Guest: Rick Rieder is BlackRock’s Chief Investment Officer of Global Fixed Income, Head of the Fundamental Fixed Income business, and Head of the Global Allocation Investment Team. Mr. Rieder is responsible for roughly $2.4 trillion in assets.
Recorded: 12/19/2023 | Run-Time: 49:41 
Summary: In today’s episode, Rick shares his take on the macroeconomic landscape as we kick off a new year. He touches on the set up for both stocks and bonds and why he’s focused on finding companies that have “rivers of fast cash flow.” We talk about several other topics including crypto, AI, Japan, the recent shift by the Fed, US debt levels, and much more.
As we wind down, Rick touches on his entrance into the ETF space this year with two fund launches.
Listen to Rick’s first appearance on the podcast.
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Links from the Episode:
- 1:30 – Welcome Rick back to the show
- 2:36 – Reflecting on current market dynamics
- 5:14 – The state of the bond market
- 9:00 – Rick’s take on inflation dynamics
- 10:55 – Areas Rick likes today
- 15:58 – Opportunities in fixed-income today
- 22:01 – Rick touches on a number of asset classes around the world
- 32:38 – Rick’s new ETFs
- 36:01 – Reviewing unexpected outcomes from the last year
- 42:06 – Rick’s most controversial viewpoints
- 46:33 – Thoughts on AI
- Learn more about Rick: BlackRock, Twitter
Transcript:
Meb:
Rick, welcome back to the show.
Rick:
Thanks for having me on. Appreciate it.
Meb:
We had so much fun last time. You were hanging out with an ETF guy. And lo and behold, welcome to the party.
Rick:
Thanks, Meb. It was a party that seems to be getting more and more well-attended. So, all of the number of people that are in the space, excited about the space, the number of models that drive around ETFs. And then I think, de facto, you got to be in this space. We’ll continue to grow. Mutual funds are still a really, really good avenue. More and more people want to be in this ETF space.
Meb:
Oh, great. I want to touch on those later and the strategies within them, but we last spoke about a year ago. Listeners, you can find the show note link to the episode. It was a lot of fun. The world felt a little different. It was a nasty year for markets last year. This year has been a bit different as they always are.
Give us a little high -level thoughts. What’s the macro-environment now? I think the, Rick, word cloud last year would have been polyurethane. I don’t know what your word cloud this year is but give us an overview of what you’re thinking about.
Rick:
I think the resilience of the U.S. economy. That was why we use that polyurethane thing. And see, the resilience of the U.S. economy is incredible. Everybody’s going to recession. I still don’t think we’re going into recession, although I think we’re slowing, but I think people underestimate the extraordinary resiliency the US has, technology, service economy, et cetera. I’ve used this metaphor of the diving board.
You can’t make a big splash until the diving board is really high. In 150 years, we haven’t seen interest rates back up this much and create a negative… We’ve had higher interest rates, but you’ve never seen the total return of… So, for example, the 10 Year Treasury exhibit this loss this quickly. And so, I would say that you can’t generate real returns or make a big splash until you lift the diving board higher and higher.
And then you think about financial crisis after periods of real downturns. That’s when returns are better. And today, I think we’re moving more to a normal economy. Next year, the Fed projection is pretty close to this 1.5% real GDP, 2.5% inflation. Pretty stable.
Life never goes to the straight line to stability, but my sense is, if that’s right, you’re still getting to buy fixed income yields at levels that are incredible. You can lock in six, six and a half. Go out a little bit on the curve. You don’t have to go that far out, meaning you can generate real return, particularly fixed income. And you’ve seen in the last month and a half, all of a sudden, pretty spectacular equity-like returns.
And my sense is you will continue to see spectacular equity-like returns with the ability to build income for what is… after equities had such a terrific, terrific run, to augment what you want in equities is… well, that’s a pretty phenomenal thing. And my sense is, a year from now, people are saying, “Gosh, remember, we could buy this stuff at six, six and a half without taking a lot of risk.”
Meb:
Well, it’s funny you mentioned that. If you were to say the theme this year, in my mind, outside of my world, I feel like the T-Bills and Chill this resurgence of having yields for fixed income investors, particularly the everyday you see in money markets, just that number in their head, 5% feels like a very behaviorally significant number. Now, as you mentioned a lot of these long bonds, I think the drawdown on the 30-year was darn near half.
And I feel like if stocks did that, everyone would be losing their mind, going crazy, but bond investors are a little more sober I think. I don’t know, but this seemed like an event that felt very rare in markets. Why do you think investors in general, and maybe they didn’t, tell me your experience, handled it so well? Is it they saw the yield side of it versus the significant losses on these long bonds?
Rick:
So, it depends who you talk to. Three straight years, pre-November-ish. Three straight years are pretty devastating. Like you said, a long bond, 30-year treasury. It was the May 2020 30-year treasury is trading at $47.5 price. People don’t want to do that. Argentina has to have the treasury. People don’t view U.S. treasuries like AAA, asset, best asset in the world, safest asset in the world, I should say. Trading 47, that was pretty remarkable.
So, it depends who you were, in terms of the reaction function to that, but like you say, there has been this sucking sound of people saying, “I don’t want to own any of this stuff, get me into bills.” And the amount of money sitting in money markets, 7 trillion-ish, depending on how you measure it, sitting in money market funds, get me five, five and a half, going into bills, and I’ll sleep at night tax-efficient.
The thing that I think is part of… your beginning question, that I think, and I think every time, I didn’t mean probably on your show as well, people say, “What’s your favorite investment?” I’d say, “One-year commercial paper for… I don’t know, how many months. One-year commercial paper.” You can get six at one point, six and a half almost. Now, I think that the Fed is cutting rates. When are they going to start, March, or May, or June?
