'We're Going to See a Productivity Revolution' Due to AI: BlackRock's Rick Rieder

0:00 Let's talk a little bit about this disconnect

0:02 that seems to be forming that we've been talking about when it comes

0:05 to the equity markets and the fixed income markets.

0:08 Because you take a look at equities in a vacuum, and it looks awesome.

0:11 The S and P 500 at record highs.

0:14 We had a 10% gain in April alone.

0:17 And then you take a look at the treasury market and the oil markets,

0:21 and it's a little bit of a different story.

0:23 There's a little bit more concern here.

0:25 And I just wonder, you know, how we sort of see this come back together,

0:29 whether or not that disconnect can persist and maybe get exacerbated.

0:33 So I so maybe I'll start from a technical point of view.

0:36 The difference in the technicals and the equity market and the bond

0:39 market are as diverse as you can as you can imagine.

0:42 In that, we don't create enough stocks.

0:44 We're you know, the buyback relative to the issuance of equities.

0:47 People talk to the IPO market.

0:48 It's tiny relative to the buyback market.

0:50 We don't create enough equities, and there's a huge amount of cash out there.

0:53 So you just get this continued buying, and then there's no stock.

0:56 Now if you have a bad piece of news, it can trend down for a day, a week.

1:01 In bonds, we're getting 520,000,000,000 a week

1:03 of trade of gross supply of treasuries.

1:06 There's no of supply.

1:07 So you have that.

1:08 That is distinctly different.

1:10 The other is we're witnessing a growth paradigm that is unbelievable.

1:13 That is I mean, I think this year, you can grow 6% nominal GDP after

1:18 a number of years of significantly positive nominal growth.

1:22 And then you see this in the earnings numbers that are coming out.

1:26 I've been pretty blown away by not just

1:28 that you have top line revenue that's impressive, but you have pricing power.

1:32 Pricing power is the worst thing you can have for the bond market because,

1:35 obviously, what it means from inflation side.

1:37 So I think it can persist.

1:39 You know, we think about portfolio allocation,

1:41 and I know we've gone through this.

1:42 You still have a lot of danger out there in terms of geopolitical risk.

1:45 But if you said, what's my convexity of upside, downside?

1:48 If you know you're gonna have either good news

1:51 or bad news and they're gonna correlate together oftentimes Right.

1:53 Like equities have a whole lot more upside

1:55 than the than quite frankly interest rates do today.

1:57 Yeah.

1:57 We'll bring this conversation to the corporate credit market because, you know,

2:00 the point has been made that spreads you've seen a little bit of widening,

2:04 but, you know, pessimists might say that looks complacent.

2:07 But when it comes to the strength that we're still seeing through,

2:11 in corporate earnings when it comes to equities,

2:13 I mean, I have to imagine that translates

2:15 to the performance of the credits as well.

2:17 So, I mean, it's pretty hard and people say,

2:19 you know, I don't like these spreads at these levels.

2:22 That being said, the yield fits portfolios, not just our portfolios,

2:25 but with your pension fund,

2:26 life insurance company, any insurance company, etcetera.

2:28 The yields are very attractive because the risk free rate is

2:31 high because central banks are keeping it there for for inflation.

2:34 So those yields are interesting.

2:35 It keeps demand at a pretty at a at a great pace.

2:39 The other thing that I think is significant is when you have know,

2:43 you people talk about, could you have defaults?

2:45 People talk about private credit.

2:46 They're stressed in private credit.

2:47 When the economy's growing at 6% nominal or let's say

2:50 I'm wrong and it grows at low to mid fives,

2:53 it's pretty hard to have a default cycle of any significance.

2:56 I've learned over my career, cash flow makes up for a lot of mistakes.

3:00 And as long as you have that sort of backbone of cash flow growth,

3:03 you're not gonna have any significant default cycle.

3:06 I I am curious that when we start talking about five,

3:08 even 6% nominal growth, I mean, where is that growth coming from?

3:11 I know there's been a lot of discussion about kind

3:13 of the accelerant that we've seen from AI and the technological spending.

3:16 Is that it?

3:17 Is that the the issue?

3:18 You know, part of why I you know, I've I've I've been pretty adamant about this.

3:21 You have a lot of The US economy.

3:23 It's actually in recession.

3:23 Yeah.

3:24 And part of why I've been a believer that even

3:25 if you grow this fast, Fed can cut rates.

3:27 The reason why I think they can is because what

3:29 is rate sensitive in the economy today is actually in recession.

