The transcript from this week’s, MiB: Rick Rieder, BlackRock’s CIO of Global Fixed Income, is below.
You can stream and download our full conversation, including any podcast extras, on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, what can I say, Rick Rieder runs fixed income at BlackRock. He holds all sorts of fascinating titles in addition to chief investment officer for bonds. He helps to oversee $2.5 trillion in various investments. And this is just a masterclass in how to manage assets, think about your career, understand the relationship between markets, between fixed income, the Fed, the dollar, sentiment, consumer spending, just everything is related and understanding what matters when is the key to your success.
If you’re at all interested in a lecture school in investing or fixed income, or active and passive, this is just a masterclass as to how to do it right. I can keep babbling about how fascinating I found this discussion. But instead, I will say with no further ado, my conversation with BlackRock’s, Rick Rieder.
You have a fascinating background, and let’s go all the way back to the beginning. You graduate Emory University with a degree in finance. You get an MBA from Wharton. Was fixed income always in the cards?
RICK RIEDER, CHIEF INVESTMENT OFFICER OF GLOBAL FIXED INCOME, BLACKROCK: I don’t think it was ever in the cards, actually.
RIEDER: Yeah. So when I graduated Wharton, you know, I wasn’t one of those people who had — you know, my family was on Wall Street and I didn’t really know what direction I was going in. And actually, I was going to go and do something different. In fact, I was going to be a strategist, financial analyst to work for a bank and write research reports. And then somebody convinced me to go into sales and trading, and I decided to do that. You know, they talked to me about, you know, love of sports. And you know, I love markets. And then when I got into fixed income, and I really liked the macro element to it. I really liked, you know, how you think about big picture. And you know, one thing led to another, there was a job opening in — once I graduated, I went to EF Hutton, and nobody remembers anymore which became —
RITHOLTZ: Those were the greatest commercials ever on TV.
RIEDER: Of all time. And I think, yes, people still remember them.
RIEDER: And then which was absorbed into Lehman, and I got lucky to go there. I got a job in fixed income, then the ball started rolling. But probably, two years prior to that or three years prior, I didn’t even know what fixed income was.
RITHOLTZ: So you spend, what, ‘87 to ’08 at Lehman Brothers?
RITHOLTZ: That has to be one of the most exciting two decades at a specific place and a specific time, anywhere on Wall Street. Tell us a little bit about that history.
RIEDER: So first of all, when I started, I mean, I started, this was July ‘87, market crash is —
RITHOLTZ: Oh, well, nothing was going on that year.
RIEDER: Yeah, so market crashes. And then, you know, it doesn’t look like EF Hutton is going to make it or potentially is going to go out of business. They get absorbed then Lehman buys them.
RITHOLTZ: Was this a distressed acquisition or —
RIEDER: It was. So Lehman paid a billion dollars for EF Hutton. And I was very lucky, there were 35 of us in the training program ad it looked like we all were going to get fired. And they took two of us, and I’m not sure how I made it through the strainer. But I found somebody who I really liked on the mortgage department and the mortgage agency, mortgage business, and took a liking to me and I went into the training program. You know, then by the way, it wasn’t like the crises ended between 1990 and the recession on the S&L dynamics.
And then in ‘94 and ’98, you know, all had a different stream to 2002. By the way, it seemed like every four years —
RIEDER: — there was — and then, you know, punctuating with obviously 2008. But boy, I mean, I went through — and I think I still have a scar tissue to this day of, you know, all of these — by the way, I think it’s an interesting cyclicality to markets, that every four years you need to recalibrate. You know, people are comfortable, leverage builds. And then all of a sudden, sometimes violently, it recalibrates. But I tell you, you know, going through it again in ’22, you know, you just know that the next couple of years are going to be pretty good because you just reprice things again. But I tell you going through those years, I’d love to skip those in my career.
RITHOLTZ: Mark your calendars for 2026.
RIEDER: Let’s see.
RITHOLTZ: And also maybe we should rename 100-year floods because every time someone goes this is a 100-year flood, until four years later —
RIEDER: Four years. By the way, it’s interesting that ’02, you know, why didn’t it happen in ’06? And so you think about what happened, well, monetary policy stayed too easy. And while I thought Chairman Greenspan was incredible, you know, he kept the policy too easy. Remember the housing market was starting to bubble. They should have started tightening ’06 and we should have had the recalibration in ’06. And the fact that it didn’t, probably created more pressure two years.
RITHOLTZ: Oh, for sure. We can spend a lot of time talking about ’07, ’08. We’ll get to that later. So what departments did you work in at Lehman Brothers? You were there long enough. Eventually, when you leave there, you’re running the firm’s global principal strategies team. So clearly, that was quite a successful career path. Tell us about the different departments you worked in.
RIEDER: So I mean, I started in while I was going to go into mortgages, and that was where I was taken out of the place from the EF Hutton Training Program. I went into a six-month training program at Lehman and I found the corporate bond business to be incredibly interesting. And I got to meet two people and you know, you learn in life, that it’s — and I’ve learned over the years, it’s all about the people.
RIEDER: And gosh, I found two people who were extraordinarily, I mean, I thought smart, capable. I love their business. And so I started in corporate bonds, and then I started trading international Yankee bonds, so foreign bonds denominated in dollars. I did that for a while, then I did cross over between investment grade and high yield. And then I ran the corporate bond trading desk, and then I did that for a while. Then I ran our credit business across emerging markets, money markets, loans, preferreds. And then I went to the principal strategies area before I left in May ’08 and —
RITHOLTZ: Oh, really?
RITHOLTZ: You hit the bid before —
RIEDER: Well, yes.
RITHOLTZ: — everything blew up.
RIEDER: Yeah, which, you know, seemed — yeah, which seemed depression, but it actually wasn’t.
RITHOLTZ: It’s dumb luck.
RIEDER: Yeah, it was definitely dumb luck. And in fact, it wasn’t even luck because I left in ’08 and I started my hedge fund. And if somebody said what would be the worst month in history to start a credit hedge fund, May of ’08 may have been the one or certainly closer. You know, part of why I left and brought my team with me, you know, this was an exciting point in time. The markets were bubbling and —
RIEDER: — there were going to be some opportunities, and then it would turn out to be calamitous. And so, now, I think part of why we merged into BlackRock in May ’09 was we did — you know, we had a tough go in ’08 but then started to do well in ’09, but we have an opportunity to move to BlackRock.
RITHOLTZ: You mentioned dumb luck, you very easily could have ended up in the MBS mortgage department —
RITHOLTZ: — at Lehman. You had a half a foot there.
RITHOLTZ: How did you escape a fate worse than death?
RIEDER: Well, I mean, when you think about it, that was ’87. You know, it probably was a good 20-year runway —
RIEDER: — after that. But —
RITHOLTZ: I jokingly say you could set the record on a racetrack. But if you don’t make the turn at the end, if you hit the wall, it doesn’t (inaudible).
RIEDER: A100 percent. That is right. But I found — you know, I was a financial analyst and I was literally — you know, what we talked about, I was going to go and do that again, I loved looking at companies. Both my parents are entrepreneurs. I love how businesses work then to think. For some reason, naturally, in school, I had a really tough go early in my school career because I didn’t really — I didn’t understand philosophy or psychology.
But business always made a lot of sense to me. And looking at companies, analyzing them, figuring out how they drive cash flow, how they manage their liquidity was — I mean, I found that phenomenally exciting. So I did it for a long time. And you know, I still to this day, you know, being in credit, I think people underestimate.
Like, I don’t really think top-down analysis works. I try to analyze the economy from the top. I think it’s too hard to do, being understanding how companies drive inventory, hiring CapEx spend. And to this day, we know when I have a view on the economy, or usually have a view on the economy or inflation, it’s usually driven because I read so many corporate earnings reports and trying to understand why they’re cutting inventory, why are they laying off people. So it’s been having a credit corporate background has been hugely powerful because I tend to every analysis we do, big picture starts bottoms-up. And that’s what informs — I find that’s the most effective way to inform your view.
RITHOLTZ: Is that how you ran R3? Was that the basis?
RIEDER: Yeah. So the idea being, you know, that we could analyze, dissect companies anywhere from, you know, senior securities, secured down to distressed. And we had a great team, many of which are still with me today, that I’m super honored. A lot of us have worked together for 20, 30 years, a couple of them over 30 years. But the idea being, you know, we were good at analyzing companies and could do it across cap stock, different sectors, its own globally. And we have a great team in Asia and Europe. So yeah, man, that was the idea. And like I say, that’s part of why it’s translated to a number of people coming to BlackRock and be with me today.
RITHOLTZ: So let’s talk a little bit about BlackRock. You said BlackRock absorbed R3. Tell us a little bit about how did that come about. Was that something you were planning on doing or —
RITHOLTZ: — the right opportunity just came along and you said, I think I can hang with you, fellas?
RIEDER: So I had known Larry Fink and Rob Caputo, our CEO and president, for a number of years. In fact, the only other place that I almost left Lehman to go and work for was BlackRock. And because I had such great respect for the people running it, there were actually more people than that, but Larry and Rob being the main drivers of the company.
And then, you know, after I would say the fall of ’09, you know, going through that duress around hedge fund to being in a — you know, it was a tough spot around the markets coming under pressure. You know, we started talking, and we were back and forth having a conversation about coming to BlackRock. And I remember Rob and Larry saying, we’ve been talking about for years, why don’t you do it now? And I had a big team with me and whatever reason, haven’t worked at places for a long time, very loyal. And I said, I got to bring my whole team. Anyway, that was a massive honor. They, you know, took 42 people.