I think they’re starting in May, but it’s not. So, what happens? Five and a half is a fleeting number if they really are going to cut rates aggressively. So, my argument is you don’t have to go that far out the… You don’t have to go to 30 years and take the volatility around it, particularly the 30 years at 4%. Not interesting at 4% unless you’re a life insurance company or pension that has to own it.
But you can go after the three or five-year part of the curve, buy a lot of things like investment grade credit agency, mortgages, a little bit of high yield, European high yield. And you can still build a little bit of a six, and maybe the six because of, if rates rally, the six can turn into a nine, or 10 from a total return perspective. So, at some point, you got to jump off that diving board, but I’m doing it personally. I’m doing my funds. I think it’s worth locking some of the sum.
Meb:
So, we were doing some fun stats. And these aren’t particularly actionable insights, but for me, it’s more sentiment related where I was talking on Twitter. And I said, “As far as the long pond, really…” And it doesn’t look like it’s going to happen now after this ferocious rally over the last month or so, but I said, “The only time sequentially had been down three years in a row, and this is nominal, not real but, was late ’70s, early ’80s.”
And obviously, the future returns were great after that marking a slightly different level of interest rates, but phenomenal returns since then. I think we’re going to print a positive year now, at least it looks like it. We still got a week or two to go.
Rick:
Do you know that because of rates were high back then, and because for a long discussion about the duration, because when you have rates super low, and then that’s your starting point, even with rates being… that period, this was worse from a total return perspective, because you were getting no coupon, and where rates are starting from. So, your price return was horrendous. So, the bad is it wasn’t the… we’re double-digit interest rates. From a return perspective, this was even worse.
Meb:
You said things have been strong in the economy, which they have. And I feel like that’s been a bit of an outside voice this past year. I think the big topic that we imagined we were talking about last year, really everyone was talking about, was this concept of inflation, which got really scary for American investors that have the PTSD of decades past. And then it seems to be mellowing out. Do you see this as something that is mostly behind us at this point?
Rick:
So, I think inflation is coming down. And I think it will keep coming down. Listen, we went through a war that created an incredible dynamic around food prices, energy prices, on the backside of the pandemic, that it created logistics, real challenges around supply chain. And so, if you go on to next year, we think, by January, you’re going to see core PCE in the twos, and by the end of the year, within two and a half.
There are a couple of things that are the governor, or maybe some stickiness to inflation. One is wages are still high. Service-level inflation tends to pivot off of that, too. There is truth around infrastructure climate-oriented spend, near-shoring, reshoring. So, there’s some stickiness to it. That being said, people say inflation is going to be high for years or, artificial intelligence, we’re going to go through a productivity enhancement.
People say, “Gosh, here’s where we’re going to be a year or two years hence.” AI, I just read a study that showed the amount of impact on AI a few months ago. It could be incredible, the number of augmented business functions, et cetera. So, my sense is a long-winded way of saying, “I think inflation is coming down.” I think that supply chain shock is largely done, save some other major event.
And so, I think we’re going to get to more normalized, but we project inflation is coming down to two and a half. We ran for 20 years at under two, one and a half to two. So, there’s some stickiness in there, but, by the way, the Fed can live with two and a half and so on. And I’m pretty outspoken about it.
Meb:
Good. Well, all right. So, we’re getting a presence in our stocking now. Cool. Let’s talk a little bit about market outlook 2024. So, we turn the page on 2023. Do you have any favorite areas, sectors, geographies? What type of investments look particularly interesting?
Rick:
So, the first thing I would say is you can build a six-and-a-half and lock it in for three to five years. And so, my favorite is in a fixed income, some of these investment grade credit agency, mortgages, securitized assets build a six-and-a-half. They’ll build that thing. You can still own a high yield. We’re not going to have a default cycle. And by the way, U.S. Europe.
The U.S., if you’re a dollar investor, they don’t get too technical because of what’s called the cross-currency base, because as a dollar investor, you get a benefit from investing European assets. You build things like European high yields. You get 10% investment grade in Europe. You get six and a half. By the way, we used to finance European investment credit negative yield. Think about that. In 2021, 88% of the front end of the year was a negative yield.
So, those assets, I love. Just put them away. And then I think the equity market is going to do its thing. We had spectacular returns driven by seven stocks. And I think for the next couple of years, I’ll say, “Oh, gosh, I’m going to buy 60-40. I’m going to take 60. I’m going to hold my equities.” There are a lot of sectors within equities that the multiples are okay, energy, healthcare, defense. And they trade at 14, 15 multiple, and were less, and free cash flow multiples that are really, really low.
So, the level of nominal GDP is still pretty darn high. So, companies can generate 10% return on equity. So, on average. You throw off 10% return on equity, the multiple is not stifling. I don’t know. I think equities will do eight, to 10, to 12. And then I’ll put six, six and a half in fixed income. Life is okay. It will never get there straight line. I’m certain of that. I’ve done this too long to realize it’s not going to be straight line to Nirvana. But I think you can have a pretty good go.
Meb:
We’ve heard so many times these people talk about traditional portfolios, 60-40 being dead. And it did have a nasty year in 2022, but that resets the opportunity set. When things go down, usually, yields go up, valuations go down, things look better. That’s the way this works.
You mentioned the Magnificent Seven and then equities doing okay. Do you have to move away from market cap weight? So, the market cap weight, obviously, having a pretty heavy tilt in that and weighing in those indices. And most investors are market cap weighted. Do people have to start to tilt away or lean away from the market cap to get those eight, 10, 12?
Rick:
For the first time in my career, and/or my personal investment history, I love tech. I call it the fast rivers of cash flow. You want to be in these companies growing because they invest in R&D. They promote future growth. And by the way, we’re still watching some of these companies. It’s pretty incredible that in some other business is still generating 30% top line revenue growth at this size. It’s unbelievable.
