economy like housing, like automobiles, etcetera. So listen, I think I think, you know, I think we're gonna see a rally in in in interest rates probably in two thousand and twenty four and twenty five, because I think ray will go back, the tenure treasure will go back to two and a half percent. Yeah. And I because you think about what is potential growth in the US and in the world. Growth follows the demographic curve incredibly closely, and you think about the world we live

in that's different than the eighties. You know, when you had explosive baby boomer, you know that was starting to enter the workforce, et cetera following now and by the way, COVID accelerated this. You've had a fertility issue, and you think about Japan, China going through a demographic difficult period. US is a slower period then, So what happens is growth follows a demographic curve? Does it come off it when you have a shock, a pandemic of financial crisis,

huge stimulus goes in. I think we're going back to a low two's percent tenure because I think GDP will operate at you know, one and a half to two, by the way, lower in Europe, lower in Japan than that. So I think rates are going back, so as the bull market in bonds as a secular move from the eighties and nine over. But I think if you said to me, part of why you've seen this huge move of people, I want to lock these rates in four and a half is nirvana, you know, if you don't

have to take a lot of interest rate this. If I can get five and get six we talked about, you know, my strategic income fund. I'm trying to keep a steady six in that portfolio. Boy, if I can get six and we're going to two two and a half, you know that's what we're playing for this year. Just sort of ride a central bank that is gonna pause. And by the way, I may still move right up a little bit more than we are today, but can you ride through it with um, you know, it's not

gonna be like last year. So it's a good market for fixed income and then I think it'll get to a better market. So let's talk about something you actually tweeted. Quote how far the Fed goes, how willing the f O m C is to overshoot to ensure inflation comes markedly lower will determine how uneven, how unpredictable this deflation of inflation will be in the months ahead. That's a fabulous tweet. Tell us what you're thinking. They're translate for

the average listeners. I agree with that, guys, so the so I'm not sure that but anyway, So the one thing that I think is real, the U S economy is very different than it was in the eighties nineties. We are now two thirds of the economy consumption is a service economy. We never had that. It used to be a goods oriented economy. When you moved interest rates, the economy recalibrated quickly because the goods oriented economy, interest sensitive,

cyclically oriented. Think about healthcare, you know, think about the jobs market today. All the jobs are being created healthcare, education, not hugely cyclical, not interest rates sensitive, um. And then obviously leisure, hospitality, where there is some cyclicality to it. But my view is the FED has gotten to a

level that is restrictive. And now the question is, when you have an economy like this, do you bludge in the interest rate sensitive parts of the economy real estate, the automobile market, um, but parts of how you finance big durable goods do you bludge in that to try and help the overall bring inflation down? My senses, the fed's gone far enough, doesn't need to overtighten, and if it does, it will create exogenous shock. You know, the leverage in the system builds. You know, you see it

in places, particularly real estate today. You know, the Feds gotta be careful about no, not going too far. And and you know the one thing that I'm really really sensitive to. You know, there's something really powerful. It's happened. All the jobs being created today are the lower wage jobs in this country, all of the ones you talk about healthcare, education, leisure, hospitality, hotel, etcetera. Now you're closing the income gap. It took twenty years to close the

income gap. You know, you're getting capital going to labor that is hugely powerful. The layoffs are happening a finance technology, the higher income jobs, and they're just unwinding some overhiring over the past. So think about what you know. The reason why I think the FED should pause is let

this play out. You know, if net disposable income for lower income, lower wage earners stays higher in kind of with a with a consumption basket is food, energy, rent, it's not a bad thing that that inflation is a bit higher as long as wages for lower income or higher.

So I think the system is recalibrating. Economy is recalibrating, It will recalibrate, and I don't think the FED should overdo it, you know, to take two to three million people out of work or more or more than that, you know, and particularly those will be lower wage jobs. To take that, I don't think it makes any sense. I could not possibly agree with you more. And I have to bring up what you just said about the

United States being a services based economy. A large part of the reason we had this inflation spike was we shifted to goods during the lockdown. Now that's over and we're going back. Shouldn't this unwine happen naturally? Why does the Fed seem to be at risk at least according to the bond market of overtightening, they were late to recognize inflation? Are they late to recognize that inflation peaks

six months ago? So? I think to one I might I think the one mistake that the Fed mate is that, like you said, they were too late, and I think they could have been the historically. Isn't that true? Yeah? But I think the reason why they were too late is because you have, I mean thinking about vaccine happened and all of a sudden you change the economic paradigm so darned fast and that and and you know, one of the things that's hugely important for the FED is credibility.