RIEDER: And like I say, many of whom are still with us today. So, you know, the fact that they’re willing to do that, and quite frankly, even at that time, before BlackRock was this big, I felt like it was much the epicenter of finance, and I thought I wouldn’t have gone to — you know, our hedge fund started to do well again and I wouldn’t have done it anywhere else, because I thought this was a place that — like, how could you turn down the ability to be at a place that was — if you liked finance and you liked what we did, this was a chance to work somewhere that was, you know, the epicenter is before it got to be the size and scale it did.
RITHOLTZ: So you’ve been at BlackRock for well over a decade. You’re running fixed income for them, essentially. Tell us about what the process was from bringing over a team from your hedge fund to, okay, now, we’re just going to talk into BlackRock and see what we can do here.
RIEDER: Yeah. So I mean, the idea of coming over is we’re going to operate our hedge fund and work within the credit business at BlackRock. And somebody ended up leaving the firm who was the CIO and anyway, opened up a spot for me. You know, it was huge honored to be chosen to do it. So that was 12, 13 years ago, and which was —
RITHOLTZ: ’09, ’10? So you’re there for six months and Larry says, hey, I got a new gig for you?
RIEDER: No, I think it was — it must have been ’10. It must have been August of — I’m thinking through it, August of ‘10. And I know there’s a little bit of trepidation. I will say at that time, it was still a big place and there was a little bit of trepidation, but incredibly exciting. And like I say, I have so many of the team had come with me and I’ve gotten to know some really great people across the organization. So anyway, I was honored to do it.
And you know, I’ve always been investing in different parts of fixed income. And the heritage of BlackRock was in the mortgage business. But my background is in credit, but we had so many talented people in mortgages and that’s obviously a huge part of the fixed income market, that I felt like that team, you know, could take my shallow knowledge hopefully to the next level. And so then I became CIO then and, yeah, I guess I’ve been doing it for over a decade now.
RIEDER: Just pretty unbelievable.
RITHOLTZ: So let’s go over all your titles. You’re chief investment officer. You run global fixed income. You’re head of the global allocation investment team. You’re also on one of the executive management teams?
RIEDER: So I’m suddenly on the global executive committee.
RITHOLTZ: All right. So sounds like you have a busy day. Like, how do you spend your time? What takes up the most hours during the day? I know a lot of these things meet once a week or once a month. It’s not like they’re 80-hour a week jobs, but sounds like a lot on your plate. We haven’t even talked about the various funds you run.
RIEDER: So I mean, I get up at 3:45 in the morning.
RITHOLTZ: Is that true?
RIEDER: Yeah, I think it’s been —
RITHOLTZ: I thought I was an early riser.
RIEDER: Yeah. No, I’m —
RITHOLTZ: You beat me by an hour,
RIEDER: You know, I think, I would say to young people who come into the business, you know, why are you coming into finance? You got to really love it. You know, I love the business and I love, you know, it’s dynamic. So I get up at 3:45, you know, workout. But literally, the first thing I do is I check every market around the world and see where things are. And you know, I pretty much go, you know, whether it’s dinners or what have you. I go to, you know, pretty late in the evening.
But I’m pretty turned on by the markets, and you know, obviously our business. So it depends on the meeting you’re in. Obviously, people drive what we do. I mean, we’re not running an industrial company. I mean, it’s people drive what we do. So a lot of those meetings are talking to people, you know, strategy meetings, who are we hiring, what businesses do we need to grow? You know, where do you think the next opportunity is in markets? Much of how BlackRock evolved is, you know, trying to be pressured about what is the next evolution of what clients are looking for. So a lot of those meetings are about, you know, trying to anticipate where things go.
I mean, I have to say the first thing, and maybe I wasn’t very good at it early in my career, but you start to think about particularly on the asset management side. Like, you know, you got to take in what you’re getting today, but you got to have one eye on where we’re going. And I think in all those meetings, just trying to think through, get in front of where we’re going, whether that’s markets positioning our business, people, strategies, et cetera.
RITHOLTZ: So you’ve been with BlackRock since the financial crisis. Back in ’09, did you ever stop and think, oh, yeah, in a decade or so we’ll be $8 trillion, $9 trillion, $10 trillion? Was that ever in the realm of possibilities?
RIEDER: No. I mean, at that time, I remember when I came over, and then soon thereafter, the firm bought BGI and the iShares business.
RIEDER: But gosh, the thought that, you know, growing to the scale that we’ve grown into, never would have even been a consideration. Yeah, I will say, you know, Larry and Rob, and the whole operating committee and the executive committee of the firm are very thoughtful about where opportunities are, and they built the business piece by piece over the years. You know, and I think there’s something that’s really important about, you know, we run our franchise around; A, what is the client looking; or B, the risk system. So the Aladdin Risk system is what I remember when I came over —
RITHOLTZ: Which unique and specific to BlackRock, and not an off the shelf piece of software,’
RIEDER: Totally. Which is run by many insurance companies, pension funds who use Aladdin, and it’s a commercial enterprise for the firm. But I remember when I came to BlackRock, I knew about Aladdin when (inaudible) was on the sell side. And because remember, Lehman had the Lehman Agg and that was the benchmark. But what happened, Aladdin was able to take it and bring it alive in terms of how do you manage money.
And you know, it’s really been extraordinary around if you can analyze your risk, anything about optimizing your return, you could build, you know, how do you look at correlations, diversification. And I remember, I was like a kid in a candy store when I first started, and I said, wow, this is powerful. I mean, I said this to clients all the time, we could make the wrong decision on markets. But it’s never that we don’t know what we own or what the implications of that decision, given our risk system. And that’s been a unique benefit to the firm, and I think that’s part of how we’ve grown so much is, gosh, if you can make good, you know, hopefully more good calls than not. But you know exactly how they’re going to interplay within a portfolio, hugely powerful.
RITHOLTZ: So no one bets a thousand. But what you’re saying is the process and managing the information flow is every bit as important as the decision process itself.
RIEDER: A 100 percent. I mean, 100 percent, and you know, when clients invest with you, or rating agencies or consultants evaluate your business, it’s all about what is your process? Is it repeatable? And then you’re not going to embarrass them, or cost them money. And you know, we built the franchise around thoughtful investing. You know, we don’t swing for the fences on one investment theme. It’s always try and build diversification, try and do it thoughtfully, and try and be consistent return, without creating real pressure on the downside. You know, I think that’s particularly fixed income. You know, it’s not the equity market, and I run some big equity portfolios, you know, different. A fixed income is convex to the downside. You either get par, and they either pay you back or they don’t. And –
RITHOLTZ: Right. It’s return of capital, not turn on capital.
RIEDER: It’s the return. And so along the way, are you clipping enough coupon to get their equities? You’re trying to get convexity to the upside, but to have risk system and a process, a repeatable process. You know, particularly in my business, I got on fixed income. I say to my funds, a lot of my funds, let’s make a little bit of money a lot of times, and as opposed to let’s swing for the fences. Let’s just do it. Use relative values. Use all your tools, use your tools around the world, do it over and over and over again. And I think that model is repeatable, and you know, people aren’t shocked to the downside, which I think particularly fixed income is the key.
RITHOLTZ: So let’s talk a little bit about that. I think most public investors know about BlackRock from an equity perspective. But the company’s history is deeply rooted in fixed income. Didn’t it start as a bond shop, catering to pension funds and foundations? Isn’t that the genesis of BlackRock?
RIEDER: It is. I mean, it started as largely mortgages, fixed income bonds shop, and you know, create a closed end funds. I mean, Larry and Rob and the management team’s origin was in fixed income, and then —
RITHOLTZ: Larry? I’m sorry, Larry and Rob?
RIEDER: Larry Fink and Rob Caputo, so our CEO and president. But then over the years, you know, through an acquisition or their merger with Merrill Lynch Investment Management, all of a sudden became a big equity house. And to this day, where equities are bigger than fixed income today. And some of that is equities appreciate over time, and compounded return works in the equity market.
But now, you know, our equity business is larger than our fixed income, while both are pretty good scale. I mean, in fact, one of the businesses I run, our globe allocation fund, that is more of an equity fund. You know, again, the way you run that is different than you run a bond fund.
RITHOLTZ: So academically, we know that the passive side of equities over long periods of time tends to be a lot of people’s best bet, but that isn’t true in fixed income. There is alpha. There is above benchmark returns to be generated by active selection of credit quality duration and specific bonds. Tell us a little bit about how you approach fixed income investing. And given the massive scale of BlackRock, how do you take advantage of that?
RIEDER: So not many people know that, that most firms actually outperform in fixed income.
RIEDER: And —
RITHOLTZ: Really? That’s not widely known?
RIEDER: No, I don’t think so, but it’s partly why.
RITHOLTZ: Because the passive equity side, there’s just so much academic literature.
RIEDER: A 100 percent.
RITHOLTZ: And as soon as you dip your toe into the research on fixed income, because if you think about a fixed income passive index, you own everything, and a lot of it is not necessarily great. So getting rid of the junk, focusing on duration and credit quality, right away, you’re ahead of the game.
RIEDER: Well, that’s my pitch. So yeah, it’s —
RITHOLTZ: That’s so funny.