But for the first time in, I don’t know, 15, 20 years, that I would say there’s some valuations that make sense around these sectors we talked about. So, I would say for some of my personal investing career, and I’m doing some of the funds, is I’m actually doing more in equal weighting. My view has been, particularly if you’re going to own equities for 10 years, 20 years, I’ve said own the fast rivers of cash flow, own the tech companies.
But for the first time, I’ve shifted some into let’s do equal weight, let’s do more equal weight, get into more healthcare to find some of these names we’ve talked about, even I know airlines, auto that beat up the multiples pretty good, even some of the banks recently. I don’t know. The multiples are okay.
And so, for the first time in a while, going into ’24, I think doing more equal weight. Again, I wouldn’t sell these. I still own a bunch of these tech companies. If you think about the amount of CapEx spend in this country, it’s going to go in it if AI is going to be what it is. Chip production, GPU expenditure, et cetera. I wouldn’t get out. But anyway, moving the needle a bit, I think, makes a bunch of sense today.
Meb:
We talked about the opportunity set of hanging out in treasuries, which you get a nice yield that we haven’t in a long time, but, I don’t know, of the opportunity set of a dozen other type of bonds that cross your desk that you spend time with when you’re up at 4:00, 4:30 in the morning… What time do you get up, your quiet hour?
Rick:
Oh, 3:45.
Meb:
Oh, my goodness. Up at that quiet time. And listeners, there’s a fun chat on the last one where if you’re making trades at that point, Rick might be on the other side. So, tell us a little bit about the world of fixed income because one of the challenges I think about is if you got this nice fat yield and treasuries or T-bills, are you getting paid to take on the risk of corporate or emerging market or all these other flavors? It’s like a Baskin-Robbins flavors of bonds when you can get this return and treasuries. So, do things look good? Areas that don’t look good? Walk us through it.
Rick:
By the way, part of the reason I get up so early, I was talking about, I trade during the London time because it’s the crossover between Asia and New York, U.S. And I just call that the unchaperoned period where, London, they tend to overreact to data. So, anyway, but away from that, so it’s a good question. If you’re just comfortable clipping five… Life is good. Five is okay in our careers. And so, in the last 10 years, the average yield on Treasury bills was 0.83%.
Five is pretty good. By the way, if you’re the U.S. government, it stinks because we’ve got a debt problem. We’ve got too much debt in this country. The government has too much debt. We’re funding it now at five and a half. It’s a problem that people realized this… I think policy makers realized this two or three years hence. But as an investor, it’s pretty good. As an individual, it’s pretty good. But I think people underestimate… Let’s get out the curve a little bit.
Lock it in. And to your point, do we need to own a lot of high yield? And so, one of the things that’s unique about bonds today is to get six, six and a half, six and a half now, it’s not that hard. To get eight is hard. I got to go down the credit spectrum. I got to buy some CCC high yield. I got to buy some leverage loans. I got to get some EM. And we own some EM. We own some high yield. But boy, I like owning it in a place that is respectful of their volatility.
And what if the economy slows? And listen, I don’t think we’re on a recession but we’re going to slow. You’re going to have some more defaults. EM always wakes you up with a piece of political news. Wow, I didn’t expect that. So, I think, at the end of the day, if you’re comfortable with six, six and a half, life is good. And so, we’re not going to go there. One of the things that is spectacular high yield, 72% of the financing and high yield happened when the funds rate was under 1%.
These companies took advantage of it. They said, “You know what? We’re going to get these rates.” Remember, high yield was three and a half, four. And so, the companies turned their debt out. They don’t have a maturity wall. I found that you can’t default if you don’t have debt maturing.
But you need to own a lot of it. And I’d say in our portfolios today, we’re really comfortable owning investment grade credit. We’re really comfortable owning agency mortgages. You can buy AAA CLOs, clip a really nice yield. So, I’d say high-yield EM to B-minus in a portfolio. It’s not a D, but you don’t need to own as much of it.
Meb:
We touched briefly on stocks and Magnificent Seven. I wonder at what point this attractive yield becomes a vacuum-sucking sound? Behaviorally, it’s hard to come up with things like the Fed model where yields compete with equities, but theoretically, I feel like most people actually believe it. And if they believe it, it might be psychologically impactful on their behavior.
And I joke for a long time, my Bank of America rewards, they would e-mail me to tell me that the yield went up from 0.5% to 0.07%. And they were very happy about it. I’m like, “Whoever sent out that e-mail is like… you had to be crazy.” But now, it’s actually 5.07, or whatever it is. In your circles, do you chat with people that the flows are starting to compete with fixed income?
Because for forever, all the acronyms, ZIRP, NIRP, all these different things, where fixed income was zero. So, it was a lot easier to do the comparison. But now that it’s at five, six, seven, eight, to me, that starts to become a very real competing asset. Is that something you hear, or is it impacting behavior yet?
Rick:
Yes and no. So, it should be, but today, people have said exactly what you said. People have said, “I’m going to sit in cash, clip five, and then I’m going to own equities.” And so, the technicals in the equity market are maybe the best I’ve ever seen in my career. So, think about the numbers. There’s no IPO calendar. 20 billion, I think, has come here to date, maybe 25 billion. There’s 800 billion of stock buyback that’s happened this year.
That’s not people’s 401k. That’s not I got income coming in. I put X amount in equities. 800 billion stock buyback, normal allocation that goes into equities. And there’s no supply. And by the way, you think about the exact opposite of that. Treasury bills were issuing 400 billion a week of treasury bills. So, the technicals in the equity market are unbelievable.