They laid out a path that they were going to keep interest rates low and QUI in place for an extended period of time, and then it was hard to change it. Anyway it was. It was it was an argument for maybe they should stop playing with their cards on the table, so or am I it's funny to say that, because listen, I think we've gotten the place

where there's they're actually too much communication. Like right now you have the SEP, the dots, now you now you have the press conferences, now you have one of the real tools of monetary policy is to be able to react and be adaptive to the economy as as it is. So listen, I don't think they I don't think they should overtighten be I think when they get to this place or where they are today, I don't think they have to communicate every single step of the way. They've

done a good job of transparent CRNCY. But now I think you want to keep your tools of you know, I can, I can surprise if I need to. Yeah, And by the by the way, surprise is you know, if you're trying to shock an economy, you drop interest rates really quickly. But if you don't have the art of surprise and to be able to shock the system, the system doesn't react to it fast. The FED has lost the art of surprise. That that's really kind of intriguing.

You know, you mentioned how quickly the vaccines came on. My favorite stat from from the Lows in March till the end of the year, the equity markets gained six That should have been a heads up to the FED that hey, we need to forget taking rates to five percent? Can we get off zero? Can we start to normalize rates? And sometimes the bond market tells you various concerns going on. Sometimes you're gonna listen to the equity market. But let

me bring it back to the bond market. There seems to be a disagreement between the Federal Reserve and the bond market. The bond market is saying, hey, we see a recession coming. We think you're gonna cut rates. In j pal is saying no, I think we're are going to go up and stay up for longer. How do you reconcile these two differences. So it's a fascinating dynamic

that's playing in the markets today. So I don't think most of the people, you know, economists, people that follow the FED, that listen to what the Feds saying, I don't think anybody believes that Fed's gonna cut rates in two three. When the FED says we're not, I mean, and all the FED presidents governors come out and say we're not, then I think you have to take them withut the word why is the market doing this? You know, I've learned in my career that the technicals are as important,

if not more important, than the fundamentals. What's happening now that kind of the discussion we had before about money flowing in because people locking in these yields, much of that money is not necessarily looking at what is the one year, one year forward, the two year two year forward. They're saying I can lock in four and a half. I So what's happening is people are sitting on immense amounts of cash and decade of zero and suddenly four

percent looks fantastic totally, So what is it doing? It actually prices your forward curve in a bit because people say, you know what, I'm willing to take that. By the way, you know, the risk is that all of a sudden you have some shock to the system. Economy does slow and maybe they do move, but people are willing to say, gosh, I'll underwrite that easy thing that's probably not priced right

because I need to lock these yields in. And by the way, I spent much of last year sitting on my hands and you know, trying to protect my downside. Now these bonds are attractive, so I think it is a technical condition that's that's driven the market to price in that ease today. So let's talk a little bit about some of the technical conditions that I recall you discussing in the fourth quarter of and there were two statements you said that have stayed with me. Let's start

with the more amusing one. October two. This is some of the wildest fixed income trading I've seen in my entire career. And I remember, I think that was the September a CPI came out in October, and then we got the job state as well tell us about what was going on in October. So it was pretty and mean,

it's pretty wild. I mean, so you think about by the way, when you think about two twenty two, and part of you know, the FED deserves some blame for taking too long, but you also at a war that was who thought you'd shock fuel prices and who in food prices? I mean, what is it? Russian Ukraine account for twelve percent of the calories in the world. Giant we bread basket and basket after the US and all of a sudden, what we thought would look like inflation

would start to moderate or at least stabilize. We took a whole another leg higher, and then, like you say, in September October, we started getting these point course, cp I was printing a point six for two straight months, you know, so so annualizing that's over seven and all of a sudden, like, oh my god, this FED may have to go significantly further. And by the way, at the same time, employment was was extraordinarily strong and is today.

And I still think people don't recognize there's not enough people for the jobs today. There's still a deficit in all those sectors we talked about earlier. So so the FED should keep raising rates. That'll get bodies and jobs. Oh wait, they can't create more people to fill those jobs. They can't create more semiconductors, they can't build more houses. At a certain point, the FED should really just declare

victory and go home. So I think, you know, you know, it's interesting how like every every committee, like the FED, etcetera, there's always this I can tweak it a little bit, and I think at the I think at this point

it's time and the system recalibrates. I mean a number of times that FED has to come to the fore when you have a financial crisis, when you have a pandemic, and then I think you've gotta go, you know, get to the back page of the newspaper versus the front and let the system do what it's gonna do, because the more that you create the news. If you think about if you're a big CEO c Ione, I'm thinking about capex spend long term hiring plans. Do I need to have the FED as one of the risk factors