RIEDER: — so funny to say that. Yeah. No. So first of all, that is exactly right. I mean, maybe I’ll start with one thing in equity. So I think there are 4,800 equities, different securities globally. I think there’s 45,000 in fixed income. So your point about the ability to —
RITHOLTZ: 10x. Wow.
RIEDER: Right. And the ability to say, gosh, you know, there’s a lot of stuff in fixed income, that for a variety of reasons, central bank owns it, a pension fund owns it, insurance companies own it. It has no value. But, you know, it’s been in a portfolio for a long time. It’s stuck there.
RIEDER: So one of the beauties of fixed income is; A, finding one of the 40,000 securities using your tools, by the way, at times, using your liquidity, being able to buy mezz, you know, buying subordinated debt, buying what are functionally capital notes. But there are so many tools at your disposal, and let alone how much duration you’re taking, how much interest, how much credit risk you’re taking, illiquidity, et cetera. There are so many tools to try and outperform.
And listen, one of the secrets of fixed income is you generally try and carry more than the index. You generally want your income in a fund to be above the index. Can you manage that through downturns? And so when you get a downturn, like ‘22 or ’08, or what have you, you know, can you manage the downside because, generally, if you can get more yield than the benchmark, you’re going to outperform over time. By the way, you know, there crises at individual companies. There is exogenous shock that hits. But managing that downside so that one expression doesn’t hurt you, you know, you can run a good business that outperforms, you know, almost every year.
RITHOLTZ: So let’s delve into that a little more deeply. It can’t be just as simple as let me buy the highest yielding stuff because there’s a lot of, they used to call them junk bonds, now we call them high yield bonds. How do you decide what is a high quality, high yield? And how do you make the decision, I’m not comfortable with this credit risk relative to the return it’s going to throw off? What’s that process like?
RIEDER: You know, it’s funny because today it’s interesting, you don’t see this very often, but much of the BB high yield market is better quality in the BBB investment grade market. And that is because companies have been operating as BBs for a long time. A number of them are moving up to investment grade or aspired to move up to investment grade, where a number of companies in BBB that are at the lowest end of investment grade or maybe on the deceleration. So —
RITHOLTZ: That’s an odd institutional quirk that —
RITHOLTZ: — higher quality, higher yielding stuff has a lower rating.
RITHOLTZ: Listen, at the end of the day, there are so many metrics, you know, debt to EBITDA, your interest coverage. There are so many metrics that we dig in, what industry you’re in, what’s your liquidity. You got to really dig in. I mean, if you’re a AA-rated company, I generally don’t do a lot of, you know, thorough analysis. But if it’s single B, we’re doing an awful lot of work.
So, you know, when we look across fixed income, the beauty of having big teams around the world, you know, I tend to say, okay, I want to be an X amount mortgages, I want to be X amount credit, and then let the teams dig in and then, you know, think about — I’ll give a good example. Today, because people need the yield or looking for the yield, the high yield market is compressed —
RIEDER: — to the investment grade market. I don’t want to take the beta risk and a lot of high yield today. If I get functionally, 90 percent, 85 percent to 90 percent return on investment grade, I can sleep a whole lot better at night. And then maybe I take some risk in emerging markets or what have you. So it’s all about relative value. Are you getting paid for the risk today? So think about, you know, where’s the stress in fixed income? Commercial real estate is tricky today. Do I want to go and get that yield today? Probably not.
You know, whereas, parts of credit card, auto finance are more attractive. So it is constantly trying to think about where do you want to be in the capital stock? Where do you want to be in sector? Where do you want to be in the world? Like last year, did you want to hang out in Europe? Probably not. This year, you know, fuel prices are lower. the economy is stabilizing, China is growing. You know, we’re shifting money internationally. It’s part of why the business is so fun, is every year, every month, every week, you know, the menu changes and the opportunity set changes.
RITHOLTZ: We’ll talk a little bit about the inverted yield curve later. But since you mentioned getting return on the risk you take, how do you think about duration when the three-month Treasury is more or less the same or better than the 10-year?
RIEDER: So, you know, think about last year, I mean, every media event or any anything we did externally, and it’s always what people said, how much cash you’re running? And we were running a lot of cash. In my career, I’ve never —
RITHOLTZ: Meaning not invest in stocks or bonds —
RIEDER: Yes, sir.
RITHOLTZ: — but literally just dollars —
RIEDER: Just stay in cash.
RITHOLTZ: — earning 0.05?
RIEDER: Well, but as —
RITHOLTZ: A year ago, anyway.
RIEDER: Right. But then, you know, the front of the yield curve started to move up and it became pretty clear, all the central banks in the developed markets were behind the curve. They’re going to have to start raising, your price returns going to be negative, stay as short as possible, hold as much cash as possible. And by the way, zero was a pretty good answer for your return ‘22. So if we were getting zero or getting our income at the short end of the yield curve, that was nirvana because we weren’t taking such interest rate risk.
Today, it’s a little bit different because now we’re approaching the end of — by the way, it’s not definitive, but we’re probably approaching a point where the Fed is going to pause, Europe still got a bit more to go. So now we can take a little bit more risk, you know, push it a bit further out the yield curve, because now our aspiration is, gosh, these yields we think about, you know, today, the one to three-year part of the Agg, the short end of the yield curve, gets you 4.5 percent. The average for last 10 years was 1.4. We can now lock in 4.5, and maybe the economy is coming off, the central bank, not in ‘23, but will start to ease. And now, there’s a discussion about, gosh, maybe I can lock these yields in for longer. And so, maybe I’ll take a little bit of downside and push my maturities a bit further on the yield curve. And we’ve been doing —
RITHOLTZ: When you say out from 1 to 3, you don’t mean 10? You mean 3, 4, 5?
RIEDER: Correct. I mean, to me, that’s the sweet spot. I think the biggest opportunity today is interest rate volatility. In my career, I’ve never seen this before. We had a Fed that moved four 75 basis point moves in a row. Interest rate volatility was massive.
RITHOLTZ: ’81, ’82? You had to go back to Volcker to see that, right?
RIEDER: Yes, but I was still in college so I wasn’t —
RITHOLTZ: Me too.
RIEDER: But now, I mean, this massive move, and now what’s going to happen is we’re going to pause. Interest rate volatility can come down. Things like mortgages, like, we didn’t own many mortgages. Last year, it’s in our tactical portfolios. You know, why would you want negative interest rate shock?
RIEDER: So now, the Fed coming into a pause, interest rate volatility comes down, things like agency mortgages fit a portfolio, that gets you a little bit longer on the yield curve.
RITHOLTZ: So let’s think about that, that we spiked up to about 7 percent. It’s pulled back to about 6.5 more or less on the mortgage side?
RITHOLTZ: Are the expectations that, hey, that’s when mortgage rates are going to be for a long time, so MBS are starting to get attractive?
RIEDER: Yeah. I mean, now you can buy assets that are like mortgages. But first of all, they’re extremely liquid. And so whenever we build a portfolio, we think about every security has a tail to it. So you think about what is it doing for you? How much yield is it getting you? How much risk, how much beta, how much illiquidity, and so you try and take all those tails and say, okay, which ones am I willing to take and which ones do I want to extract? Mortgages, last year, I don’t want to take that interest rate volatility risk.
RITHOLTZ: Right. Clearly.
RIEDER: Now, boy, if I think rate volatility can come down, I’ll take some mortgage risks. They’re super liquid. They fit the portfolio nicely because, you know, having such liquidity through those assets, now, I could buy a little bit of emerging markets which are less liquid and more volatile, but also get me more yield. So it’s very, very different portfolio positioning today than, quite frankly, three months ago.
RITHOLTZ: Before we leave the subject of BlackRock, I feel like we have to talk about the funds you manage —
RITHOLTZ: — on their behalf, many of which have been awarded Morningstar gold medals as well as you received a number of recognitions about your funds. Let’s talk a little bit about strategic income, global opportunity, total return and strategic global opportunity total return. I’m messing up those names. Tell us about your funds.
RIEDER: Yeah. I mean, I’ve been honored to run some pretty great funds. I mean, our strategic income opportunity is a flexible, unconstrained fund. So unconstrained, you know, when you think about fixed income, when you say they’re unconstrained, it sounds like you’re hanging from the chandelier as taken risk. Unconstrained, this means I can take less risk. Because, you know, the point you made earlier about cash, I don’t have to be tethered to an index.
RIEDER: I can move around.
RITHOLTZ: You’re free to own what you want.
RIEDER: I can hedge my portfolio freely. Like last year, we can use the dollar. I can get short in some areas. So unconstrained, what we’re trying to do is create consistent return over time and that —
RITHOLTZ: Regardless of the exterior market —
RITHOLTZ: — conditions.
RIEDER: We didn’t make money last year. We were down. But we beat the aggregate index by I think 750 basis points. You know, years like that, if you recognize the regime and you lose less —
RITHOLTZ: What was the Agg down last year? Like 17 percent?
RITHOLTZ: That’s the worst year in 40 years.
RIEDER: Yeah. And so, you know, being able to recognize to use some hedges, run a lot of cash, and then, you know, you stay in the short end of the yield curve. And then today, it’s a little different. So the ability to be flexible and tactical is unbelievable in fixed income. But I think much of the future of fixed income is, you know, when you think about the growth of iShares and passive, can you marry an opportunistic tactical portfolio that, by the way, lets us invest around the world when things like emerging markets become a drag? So anyway, that’s why it has grown quite a bit over the years. And you know, it’s been an honor to have a number of awards to it. But I think it’s just creating consistent returns. So quite frankly, people can get yield, and then focus on the other areas where they take risk, equities, et cetera, private equity venture.