So, I think what happens is people sit in cash, then they hold their equities, and equities move higher because I think people underappreciate the technicals are incredible. So, what I think is going to happen now into 2024 is I think you’ll see people take money out of money market funds, put it into bonds, because you can clip and lock in some of this yield. We’ve seen that last month or so. And I think they’ll hold their equities.
So, I don’t think there’s a big reallocation. Particularly, if you think equities… say, the technicals are great, they can throw off this 10% ROE. I just think what happens now is people say, “Gosh, I don’t want to miss the trade.” By the way, it’s not crazy. If you get 100 basis point rally and rates, we’ve got a lot of it recently, you can get double-digit returns and stable, like you said, quality assets.
And so, why not do that? But I don’t think there’s a reallocation because I just don’t think people are wrong. Look at most strategies. I think the equity market is not going… or they have not gone up that much. I look at their competitors. People are underweight equities. So, I don’t know. I think the equity market is fine. And technically [inaudible 00:19:56].
Meb:
So, let’s bounce around a little bit. You seem pretty positive and content on the traditional spots, which I think is great. Let’s get a little weird. You had referenced Argentina earlier. They got a lot going on down there. There’s always a basket case of financial markets.
But as you look beyond the shores of traditional assets, this could be foreign assets, but this could also be real assets. So, we haven’t even really mentioned commodities, gold, real estate, Bitcoin, all that fun stuff. Any general thoughts of field of the traditional core portfolio that most U.S. investors think about?
Rick:
We’ll go around the world. So, first of all, I think Japan’s really interesting. For most of my career, Japanese equities, why? For the first time, you actually have wage inflation. It’s really happening. And so, I think Japan is an interesting place to get equity exposure. India’s obviously gotten a huge amount of attention. The stock market there has done well. I actually don’t think most of the valuations in India are interesting at all.
What we’re doing is doing more mid-cap stuff because you got to find these companies that are big caps. There aren’t that many. And they trade rich. But India is a place that I think is going to be interesting going forward. We take some shots in parts of China that have really come under pressure. And we don’t own that much, but there are some interesting individual name stories that I think were taken advantage of.
EM, I think, in local, some of the local rates, EMs cutting interest rates. A lot of places are. So, some of Mexico, Brazil, I think, are places to take a shot at. And listen, all of this gets into the world of controversy, but I think the crypto, and particularly some of the Bitcoin, et cetera, has proven to be… there’s some durability to it. There are more people in the space. And so, it’s something that I think more and more people have become receptive to, so.
Meb:
Always interested in things that don’t die that are hard to kill. That seems, to me, to be enduring. Although, you can buy gold bars. I learned this past week, you can buy gold bars, not only on Costco, but on Walmart’s website as well, which Costco has announced they sold 100 million of gold bars, which I found-
Rick:
I didn’t know that.
Meb:
… astonishing, but India and China are probably like, “Oh, please, that’s a drop in the bucket.” Japan is a particularly interesting one, because the amount of people that I’ve heard similar sentiments, “This is an equity market that’s essentially had no real returns for 30-plus years.” But the amount of under allocation statistics… We posted one on Twitter the other day.
We’ll add to the show note links about how far… It was in our Idea Farm Newsletter. It was 75 facts from 2023 that were interesting. And one of them was about how under allocated investors were to Japan, but this is usually true of foreign in general, particularly emerging markets.
But Japan is not some tiny economy. It’s a top-three type of economy and market cap that the governance seemingly is changing. We’ve seen a lot of buybacks there, which is not something that historically they’ve done a ton of. So, that’s going to be a fun one to watch. I’ll be over there in about a month. So, I’ll give some boots on the ground.
Rick:
Agree. That’s pretty incredible. It’s one of the most attractive… Well, one thing I will say, it’s hard finding a lot of great companies that aren’t fully priced there. So, you got to do a lot of digging. The banks are interesting, these prices automation, and the automation companies are interesting, but you definitely have to do your work.
Other than, quite frankly, we bought a lot of the index and just topics. We like topics more than the game. So, I don’t know, but we think it will probably do okay from here. Some of the [inaudible 00:23:27] are interesting as well.
Meb:
We’re excited as excited as a quant can be. I’m excited to cheer for the names that they spit out. So, we’ve talked about a lot that you seem pretty happy with… anything where you’re like, “Oh, man, this doesn’t look good. I don’t like this. Stay away. Put this coal in your stocking, this asset, this strategy.” Is there anything in particular that you’re a little nervous about on assets and various investments?
Rick:
So, the one thing that keeps me up at night is, I think, the U.S. debt issue is a problem.
Meb:
And how does that ever come to a head, though? Everyone, I feel like, worried about this forever. Is this something that just doesn’t really matter to what matters?
Rick:
I think that’s exactly right. I think what happens is… So, in 2024, are people going to lose sleep over it? No, but what happens is there’s a cumulative effect because if we don’t deal with it, then what happens is, and I always say, policymakers generally don’t deal with things until the shark is right next to the boat. And this is going to get right next to the boat. In January, it’s not going to get next to the boat.
What happens is this cumulative effect, because the Treasury issues so much of their debt at the front end of the yield curve, so much in bills, massive amounts of bills. We used to issue them at zero to one. Now, we’re issuing them at five and a half. So, what happens is our debt burden and our debt service, which is even more important, just keeps growing and growing and growing.
And then a year or two years hence, the debt service is going to eclipse the spend on military, and all the discretionary spending in this country is going to get used up by debt service military, and then, obviously, entitlement, but mandatory spend. It’s a problem. Are we going to deal with it in 2024?