3:33 So you think about traditional manufacturing,

3:35 you think about housing, you think about where young people,

3:38 low income people that are struggling,

3:39 and that's where the interest rate tool is effective.

3:42 But then you have two two parts of the engine that are steaming ahead.

3:46 You've got, obviously, AI, and that number is so big.

3:49 Certainly, on a short term basis, it's huge.

3:52 And then you've got consumption that's coming

3:54 from the higher income cohort generally Mhmm.

3:56 That's keeping it up.

3:57 So you've got an economy that's doing extremely well Yeah.

4:01 On two engines.

4:01 And then, by the way, for a lot of people in the country Yeah.

4:05 It's actually not going so well.

4:07 And so that's that's part of why and to your question about,

4:09 you know, the interest rate tool and how to think about it,

4:12 I think it I think you'll see a Fed

4:14 that will cut rates because of that part that's really going.

4:16 Well, I'm curious because this gets to the whole debate about monetary policy,

4:19 and, obviously, you were rumored to be in the running for the pitch here.

4:22 But, I mean, Kevin Walsh is coming in.

4:24 He clearly has, at least if you take him at his word,

4:26 is gonna approach monetary policy in a much different way philosophically.

4:29 And I asked this question to Allen Schwartz over

4:31 at Guggenheim earlier about this idea of the market also needing

4:35 to change itself philosophically if we are indeed gonna start

4:38 looking at the economy and monetary policy in a different way.

4:42 That is a long discussion, and I quite frankly,

4:44 I think one of most interesting discussions we have in the world today.

4:47 I think we're seeing part of the derivative impact of this AI,

4:51 the technology boom,

4:51 is we're gonna see a productivity revolution that nobody's ever seen before.

4:55 I mean, many companies including yesterday are announcing growth,

4:58 CapEx spend, and we don't need as many people.

5:01 Part of why I'm not that worked up

5:03 about inflation over the over the intermediate term.

5:05 Certainly, over the near term,

5:07 we've got a transmission from a variety of things, fuel being the number one.

5:11 But I think productivity and employment are gonna change,

5:13 and I I worry about and I've not heard anybody

5:16 give me a good reason why in the short term,

5:18 the transition in terms of employment is not a difficult one.

5:21 The one thing that I think will be different in terms of Fed perspective Yeah.

5:25 I think you have to be more prospective about where the puck is going Right.

5:29 Versus where we've been historic and the historic analogs

5:32 don't really work in what is a new era.

5:35 I'm curious on that transition, in terms of the labor market.

5:37 Do you think that will be a short transition?

5:39 Because that that matters.

5:40 I mean, if we're talking about a prolonged displacement of folks for years,

5:43 that's obviously a much bigger issue.

5:45 But if we're talking about something that's a little more truncated,

5:48 is that something that everyone can live with?

5:50 So listen.

5:51 I think the trans I think we're talking

5:52 about a it's certainly a couple of years.

5:54 I mean, it's pretty hard to project how the the world changes,

5:57 industries that grow relative to this.

5:59 But for the next couple of years, some big industries,

6:02 I always talk about driving and some others that employ a lot of people.

6:06 Mhmm.

6:06 That transition, that retraining is gonna be and the size that it's happening

6:10 and the speed it's happening at will

6:12 be dislocating certainly for a couple of years.

6:13 By the way, I would argue at the same time,

6:16 we have a debt burden in the country that that is compounding higher.

6:20 So, anyway, see, there's some of the things that I think and I you know,

6:22 so I think this Fed will do a great job.

6:24 But I think the key is gonna be,

6:26 are they prospective about where we're going and about what the new

6:30 challenges are versus the analogs from history that aren't as relevant.

6:33 Well, I wanna also talk about whether or not the the market is ready

6:37 for the idea that maybe we're going to get less communication from the Fed.

6:40 We know that, you know, the idea of maybe not having a press

6:44 conference at every meeting has been floated,

6:46 and you also have a Fed makeup that looks

6:48 like there's going to be more dissents coming forward.

6:51 I think you think about the last Fed meeting, four dissents.

6:53 We certainly haven't seen that for a couple of decades.

6:56 So, I mean, what does that potential adjustment period look like if you are

7:00 getting less communication from the Fed and you are seeing dissents on the rise?

7:05 The Fed's objective is to create full employment and price stability.

7:09 It's not to make sure the markets feel

7:12 good about what you're doing at every meeting.

7:14 And I actually think having a a lower level of forward guidance,

7:17 particularly when you're easing.