You know, our global allocation fund is more of an unconstrained, but more with an equity tilt. And that’s been super fun to run that.
RITHOLTZ: That’s a blended portfolio stock?
RIEDER: Yeah. So traditionally, it would be 60/40 equity debt. But with an eye towards you can be international, you can be domestic. Last few years, we’ve run global allocation much more with the U.S. spend. Think about the incredible growth of U.S. technology, that was something to ride for a while. Now, we’re shifting to more international places like China, Europe, et cetera, that are really growing, and that valuations are cheaper.
So the nice thing about that fund; A, we could toggle from equity to debt. We could use a little bit of illiquidity around some privates. You know, now, we’re doing something in global al that it’s hard to do in other funds, building up our carrying income, you can use that, use fixed income to get there, use quality assets, but then take some risk in equities to try and beat the index for global allocation.
And then, you know, the other funds, I won’t take too long. But total return gives you more of, you know, that if you were building a 60/40 portfolio, they should get you the 40 and get you the fixed income, you know, trying to outperform the Agg every year, but closer to the Agg. And then our strategic global fund allows us to use the international markets more aggressively.
RITHOLTZ: Last BlackRock question before I jump to talking about interest rates and the Fed and the economy, @rickrieder on Twitter, you have your own Twitter feed. That is really unusual for a person with your role in a firm as large and buttoned down as BlackRock. Tell us a little bit about what you do on Twitter and how was it getting that through legal and compliance?
RIEDER: Well, first of all, anything I tweet goes through legal and compliance before it gets out there, first part. Second part, so I do these monthly calls, I do these write-ups. I use immense amount of data and analysis. And you know, when I do my monthly calls, I literally locked myself literally in a room for one weekend a month and —
RITHOLTZ: It’s brutal putting those together.
RIEDER: It takes forever.
RITHOLTZ: I do a quarterly and it’s just a solid —
RITHOLTZ: — 50 hours of work to get them ready.
RIEDER: It’s brutal. But you know, I’ve learned in my career that you got to take a step back and think about, you know, instead of following dollar-yen every second, you got to think about why is dollar-yen doing what it’s doing, try and assimilate it all into a cogent set of thoughts. So I need a weekend to do it. My wife hates it, but it’s not the most social ingratiating weekend of my life, but I have to do it.
And I go through and I put it all together, I use immense amounts of data and analysis. I stare at graphs, tables. And then all of a sudden you get these aha moments. Literally, you know, I could sit there for six hours, like, now I get it. Now, I get why high yield trades here in Europe and it doesn’t in the U.S., and what cross currency basis, et cetera, takes a while to assimilate at all.
The reason why Twitter and maybe I’m not the perfect specimen for Twitter is, you know, my tweets tend to have five or six long thread to them with graphs and it’s not a perfect, you know, in a world that wants —
RITHOLTZ: No. They’re very useful. It’s a rare insight to somebody in your role as to —
RITHOLTZ: — what you’re thinking. I strong recommend Rick Rieder, @rickrieder on Twitter.
RITHOLTZ: If you’re interested in fixed income and want to get a sense of a person’s — even though it goes through compliance, it all looks like real-time thought.
RIEDER: It is real time.
RITHOLTZ: It doesn’t look like it’s been massaged to death by legal.
RITHOLTZ: In fact, some of my questions we’ll come up with, are pretty blunt —
RITHOLTZ: — and they’re just your tweets asking you what you were thinking. So —
RITHOLTZ: — I find that fascinating that you’re able to — was there any pushback when you first said, hey, I want to go on Twitter and do this?
RIEDER: So my biggest reservation is, you know, I think the world, you know, it’s pretty hard to think about what are you doing with duration? Oh, here’s 140 character, whatever the number of characters and —
RITHOLTZ: Now, 280, right?
RIEDER: Right. 280 now. So now, how do you do that effectively? And I’ve never been able to do it effectively. I always want to, here’s my hypothesis, here’s my ultimate thesis around what we’re doing with it. But you can do it as long as you can get a few thoughts out there, that made people look deeper into what you’re thinking. It can be a really effective mechanism.
So here’s my conclusion and it’s different, because usually you build up the conclusion there, I tend to find, here’s my conclusion and maybe I can give you a couple of snippets to try to do it. But it’s a super effective mechanism to get out there. And I read a lot on Twitter, I find it because like you say, it’s instantaneous opinion and —
RITHOLTZ: The new tape.
RIEDER: I think so.
RITHOLTZ: Yeah, absolutely.
RIEDER: I spent a lot of time, so it’s been effective to be out there with it.
RITHOLTZ: So let’s talk a little bit about where we are today. I mentioned previously Volker taking rates up in ’81, ’82. From 1982 to 2022, we’ve pretty much enjoyed a spectacular 40-year bull market in bonds. Is that bull market over?
RIEDER: So I mean, it certainly didn’t work last year. You know, I think we are. I mean, I was looking at it, how the rates market, the Fed funds rate looks like a mountain range over time. You know, it spikes higher, and then you come down the other side. The economy slows and you come down the other side. And then a couple years goes by, you start to move up again, and then you come down the other side. I don’t think we’re coming down the other side today. So usually when rates move up this much, economy slows and we’re coming. I think we’re going to stay on the top of the mountain range for a while.
And I think the Fed is going to let this restrictive policy percolate through the system. And I think people underestimate U.S. economy as the most adaptive reflexive, and it will adjust and you’re seeing it in the interest rate parts of the economy like housing, like automobiles, et cetera. So, listen, you know, I think we’re going to see a rally in interest rates probably in 2024 and ’25, because I think rates will go back, the 10-year Treasury will go back to 2.5 percent.
RITHOLTZ: Oh, really?
RIEDER: Yeah. Because you think about what is potential growth in the U.S. and the world, growth follows the demographic curve incredibly closely. And you think about the world we live in, that’s different than the ‘80s, you know, when you had explosive baby boomers. You know, they were starting to enter the workforce, et cetera.
RITHOLTZ: Or the eco boom following that, right?
RIEDER: Totally. And by the way, COVID, accelerated this. You’ve had a fertility issue. And you think about Japan, China going through a demographic difficult period. U.S. is a slower period then. So what happens is growth follows a demographic curve. Does it come off it when you have a shock, a pandemic or financial crisis? Huge stimulus goes in. I think we’re going back to a low 2s percent 10-year because I think GDP will operate at, you know, 1.5 to 2, by the way, lower in Europe, lower in Japan than that.
So I think rates are going back. So as the bull market and bonds as a secular move from the 80s, 90s, over 100 percent. But I think if you said to me, part of why you’ve seen this huge move of people, I want to lock these rates in, 4.5 is nirvana. You know, if you don’t have to take a lot of interest rates, if I get 5 and get 6, we’re talking about, you know, my strategic income fund. I’m trying to keep a steady 6 in that portfolio. Boy, if I can get 6 and we’re going to 2, 2.5, you know, that’s what we’re playing for.
This year, just sort of ride, central bank that is going to pause. And by the way, it may still move rate up a bit more than we are today. But can you ride through it with — you know, it’s not going to be like last year. So it’s a good market for fixed income, and then I think it would get to a better market.
RITHOLTZ: So let’s talk about something you actually tweeted, quote, “How far the Fed goes, how willing the FOMC is to overshoot, to ensure inflation comes markedly lower, will determine how uneven, how unpredictable this deflation of inflation will be in the months ahead.” That’s a fabulous tweet. Tell us what you’re thinking there, translate that for the average listeners.
RIEDER: I’d say I agree with that guy too. So, yeah.
RITHOLTZ: So you know what he’s talking about.
RIEDER: I’m not sure of that. But, anyway, so the one thing that I think is real, the U.S. economy is very different than it was in the ‘80s and ‘90s. We are now two-thirds of the economy consumption as a service economy. We never had that. It used to be a goods-oriented economy. When you move interest rates, the economy recalibrated quickly because the goods-oriented economy, interest sensitive, cyclically oriented. You know, think about the jobs market today, all the jobs are being created. Healthcare, education, not hugely cyclical, not interest rate sensitive. And then obviously, leisure, hospitality where there is some cyclicality to it.
But my view is the Fed has gotten to a level that is restrictive. And now the question is when you have an economy like this, do you bludgeon the interest rate sensitive parts of the economy? Real estate, the automobile market, but parts of how you finance big durable goods, do you bludgeon that to try and help the overall, bring inflation down? My sense is the Fed has gone far enough, doesn’t need to overtighten. And if it does, it will create exogenous shock. You know, the leverage in the system builds. You know, you see it in places, particularly real estate today. You know, the Feds got to be careful about not going too far.
And you know, the one thing that I’m really, really sensitive to, you know, there’s something really powerful that’s happened, all the jobs being created to lower wage jobs in this country. All of them, once you talk about health care, education, leisure, hospitality, hotel, et cetera. Now, you’re closing the income gap. It took 20 years to close the income gap. You know, you’re getting capital going to labor. That is hugely powerful. The layoffs are happening in finance technology, the higher income jobs.