Probably not, but, boy, they’re going to go through… If you said to me in 2024 they’re going to be… You’ve seen some of this recently, even in a good market, failed auctions for treasuries, because we’re issuing at a pop. In a given day, we’re issuing… What did we have last Monday? 250 billion in a day. We’re doing 650 billion a week sometimes. On Monday, we’ll have a two-year option, a five-year option, to a 13-week treasury bill, a 26-week treasury bill.
And, wow, in between 11:30 and 1:00 in the afternoon, Eastern Time, in an hour and a half, we’re going to price 260 billion. We’re going to have, during 2024, people aren’t going to show up one day for the seven-year note. They’ll be like, “Oh, my God.” So, it’s something that keeps happening because it’s too big. And I don’t think people are going to deal with it. But mark my words, there will be bouts of volatility with it.
The other thing, obviously, geopolitics, you got to really think through where your investments are given the geopolitics are unpredictable. And then, I’d say, then you got to keep an eye on China in terms of growth and influence, and how that develops over the year, but we’re definitely not… Like you were saying, I feel okay about things, but I bet, December 31st next year, we’ll be sitting like, “Wow, that was easy.”
Meb:
Maybe the AI overlords will save us or just turn us into pets by then anyway, so it’s not going to matter. I want to hear about your ETFs, man. This is exciting. You’ve launched two now. The first was, I believe, the flexible income ETF BINC, and then the total return ETF BRTR. Give us a little overview.
Rick:
So, the first one is this one bank that we’re running as a high-income ETF. So, we’re trying to keep it at about 7% yield. Recently, we’ve dipped down at six and a half. To your comments earlier, is it worth stretching to get seven? I don’t think so. So, we’re going to let it run at about six and a half. The idea being diversify it, securitize assets, parts of investment grade, European investment grade. Just be tactical.
Anyway, the reason why it’s grown, quite frankly, a lot faster than I thought, we’ve gotten a huge amount of nice notes around it, media around it. And I think it’s a headline today. It’s just being tactical, trade six and a half with low volatility. And I think we literally are 100% of the yield of the BB high-yield market, and we’re half the volatility.
So, it’s gotten a lot of attention. I think it’s going to grow quite a bit. I will open them, I think, in the beginning of the year because people more and more are looking to get that yield with… And like I said, there’s 68,000 securities in fixed income. It’s a hard market if you’re not in it day and minute to minute. And so, we use a lot of research.
Meb:
Well, I think that, not to interrupt you, but that’s such an important point. And we talk to investors a lot about this. We say, look, global stock market, the U.S. stock market, you’re talking about thousands of securities, and global, maybe 10,000 really investable, and the private markets on, say, private equity type of investments.
There’s a lot of arguments that I think are bunk and bogus in the private equity world, that no volatility angle that Cliff talks a lot about, and a bunch of others. But breadth, meaning the number of choices, to me, is the one they should be talking a lot about where there’s orders of magnitude, more choices.
And the same thing is true in your world where fixed income… My God, tens of thousands of potential choices out there of every flavor. Most of them, it’s not as easy as just buying Google or IBM under E-Trade account either. So, it’s a lot more complex area.
Rick:
So, you think about, if people say commercial real estate, oh, my god, I don’t think it’s commercial. Actually, you think about places like hotels, and the dynamic around hotel financing. And by the way, because of the stress in some places in the banking system, you get to finance some of these businesses with great collateral, great structure, great covenants, cashflow sweeps, et cetera, but it’s pretty complex unless you’re in it, doing it.
And are you financing at the top of the stocks, bottom of the stocks? It’s really complex. So, anyway, but the beauty of it is you can finance at attractive levels. And so, it’s a big part of fixed income. We do more in our mutual funds, but some in the ETFs where we can. But like you say, it’s a really diverse set of things you do. So, that’s been one that we’re super excited about.
And we just launched BlackRock Total Return, which is pretty similar to what we run in mutual fund form, a total return fund, similar to a core plus strategy, or a core plus strategy, where people say, “Gosh, I own equities and I want to have that 40.” This gets me the 40, and has outperformed the AG almost, I think, every year, almost every year, on all these straight years.
But it gets you some of the additional return because we can do things, eliminate bad parts of the index, one of the other secrets in fixed income. The more you lever, the more you put on debt, the more you’re in the index. That’s not where you want to go. And there are some parts of the index that trade too rich, like agency debt or supranational debt. They trade it like nothing. You can buy treasuries at the same level virtually.
So, we’ve cut that stuff out. We’ve cut out parts of the yield curve that don’t make a lot of sense today, like there at the long end. Why own it? It might do more than five, sevens, tens. So, anyway, we’re excited about that, that people will use them, and are starting to use it for… I can marry that to my equity portfolio, create my 40, do it in a way that’s efficient, where the people use ETS for tax strategies, et cetera.
Meb:
So, let’s say, there’s some advisors listening to this call, and they say, “Okay. I’m going to check these tickers out,” how do they think in terms of conversations? Because we’ve had some over the years where, with the way we thought investors may use these funds, maybe it didn’t turn out to be the actual way they use them.
But is there a way you talk to investors and say, “Hey, look, this is how we think about positioning these funds in your portfolio, the core satellite placements for AG, blah, blah, blah.” Where should investors that are doing a strategic allocation slot these in?
Rick:
So, like everything, that depends on how much you own in equity, how much you own in real estate, what do you own in private equity, et cetera. So, the way I would think about it, though, on these two funds… The income fund is one where I say, “Gosh, I want to generate… I want to hold a lot of income.” And then we don’t run as much duration and much interest rate sensitivity. So, we run a two-and-a-half-year, two-and-three-quarter-year duration.
So, it’s not going to move around as much as interest rates, but it’s a lot of income, and it should do its job. And if rates rally, it will do its job and throw off a lot of income. The total return one is much more of an AG. If I own a lot of equities and a lot of beta, it’s got a longer duration to it by three or four years longer duration to it. It will move.
