Investing Trillions: BlackRock’s CIO on Life in the Markets ft. Rick Rieder

26:31No. so talk me through how how you invest now because now you've obviously got large teams behind you you're now much more strategic in what you do you run the number of funds right you've got you've got the etf yeah so talk us through all the kind of various parts you run and then we'll start getting into the whole macro view because yeah how you say yeah no you know it's a huge John, I run, so we just started this ETF that's grown pretty big. It's called Bank. It's called BlackRock Flexible Income. So it's just giving people an ETF that we diversify the income as opposed to just a straight high yield fund.

27:13We do securitize. We do investment grade mortgages and parts of EM. So it's just giving them yield that we manage, you know, try and keep the yield up with a lower volatility than just buying a singular asset. And so that's a neat fund. I run a strategic income fund. that's a big unconstrained fixed income allows us to go anywhere in fixing. I can use some equities, 15 % equities, but mostly fixed income, tactical around fixed income. So very unconstrained, very, I can move my duration around. I can run negative two years to seven years. So I've got a huge swath and I can run some shorts. It's not a long short, but I can run up to 15 % shorts in it.

27:50And then, and I run a global allocation fund that is, you know, equity oriented 6040 or sort of a multi asset that allows me to do, you know, some commodities using that through through ETFs generally. And it allows me to move around debt to equity. So, so no, those funds are awesome to run. They're a lot of fun because we can literally go anywhere, you know, with obviously some targets and some parameters on the different ones. But, yeah, they're fun. They're fun to run. And, you know, I'm pretty intense about, like you say, about research and analysis and maniacal about trying to figure out, you know, how you optimize return per unit of risk.

28:35And, you know, I'm crazy about data and to try and figure out how to do it effectively. How did you figure out how to add equities into your mix? I mean, corporate credit trades somewhat like equities, particularly in terms of stress, but because a lot of macro people struggle with equities. How did you get your head around equity risk? Yeah, I mean, a lot of it was starting with this we talked about earlier, being an entrepreneur and then being in credit. And I really, really love, I mean, to me, this may not be an inspiring thing, but I mean, to me, I like reading a corporate earnings report or a 10K or an annual report.

29:13I kind of know, like my wife on vacation, she'll say, what are you doing? Working, you show it to me on vacation. It's like, I actually enjoy it. Like if you hand me a big companies and like trying to figure out, like, how do they drive cash flow? Why are they spending this much on R &D? And it's a little bit like, it's a puzzle for me. And I like trying to figure it out. So that, so it was pretty natural to move from credit to equities. Even when I was running credit, I used equities to hedge. Right. But you know, the one thing I will find about that woman's opinion about doing equities for as long as I've been doing them now.

29:42It's a really interesting thing. I think most equity people that have a heritage of just inequities, they follow earnings, top-line revenue growth, and they don't really look at the balance sheet. And so there's three ways companies can generate earnings. It's your top-line revenue, and it's your gearing and your margins. But gearing is a really, really big deal. And understand, like, how does the cash flow get down to the equity? like in uh you know if you got a bunch of debt on a long way you're not going to get the cash flow down to the equity so anyway i i spend more time looking at gearing and the structure of the balance sheet and what drives cash flow than i think where most equity people are very much no by the way it's nothing wrong about it but most equity people like to follow like and pretty of your tech company it's a different gig like how am i getting from here to there but um but it may be a a little bit of a different orientation, but I really like looking at companies.

30:39And I think it's, and you know, as companies are changing and you know, at AI, it's fascinating. And how do you think about the macro in terms of equities or are you all bottoms up or is this within your macro framework? Oh, it's a great question. So I've come to my personal opinion. I don't think top-down analysis works, one man's opinion, because I don't think like people say, well, labor is going to slow and this is why employment is going to slow. The only reason I think that you can figure out, for example, when you get an employment report or a joltz report, what's happening in construction?

31:16Why are they hiring? Why are they not hiring? Why are they not hiring? What's driving the decision around CapEx? Are they spending on CapEx because of the growth dynamics or is it maintenance CapEx? What's driving inventories? Why are companies running up or running down their inventories? What are they seeing? Like, I just don't think coming from the top and trying to figure that out works. I think you've got to build up. And so we use so much data. And I've been to read so many of these earnings reports. I really think I learned way more about what's happening in labor from just understanding how companies are doing it.