RITHOLTZ: And they’re just unwinding some overhiring over the past —
RITHOLTZ: — two years.
RIEDER: You know, the reason why I think the Fed should pause is let this play out. You know, if net disposable income for lower income, lower wage earners stays higher, with a consumption basket as food, energy, rent, it’s not a bad thing that that inflation is a bit higher as long as wages for lower income are higher. So I think the system is recalibrating. Economy is recalibrating. It will recalibrate. And I don’t think the Fed should overdo it, you know, to take 2 to 3 million people out of work, or more than that, you know, particularly those with lower wage jobs. I don’t think it makes any sense.
RITHOLTZ: I could not possibly agree with you more. And I have to bring up what you just said about the United States being a services-based economy. A large part of the reason we had this inflation spike was we shifted to goods during the lockdown.
RIEDER: A 100 percent.
RITHOLTZ: Now that’s over and we’re going back, shouldn’t this unwind happen naturally? Why does the Fed seem to be at risk, or at least according to the bond market, of overtightening? They were late to recognize inflation. Are they late to recognize that inflation peak six months ago?
RIEDER: I mean, I think the one mistake that the Fed made is, like to said, they were too late. And I think they could have been —
RITHOLTZ: But they’re always too late, by the way —
RIEDER: Yeah, but —
RITHOLTZ: — historically, isn’t that true?
RIEDER: Yeah. But I think the reason why they were too late is because, I mean, think about vaccine happened.
RIEDER: And all of a sudden, you change the economic paradigm so darn fast. And you know, one of the things that’s hugely important for the Fed is credibility. They laid out a path that they were going to keep interest rates low and QE in place for an extended period of time, and then it was hard to change that. Anyway, it was the wrong —
RITHOLTZ: That’s an argument for maybe they should stop playing with their cards on the table.
RIEDER: So —
RITHOLTZ: Or am I wildly off with that?
RIEDER: It’s funny you said that because, listen, I think we’ve gotten to the place where there actually is too much communication.
RITHOLTZ: A lot, right? It is too much.
RIEDER: You know, you have the SEP, the dots. Now you have the press conferences. One of the real tools of monetary policy is to be able to react and be adaptive to the economy as it is. So listen, I don’t think they should overtighten. B, I think when they get to this place or where they are today, I don’t think they have to communicate every single step of the way.
RIEDER: They’ve done a good job at transparency. But now I think you want to keep your tools of, you know, I can surprise if I need to.
RITHOLTZ: A little mystery? Yeah.
RIEDER: Yeah. And by the way, surprise is, you know, if you’re trying to shock an economy, you drop interest rates really quickly. But if you don’t have the art of surprise and to be able to shock the system, the system doesn’t react to it fast.
RITHOLTZ: The Fed has lost the art of surprise. That’s really kind of intriguing. You know, you mentioned how quickly the vaccines came on. My favorite stat from 2020, from the lows in March till the end of the year, the equity markets gained 68 percent. That should have been a heads-up to the Fed that, hey, we need to forget taking rates to 5 percent. Can we get off zero? Can we start to normalize rates? And sometimes the bond market tells you various concerns going on, sometimes you got to listen to the equity market.
But let me bring it back to the bond market, there seems to be a disagreement between the Federal Reserve and the bond market. The bond market is saying, hey, we see recession coming. We think you’re going to cut rates in 2023. Jay Powell is saying, no, I think rates are going to go up and stay up for longer. How do you reconcile these two differences?
RIEDER: So it’s a fascinating dynamic that’s playing into markets today. So I don’t think most of the people, you know, economists, people that follow the Fed, that listen to what the Fed is saying, I don’t think anybody believes the Fed is going to cut rates in 2023.
RITHOLTZ: Oh, really?
RIEDER: When the Fed says, we’re not, I mean, all the Fed presidents, governors come out and say we’re not, that I think you have to take them at their word. Why is the market doing this? You know, I’ve learned in my career that the technicals are as important, if not more important than the fundamentals. What’s happening now, you know, the discussion we had before about money flowing in because we were locking in these yields, much of that money is not necessarily looking at what is the one-year, one-year forward, the two-year, two-year forward. They’re saying I can lock in 4.5.
RIEDER: So what’s happening is people are sitting on immense amounts of cash.
RITHOLTZ: And a decade of zero.
RIEDER: And a decade of zero.
RITHOLTZ: So suddenly 4 percent looks fantastic.
RITHOLTZ: So what is it doing? It actually prices your forward curve in a bit, because people say, you know what, I’m willing to take that. By the way, you know, the risk is that all of a sudden, you have some shock to the system, economy does slow, and maybe they do move. But people are willing to say, gosh, I’ll underwrite that easing, that’s probably not priced right, because I need to lock these yields in. And by the way, I spent much of last year sitting on my hands, and you know, trying to protect my downside. Now, these bonds are attractive. So I think it is a technical condition that’s driven the market to price in that ease today.
RITHOLTZ: So let’s talk a little bit about some of the technical conditions that I recall you discussing in the fourth quarter of 2022. And there were two statements you said that have stayed with me. Let’s start with the more amusing one, October 2022, this is some of the wildest fixed income trading I’ve seen in my entire career. And I remember I think that was the September CPI came out in October, and then we got the job state as well.
RITHOLTZ: Tell us about what was going on in October.
RIEDER: I mean, it’s pretty wild. By the way, when you think about 2022, and the Fed deserves some blame for taking too long, but you also had a war, that was who thought you’d shock fuel prices and even food prices? I mean, what is it? Russia and Ukraine account for 12 percent of the calories in the world.
RITHOLTZ: Right. So giant breadbasket, second biggest breadbasket after the U.S.
RIEDER: And all of a sudden, what we thought, it looked like inflation would start to moderate or at least stabilize. We took a whole another leg higher. And then like you say, in September-October, Core CPI was printing a 0.6 for two straight months, you know, so annualizing, that’s over 7 percent. And then all of a sudden, like, oh, my God, this Fed may have to go significantly further. And by the way, at the same time, employment was extraordinarily strong.
RITHOLTZ: And it is still. Yeah.
RIEDER: And it is still today. And I still think people don’t recognize there’s not enough people for the jobs today, there’s still a deficit in all those sectors we talked about earlier. So —
RITHOLTZ: So the Fed should keep raising rates. That will get bodies in jobs. In ’08 —
RITHOLTZ: — they can’t create more people to fill those jobs. They can’t create more semiconductors. They can’t build more houses.
RITHOLTZ: At a certain point, the Fed should really just declare victory and go home.
RIEDER: So I think, you know, it’s interesting how like every committee like the Fed, et cetera, there’s always this, I can tweak it a little bit. And I think at this point, it’s time that the system recalibrates. I mean, the number of times that the Fed has to come to the fore when you have a financial crisis —
RIEDER: — when you have a pandemic. And then I think you got to, you know, get to the back page of the newspaper versus the front —
RIEDER: — and let the system do what it’s going to do. Because the more that you create the news, if you think about it, if you’re a big CEO, CFO and think about CapEx spend, long-term hiring plans, do I need to have the Fed as one of the risk factors in? I don’t think so. And I don’t think we need to keep, the economy will do its job of keeping the system on pace. And you think about we just have the last couple of years, like you said, goods economy to service economy, the number of people job shifts, extraordinary of how it played out.
RIEDER: And I think there’s a time that you need the central bank to be on the front page, but I think we’re leaving that new story.
RITHOLTZ: You mentioned Greenspan earlier and I had the same sense that, you know, he had a great career, and then the last couple of innings, helped to really ding his reputation because he stayed on the front page for too long and didn’t say, no, no, the system is fine. I’m going to step back and let things play out the way they should on their own.
RIEDER: So I mean, if you go back in the annals of time, I think Alan Greenspan may have been, at least in my generation, the best central banker I’ve ever seen.
RITHOLTZ: I’m on the other side of that trade. Sold to you. I’m short Alan Greenspan —
RIEDER: All right.
RITHOLTZ: — and will continue to be. I have long puts, I will write calls, whatever you need to do, I’ll take the opposite side of the maestro trade.
RIEDER: All right. So —
RITHOLTZ: But make your case.
RIEDER: All right. So I mean, I watched them for years and I’ve seen very few people, including getting the honor of presenting to him many times. I’ve seen, I mean, the way he analyzed the data, the way he reacted to the data, the way he commanded policy. I’ll never forget when Greenspan said we’re going this way. He had immense credibility to execute it.
Listen, but I think your point is the last year or two, it didn’t make a lot of sense for him. I think people knew subprime and the mortgage crisis, the mortgage wasn’t in crisis, the mortgage dynamic, the housing dynamic was creating a problem. That would, you know, put a real damper on what was, I think, an immaculate central banker.
RITHOLTZ: So you mentioned credibility. Does the current Fed insistence on taking us up to 5, 5.25, is that sort of third, hey, we’re going to have stable rates, we’re going to have full employment, and we also have to maintain our credibility. Is that a third mandate for the Fed?
RIEDER: I mean, you know, part of why I say the Fed stays in policy later is credibility is such a big deal, and it’s part of why I think they’ve done a really good job of communication. You think about how the few number of dissents when you get an FOMC decision.
RITHOLTZ: Very rare.