And if interest rates go up, it’s not going to perform as well, but if interest rates drop, total return will give you a really good… And particularly, if we’re in that normalized world where economy really slows, you want that interest rate sensitivity. You want that attached to your equity portfolio. And so, that’s how people say, “Gosh, hold on, I want to own some total return,” similar to the way people owned it for 30 years when rates came down.
So, now, because there’s more, you’ve got a Fed, that’s more two-way. And if you look at, gosh, they’ll cut rates if the economy slows, but they’ll leave it here, it’s a pretty good hedge now, whereas for the last three years, and the way you opened the show, it’s like it wasn’t because it boosts. Inflation moved up.
You got hurt on rates, and you got hurt on equities, but now it’s much more two-way. So, anyway, but they’re different. Depending on how much equities you have, how much beta you have, how much real estate, et cetera, I would implement them differently based on that.
Meb:
Good. Just buy in both. I don’t know if in these strategies, but I know in some of your others, you do some hedging. And I don’t know if it’s through shorting futures, or how you guys swaps, or how you guys do it. Are you doing that in these funds, too, or is it purely long only?
Rick:
Not as much. So, these funds, the idea being they’re puzzle pieces for this income, the one bank that we talked about, you’re going to buy that income. And it will have some volatility. It has a lot less volatility than anything else, than the AG, than high yield, et cetera. What we do is we tactically move around. We’ll take some beta down. We’ll get it more into high quality, but it’s going to do what it’s going to do.
Same thing with total return. We’ll move around tactically. In our mutual funds, I do a lot of hedging. I run this unconstrained fund called SIO, Strategic Income Opportunities. I do a lot of hedging. I use equity options. I use the dollar. I use a lot of hedging to try and keep… Pretty proud of it.
I’ve done more than double the return of the AG at half the ball for a long, long time, but I’m using a lot of hedging tools. The idea of the ETF is it’s going to do what it’s going to do when you can put it in the model and assume that it’s going to have this, but it will have more volatility, more sincere than what we’re trying to… what somebody presumably was trying to achieve for that tool.
Meb:
Cool. Well, listeners, check those out. By the time we talk to him next year, he’ll probably have four more funds. So, we’ll keep an eye out. And we’ll update on the ETF landscape. Let’s bounce around with some other ideas. Anything on this past year really surprised you, I think, either in the macroeconomy or in the investing world where you look back and shake your head a little bit and say, “Wow, that was weird,” or, “That wasn’t what I expected.”?
Rick:
So, oh, gosh, I’m going to think it through. Obviously, I always think about the things that are most recent. The shift in the Fed was unbelievable in two weeks, three weeks. And by the way, the data didn’t change that much, but all of a sudden, the Fed going from, “We got more to do on inflation. We got more…”
All right. Now, we’re going to start cutting… I’ve been pretty blown away by that, how fast, because usually, I was on the Feds Investor Advisory Committee for eight years, and they’re very pragmatic about communicating, setting people up for a transition. That was fast. Anyway, my guess is the markets think it’s faster than it really is. But anyway, that was surprising.
The long end of the yield curve as the economy slowed, the incredible bid at 4% for long bonds, I think a lot of it is pension and life insurance that are less sensitive because they’re matching a liability, but, wow, I don’t know why people want to own that asset. That’s been surprising.
I think the technologies in the equity market are incredible. The technology performance has been amazing. And then obviously, the inception, the growth. I think a lot of it, people say, is AI. Definitely, but, boy, I think people underestimate these businesses throw off a lot of cash. And they reinvest in R&D. But the price performance after last year, it pretty blows you away.
Meb:
The rivers of cash flow. I can tell you, these tech firms, you know what’s interesting to me, has been, I think, most American investors, we talk a lot about… At this point, the cycle are not as interested in foreign investments.
But we’ve started to see a lot of interesting tech companies, tech stocks in the emerging market space, where it’s combining a bit of the fundamentals but also the performance and momentum, which is really what hasn’t been there for a long time. China has, I think, really struggled this year, but other countries are doing quite a bit better.
Rick:
Hey, man. Can I throw one other thing that I think is interesting?
Meb:
Throw out more than one. Throw out a dozen.
Rick:
The other thing that’s been extraordinary, and I think we call this okay, but it’s this dynamic around healthcare change and this GLP-1, the Eli Lilly’s and Novo Nordisk’s. This was an extraordinary. And the impact it had on companies, you wouldn’t even think that it impacted it from kidney to heart failure, et cetera. Pretty remarkable. And I think for the next couple of years, we’re going to see something around the ability to deconstruct DNA.
You’re seeing some, hopefully, encouraging things on cancer and cancer development, brain health. I think the next couple of years could be a pretty amazing point in time. And you spend a lot of time looking at companies trying to figure out where do you get into some of these spaces, but I think that’s going to be…
Assuming you throw out things that surprised you is we think that technology is real, and we think it’s… but the impact that it had, oh, something like McDonald’s stock came under pressure because people were worried about the GLP-1. Wow, did you think people would eat less Big Macs? I guess that’s a pretty amazing thing. And I think the next couple of years, we’re going to see some pretty wild discoveries, I think.
Meb:
I cut my teeth coming out of university. My first job was a biotech analysts. And this was all the excitement. And listeners, as big as the internet bubble was, there was equally as impactful biotech bubble because the original sequencing of the human genome which how many over billions it costs to that point. And today, I think it’s 1,000 bucks now.
I just sent off my swab, I can’t say swab without saying Schwab, my swab of my DNA to a company to get sequenced. And I think it was 500 bucks for the whole kit and caboodle. I haven’t got it back yet. So, who knows where it’s going? But biotech, it feels like it, in a Gattaca sense, has really turned the corner. You’re starting to see a lot of these therapies.
