BlackRock's Rieder Talks Jobs Report, AI and Markets

0:00 Great to have you on, uh, Friday jobs Day. Um, and especially on one with such good news for the labor market and for the U.S. economy. What do you make of the nonfarm payrolls? So, you know about, I mean, a solid number. And I think, you know, I think one thing, I always find it interesting when you get the top line, but then it's like markets like all the money is when you get underneath the surface. It's a fascinating report in a couple of different regards. When you actually look at it.

0:26 So you know we know health care. You know we talked on the show all the time. Health care. Health care could again check local government was a big number this month. So was about 50,000 jobs. Local government. So what do you do with that. You know interesting. That tends to move around obviously. But then when you get underneath the surface, I find it fascinating. A couple of things. Construction was strong. Why is that? Then you dig into construction, you look at it, it is nonresidential.

0:49 Construction is strong. Meaning I build out which we know is coming, which we know it's happening and will continue to come. And then you look at underneath and you look at real estate. Real estate softer. And then you look at a resi residential softer. And then I think I also thought was fascinating. Yeah. And I think you mentioned the finance jobs softer then you dig into finance. What's happening. Insurance was pretty soft, which is a trend you've been seeing. Why is that.

1:14 It's I sensitive. These are the areas and services where you're going to start to see the softness. You're going to start to see. I start to press on the areas where you can create some real efficiencies, real productivity. So, so net not solid number things like food and drinking. I don't know what was happening that that created that sort of hiring. That was that was solid. You got to factor that in your equation. So anyway, point being I think you got a factor going economy that's doing quite well. You've got an eye, you've got a big cylinder of eye that you see show up in construction and you see that what companies are doing that are starting to implement.

1:51 Um, so, you know, and I think you got to think about the Fed's reaction function, the data so far solid. And you got to build that into your positioning. I mean, I don't know about what people are doing in food and drink. I guess it's some celebration with, um, indexes at all time highs. I'm always tracking, uh, g body, nine elevens. Even the nine nine sevens are, um, at prices that I just can't believe. There's a lot of cash out there.

2:13 Rick. Um, I look at credit. Right? Uh, the agate 30 year tights right now. Where is all this cash coming from? You know, my you brought up there a couple of very relevant statistics that, I mean, the money market fund number is extremely high. And by the way, every I mean, I stare at it's one of the numbers I stare at every week. And the inflows and the money market funds just keeps coming. By the way, I think a strong economy that is supporting that.

2:39 You got money market inflows, bank deposits, very solid. The other thing that you see that happens, we see we track in the market. You know, why is all the supply well subscribed in fixed income. You know you see the pension demand the life insurance demand you're at yields. If you're matching a liability, you've got yields that are pretty attractive. You know, even those spreads aren't that interesting. So you've got two big pockets of demand, you know, particularly for fixed income and then for equities. You know, I've said it before, even though you're getting IPO calendar. So a little bit of digestion, you have so much in the way of buyback that the net supply of equities is just not that not that large. So you know, not to say you can't pull back on numbers like this are war related issues.

3:21 But the technicals underlying the equity market are pretty pretty solid as well. I you know when you come on Rick, my IB just lights up viewers writing in with about a thousand questions here. So get ready. Um, what's your view on all the investment grade data center issuance. Is it overweight. Because that's the future, right? Because that's the dream and it's going to come true. Or you be more cautious because you see so many more deals.

3:45 Uh, it's a great question. So one, I think you've got to build that into your into your duration, your interest rate exposures. Do you take in a portfolio today meaning you got a supply? You know, we talked about a lot of treasury supply that comes. There's a lot of financing that's coming to support this data center bill that just showed up in the employment report today. So I think you got to think about how much interest rate exposure I have today when you're pushing a lot of supply in the market.

4:08 Maybe I run a little bit less rate exposure, which I think makes a ton of sense. And then listen, I think it's mixed. I mean, some of the, you know, some of it quite frankly, some of that some of the supply and investment grade is okay. You know, there's, you know, because people don't have a lot you get you get, um, you know, some demand for that. But, you know, some of the, uh, you know, some of that comes in convert form. Very interesting.

4:31 If you get equity upside along alongside of it and a coupon that I think is super interesting. And then, you know, quite frankly, some of the quasi private, you know, some of the more off the run data center finance that I find more interesting than just the regular way auctioned investment grade debt. Uh, let me also ask about, um, I had a trader right in Anthony Santo Stefano about the Japanese yen when we got this jobs number across because it gives strength right to the dollar.