RIEDER: Yeah. And there’s opinions from the different officials that speak, but they’re generally on the same page, and that I think is really effective. Listen, I think once you lose credibility, then all of a sudden, your monetary policy, because moral suasion and how you think about where you want to guide the system is usually important. By the way, if you guide the system in too finite away, and this is part of the idea of like go away for a bit, stop defining every single —
RITHOLTZ: You can’t be that granular.
RIEDER: You know, quite frankly, I think these SEP, the dot plot is crazy. Like, why do you need to tell the world where we’re going to be two years hence? You don’t know where you’re going to be two years hence.
RIEDER: Why do you need the price of the Treasury market to the two-year forward or the three-year forward? You don’t know where, and you know, their forecast —
RITHOLTZ: That goes back to your sense that you need the ability to surprise when necessary.
RIEDER: Totally. And in the past, the Fed has pinned themselves to a date and say we’re going to move it. That’s crazy. Or you know, one number like core PCE is the most important, but why would you pin yourself to core PCE because there’s weird nuance that happens. You have to look at the abstract, give yourself some flexibility, allow the system to do what it’s going to do, and create normal volatility to markets as opposed to defining you have to be here.
RITHOLTZ: You mentioned core PCE, I’m trying to remember, was it Bernanke or Greenspan that liked the GDP deflator as their inflation measure. I don’t remember which.
RITHOLTZ: It’s kind of surprising, they’re not always the same.
RITHOLTZ: Last year, for example, I always love to throw charts up to shock people. Oil was negative for 2022.
RITHOLTZ: Everything ran up in anticipation of the wartime chatter.
RITHOLTZ: And then by the time we got to the fourth quarter, it was red, which is kind of stunning. What do you think is the best measure of inflation? And have we seen peak inflation? Are we over the hump?
RIEDER: I think so. I mean, you know, what do I look at? I look at my core PCE, it’s important. I look at wages a lot. I look at the commodity markets, you know, a ton.
RITHOLTZ: Copper, lumber, natural gas, all way off their highs.
RIEDER: Yes. And by the way, if you take and we looked at this stat the other day, if used car prices and shelter are coming down, which we know they’re coming down, if they come down, if they continue to come down, everything else could stay 4 to 5 and you still get into the mid to high 2s.
RIEDER: So meaning it’d be pretty hard for us not to have seen the peak. But, you know, always in my business, we try to think of what are your constants so you could evaluate the variables. Inflation is a hard one to think about the constants. You know, part of why I read inventory numbers at retailers, you know, you talked about semis earlier, I think you have to think about the whole construct of what’s driving topline revenue for companies. You know, you’re seeing Tesla adjusted. You’re seeing companies all of a sudden are dropping price.
RITHOLTZ: Or match Tesla’s price cut.
RITHOLTZ: Big 8 and 10 percent cuts, that’s substantial.
RIEDER: Huge. You know, when you see retailers, the Targets, Walmarts, you know, they’re changing in terms of dropping price. And you’re seeing customers that are actually now shifting, using more couponing, trading down, buying in higher quantity, as opposed to they can get scale and purchase. That’s real and that means inflation is coming down. And all these things factor into what do you build into what’s happening on inflation? Because that one is hard to say, this is the number. And if do, I think markets do that.
RIEDER: Like the employment cost index, like that’s the number, and then it goes to this one. Listen, I think markets like to have superficial information to drive big picture thoughts.
RITHOLTZ: So let’s stick with inflation for a little bit because you’ve touched on so many really interesting areas. One of my favorite aspects of where I think the CPI model is wrong, is the cost of apartment rentals. And I get the sense the Fed understands this, BLS understands this. The Cleveland Fed just created this new measure of owner’s equivalent rent that looks at renewals. But you also have things like Zillow apartment rental listings, and apartment list is another index that tracks this.
It seems that everywhere we look, we see apartment rental prices coming down faster than the BLS, CPI model is showing. All models are wrong but most are useful, said George Box. How do you calibrate a model that has issues that we think the Fed understands what the issues are and yet are still acting as if the model is dead right?
RIEDER: So one of the things I was thinking about for investing and I say it to our teams all the time, we’re not in the business of being right. We’re in the business of generating return for clients.
RIEDER: So what happens? So we have incredible AI data simulation, where we look at billions of prices and trying to go where is inflation going. But the markets focus on core CPI. So you got to try and put together what are the markets going to react to. And oftentimes, it’s much more important to me to understand what is the psychology of markets than it is understanding, you know, like, where are we really going because you get leads and lags, apartment being the big one. There are huge lags in terms of when apartment gets in the reduction in prices.
RIEDER: So, you know, we try and think through all of that. And you know, at the end of the day, you know, part of what I’m trying to think through is it’s less important for me to be right six months hence. But if the market is going to focus on this core CPI report for the next two to three months, and maybe the Fed is going to focus on core PCE, that I put at the top end of my priority set, because I’ve got to buy and sell within a market. And so I spent a lot more time trying to think through what’s the market reaction function, and what is the date of the markets tuned into because that changes over time.
RITHOLTZ: So you’re always providing insight and advice to clients. But if you had 10 minutes alone with Jerome Powell, what sort of advice would you give him?
RIEDER: So I would say I’m a big fan. But I think the —
RITHOLTZ: Longtime listener, first time caller?
RIEDER: Yeah. But like I say, you know, with all due respect, I thought last year was crazy around keeping rates easy for too long and doing QE. I mean, in January last year, $120 billion a month going into the system.
RITHOLTZ: Certainly, zero way too long.
RITHOLTZ: You could argue how far it should go, but zero wasn’t the right —
RIEDER: No, I thought that was wrong. Listen, I think one of the things that he has brought to the Fed that I think has been extraordinary is collaboration, and you know, a collaborative decision-making across and taking in tremendous amounts of information. The thing that, you know, I always say, let’s say and I’ve said this before, if the Federal Reserve said the funds rate is going to be 2 percent for the next five years, with the system operate better or worse. And if you were a CEO or CFO and said, okay, I know I got to figure out what my inventory level is, or my supply chain dynamics. But I know that we’ll be able to fund myself off of our relatively constant interest rate.
Certainly the risk free rate, there is huge power in that and I think people underestimate this, get us back on the curve. A, I tweak it less than they do until you need to, and then you move decisively. And I think one of the things we’ve learned, you know, that central bankers have done a good job with, is when you need to move, be decisive and get it, and tell people this is where we’re going and shock the system when you do it. But let them know, now we’re going. And I think that’s powerful. But then otherwise, back off, and let the system do whatever the system is going to do.
By the way, it’s harder in Argentina because you get —
RITHOLTZ: A little.
RIEDER: You don’t have. I mean, we have such a technology innovation, adaptive human. And think about it, I did a presentation, I showed what it was 30 years ago, they used to look for a job in the classified and you’d circle and go get a job. Now, you think about getting a job today with all of the immense online. You have fluidity of employment that we’re watching play out. Fed doesn’t need to do that much, other than the shock periods.
RITHOLTZ: Talk about the impact of a loss of credibility of a central bank. It’s apples and oranges between the U.S. and Argentina, which by the way, I’m always shocked when the parade of Fed haters come out and it’s like, we’re going to be Zimbabwe, the dollar is going to be worthless. Talk about getting a trade 180 degrees wrong. Let’s talk about the dollar since I mentioned Argentina and Zimbabwe. The dollar for the past decade has been the only game in town. That seemed to have topped out in 2022. How do you think about the strength of the U.S. dollar relative to fixed income equity, U.S. versus emerging markets? What is the role of dollar in your process?
RIEDER: So I mean, well, 2022 was the only hedge we had. I mean, literally —
RITHOLTZ: On the dollar? Really?
RIEDER: Yeah. So 2022, you think about normally interest rates work against beta, against your risk assets. You know, normally volatility markets, we use a lot of, think about call options, put options. The equity market when volatility spikes, not a good hedge. It’s too expensive because everybody is trying to buy insurance. The dollar was a good one. Because you knew that as the central bank was going to tighten, the dollar was going to appreciate, and risk was going to have a hard time. Today, you know, I would argue we’re on the other side of that mountain we talked about.
RIEDER: The dollar doesn’t need to appreciate. And actually, you know, you could start to do things since the volatility markets have come down. I think there’s one important thing with the dollar. You know, we’re going to going to go through a potential debt ceiling crisis issue. The dollar is the reserve currency in the world. I don’t think people really understand it’s two-thirds of the trade flow in the world. It’s roughly two-thirds, three-quarters of the liabilities in the world. It’s the collateral. The U.S. Treasury is the collateral in the world that is underneath, you know, most transactions in the world.
The dollar is such a critical dynamic we’re going to go through. We always find, like, when do you set up for these trades, when do you set up for positioning your portfolio. We’re going to go through, you know, sometime three to six months from now, what could be an incredibly volatile period, and then the dollar becomes, you know, your lever. And how you think about that is going to change and evolve. And then like I say, it’s crazy because of the —
RIEDER: — immense benefits that accrue U.S.
RITHOLTZ: Why would anyone ever put our exorbitant privilege at risk to score political points?
RIEDER: It’s crazy.
RITHOLTZ: All those people really are deserving of our disdain and should be called out for their recklessness and their responsibility.
RITHOLTZ: But let’s hold the politics aside. The last question I have in the state of the fixed income world is since we talked about dollar, we have to talk about emerging market. Last year, you said you’re starting to become more constructive on emerging markets and more balanced, obviously, on the U.S. dollar. You know, it has looked like EM was going to be the next part of the world to do well, for the better part of a decade, and the tire spin and there’s no traction. Is 2023 the year EM finally starts rewarding investors?