I’m a quant guy, so every stock pitch I hear… One of the reasons I’m a quant is they all sound good to me. I used to go to the value-investing Congress. I listened to Buffett or all these hedge fund managers in every pitch, or every even time I read Baron’s, I’ll go read and listen to you, guys, talk about best investments next year. And they all sound good to me But I have had a buddy, Steve Sjuggerud, shout out Steve, who… It was a year and a half ago.
He was talking about these drug companies. And he’s talking about Lilly and Novo. And he said, “You want to be buying these stocks.” And he said, “I lost 50 pounds on this already.” And I just nodded and I said, “My discretionary stock picking days are long behind me.”
But in the last year, I wish I had listened to him because the impact they’re going to have, it could, theoretically, even though everyone knows about it now, be understated if it really has the impacts in the world of, say, alcoholism, and other areas. I’m sure there will be some side effects, too.
Hopefully not. Fingers-crossed. But it’s exciting. Now, the crazy part is if you look at the biotech stock charts, a lot of these biotech ETFs, you got a little run in the last month, but they straight up have had zero returns since 2015, close to, some of them depends on the index you use, but you’re going on better part of almost a decade. They really peaked in ’21.
Rick:
I’m going to tell you. We’re in the business every day, working on big research teams. It is hard to pick them up.
Meb:
It’s going to be exciting. Fun times. They’re all going to live to 100 or start planning for it. All right. So, let’s say after this, you’re going into a holiday party, you’re sitting around drinking some eggnog or having a coffee with your team tomorrow, casual lunch, and you make a statement. And these are your peers.
So, 75% of them shake their head. They look at you. And they’re like, “Rick doesn’t know what he’s talking about.” It could be a framework, it could be a very specific, “I think this is going to happen, blah, blah, blah. I think this is something else,” what is a belief you hold that, say, 75% of your peers at this holiday party, at this lunch, would shake their head and say, “I disagree with Rick. I think he’s crazy.”?
Rick:
So, the one that I keep espousing, and I think some of them have been on your show, I don’t like economies going… I think this idea of investing in equities, like there’s cycles, like this is the classic. I don’t think there’s a classic anymore. People think I’m nuts about this. You have a set in economists, 70% services, 70% consumption oriented, and the variability on spending on healthcare and education. And it doesn’t really change that much.
There’s been, I think, it’s 13 quarters in 100 years that we’ve had negative growth in services during recessions. The average growth is 2% growth. I just don’t buy the whole, yes, there’s some variability, the economy is slowing. I don’t agree with that. People say, “You have no respect for history.” I think you have to have a healthy disrespect for history. You don’t follow it because others do and it impacts the technicals of the market.
But life is different. Regimes shift. Things change. And I think people always look for the analogue that this is what happened historically. And I think most of that. I think you have to know it because others follow it, but I don’t know. I think if you’re going to go to a party, and people say, “Well, think about this is just like that,” and I’m like, “Actually, I don’t think that way.”
I don’t know. I think you always have to identify the regime and think about where we’re operating [inaudible 00:41:49]. I think, surveys. This industry loves surveys. What are people feeling? People all feel the same way at the same time. If the markets going down, everybody’s like, negative on the economy. They’re negative on everything. And then, by the way, I think… What is the story?
And the number of surveys of the UK are predicting eight out of the last three recessions. They stink. And it’s like polling. It’s like election polling. It’s like they stink. I’m a big believer. Study the data. I want to hear companies. I want to know, we’re looking at some of the retailers recently, who’s buying electronics, who’s buying… They’re buying apparel. They’re buying electronics. Are they not doing as much in goods and doing more in services?
I think this industry spends way too much time surveying other people. And everybody gives the same answer. By the way, there’s a bunch of things that I think blow me away about the consistency of this is accepted, some of these things. And I just think things are different. I don’t think you got to evaluate. Man, I’ll throw one other thing you might want to hear is that I believe in quant. I believe in fundamental.
And I actually think that it’s the marriage of the two that really is successful. And I think you just got to do… On a fundamental, you got to do all your work. And to understand, like we just talked about, why is healthcare different than it was five years ago and why is… And then then use your quant to understand who’s long, who’s short, because, by the way, it won’t perform if everybody’s already long.
And so, I do a bunch of trying to figure that out. Marry the fundamental and the quant, because I just don’t think either of them individually is durable in terms of consistent performance. And everyone’s on that opinion.
Meb:
You hit a couple of things that I think are really interesting. Using history as a guide, but realizing it’s always different, I think that’s pretty instructive and instrumental, really, because so many times, I feel like investors are prepared because they haven’t studied history.
But if you hold it as a Bible, where it’s guaranteed to look like the past, it becomes problematic when things get even weirder, which they’re bound to do. COVID was pretty weird, but we’re always hitting things that have never happened before. And that’s the hard and makes this fun and challenging is trying to decide when these times are actually real, or it is something that reverts.
Sentiment is tough, though. We look a lot of the sentiment surveys. And I think they’re interesting from a magazine cover standpoint, but as far as placing investing decisions on them, it’s usually more obvious in retrospect than it is concurrent, but others feel differently, but I find it hard. I like talking about it, but I find it hard.
Rick:
No, I totally agree. I think you got to bring a lot of tools to the fight every day.
Meb:
As you look out into ’24, and this is a bit of an open-ended question so you can take this a couple of different ways, if you think about, you can say what’s on your brain that you’re excited or worried about, but the other one is, as you look back, what content, book, idea influenced you most this year?
And if you got one, good, we can talk about it. If you don’t, I have one also that I’m going to bring up either before or after. But is there anything you’re thinking about, anything you’re streaming as the year comes down, any good presents that suggest giving out?