in I don't think so. And I don't think we need to keep the economy will do its job of keeping the system on on on pace. And you think about we just happen the last couple of years, like you said, goods economy to service economy, the number of people job shifts extraordinary of how it played out. Anyway, I think there's a time that you need the Central Bank to be on the front page. But I think

we're leaving that new story. You mentioned green Spin earlier, and I had the same sense that you know, he had a great career, and then the last couple of innings helped to really ding his reputation because he stayed on the front page for too long and didn't say no, no, the system's fine. I'm going to step back and let things play out the way they should on their own. So, man, if you go back in the anlds of time, I think Alan Greenspan may have been, at least in my generation,

the best central banker I've ever seen. Certain I'm on the other side of that trade sold to you. I'm sure, Alan green all right, and we'll continue to be I have long put I will write calls, whatever you need to do. I'll take the out of the maestro training, alright.

So so but make your case, alright. So, I mean, I watched them for years and and I've seen very few people, including getting the honor presenting to him many times, I've seen, I mean, the way he analyzed the day of the way he reacted to the day of the way he commanded policy. I'll never forget when when Greenspan said we're going this way you he had immense credibility

to execute it. Listen, I think, but I think your point is the last year or two it was it didn't make a lot of sense for and I think people knew subprime in the mortgage crisis, the mortgage wasn't crisis. The mortgage dynamic, the housing dynamic was was creating a problem that would put a you know, put a real damper on what was I think an immaculate um central banker. So you mentioned credibility. Does the current FED insistence on

taking us up to five five and a quarter? Is that sort of third Hey, we're gonna we're gonna have stable rates, we're gonna have full employment, and we also have to maintain our credibility. Is that a third mandate for the FED? I mean, you know, part of why and I say the FED stays in policy later, is credibility is such a big deal. Once you lose credibility. It's part of what I think they've done a really

good job of communication. You think about how the few number of dissents when you get an f O MC decision, think about yeah, and there's opinions from the different officials that speak, but they're generally on the same page. And that that I think is really effective. Listen, I think once you lose credibility, then you're all of a sudden your your monetary policy. Because moral suasion and how you think about where you want to guide the system is

usually important. By the way, if you guide this the system into finite a way, and this is part of the idea of like go away for a bit, stop defining every single you know, I think quite franking. I think these sep the dot plot is crazy, Like why do you need to tell the world where we're gonna be two years? Hence you don't know where you're gonna be two years? Hence why do you need the price the treasury market to the two year forward or the

three or four work? You don't know where and you know they're back to year sense that you need the ability to surprise when necessary totally and if you pin yourself and even in the past the Fed has pinned therese ups to a date and say we're going to move that that's crazy or to or do you know one number like core PC is the most important, But why would you pin yourself to core PC because there's

weird nuance that happens. You have to look at the abstract, give yourself some flexibility, allow the system to do what it's gonna do, and create normal volatility to markets as opposed to defining you have to be here. You mentioned core PC. I'm trying to remember was it Bernankee or green Span that liked the GDP deflator as their inflation managumer, I don't remember which, Um, And they're not always it's

kind of surprising they're not always the same. Last year, for example, I always love to throw charts up to shock people. Oil was negative for everything ran up an anticipation of the wartime chatter, and then by the time we got to the fourth quarter, it was red, which is kind of stunning. Um, what do you think is the best measure of inflation? And have we seen peak inflation? Are we? Are we over the hump? I think so?

I mean so, you know, I'm always you know, what do I look at I look at a core PC is is important? I look at wages a lot um. I look at the commodity markets. You know, a ton of copper, lumber, natural gas all way off their highs. Yes. And and by the way, by the way, if you if you take and we looked at this stat the other day, if use car prices and shelter are coming down,

which we know they're coming down. If they come down, if they continue to come down, everything else can stay four to five and you still get in the mid to high twos, so meaning it's pretty it'd be pretty hard for us not to have seen the peak. But you know one thing that I you know part of you know, I always in my business we try and thinking what are your constancy you could have value the variables. Inflation is a hard one to think about the constants.

And if you don't, you know, part of why I read inventory numbers at retailers, what's the you know you're talking about Semi's earlier. I think you have to think about the whole construct of what's driving top line revenue for companies. You know you're seeing Tesla logist, did you see companies all of a sudden they're dropping big cuts

that substantial. You know when you see retailers, the targets and Walmarts, you see you know they're change in terms of dropping price, and you're seeing customers that are actually now shifting using more couponing, trading down, buying in higher quantity as opposed so they can get scale and purchase. That's real and that means inflation is coming down. And all these things factor into what do you build into what's happening in inflation because that one is hard to say.