RIEDER: So I mean, one of the things I’ve learned over my career running emerging market businesses for a long time is you have to take EM and dissect the asset class. I mean, sometimes —
RITHOLTZ: It’s not a monolith.
RIEDER: No. And so, you know, the difference between Mexico and Argentina and South Africa to Turkey is immense.
RIEDER: And so part of what we try and think through is where are we comfortable today when we are taking more risk and building some income in emerging markets. But, gosh, you know, there are places today that, listen, we’re not doing a lot in Turkey, we’re not doing a lot in South Africa. But, you know, Mexico, you think about who the beneficiary for a world that’s becoming more regionalized. And who, you know, the U.S. has partnered? Mexico is interesting. Central bank has done a pretty good job. Brazil is a good place, Indonesia. So they are places.
And by the way, there’s some corporates that are domiciled in these countries that are oftentimes better credit than the sovereign. So we’ve worked on, we’ve increased our emerging market exposure, but I would say we’re doing it in a way that is less emerging market volatility sensitive to it.
RITHOLTZ: Another example of where active has an advantage —
RITHOLTZ: — over passive is choosing your country of both equity and fixed income.
RIEDER: Yeah. I mean, the one thing I will say, you know, active is going to live with passive forever. We obviously, you know, were proud of the iShares development. People in fixed income, I use a ton of them. So passive has a place. But then the ability to use it as active in your process is huge. And by the way, parts of EM are hugely effective, and we’ve been doing a bunch of debt and equity to get into emerging markets where, at times, getting scale is hard on the individual securities.
RITHOLTZ: Before I let you go, we have to talk a little bit about Lehman Brothers, you started there in 1987. What was Black Monday like at Lehman Brothers who, then, we’re really known as a fixed income shop. Tell us what that experience was like, and did it leave any marks?
RIEDER: So I’ll say a couple of interesting things when I think about that. I mean, every time you go through one of these crises, you think about usually crises don’t happen the same way the second time.
RIEDER: And by the way, usually regulation solves yesterday’s dispute.
RITHOLTZ: Right. Every general fights last war.
RIEDER: Totally. But you know, still to this day, Black Monday wears on you, by the way, including on Mondays, there’s a specific reason the Mondays happen because of liquidity, et cetera, that tends to be on news and things over the weekend.
RITHOLTZ: Plus all the stress over the weekend —
RITHOLTZ: — and new news comes out and it’s just billed.
RIEDER: Totally. But one thing I’ve realized over the doing these things 36 years now, you know, think about those crises, think about how do you manage the risk of it, what’s the downside, what’s the odds of it happening. And then, you know, you still have to invest and you still have to take risk. And one of the things I’ve found that I’ve tried to fight against for my whole career is, you know, the longer you get, you’ve done this, and the more crises you see, you know, when you get punched in the stomach, like it doesn’t feel good. Like, I kind of like to do less of that. And you got to think about we’re still in the business of taking risk. How do you manage those things effectively, that you’ve got your tail risk downside?
So to this day, you know, there are things like I’ve been through whether it’s, gosh, years of trading in Korea. And you know, every time there’s something in North Korea, I think about, oh my god, we got to hedge that. And I’ve learned over my career, gosh, I spent more basis points buying insurance.
RIEDER: And think about it, if I just run my portfolio the right way, stop buying so much insurance because you’ll figure out how to get it returned to zero. But you got to think about those things and what are the risks and what is the hedge that could work relative to it, that doesn’t cost you that much, or how can I run my portfolio taking those risks?
RIEDER: So fast forward from ’87, 20 years, now it’s ’05, real estate sort of peaks in price in ’06 in volume. The MBS, that was a big part of not what you were working with, but generally, Lehman Brothers —
RITHOLTZ: — starts to roll over and starts to be stressed. We see the derivatives begin to play out. When did you start to smell things were going off the rails at Lehman Brothers?
RIEDER: Well, I didn’t.
RITHOLTZ: Really? You’re there and you just thought this would be another thing?
RIEDER: I mean, I left in May ’08. By the way, if I thought there was any issue there or any other place, then I wouldn’t have started a hedge fund. I mean, think about the volatility that I would have created. I would have —
RITHOLTZ: Well, if you’re betting on the other side.
RIEDER: Yeah. But, no, I mean, first of all, I was doing credit. And as a credit hedge fund, it’s pretty hard to run big shorts in credit.
RIEDER: You know, so I didn’t think there was an issue. What I think was, you know, it was hard to believe at that time and we get back to the discussion of Greenspan and/or Treasury, that it was hard to believe that you knew from ’06, ‘07, subprime was a problem. And you knew the housing froth was so extreme.
RIEDER: But then it just kept going. I mean, remember, in ’07, you know, we thought, okay, there’s going to be regulation. There’s going to be change. The central bank will move, and you never thought that, you know, policymakers would ignore all of these signals along the way. And then we’d go down, what was this tumultuous point in time. You know, started with Bear Stearns, and then all of a sudden, financial institutions are levered entities.
And you know, you have whether it’s derivatives, the intertwined financial system. Once the dominoes start to fall, and you think about what would have happened to other firms as well, so let’s say, you know, this went on for longer. ’06, certainly ’07 felt a little queasy about, like, why is nothing happening? And you had this incredibly overzealous housing market, you know, I don’t think that will ever happen again because I think policymakers will react to that a whole lot sooner than they did.
RITHOLTZ: One would hope. So you spent two decades at Lehman Brothers, you spend much time with the gorilla?
RIEDER: I do, yes. And yeah, I mean, I had a lot of respect for them. Listen, I think their decisions that I think anybody in their career, anybody who’s running a company or a business would like to have back. But, listen, you know, the firm had a really, really good track record for a lot of years.
RITHOLTZ: 200 years.
RITHOLTZ: That’s pretty good run.
RIEDER: And by the way, including going through the ‘94 crisis, ‘98 crisis —
RIEDER: — the ’02 crisis, you know, all of these things —
RITHOLTZ: Long-term capital management.
RITHOLTZ: They were on the right side of that —
RITHOLTZ: — unlike Bear.
RIEDER: Yeah. So I think, you know, the track record was pretty good. And you know, what’s sad? I mean, I find it sad that, you know, there were a lot of amazing people at —
RIEDER: — Bear Stearns, Lehman Brothers, a bunch of places. And by the way, many of those people go into, you know, fruitful careers in other worlds. But, you know, it’s sad that it’s not that quite —
RITHOLTZ: My pet theory on where Dick Fuld went off the rails was rejecting the offer from Warren Buffett. Late in ’08, I think when the time came to think about who do we bail out and who do we set an example, gee, Warren Buffett offered you a few billion dollars, how do you say no to Warren? That’s, you know, the finance good housekeeping seal of approval. Goldman took money from Warren at an even higher rate, and it basically removed them off the table for, hey, do we have to worry about Goldman. Had Fuld taken Warren’s money, I think this might have ended differently.
RIEDER: Maybe. Yeah, probably. I mean, like I say, there are decisions that get made. And you know, I’m sure not everyone was the right one, ultimately, but yeah.
RITHOLTZ: So you’re at Lehman for 20 years and you decide, I’m going to set up a credit hedge funds. I want to go on my own, even though we saw the Bear Stearns hedge funds run into trouble, there was clearly froth in the housing market, and the early signs of cracking the MBS foundation. As you’re getting ready to launch, are you thinking, hey, maybe this is a bad idea, or Lehman has been good to me for 20 years?
RITHOLTZ: Tell us about your thought process.
RIEDER: I mean, you know, first of all, I have strong passion around it. And by the way, we started a company called the R3 Capital. And so R3 people think it’s my initials. Actually, it was for reading, writing and arithmetic. And one of the things I was super excited about was to start a fund, and actually 20 percent of our proceeds were going to go into urban education in the country. But I had a great, great team, many of which are still with me today, and I had to ask the firm about it two years prior about, gosh, I’d love to go and try and do this on my own.
RITHOLTZ: You got permission in advance?
RIEDER: Well, no, I asked the firm a couple of years ago and I probably should have gone and done it. But, anyway, that to me, I mean, at the beginning of a way, it struck me as, my god, there’s going to be volatility. There’s going to be opportunity. We got to a really good team. You know, let’s go strike out on our own and do this. And so, you know, it was an exciting point in time. Like I say, I didn’t think the system would come to an end. I certainly wouldn’t have done it if I thought that were the case.
RITHOLTZ: You teed me up for a perfect segue into a curveball question. You mentioned, 3 Rs, reading, writing, arithmetic. You serve as the National Leadership Council of Communities in Schools, and the Educational Foundation in New York. Tell us a little bit about the work you do with community schools in less affluent neighborhoods.
RIEDER: So I mean, I’m less involved than I was on the national leadership. So my biggest endeavors today, I chair the board of North Star Academy, which is for 14 schools in Newark, New Jersey charter school. I’m biased, but I think it’s the highest performing set of schools in the country. I’m super, super proud of what the team does there, and how we’ve been able to build that.
And I started something called Graduation Generation in Atlanta, which puts together the city of Atlanta communities and schools, and Emory University, to try and create the whole package around the student from social work, tutoring, mentoring, health care. So anyway, those are big drivers of, you know, my passion and my life is giving people particularly in urban education, you know, giving them a kick-start and a chance to succeed. And we’ve watched it, you know, in our schools in Newark. I mean, it’s extraordinary (inaudible).