31:49Those are those who hire people. Like, for example, today, like health care. Like, why are people hiring in health care? And you could see it in terms of need that we've had from nurses. And we're not. We still haven't solved that deficit. But, you know, by the way, look at some of these numbers come out, healthcare and education, not cyclical, not interest rate sensitive. Why do people keep hiring? Well, they keep hiring because there's a dearth of those people and you need them to, you can't operate in your top line revenue until you fulfill. Same thing with restaurants and hotels. But I just think trying to figure out that labor condition, you know, from the top, you know, using traditional economic models.

32:24And there's some geniuses at doing that. One man's opinion. I just think it's superfluous. But then how do you spin your head the other side, which is you're trading fixed income, which is much more macro. So you're using two different sides of your brain at the same time, right? Your bottoms up credit and equity and then top down fixed income. So it all starts from the bottoms up. I mean, for me, it does because so today. So another good example today. Like I think the interest rate tool that the Fed is using is completely blunt. I don't think it works because what happens is you have an economy that most people, most big companies don't really borrow today.

33:02The companies that spend on CapEx and R &D don't really borrow. You know, they're free cash flow rich. And so, but then you look at the bottom end of the income strata that is really struggling. The borrowers, you see this in credit card charge-offs, loan delinquencies. And, you know, we look at the credit card companies and you say, gosh, I see what's happening. I mean, look at when Walmart reports or any of the retailers reports, you can look at what's happening, why you're seeing more couponing, more promotions, the lower end's getting hurt. Like, you take all that data and say, OK, now I got to now assimilate that.

33:36Why is the economy slowly moderating? It's slowly moderating because we're pressuring the heck out of low income, small business, local banks. And you see that manifest itself in all the numbers. So I always believe that you got to understand the component parts and that drives. And part of why I think people get so wrong weight on the Fed, not that I get it right with others, but I think people get so wrong weight on the Fed. It's because they look at surveys. I think surveys are grossly distorted. I think this industry spends way too much time reading surveys. People just, I mean, I think everybody reads the same stuff.

34:18And they all respond the same way. It's like the service don't tell you anything. I don't think, or I think they're incredibly distracting. Whereas I'd rather dig in and understand, like, what did they actually do versus what they're telling you they're going to do? You mean us better than me? Markets do what people have to do as opposed to what they want to do. And it's the same thing with companies. Like, you know, if they don't want to hire more people, they'd rather keep their margins up. but if I have to and so you know I really believe that's what drives you know that's what drives how you think about these things how about in the fixed income where you know you guys are very big fixed income managers what's changed the structure of liquidity these days do you struggle to move stuff around um because the structure of markets for you feels that it's changed significantly after Basel III and a bunch of other things?

35:10I'd say the market's really episodic. Like it tends to be markets go one way. And I think it's led to the growth of a lot of momentum players because whether that is not enough deep capital or what have you, or capital that's a frictional capital in the markets. But there are times when part of why, like I don't like trading some markets, Like, for example, inflation break evens in the tips market, not liquid. Everybody goes the same way at the same time. I don't even want to do it. So we tend to, you know, when I move around my risk, I tend to do it in the deeper markets, current, you know, rates, currencies, you know, equity indices.

35:49And then, you know, the way we're trying to look at it is, you know, I always bucket my portfolios into four categories, one being the most liquid, where my transaction costs are pretty low, down to the fourth, which is like cement. And I'm never trading it. I bought it because I'm going to hold it for five years and I'm going to sit on it. And then you've got to scale it appropriately. But I trade a lot in the active liquid markets. I've moved my betas, my correlations around using the most liquid markets. I use a lot of the volatility markets. I trade a ton of equity options because that market, you get some depth around convexity.

36:25And so I know, but I think your point's well taken. It is definitely trickier at times. And, you know, you think about some of the credit markets, like the high yield market. I think that market trades the same size it did two years ago. And other than the index, like to trade an individual name, it's brutal. So, you know, it's part of why in some of the individual names, you know, we own them, we're going to hold them. And then we trade the index to trade our beta around it. But a market is that way. Yeah, it feels that the demise of bank trading desks has killed a lot of liquidity that used to be there because there were some big balance sheets that could move stuff around, and that seems to have gone.

37:05So it seems to be much more flows-driven one way or the other. Can I throw one addendum at that? I think that's right, and I think there's truth to that. However, I will say, I haven't been on the sell side for a long time. And I thought I should reduce myself. I try and sell faster than anybody else. So I still feel like you had, well, no doubt, like you said, the pool of capital was different. I think there's been a democratization of information, though, that has made everybody traveling in the same circles at the same time. And I think that has been a really, really big driver of things over the last few years, that the information flow is all out there.