This is the number, and by the way, I think markets do that, like the employment cost index, like that's the number, and then it goes to this one. I said, I think markets like to have superficial information to drive big picture thoughts. So let's dick with inflation for a little bit, because you've touched on so many really interesting areas. One of my favorite aspects of where I think the CPI model is wrong is the cost of apartment rentals. And I get the sense the FED understands this, BLS

understands this. The Cleveland Fed just created this new measure of owner's equivalent rent that looks at renewals, but you also things like Zilo apartment rental listings, and Apartment list is another index that tracks this. It seems that everywhere we look we see apartment rental prices coming down faster than the b L s C p I model is showing. How do you calibrate all models wrong but most are useful?

Said George Box. How do you calibrate a model that has issues that we think we the FED understands what the issues are, and yet are still acting as if um the model is dead right. So one of the things I always thinking about we're investing, and I say to our teams all the time, We're not in the business of being right. We're in the business of generating return for clients. So what happens? So we've we have incredible AI data assimilation where we look at billions of

prices and trying to where is inflation going? But the markets focus on core CPI, so you've got to try and put together what are the markets going to react to it. Oftentimes it's much more important to me to understand what is the psychology of markets than it is understanding you know, what is like where are we really going? Because you get leads and lags, apartment being the big one, there are huge lags in terms of when an apartment

gets into in the reduction and prices. So you know, we try and think through all of that, and you know, at the end of the day, you know, part of what I'm trying to think through is it's less important

to me to be right six months. Hence, but if the markets are going to focus on this core CPI report for the next two to three months, and maybe the FED is going to focus on core pc that I put at the top end of my priority set because I've got to buy and sell within the market, and so I spend a lot more time trying to think through what's the market reaction function and what is the data the markets tuned into because that changes over time.

So you're always providing insight and advice to clients. But if you had ten minutes alone with Jerome Palell, what sort of advice would you give him? So I would say, I'm I'm a big fan, but I think the say so, I think I'm list so, but I'd like I say, you know, with all the due respect, I thought last year it was crazy around keeping or the year of keeping rates easy for too long and doing que I mean in January last year add billion a month going

into the system. Certainly zero way too long. You could argue how far you'd go, but zero wasn't That was wrong, Listen. I think one of the things that he has brought to the fund that I think it's been extraordinaries collaboration and you know, a collaborative decision making that across and

taking in tremendous amounts of information. The thing that I would you know that I always say, let's say, and I've said this before, or if the Federal Reserve said the funds rate is going to be two percent for the next five years with the system operate better or worse. And if if you were a CEO or CFO and said, Okay, I know, I gotta figure out what my inventory level is, what my supply chain dynamics, but I know they're gonna be able to fund myself off of a relatively constant

interest rate, certainly the risk free rate. There is huge power in that. And I think people will underestimate this. Get us back on the curve and get us back on a I tweak it less than they do until you need to, and then you move decisively. And I think one of the things we've learned, you know that central bankers have done a good job with is when you need to move, be decisive and and and get it and tell people this is where we're going, and shocked the system when when you do it, but let

him know now we're going. And I think that's powerful. But then otherwise back off and let let the system with the system is gonna do. By the way, it's harder in Argentina because you get you get a little you don't have. I mean, we have such a tech, chnology, innovation, adaptive human and thinking about I did a presentation. I showed what it was thirty years ago. They used to look for a job in the classified needs circle and

go get a job. Now you think about getting a job today with all of the immense online you have fluidity of employment. That's that we're watching play out if that doesn't need to do that much other than the shocked period, talk about the impact of a loss of credibility of a central bank. It's apples and oranges between the US and Argentina, which, by the way, I'm always shocked when the parade of FED haters come out and it's like, we're gonna be Zimbabwe. The dollar is going

to be worthless. Talk about getting a trade degrees wrong. Let's talk about the dollar. Since I mentioned Argentina and Zimbabwe, the dollar for the past decade has been the only game in town that seemed to have topped out in two. How do you think about the strength of the US dollar relative to fixed income equity US versus emerging mark gets What is the role of the dollar in your process? So for I mean, well, two was the only hedge we had, I mean literally, yeah, So two thousand two.

You think about normally interest rates work against beat against your risk assets. You know, normally, volatility markets we use a lot of you know, think about call options, put options, the equity market when volatility spikes. Not a good hedge. It's too expensive because everybody's trying to buy insurance. The dollar was a good one because you knew that as as the central bank was gonna tighten, the dollar was gonna appreciate and risk was gonna have a hard time. Today.