RITHOLTZ: What’s your affiliation with Newark? How did you start with them?
RIEDER: So early on, somebody asked me to get involved with the Harlem Children’s Zone, which is an extraordinary place. But I lived in New Jersey, and I said, gosh, something comes up in New Jersey and then this opportunity came up in Newark, and I got to meet somebody named Norman Atkins who, I think, is one of the best educators in the world. And anyway, I was motivated by it. There was just one school at that time. Cory Booker was on our board at that time. That’s one school.
And then we got ability to grow to the point now were 6,000 kids, big part of the population in Newark, with extraordinary performance from our schools and our students. I mean, the number of students we send to Ivy League and graduate to colleges is incredible. I don’t know it’s —
RITHOLTZ: I knew a kid’s reputation of not having a great school system. What’s the impact of this council on neighboring schools? How do you elevate the entire educational system?
RIEDER: So I mean, a big deal around and I’ve learned this in my career, it’s part of why North Star was so near and dear to my heart. There’s number of books. Our lead director, Paul Bambrick, started what’s called Driven by Data. It was one of the most famous books in education for a long time. We analyzed the data, where are students performing, where are they not performing? Where are we? How are we doing in literacy versus math versus science? And we study it and we’re maniacal about the data, where are we not fulfilling the needs, and then we adjust relative to that, similarly, what we do in investing. And that has been really successful.
And by the way, it’s permeated not just the City of Newark, but in many countries around the world. They’re using, you know, sort of our methodology around data analysis, and making sure we’re keeping our kids up to a level. And the number of our students that take AP exams and succeed is just extraordinary. So I know I’m super proud of, you know, what the team does around it.
RITHOLTZ: Really interesting. I know I only have you for a limited amount of time, so let me jump to my favorite questions that I asked all of our guests, starting with, tell us what you’ve been streaming these days, what’s been keeping you entertained?
RIEDER: So I mean, because I’m going at work million miles a minute, every minute of the day, my release is on sports. I mean, I watch tons of sports. When I get home, I love to watch —
RITHOLTZ: Man, that San Francisco game was just unwatchable.
RIEDER: Yeah. That one I didn’t spend a lot of time watching. But I watch a lot of sports. I’m particularly intrigued as you would imagine, I like a lot of the shows. ESPN does a ton of shows on getting into people’s mentality and how do they win. And so there was Michael Jordan. That was an incredible one.
RITHOLTZ: Man, that was an amazing series, wasn’t it?
RIEDER: That was maybe the best I’ve ever seen.
RIEDER: But I love understanding what drives people, how they get to the next level. Similarly, when I read books about how do you get the business to the next level. But I watch a load of those and then —
RITHOLTZ: So did you get around to seeing Drive to Survive about F1?
RIEDER: So it’s so funny because I went to F1 last year and we talked about it. I still haven’t watched it. I got to watch that.
RITHOLTZ: It’s shockingly interesting. And they just rolled out a new one on tennis.
RIEDER: I haven’t watch. Really?
RITHOLTZ: And then there’s a third one coming that they started on golf, just as the Dubai League began.
RITHOLTZ: Yeah. They do a really good job of making people you probably haven’t —
RITHOLTZ: I mean, we’ve all heard of a handful of names, but it’s that, you know, the up and coming tier that’s so interesting. Netflix does some really interesting sports stuff. Yeah, it’s fun. So let’s talk about mentors who helped to shape your career.
RIEDER: So first of all, the person who hired me at Lehman many years ago, a guy named Bart McDade was extraordinary. I mean, I still to this day, think about what would Bart do in that. He just had this incredible ability to trade, invest people, have confidence in people, let them make mistakes, not too big. But, anyway, he taught me a ton. I mean, he taught me more. He’s one of my best friends today and he was extraordinary.
But I have also learned from the best investors in the world. I mean, it’s a great honor to get to know David Tepper, Stan Druckenmiller, Paul Tudor Jones. And I’ve learned a bunch from each of them, and you know, a few things about investing. You know, like separating the news from the noise. Some of these people are extraordinary. And we live in a world where we talked about earlier, things like Twitter, et cetera. We live in a world where it’s constant soundbites. Most people have an incredible ability to separate the news from the noise. You know, interestingly, that matters. And those people have been really, really helpful to me in terms of, you know, getting to understand how they think about things, and you know, what drives their persistent success.
RITHOLTZ: Let’s talk about books. What are you reading now? What are some of your favorites?
RIEDER: So I read a lot of books on technology. And today, I would say less of book that I’m reading today. But I can’t read enough about really deeper research papers on artificial intelligence, that including the ChatGPT, and I’m spending a bunch of time this weekend playing around with that to understand it. But that, I mean, the best book I ever read was The Second Machine Age that talked about —
RITHOLTZ: Oh, sure.
RIEDER: — where technology was going to go. And now, I’m all about what is the next evolution of technology. Like I said, I think this AI is going to change the world in many ways. But also I’d like to read books on things like Good to Great, et cetera, you know, how companies ran their businesses and how momentum changes things like the tipping point. The Malcolm Gladwell thing is extraordinary. So a whole myriad of them.
And I actually started reading some books, the one I just finished called Permission to Feel, which is a book from Yale, you know, our students and our schools undergo a lot of stress, particularly during COVID. And this is how emotion and letting emotion out, allows you to be more effective and deal with some of the stresses. And so there’s a lot of cool things that they have been investigating over the last few months.
RITHOLTZ: Really interesting. Our last two questions, what sort of advice would you give to a recent college grad who was interested in a career in fixed income?
RIEDER: I mean, the first thing, a lot of people I watch in industry do it because I hear that’s a way to make a lot of money or a way to make money, and I just think that I watch people come in, and then they leave because they’re not driven by it. Make sure you’re driven by it.
RIEDER: And then I think most people that come into this business or any business always feel like they follow the person who did it well right before them. And you know, what was the hot firm? What’s the hot firm? What’s the hot area? And you only think about what markets have taught me, usually don’t want to buy the hot thing.
RIEDER: You want to buy the thing that’s maybe trending down and that may come back. You know, I remember when I was interviewing, you’ll appreciate this, Drexel was a hard firm that it was impossible to get into. And of course, I didn’t get a job there. Thank God. But, anyway, people always on what’s in front of me today, but think about where are we going longer term, and then where’s the area that maybe I can grow as opposed to the place that maybe has already figured it out, or the area that’s already figured out. I think people particularly coming out of school, you know, tend to all move in one direction. It’s amazing. Like, the interview when I was at Wharton, now everybody wants to interview with the exact same places.
RITHOLTZ: So don’t top take the market.
RIEDER: No. And be thoughtful about, you know, where do you go? And it’s so much about people. If you find the right person, the right mentor, the right group that you fit in with culturally as opposed to, gosh, this seems to be the path that worked for somebody else.
RITHOLTZ: And our final question, what do you know about the world of investing today you wished you knew 36 years ago, when you were first getting started?
RIEDER: So I mean, we talked about one of them was just, you know, taking a step back and letting the superficial work its way through. You know, when I first came into the business, I used to want to read everything. It’s like, the more I read, the smarter I’m going to be. And now, I’ve really tried to boil it down to the things that I think are going to be the most relevant, the researchers that I think are the best, and do a lot of the work on my own.
Like, you know, the research, the information that gets out there, it’s usually homogenized and it’s usually, you know, somebody else already had the idea. It’s probably been expressed in the markets.
RITHOLTZ: It’s in the price.
RIEDER: You know, I find, like, if I can do the work organically and come up with my own ideas, you know, a lot of people go, you know, every night to roundtable dinners and listen other people’s opinion. And I tend to believe while I’m wrong a ton, I feel like if I can do my own work and my own analysis, then I probably come to a better conclusion, especially if it’s already been played out in the market. So there’s a bunch of things like that, that I’ve learned over my career.
And then one last thing I will say is I learned in my career, similar to why I struggled early in my academic career, is you have to prepare for everything you do. I used to think, like, you just come in and do it. Like, I did well in school early on, and then I started to not do well, because you can’t overintellectualize it. You got to prepare. And I find today that, now, every single thing I do, I spent a lot of time preparing for it. And it’s similar to why I finally got better at college was, you know, you got to do the work and put in the preparation. But I find the young people that come in, you know, every day and they think, you know, I just read this and I can do it. It’s all about the preparation, and I’ve learned a bunch about that over the years.
RITHOLTZ: We were talking yesterday about simple but hard.
RITHOLTZ: Like, people think it’s easy. It’s like no, no, it’s simple. But it’s a lot of blood, sweat and tears.
RITHOLTZ: And that’s the hard part.
RITHOLTZ: Really fascinating. Rick, thank you for being so generous with your time.
RIEDER: It’s awesome.
RITHOLTZ: This was tremendous. We have been speaking with Rick Rieder, he is the chief investment officer for fixed income at BlackRock as well as holding a number of other titles.
If you enjoy this conversation, be sure and check any of the other 492 such discussions we’ve had over the past eight years. You can find those at YouTube, iTunes, Spotify, or wherever you get your podcasts from. Be sure to sign up for my daily reads at ritholtz.com. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Justin Milner is my audio engineer. Sean Russo was my head of Research. Atika Valbrun is my project manager. Paris Wald is my producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.