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00:00We start with the bond market caught between fears of inflation and long-term fiscal risks.
00:05Rick Reeder is BlackRock's chief investment officer of Global Fixed Income
00:09and head of the Global Allocation Investment Team.
00:12Rick, we got CPI numbers this week, and there was good news in the fact that they're not going up.
00:19On the other hand, it's not 2.0 the way we've been promised.
00:22So which is more important, the good news or the bad news?
00:25Well, I would say markets have been more nervous about this number,
00:28and I would think there was a collective industry-wide sigh of relief when this number came out
00:32because it wasn't, you know, this is one of those numbers.
00:35If it comes in high, then all of a sudden, now you put the Fed in clear hiking mode.
00:40And, you know, starting to see consistent numbers.
00:42So if you go back into the last 10 numbers that we've gotten in core CPI,
00:47eight of the 10 have been 0.2 rounded or below that.
00:51So it's still a bit elevated relative to where the Fed's long-term objective is,
00:56but I think the markets felt pretty good about, whew, we got through it, and it wasn't that high.
01:01And then if you go through the component parts,
01:02otherwise, it was a number pretty close to expectations in almost every regard.
01:06You are seeing still things like lodging away from home, hotel, airlines.
01:11You're seeing leisure experiences, think about the World Cup effect and otherwise.
01:15You're still seeing some pricing pressure around that.
01:18But overall, it was an okay number, but yeah, we're certainly not at target yet.
01:22But so pull back a little bit and give us a longer-term view over the years of how it's
01:27bounced around and where we are today compared to where we've been.
01:30So, I mean, the big deal for me is the Fed's mandate is price stability.
01:34It's not two, but you'd like to get it.
01:37There is real efficacy around two percent is a normalized equilibrium for what an economy
01:42should run out.
01:43So you want to get to that number.
01:44We haven't gotten there in a long time.
01:46By the way, you could take the two decades before.
01:48It's pretty hard to get it as high as two.
01:49You're in the ballpark today, and when you were running, certainly post-COVID, you're
01:53running at numbers five, six.
01:55That was scary.
01:57But if you look at inflation expectations today, you think about where we've come from,
02:01it's pretty stable, particularly when you've got an economy that's running with a lot of
02:05debt on it.
02:06The thing you really can't have happening, you can't have a deflating dynamic because
02:09it enhances the true cost of the debt.
02:13Today, I would argue it's the number we'd like to see a little bit lower, but it's certainly
02:16not daunting by any stretch relative to anything we've seen in history.
02:20So take COVID out of it for a moment.
02:21Go back to like 2024, for example.
02:24Where are we in core?
02:25What's the trend line?
02:26Yeah.
02:26So, you know, the thing I find interesting is that Chairman Walsh is focused on the left
02:30side of the decimal place and the right.
02:32And I think you have to take that to heart, meaning if you're in and around the twos,
02:36you're OK.
02:37But when you actually zoom in closer with the markets, then the focus on there's this been
02:41this maniacal focus on the right side.
02:45And, you know, since, you know, certainly over the last year or so, the trend is pretty
02:49good in that it's coming down, but it moves around.
02:52And, you know, the markets tend to focus on the tenths of a percent in terms of these
02:56movements.
02:56By the way, I always get a kick out of the first thing I saw this morning while Chairman
02:59Walsh talked about the left side of the decimal place, and the number was it printed
03:02at 0.2154.
03:04And people are talking about the rounding.
03:06You think about for a broad economy like this, does anybody really care about the 0.4?
03:10Other than the market, participants do.
03:13So, you know, part of when you zoom out and you say, OK, that's a pretty good, we're in
03:17a pretty good place, would like to see a trend lower.
03:20For me, I actually think we are trending a bit lower.
03:22We think core PCE by the end of the year is around 2.8.
03:26Next year, we think it gets to 2.5.
03:28And core CPI is running lower than that.
03:31Core CPI is running at 1.6.
03:33The last six months, 2.4.
03:35When you strip shelter out, it's actually running at about half that.
03:38So not bad.
03:39I'm pretty relaxed about where we are.
03:41There are other things I worry about, but I don't think that's going to be the thing
03:44that disrupts the markets.
03:46And in fairness to some of the commentators and analysts, I understand Chair Walsh has
03:51said, we care about what's left of the dollar.
03:52He also has said, we're not done yet.
03:55I mean, if he really is just happy with the left side and given the numbers you just gave
03:59us, he would say, mission accomplished.
04:00Job done.
04:01So I think there's a real nuance to that.
04:03I mean, I think the Fed, what the Fed needs to accomplish is get to that 2% number.
04:07But that 2% doesn't have to happen today.
04:09It doesn't have to happen next week.
04:10It's that is a long run number.
04:13And I think, quite frankly, if you are any head of any monetary policy authority, you
04:18have to be committed to that 2% number.
04:20The long end of the yield curve, every tick of it is dependent on how you articulate that
04:25thesis in terms of where you're trying to get to.
04:28It doesn't mean you have to raise rates to get there.
04:30And I think why these task forces are a very elegant way to get there.