5:00 That makes the yen weaker. Right now we're at one 6007. And they've already blown through like $75 billion in foreign exchange reserves. Um, if they go in to defend this here, they're going to have to sell more treasuries, right. What does that do to yields? So, um, you know what? I would say a couple things of that. And a, you know, when we look at U.S. rates, I think the thing you got to respect today, you got the Bank of Japan that's raising rates, the ECB, uh, the RBA, the bank.

5:30 So you've got you're in a cycle today and you've got a fiscal dynamic that I think you have to respect if you're the U.S. rates market. So that's one part of it. Listen again I mean I you know, we spent a bunch of time looking at it. And, you know, how much risk do you take in GBS and how do you hedge it? Listen, I think one of the things, you know, we need, you know, Japan's been banks. Japan's been a bit deliberate on moving rate like they need to in terms of getting that rate up.

5:55 And so obviously the derivative impact you see that play out in the currency. So listen we follow it obviously closely with positions in it. And we look you know we watch it pretty carefully. And I think listen there's one thing that is beneficial. And one of the ways I think Japan is very interesting is on the equity side. Like I think you we see that sort of price action. And yeah. And then you think about the beneficiary thereof. Listen I like Japanese equities.

6:18 Races like this particularly front end rates is a it's a pretty tough trade. What are you doing in bank right now Rick. Are you've been outperforming the market in your ETF. You know what moves are you making that you can share with maybe your competitors who are watching. Oh thanks for that. You know I'd say I'd a couple of things. Listen, I think, you know, we've moved our interest rate exposure sympathetic to you've got a strong economy.

6:42 I, we've, you know, we've reduced a decent amount of interest rate exposure. You know, some of the negatively convex the rates, you know, agency mortgages, which you know, is a good asset class. We like it today. Maybe we want to be. And you know we have been a bit more cautious about that space. You know, I like Europe, uh, in a relative basis. You know, Europe's already priced in the hikes. You know, we get to be.

7:03 Do they have a lot more to do? I think European fixed income is quite interesting because you've already priced in the hikes. And so that you know we like that quite a bit. And then m you know obviously going to manage the currency and think through it. But I actually you know we've I'm Tim we've been pretty neutral on em. But you know we have you know higher exposure and m that we've had historically. You know we'll be at that's not a huge position for us but big moves you know watch your negative convexity and interest rates.

7:28 Europe's got it more priced in than the US. And that's um you know we think the balance and the carry that comes from Europe is, is uh fits your portfolio nicely. Does the war make any difference to your investment strategy? I mean, if we just sit in a cease fire where we shoot at each other for, you know, months and oil holds around 100 does that? Does that matter? Yeah. I mean, what really matters for the markets that are human is, uh, you know, obviously what the forwards are going to be in oil.

7:55 So you think about what are your inflation break evens and how do you so you know, we watch the forwards pretty carefully in terms of where that goes. So yes that's important. You know if you stay in a range markets to your point that you made earlier, there's so much cash in the market. As long as you believe that it's in this status, even if it is, you know, similar the Ukrainian situation, then markets generally okay.

8:16 It's not shocked that it's going to move one way or another in a significant fashion that obviously you've got to you've got to be sympathetic to one portfolio. You know, I would say we've built a lot of, you know, what's happened recently is volatility has come down in the equity market pretty markedly, not so much a single name but in an index. And so you can you can you start to use volatility to protect your left tail to protect the downside in the equity markets.

8:39 So you know we've done some of that particularly when you have you know the news around it is uh is you know just you know we're not really going anywhere. I'm looking at the forward curve on Brent. Uh, anyone can do this on the Bloomberg terminal. By the way, just type KT for the contract table on on a commodity. And I see we don't get below 80 until um, 27. What about space. What about, you know, an IPO that sucks that much liquidity out of the market, especially if you have three of them in a row?

9:07 Does it matter to fixed income? It definitely matters to equity. Uh, you know, I was thinking, ah, you know, our equity portfolio, you know, and every your, you know, we think about, you know, a name like this and, uh, you know, it's a name we've been involved with and others are involved with. And so, you know, you got to think about it within the portfolio and think about, you know, how much you know what, what else do you own and how do you manage, how do you manage that?

9:30 Or, you know, when you think about new issue that comes like this. So it it I obviously manage the supply and demand and the equity market in the in the rates market, the fixed income market. I think there's one thing that does not I mean, equities have taken you to such an elevated position. If you're a pension, a foundation endowment, and then now you get to a place where you're fully funded in some places. And when rates back up your real rates.