You know, I would argue, we're on the other side of that mountain we talked about in the dollar doesn't need to appreciate, and actually, you know, you could start to do things because the volatility markets have come down. I think there's one important thing with the dollar. You know, we're gonna go through a potential debt ceiling crisis issue. There were dollars of reserve currency in the world. I don't think people really understand it's two thirds of the

trade flow in the world. It's roughly two thirds three quarters of the liabilities in the world. It's the collateral us treasures that call lateral in the world that is underneath you know, most transactions in the world. The dollar is such a critical dynamic. We're gonna go through and always find like when do you set up for these trades?

When he set up for position your portfolio. We're gonna go through, you know, sometime three to six months from now what could be an incredibly volatile period, and then the dollar becomes you know, your your lever and how you think about that is going to change and uh and evolve. And like I said, it's crazy that we'd ever because of the immense benefits that accruiting. Why would anyone ever put our exorbitant privilege at risk to score

political points. All those people really are are deserving of our disdain and should be called out for their recklessness and ir responsibility. But let's hold the politics side. The last question I have in the state of the fixed income world is you mentioned since since we talked about dollar, we have to talk about emerging market. Last year you said you're starting to become more constructive on emerging markets

and more balanced obviously on the U. S. Dollar. You know, it has looked like em was going to be the next part of the world to do well for the better part of a decade. And the tires spin and there's no traction is three the year e M finally starts rewarding investors. So, I mean, one of the things I've learned over my career running emerging market business for a long time is you have to take em and

dissect the asset class. I mean, there's sometimes no and so you know the difference between Mexico and Argentina and South Africa to Turkey is immense. And so part of what we try and think through is where are we comfortable today when we're we are taking more risk in UH and you know, building some income in emerging markets. But gosh, you know there are places today that that listen, We're not doing a lot in Turkey, We're not doing

a lot in South Africa. But you know, Mexico. You think about who the beneficiary for a world that's becoming more regionalized, and who is you know, the US's partner in Mexico is interesting. Brazil has done a pretty about central banks and has done a pretty good job. Brazil is a is a good place Indonesia. So there are places and the way we've grown and by the way, there's some corporates that are domiciled in these countries that

are often times better credit than the sovereign. So we've worked on we've increased our emerging market exposure, but I would say we're doing it in a way that is less emerging market volatility um sensitive to it. Another example of where active has an advantage over passive is choosing your country of both equity and fixed income. Yeah, and then one thing I will say, you know, active is going to live with passive for forever and the growth of you know, we obviously you know, are proud of

the I shares. Development people can, fixed income, you can, I use a ton of them. So passive has a place. But then the ability to use it as active man in your in your process is you. And by the way, parts of em are hugely effective. Been using UH and we've been doing a bunch of dead and equity to get into merging markets where at times getting scale is hard on the individual securities. Before I let you go, we have to talk a little bit about Lehman Brothers.

You started there in what was black Monday like at Lehman Brothers, who bet then we're really known as a fixed income shop. Tell us what that experience was like and did it leave any marks? So I'll tell you. You know, every time we'll a couple of interesting things

I think about that. I mean, every time you go through one of these crises, you think about music crisis don't happen the same way the second time, you know, so usually and by the way, usually regulations solves Yesterday's every general fights the last one totally and so that you know that was and how but you know still to this day, black Monday, you know, wears on you, by the way, including on Mondays. There's a reason that

Monday's happened because a liquidity etcetera. That tends to be a war news all the stress over the weekend news comes out and it just built totally. But one thing I've realized over been doing this almost thirty six years now is you gotta put you know, think about those crises, think about how do you manage the risk of it, what's the downside, what's the odds of it happening? And then you know you still have to invest and you

still have to take risk. And one of the things I've found that I've tried to fight against for my whole career is you know, the longer you get you've done this and the more crises you see you know less you you know when you get punched in the stomach, like it doesn't feel good, Like I gotta like to do less of that. And you've gotta think about we're still in the business of taking risk. How do you manage those things effectively that you've got your tail risk downside?

So to this day, you know there are things like I've been through, whether it's gosh, years of trading Korea and you know, every time there's something in North Korea, think about, i' my god, we got a hedge that And I've learned over my career, gosh, I spent more basis point buying insurance and think about if I just run my portfolio the right way, stop buying so much insurance because you'll figure out how to get returned to zero.