04:34These are complex issues.
04:35When people ask, are you restrictive or not?
04:37Well, in housing, you're clearly restrictive.
04:39You have a dormant housing market.
04:43But then you look at the amount of spend on CapEx.
04:46Like, you were not restrictive of that.
04:48But you think about, what would you have to move rates for the big hyperscalers not to
04:52spend on AI?
04:54You'd have to raise rates hundreds of base ones to get your IRR to a level that didn't
04:58make sense.
04:59So I think he is committed to it.
05:01I think he's going to think about the tools.
05:02You have the balance sheet.
05:04You have the money supply.
05:05You have a lot of things, a lot of tools at your disposal.
05:08Raising the overnight funds rate, in my mind, is not a terribly effective way to bring that
05:12number down.
05:13And I think if you really think about it in a sophisticated way, which I think they will,
05:18what are the tools?
05:19And how do we get there?
05:20And what's the time frame to try and achieve it?
05:22So you say the long end of the yield curve really needs to believe the Fed, monetary
05:27authorities.
05:27If you look at what happened with the 30-year yield during and after that, news conferences,
05:32they were not buying it.
05:33It went up to the highest level.
05:35It's been, what, since 2007 or something.
05:37So I think you did right.
05:38I think there are a couple of things to think about there.
05:40One, you know, he didn't say hike.
05:42And I think the markets, the back end of the curve was like, we could get a hike here,
05:46which would obviously show maybe a stronger near-term commitment to inflation.
05:50So there was a little bit of that.
05:52Second thing that I think proved it to be a bit untethered was this idea of, gosh, we
05:56didn't hear a lot of the metrics.
05:58Markets want to hear the reaction function.
06:01And how are you going to interpret data?
06:02And then how will you react to it?
06:04I don't think you need more forward guidance.
06:06I think actually pulling back on forward guidance is a good idea.
06:08I don't agree with the ethos that people have put out there that less forward guidance
06:12means more volatility.
06:13Actually, if you go back to 21, 22, there was a lot of forward guidance.
06:17It wasn't right.
06:18As long as the markets understand and can interpret, here are the metrics you're looking at.
06:23Here's what your reaction function is going to be to the data.
06:26And I think it's quite sincere when Chair Worsh says, let the markets determine where should
06:32you be, and then they could react.
06:34And that's a good piece of data for the Fed.
06:36So anyway, I think that's really important going forward.
06:39But I think the long end of the yield curve is a very important thing, how you manage that.
06:42And oftentimes, I think you need to use the balance sheet to actually keep the long end
06:48down.
06:48And we'll see how that goes.
06:50The markets certainly react to what they think is going on in the monetary policy.
06:53Are they also taking into account fiscal policy?
06:56And how big a risk is it that actually we won't be able to pay all these debts back?
07:00If you look at the term premium, for example, how big a factor is that in keeping things above
07:05to the right or the left at this point?
07:07David, I actually think you hit on exactly the right point in that I actually don't think,
07:12I think the markets will talk about on the day that maybe the long end backed up.
07:16And what does that mean for credibility?
07:17I think that was overstated and unfair.
07:20However, you do have something going on that we have, not just in the US, you have fiscal
07:24burdens that are significant.
07:25And by the way, alongside of the amount of financing this week, there was 673 billion of
07:31US Treasury debt.
07:32You know, it's like issuing Indonesia in a week.
07:34It's an awful lot of debt.
07:37Plus, you have an immense amount of supply coming through that is AI related.
07:41So you're pushing into the system an awful lot of financing.
07:45To me, that's why real rates are pressing higher is the cost of finance is going up,
07:50driven by fiscal deficits around the world, not just US.
07:54But also, we've got to push a load of financing in the market.
07:57And the markets are saying, OK, these real rates are attractive.
08:00But boy, maybe they have to back up a bit more to get all this financing done.
08:03And that, to me, is a big one.
08:06Give us a little more detail on how you are balancing your portfolio.
08:09I took a look at some of the numbers.
08:10It looked like high yield and securitized you've got a fair amount of.
08:14And there's some other stuff.
08:15So my fixed income portfolio, so BINC is our big ETF.
08:18You know, bonds are very different than equities.
08:20In bonds, my upside is they pay you back.
08:23So I know I just got to create a portfolio of people that is as boring as possible, that's
08:27as stable as possible.
08:28What is incredible about today's environment, you can create almost a 7% yield.
08:33So we're running about a 680 yield at an average rating of A minus.
08:38And by the way, with interest rate exposure, that's under three years.
08:42That is, I've lived much of my career never being close to decades for not being able to
08:47do that.
08:48So then what do I do with it?
08:49High yield, emerging markets, some securitized assets.
08:52I own more Europe than the US.
08:54And I just try and keep the quality of the portfolio in good shape and diversify it like
08:59crazy.
08:59And, you know, today, you don't have to stretch because these real rates are so high.
09:04High yields should be trading 150, 200 base points lower in yield.
09:08It's not because we have real rates high because we have an inflation issue or we have these real
09:14rates that are, you know, which make corporate investing pretty attractive today.
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