9:54 Now we're at levels that are pretty darn attractive if you're diffusing a long dated liability stream. So, you know, I think what a lot of people are thinking about like, boy, this has been a pretty positive, pretty powerful period for equities, including some names within the portfolio of names that are doing well, you know, fixed income, when you keep elevating these rates and you think about your real rate and cash within flow, even if inflation is running a bit elevated, if you can build portfolio, some of what we do and think if you can create six and a half, six and three quarters yield, boy, it's pretty attractive. And it seems like I, uh, isn't just bullish on the economy but changes the trajectory at which we operate if they're true. I mean, I mean, listen, I mean, you know, I went through the data and I talked about a presentation I gave her.

10:38 I looked at if you take I related the last three years, it's about it's still about 28% of the growth of an economy. That's a well over $30 trillion economy. You think about how big that I mean, how can that be? And by the way, about 70% of the return of the S&P. And then you think about every part of the economic, uh, ecosystem today and think about how I the spend and the CapEx. And then on, you know, per the number today, you look at the companies that are starting to adopt it and and how it impacts everything.

11:06 And when we talk about insurance, we talked about, uh, the impact that's having on on some of these services, software, etc., it's become, you know, the thing I would, I would, I would suggest, though, you have an economy that's operating on that cylinder and the rest of the economy is just okay. You know, I was talking about small business, not great young, you know, young people, lower income, not great. But boy, that that part of the ecosystem is humming. The numbers are mind blowing.

11:31 I mean, every day when I talk, including weekends where you get calls on financing, that's got to come to the market. It's, uh, it has become, uh, pretty impressive. Well, and we see I mean, you were talking about construction jobs, Rick. It doesn't seem as concentrated as the naysayers are worried about. Like, um, we look at companies that do HVAC that make boilers and they're rallying hard. You know, Ford Motor Company has become an eye play because it makes big batteries that data centers can use.

12:00 Um, caterpillar Deere, all of these old economy. I mean, yesterday we saw the Dow up the Dow Jones Industrial Average up 900 points. What do you think of this rotation? So I think there's a lot to make sense of what you saw. So you think about there was the first level. You think about semis. You think about the direct beneficiaries. And then you look at things like electrical equipment. You mentioned cooling like the infrastructure build. Like I think the thing that makes sense is people are starting to account. And you're seeing that the numbers of these companies are reporting the companies that are tangential to AI, or maybe not anymore. Maybe they're business, actually, and some of them has become directly top line revenue related to I like that's where quite frankly, the multiples are not as egregious today.

12:44 And power obviously power and that there is the demand function for those products. And by the way, related to space. You look at the components there as well. Like those companies become pretty interesting today as people start to think about, okay, I need to diversify a little bit. I've got concentrated risk in some of the parts of my equity portfolio. Yeah, I think I think it's real. But again, it gets to the point of like, you got one big cylinder that's driving so much of the economy today.

13:11 It is driving so much though, and I think that's the point. I mean, are there areas that I is going to miss Rick? Are there are there industries that you're worried are left behind? Do you worry about AI eating jobs in some places? Man, I you know, I think, uh, you know, people talk about the K shaped economy. And I actually think that visual is not that great because it suggests that the lines are are equivalent on both sides. I actually think that the economy today is more like a three month old birthday cake.

13:39 The icing is great, but then you look underneath that, which is the bulk of it, and it's actually not doing so well. I mean, the thing that is tricky today is I think you're going to displace a lot of workers. And I think, you know, part of what the, you know, the Fed's job and otherwise is be a bit anticipatory of where we're going and, and how it affects the broad population at large. And I listen, I think I mean, you know, obviously we and every company uses AI aggressively.

14:03 And you think about including this morning I was going through with a member of the team, gosh, I could do this thing. I could do that. Now I don't need to go to it is going to change the ecosystem. And you're seeing productivity. That's the year before kicked in, by the way, robotics, automation, all powered by that same ecosystem that listen, I think where we're going and you know, by the way, when you think about the economy today, you've also got a big fiscal tailwind. When you think about where we're going the next few months. You know, I think you'll have somewhat different disposition around that. So anyway, point I would make, if you're the fed, I think you got a pull back. Maybe, you know, you're on hold.

14:36 And I think say I position for you know what could be a friend that's more hawkish. But gosh you know I think you got a you got to think about where are we today, what's being impacted in the economy of the people in the economy, and then you know it and give it a bit of time to evaluate the condition. But are you saying, I mean, it looks like we're adding so many jobs and inflation is still way too high.

15:01 You don't want to be cutting, right? You kind of if anything you have to raise into this don't you. So I my personal view is when you look at the broad construct and you look at what the interest rate tool really impacts, is it affecting the I spend is is affecting the individual is expecting is it really influencing. Does you move the discount rate. Does a really influence the hyperscale or demand really not. It influences housing where you're seeing that and influences obviously small business where you're seeing it. You look at credit card charge offs anyway. So what do you do with that?