And but you've got to think about those things and what are what are the risk and what is the hedge that could that could work relative it it doesn't cost you that much, or or how can I run my portfolio taking those risks? So fast forward from eight seven, uh, twenty years now it's oh five real estate sort of peaks and price and oh six and volume, the mbs that was a big part of of not what you were working with, but generally Lehman Brothers starts to rollovers,

it starts to be stress. We see the derivatives begin to play out. When did you start to smell things were going off the rails at Lehman Brothers. Well, I didn't write that you're there and you just thought that this would be another thing. I mean, I mean I left in Mayo eight. If I, by the way, if I thought there was any issue there or any other place, then I wouldn't have started a hedge fund. Let me think about the volatility that I would have created. We're

betting on the other side. Yeah, but no, I mean the Nate. First of all, I was doing credit, and as a credit hedge fund, it's pretty hard to run big shorts in credit, so you know, so I didn't I didn't think there was an issue. What I think was, you know, it was it was hard to leave at the time, and we get back to the discussion of Greenspan and or Treasury that it was hard to believe that you knew from O six oh seven subprime was was a problem, and you knew the housing froth was

so extreme, But then it just kept going. I mean, remember, you know seven, you know we thought, okay, you know there's gonna be regulars is gonna be changed, the central bank will move and you never think you never thought that you would, you know, policymakers would ignore all of these signals along the way, and then we'd go down what was this tumultuous point in time you know, started with Bear Stearns and then all of a sudden, financial

institutions are levered entities once the dominoes start to fall, and you know, you have whether it's derivatives, you have intertwined financial intertwined financial system once the domino start to fall, and you think about what would have happened to other firms as well. So listen, I mean, I you know this went on for longer. Oh six, oh seven felt certainly oh seven felt a little queasy about like why is nothing happening? And you had this incredibly over zealous

housing market. I mean, you know, I don't think that will ever happen again, because I think policymakers will react to that a whole lot, one would hope. So you spend two decades and Lehman Brothers. Do you spend much time with the guerrilla yes, and and yeah, I mean in a lot of respect for them, and uh, listen, I think their decisions that I think anybody in their career, anybody's running a company or a business, would like to

have back. But but listen, I'm and you know, the firm had a really really good track record for a lot of years. That's that's the pretty by the way, including going through the crisis crisis, you know, a long time capital management they were they were on the right side of yea unlike back. Yeah, so I think, you know, the track record was pretty good. And you know what's sad.

I mean, I find it's sad and that you know, there were a lot of amazing people at bear sterns Levan Brothers, a bunch of places that, by the way, many of those people go into, you know, have fruitful careers and other in other worlds. But you know, it's sad that that. You know. My my pet theory on on where Dick Fold went off the rails was rejecting the offer from Warren Buffett Layton oh eight. I think when the time came to think about who do we bail out and who do we set an example? Gee,

Warren Buffett offered you a few billion dollars. How do you say no to warrant? That's the you know, the finance good housekeeping seal of approval. Goldman took money from Warren at an even higher rate, and it basically removed them off the table. For Hey, do we have to worry about Goldman had Fold taken Warren's money. I think this might have ended differently. Maybe, yeah, probably, I mean I say, they're there are decisions that get made, and

you know, I'm sure not everyone was. You know, it's the right war and ultimately but but yeah, so you're at Lehman for twenty years and you decide I'm going to set up a credit hedge funds. I want to go on on my own. Even though we started, we we saw the Bear Starns hedge funds UM run into trouble. There was clearly froth in the housing market and the

early signs of a crack in the NBS foundation. As you're getting ready to launch, are you thinking, hey, maybe this is a bad idea or what's Leban has been good to me for twenty years? Tell us about your thought process. I mean, you know we thought, you know, first of all, I have a strong passion around it.

And by the way, we started coming to called our three capital and so our three people think it's My initials actually was for reading, writing, and arithmetic, and so part one of the things I was super excited about was to start a fond and actually proceeds we're gonna go into urban education in the country. But I thought this was I had a great, great team, many of

which you're still with me today. And I thought, and I had asked the firm about it two years prior, about gosh, I'd love to go and try and do this on my own. We've got permission in advance. Well, no, I asked the firm a couple of years ago, and I probably should have gone and done it. And anyway, that to me, I mean at the beginning of Oh struck me as my god, there's gonna be volatility, is

gonna be opportunity. We got a really good team. Let's you know, let's go strike out on our own and do this, and and so you know, it was an exciting point in time to do it. Like I said, I didn't think the system would come to an end as as it. I certainly wouldn't have done it if I thought that that were the case. You tied me up for a perfect segue into a curve bowl question.

You mentioned three rs, reading, writing, arithmetic. You serve as the National Leadership Council of Communities and Schools and the Educational Foundation UH in Newark. Tell us a little bit about the work you do with community schools and less affluent neighborhoods. So I mean less of all than so I was on the National Leadership So my my biggest endeavors today I cheer the board of North Star Academy, which is where fourteen schools in Newark, New Jersey charter

schools that I think I'm biased. I think it's the highest performing set of schools in the country. I'm super, super proud of what the team does there and how we've been able to build that. And I started something called Graduation Generation Atlanta, which put together City of Atlanta, Communities, communities and schools, and h Emory University to try and create the whole package around around a student from social work, tutoring, mentoring, healthcare.