Rick:
I’m a big gadget geek. I am maniacal about… I love all the new cool stuff that is out. By the way, part of why I like tech is, listen, they’re hardware companies. There’s not that many interesting new technologies. You go back in time, and there was the iPhone, or the AirPod, or whatever it was, and not that many that I think are that exciting now.
I will say that… What did I… there was a… What was it? There was a Wharton study. It was with OpenAI. It was this collaboration that talked about the impact of large language models. God, what was it? Six months ago. Nine months ago. And I remember reading that and thinking that the story was 80% of job function would be affected, and it was… I forgot the number, but something like it would eliminate 20% to 35%, 40% of the jobs.
They helped me around whether it’s investing in some of the chip companies who are the winners in AI. And by the way, I don’t think it’s clear who those winner… And I think that markets overreact on some versus others, but I don’t know. When you rewrite 2023, it’s hard to say. And there were some studies I read that really blew me away about that this could be the real deal.
Meb:
The Real Deal Holyfield. It’s funny. And I talked to a lot of friends that have implemented AI extensively into their personal or business life. I’ve toyed with it a lot. I played around with it. We’ve recorded my voice and trained podcast where they could read it, but from more of a just curiosity standpoint.
So, listeners, if you have any major use cases or ideas that you’re using, shoot me an e-mail. I’m curious to hear. I have some friends that have implemented extensively, and absolutely go nuts, swear by it. So, in 2024, it’s going to be on my to-do list. Are you implementing it on daily basis yet, or found any great use cases?
Rick:
So, I think the place where we are using it the most is two places. One, it’s helping us absorb a lot of data. We use tons of systems to help us absorb signals and, globally, to look at indicators around the economy, and pull from corporate results around what homebuilders are saying about the housing market.
So, that’s been really, really instructive for us. And that, I think, will keep growing. And I would say we’re scratching the surface of what can be done there. And the second is we do a ton with portfolio construction.
And the ability to run massive simulations and just run it over and over again and use technology broadly, artificial and otherwise, that’s been really, really trying to manage stress tests and manage what you’re doing. Those are the big ones. By the way. Today, somebody took one of the things I wrote, and I guess you could do it in somebody else, in other people’s style, rewrite this.
Meb:
Take Rick’s annual letter and put it in the style of Warren Buffett or Peter Lynch. That’s actually a good idea is to take something and then get five other famous investors and write in their style. Maybe we’ll try it for Meb year-end letter. That’s a great idea.
Rick:
Never knew you can do that. But anyway, I think we’re learning… done more for my business, for our business. I think assimilating and talking about… I don’t really love surveys. I use them, but I really love if we can get these companies come out with these retailers, there’s so much information in terms of what’s really impacting consumption.
And if we can absorb that quickly, and not just quickly, but comprehensively so that we’re not pivoting off of noise, like somebody said something that was… If we can use it comprehensively, that’s pretty powerful.
Meb:
It’s going to be fun to see what goes down certainly in the startup investing world. It’s certainly over a third but it’s probably half of the startups I see are AI-flavored. And, of course, all of them are close to pre-revenue also. Some of them are really starting to get some traction. Big differentiator versus I think a lot of the traditional crypto space was you’re seeing infinite use cases and actual revenue-generating companies and products pretty quickly, which is going to be fun to watch.
Rick:
It’s like you have to take a step back in time. Do you know we live for… it’s pretty much fixed income? We lived in this negative… Think about negative yields, how crazy that is. And I’m just like, you know what am I excited about in 2024? It’s like getting yield. For years, rates were at zero. We had to buy high yield at three and a half.
And you knew it was stupid. You knew that it was not stupid if you can outperform for a period of time but you knew ultimately that asset was not a fruitful asset. And you just had to be tactical about getting out when you wanted to get out. This is a pretty cool… I’m pretty energized going to 2024. Getting this yield and trying to lock it in, that… It’s a fixed income verse in that.
Meb:
No, I hear you. That was a weird time looking back on it. We’ve seen a lot of crazy stuff in the past couple of decades. The negative yielding sovereigns in trying to how to think about doing the math on something like a negative yielding mortgage, just…
Rick:
How about lending money to companies? And by the way, we’re going to lend you money, and we’re going to pay you for the right to do it. How is that possible? It’s insane. Looking at these European companies, they are owned by the U.S. companies as well. They took the money.
And now, these companies, they have no debt needs. So, a lot of them are big investor-grade companies. So, that’s part of why it’s weird. You’re getting the yield for them. And the risk is down because they took advantage of it. But lending money is crazy. Paying them is crazy.
Meb:
Part of what you were saying earlier on the U.S. consumer being particularly strong, I think, not a trivial amount has to do with their wealth in real estate, but also the mortgages, the vast majority, being locked in at low levels. They’re not floating. And so, the rates going up doesn’t affect them maybe the way that they would have been the past.
Rick:
No. People underestimate it, the leverage in the system. Let’s say that the lower income, the bottom 10%, is hurting a bit because they didn’t have the facility or ability to do that, but generally, within housing, a ton of that was done. And so, the overall leverage is in pretty good position.
Meb:
Rick, it’s been awesome. Where do people find out about the ETFs, what you’re up to, what you’re writing about? Where’s the best place to go?
Rick:
It’s a BlackRock website. And we have it on blackrock.com. And we have a ton of information on it. And then, obviously, all the new ETFs. It’s just a ticker symbol, BINC and BRTR. Knowing what we have on our website is great. I appreciate your mention and people taking a look at them.
Meb:
Rick, thanks so much for joining us again. We’ll have to do it again next year.
Rick:
That would be great. Thanks for having me.