15:31 I think you've got to take the whole equation and say my personal view is well obviously inflation's above target. Obviously growth fiscal tailwind is solid. I think you just got to give it a little bit of time. Would I know you wouldn't cut obviously into this. Do you need to hike into it? By the way you look at Europe. Europe's going to hike into a supply shock. You look at the data in Europe around consumer confidence. You like you're seeing a tangible slowdown. I just think if you're a central bank, you've got to be a bit anticipatory of, you know, I heard somebody say the other day, you know, what happens with commodities.

16:04 You know, price adjusts commodities and demand adjusts in terms of what happens. And I think you just got to be a bit thoughtful and look at the whole picture when you make that decision. And you know, quite frankly, I think going forward I think Chair Warsh, we're very thoughtful about do you have to keep keep moving the funds rate around to tweak small moves, particularly when it's supply shock driven. My perception would be my perspective would be look at the whole construct. You don't have to constantly adjust and, uh, and be thoughtful about where where the puck is going.

16:36 Hey, uh, we've been talking a lot on this program over the last week and over the last several months about, um, uh, pulling money out of private credit, and now it seems to have spread to private equity. And then gates, redemption gates coming down. We talked about cliff water, right. 17%, uh, withdrawal requests. You had partners group. Um, seeing that creep over into private equity, um, yesterday you had Blackstone, um, talking about redemptions and gates as well. Is that it seems to be the only track here that I see it in, in financial markets.

17:09 Is that a concern? Uh, no, not I mean, not it. So is that a concern? Idiosyncratic? Yes. And in some, some parts we've talked a lot about software etc.. Is it a systemic shock? No, I mean I've gone through, you know, where you have first of all, it's term financed, you know, versus you go back to the financial crisis that was largely overnight funded. So no, it's not it's not systemic. And the sheer size of it is not that large.

17:33 What, quite frankly, is done for portfolios and how we think about investing. The needle has moved around opportunities. If you go back the last few years, there was so much money floating around that privates were trading at very rich levels in credit. And now the opportunity side is much more robust. I mean, now you've created normalcy, which I think is awesome. Like now all of a sudden you have, you know, the dynamic of if you're if you've got an illiquid asset, you should get compensated for that. And now you're starting to see that into the equation. So no, I'm not worried about the systemic at all. You know, in some names where you have debt that needs to be rolled, you got to be like, you got it, you got to watch it. But no, not definitely not from a systemic crack in the system. I'm not worried about it.

18:11 What? Um, so I'm going to talk to Kevin Hassett on the other side of this break. Rick, what would you ask him right now? I mean, um, you mentioned the the cake shaped economy. Um, what questions do you put to to Kevin? Yeah. I mean, I think, you know, I think he's been pretty thought very thoughtful. I just saw a headline about listen, I think you have to, you know, think about the broad picture and give and give the system some time and, and and think about what the interest rate tool does versus liquidity versus balance sheet. Listen, I think that's really important.

18:45 You know. Think about, you know, how do you think about, you know, there's a lot of treasury issuance that's got to come to the market. You got to make sure that the back end of the yield curve is contained. How would you know? How would you think about that? How would the fed think about that? To me, I mean, you know, financial velocity today, it's not really created by the overnight funds rate. It's out the yield curve.

19:03 It's where we finance commercial real estate residential corporate. Like that's a really big deal. And you know hearing you know how does the administration think about that. How will the fed think about that. You know he's very thoughtful on these things. We uh, the new chair, Kevin Warsh in 2024, said central bankers around the world seem to be more comfortable with inflation closer to 3% than I wish were the case. That's very dangerous stuff. We can have an economic boom in that scenario, but there will be a high price to pay. Do you think this central bank is comfortable with inflation where it is? And so I think there's something that's important. The momentum of the momentum of inflation and what is driving it. So if you look at the interest of the rate sensitive parts of the economy today, and we break down inflation.

19:45 You say what's rate sensitive? Obviously, you know, shelter is rate sensitive. We need to build more houses in this country. Obviously take things like used cars. What's interest rate insensitive? Things like health care, education insurance. Those are sticky high. But the interest rate tool doesn't really do a lot with it. You know, get to this point about the headline versus what actually is happening. And I think you just kind of factor in if you're a central bank, if you have a supply shock where that should abate over time, and if your tool isn't really effective for some of it, then I just think you have to think about what is that?

20:19 What is your tool doing. Maybe the monetary base should be adjusted, maybe the balance sheet, but I think you have to have a broader discussion around it. Listen, today I think the central bank's inflation is above target. We got to wait. Maybe the ECB hikes a bit um, and I but I you know, I just think the simplistic top line answer for these which are complex subjects. Yeah I think is uh, is a bit superficial at times.