So anyway, though those are big drivers of of you know, my passion of my life is giving people, particularly in urban education. You know, giving him a kickstart and a chance to succeed. And we've watched it, you know, in our schools, in it in Newark. I mean it's extraordinary included what's your affiliation with Newark? So early on somebody asked me to get involved with the Harlem Children Zone, which is an extraordinary place. I lived in New Jersey

and I said, I gosh, I'd left. Something comes up in New Jersey. And then this opportunity came up in Newark and I got to meet, uh, somebody named Norman Atkins, who's I think is one of the best educators in the world. And any I was motivated by we doing

it's just one school at the time. Cory Booker was on our board at the time It's one school and then uh, and then we got ability to grow to the point now where six thousand kids, big part of the population of new work with extre straordinary performance from from our schools, in our in our students, I mean, the number of students we send in the ivy leagues and graduate to colleges is incredible. I don't know, it's a Knwich has a reputation of not having a great

school system. What's the impact of this council on neighboring schools. How do you elevate the entire um educational system? So, I mean a big deal around and I've learned this in my career. It's part of why, part of why north Star was so near and due to my heart. We call it and there's a number of books are our lead director Um Paul Bambreck started. It's called Driven by Data is one of the most famous books in

education for a long time. We analyze the data where students performing, where they're not performing, Where how are we doing in in in literacy, in literacy versus math, versus science, And we study it and we're maniacal about the data. Where are we not fulfilling the needs? And then and then we adjust relative to that. So what we're doing investing and that it's been really successful. And by the way, it's permeated not just the city of Newark, but in

many countries around the world. They're using, you know, sort of our methodology around data analysis and making sure we're keeping our kids up to a level or in trying to the number of of our students that take a p exams and succeed is just extraordinary. So I know, I'm super proud of you. Know. What the team does

around it really interesting. I know I only have you for a limited amount of time, So let me jump to my favorite questions that I asked all of our guests, starting with tell us what you've been streaming these days? What's been keeping you entertained? So I I do. I mean, because I'm going at work million miles a minute, every minute of the day, I tend them I releases on sports, I mean, I watched tons of sports when I get home, I like, I love to watch that San Francisco game

was just that. Yeah, that one I didn't spend a lot of time watching, but I watch a lot of sports. I'm particularly intrigued, as you would imagine. I like a lot of the show's. ESPN does a ton of shows on getting into people's mentality and how do they win? And some Michael Jordan's There Was a Man That Wasn't amazing series, wasn't it? Maybe the best I've ever seen. But I love understanding what drives people, how they how

they get to the next level. Similarly, when I read books about how how do you get to business to the next level, but that that's what I watch a load of those. And then so did you get around to seeing Drive for Survive to Survive? About F one? It's so, it's so funny because I went to F one last year and we talked about it. I still haven't watched it. I gotta watch that. It's shockingly interesting. And they just rolled out a new one on tennis, and then there's a third one coming that they started

on golf just as the Dubai League begin. Yeah, it's They do a really good job of making people you probably haven't. I mean, we we've all heard of a handful of names, but it's that, you know, the up and coming tier that's so interesting. Um, Netflix does some really interesting sports stuff. Yeah, it's fun. So so let's talk about mentors who helped to shape your career. So so, first of all, the person who hired me I lamed many years ago, a guy named Bart McDade. His was

extraordinary and making. I mean I still do this day, I think about what would Bart doing that. He just had this incredibility trade invest people, have confidence in people, let them make mistakes. Uh not too big and uh but anyway, his he taught me a ton of men. He taught me more. He's one of my best friends

today and and he was extraordinant. But I have also learned from the best investors in the world, have a great honor get to know David Tepper's that, Dan Druccon, Miller's, Paul Tutor Jones, and I've learned a bunch from each of them. And you know a few things about investing, you know, like separating the news from the noise. Some of those people are extraordinary. You know, we live in a world where which about earlier things like Twitter, etcetera.