7:19 When you're easing to tell the world, like,

7:21 we may go 25 every six weeks, I don't think is actually that robust.

7:25 If you if you kept your cards to your vest and said, okay.

7:28 Now I gotta shock the system because I'm trying to execute change.

7:31 I'm trying to get financial velocity moving.

7:33 I actually think lower and, you know, is do the markets feel like, gosh,

7:36 it's a little bit more uncertain and the increased vol volatility and so on?

7:41 Maybe at the margin.

7:42 But as long as you're effective on communication as to the metrics you're

7:46 looking at, this is what we're pivoting off of so the markets understand.

7:49 Okay.

7:49 I understand what the reaction function is gonna be.

7:51 I don't think you have to be that explicit.

7:54 So, anyway, I think that I think it's super healthy to to pair that back a bit.

7:57 Yeah.

7:57 And it'll be interesting to see what that weaning process looks like,

8:00 but in your view, a healthy one there.

8:02 I do wanna talk about how the shape

8:04 of the yield curve might change going forward.

8:06 We were having a great discussion with Ann Walsh of Guggenheim yesterday,

8:09 she actually made the case that you could see a flattening come through.

8:13 You know, the steepener has been breaking hearts for years now,

8:17 and the logic made sense.

8:19 We had a cut cutting cycle come through that would lower the short end.

8:23 Maybe you see the long end rise,

8:25 but she's talking about the issuance that she's expecting.

8:27 Maybe you could actually see more of a flattening impulse come through,

8:30 and I wonder where you land.

8:32 You know, listen, I'm out.

8:33 You know, we run the CTF Gold Bank as you know.

8:35 That's been heard about it.

8:36 Yes.

8:36 No.

8:36 You've been very kind to mention.

8:38 We and so, listen, I'm part of what

8:39 has been effective heretofore is to say, gosh.

8:42 The long end of the yield curve, interesting.

8:44 I'm getting my long dorated assets through equities or a lot of people

8:47 are doing that, and my other portfolios are doing a ton of that.

8:50 And say, gosh, I don't need the thrill

8:52 of the back end of the curve moving around.

8:54 Yeah.

8:54 So I'd rather stay in the front of the belly of the yield curve.

8:57 So that's part of why you've

8:58 created this natural steepening tendency because you

9:00 get enough yield when you when you diversify in terms of different assets.

9:05 I will say people don't realize that 89% of the treasury's

9:08 debts in the zero to two year part of the curve.

9:11 Don't actually have that much debt when you

9:13 take what's net of the Fed's balance sheet.

9:14 So the reason why people get in the steepener

9:17 trades and I actually think fundamentally the curve could steepen.

9:19 The technicals are actually keep that from happening.

9:21 So listen.

9:22 I think if you said to me, where are we going in six months,

9:25 a year from now, we have to get the mortgage rate down in this country.

9:29 And do I think the back end can stay contained?

9:31 I think so.

9:32 My view is, like, putting on steepeners and flatteners,

9:34 hard to make money on that to your point.

9:36 But listen.

9:37 I think the ten year is gonna get down to 4%.

9:39 Okay.

9:40 But I think it's gonna take a little bit of time.

9:41 Can I just say when you're ready to really step out

9:44 the yield curve and go long duration, will you tell us?

9:46 Because we've been talking for years,

9:48 and you've been in the belly for a long time here.

9:50 Yeah.

9:51 Yeah.

9:51 So now maybe if yeah.

9:52 Maybe if we get on, we can talk about on the on the show.

9:55 No.

9:55 I mean, we're we're and by the way,

9:57 there's no like, says, it's this yield that I'll jump in.

10:00 I actually don't think I think what will

10:02 be the catalyzing influence is when you start

10:04 to see real motivation around the mortgage rate

10:06 coming down and some and by the way,

10:08 I think there's some fiscal initiatives that can

10:10 bring rate down and mortgage rates down.

10:12 But once you start to see that, then I think it's gonna be

10:15 then it's in place where we start to go out the yield curve.

10:18 I will say we run optimizers on our portfolios.

10:21 These real rates out the curve Mhmm.

10:23 Are pretty attractive.

10:24 I just think today, you've got some

10:26 inflation coursing its way through the system.

10:28 You've got a more you've got an alternative asset, I.

10:30 E.

10:30 Equities.

10:31 It's a better long curated asset.

10:32 But my sense is that we'll get a chance over the next few

10:36 months to to start to to start to go out the curve more aggressively.