We live in a world where it's constant soundbites. Those people have an incredible ability separate the news from the noise. You know, interesting, interesting that matters. And those people have been really really helpful to me in terms of thinking, you know, getting to understand how they think about things, and you know what what drives persistent success. Let's talk about books. What are you reading now? What are some

of your favorites. So I read a lot of books on technology, and i'm today I say, let's less a book that I'm reading today, But I can't read enough about deep research papers on artificial intelligence that including the chat GBT, and I'm spending a bunch of time this weekend playing around without to understand it, but that I mean technology to me. And the best book I ever read was The Second Machine Age that talked about where technology was gonna go. And now I'm all about what

is the next evolution of technology? And like I said, I think this AI is going to change the world in many ways. But I also like to read. I'd like to read books on things like good, Degrade, etcetera. That are you know that how companies ran their businesses um and how momentum changes things like the tipping point Maxim and Malcolm Gladwell. I think it's extraordinary, So the whole myriad of them. And I actually started reading some books when I just finished permiss and to Feel, which

is a book from from Yale. You know, our students in our schools undergo a lot of stress, particularly during COVID, and this is how emotion and letting emotion out allows you to be more effective and deal with some of the stresses. And so there's a lot of cool things that have been investigating over the last last few months, really interesting. Our last two questions, what sort of advice would you give to a recent college grad who was

interested in a career in fixed income. I mean the first thing I meant, if you really, I mean a lot of people I watched them in the industry do it because I hear it's a way to make a lot of money or a way to make money. And I just think that be by watching people come in and then they leave because they're not driven by and make sure you're driven by it. And then I think most people that come into this business or any business, always feel like they follow the person who did it

well right before them. And you know, what was the hot firm, what's the hot firm, what's the hot area, and anything about what markets have taught me. Usually don't want to buy the hot thing. You want to buy the thing that's that's maybe trending down and that may come back, but it's you know, I I remember when I was interviewing you appreciate this that I Drexel was the hard front was a part firm that was impossible to get into, and of course I didn't get a

job there, thank god. And they are a bit of those. But the but I know why people always on what's in front of me today, but think about where are we going longer term, and then where's the area that maybe I can grow as opposed to the place that maybe has already figured it out, or or the area that's already figured out. I think people you are, particularly coming out of school, you know, I tend to all move in one direction. Was amazing, Like the interview when

I was at Wharton. How everybody want to interview with the exact same places the market, No, and be thoughtful about you know, where do you go? And it's so much about people, But do you find the right person, the right mentor the right group that you fit in with culturally as opposed to gosh, this seems to be the path that worked for somebody else. And our final question, what do you know about the world of investing today? You will us you knew thirty six years ago when

you were first getting started. So I mean I've talked about One of them was just you know, taking a step back and letting the superficial work work its way through, you know. I you know, when I first came into the business, I used to want to read everything, and it's like if the more I read, the smarter I'm gonna be. And now I've really tried to boil it down to the things that I think are going to be the most relevant, the researchers that I think are the best, and do a lot of the work on

my own. Like you know, people the research, the information that gets out there, it's usually homogenized, and it's usually you know, if somebody else already had the idea, it's probably been expressing the markets. So I try and do it. You know, I find like if I can do the

work organically and come up with my own ideas. You know, a lot of people go, you know, every night to round table dinners and listen to other people's opinion, and I tend to believe while I'm wrong a ton, I feel like if I can do my own work and my own analysis, then I'd probably come to a better conclusion, especially if it's already been played out in the market. So there's there's a bunch of things like that that

that I've learned over over my career. And then one last thing I will say is I learned in my career similar to why I struggled earlier my academic career, is you have to prepare for everything you do. I used to think like you just come in and do it like I did well in school early on, and then I started to not do well because you can't just you know, you didn't. You can't over intellectualize it. You've got to prepare. And I find today that now every single thing I do, I spent a lot of

time preparing for it. And similar to the way I finally got better at college was you know, you got to do the work and put in the preparation. But I find that young people that come in, you know, every day, and they think, you know, think I just read this and I can do it. It's all about the preparation and I've learned a bunch about that over the years. We were talking yesterday about simple but hard,

Like people think it's easy. It's like, no, no, it's simple, but it's a lot of blood, sweat and tears, and that's the hard part. Really fascinating, Rick, thank you for being so generous with your time. This was this was tremendous. We have been speaking with Rick Reader. He is the chief Investment Officer for fixed income at black Rock, as well as holding a number of other titles. If you enjoy this conversation, be sure and check any of the other four d and ninety two such discussions we've had

over the past eight years. You can find those at YouTube, iTunes, Spotify, or wherever you get your podcast from. Be sure to sign up for my daily reads at Ridhalts dot com. Follow me on Twitter at Rihalts. I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Justin Milner is my audio engineer. Sean Russo is my head of research. A Tika val Bron is my project manager. Paris Wald

is my producer. I'm Barry Rihalts. You've been listening to Masters and Business on Bloomberg Radio.