37:51And when people get it, they tend to react. And, you know, for me, it's changed the nature of how you invest. Like, quite frankly, the only way to make money in most of these markets is you have to take the risk into the news because after the news, the market has fully priced it. And so you've got to take the risk into it and be willing to bear the consequences if you are right. The other way that I found, for me, what really worked, I haven't been a macro guy my whole life, running a hedge fund, everything else, is I just entirely changed my time horizon. And I went super long term and nobody's there because everybody was down to managing two-week P &Ls to have their monthly NAV reporting.

38:32And I found that really worked. So how do you think about this balance between long-term risk-taking, short-term trading? And does that bucket move around a lot when you think you've got visibility? How do you think about it? It's a great question. So part of why I bucket my assets into, because I think about it more stratified, that like the tier one stuff, I could trade a lot. I can move my duration around a lot. I can't move my individual credit exports. I can't move my bespoke financing stuff from real estate or others. I can't move that at all. So I didn't stratify it. But I would love to have the luxury in all my portfolios, have as much time and extend my time.

39:10And I just don't. So what I try and do at Orient Cash, if I got a lot of my funds are data liquidity funds, I just got to run a big pool liquidity. So what I end up doing is if I think, for example, you're getting paid for illiquidity and assets today, I'll amp that up. But then I know on a multiple basis, I've got to amp up my what I call tier one liquidity. I got to run a way more liquidity than I otherwise would. So I'm always thinking about like, what are the levers that I have to pull around that? You know, having more time is always beneficial. But you know, there's a real, I mean, we run a lot of portfolios that people like, you know, may change their opinion and they want to change it tomorrow.

39:51And so - Yeah, you've got super liquidity terms. So you have to match that and still drive long-term returns. It's not an easy balance to take. No, but quite frankly, part of why I like it the way it's structured is I really enjoy the dynamism of the news changes and trying to figure out that news. And hopefully you've prepared in advance to think through it. And then, you know, oftentimes a lot of the great returns are, you know, talking about like right before the news, you know, right before the payroll report. You got to place your bets, as it were, do all your work, all the analysis, and then try and do it and then react to what, quickly to what happened.

40:34So, you know, there's some good returns if you get that right. How do you think about risk? So I have a different view than most around, and maybe that's going through 08 or early in my career, taking a couple of big hits. You know, I use this expression, make a little bit of money a lot of times, you know, and some of it is the scale of what we run. But I really believe in this thesis that, you know, we got big teams around the world. and so I've been up to a store before, you know, I learned from one of my, we had an outside speaker at Wharton that came in and taught us about how they run casinos and he said, how do you think we make money in casinos?

41:14I'm like, I raised, man, the odds are in your favor and I've studied this. You know, he said, actually, only moderately. He said, people come in, they break$200, as they're aware. They break$200 and when they lose the$200, they leave. And he said, you think about how markets oscillate and he said, they go up, they go down. They were thinking about how people gambling, they oscillate and they're always going to hit the down 200 at some point, then they leave. Well, I've always thought about that. I always thought like, I don't want to hit the down 200. And so I always thought about like, gosh, it's a better business to be at the casino than the person who's doing that.

41:45So I've always thought like, if we use really good research and analytics and portfolio construction tools, if we can tilt the odds in our favor, just do it a billion times. And so my thesis has been just, you know, keep making a lot of lot of decisions. And I've tracked this over time. In credit markets, less liquid markets, we can usually get a right 70%, 75 % of the time, hopefully. And then in more liquid markets, 60%. Just instead of blowing my year up because, gosh, I think everybody's wrong in the Fed, those markets tend to be pretty efficient. I'd rather make a billion decisions. And so So I really run this business of trying to be tactical, make a lot of decisions, let your teams let the odds work for you, and then do it a billion times.

42:37I just think that creates what I call durable alpha. You still go through some painful periods, but you tend not to hit the down 200 if you're running it that way. um because when you and i uh were chatting over dinner we were talking about ai how how are you implementing ai in your process now so i'm spending way too many hours trying to figure it out because it is it's you know arguably the biggest technology innovation certainly since the internet but you know maybe the biggest thing we've ever seen so there are a bunch of different ways we're going first of all i'm convinced he who has he or she who has the data is going to win And, you know, so companies that are, I mean, and I think part of why you're seeing this with big business or small business, you're seeing this moat growing is the companies that have the data.

43:29You know, you look at some of the big tech companies that have the data and this acquiring all the data. I think those companies win and they'll build their moat. And so people say, gosh, look at the Russell versus the big, like, I don't know, like small caps are thing today is if you have the data. So that's one. to trying to figure out the energy implementation like everybody and think about all the parts around. I mean, the amount of capital that's got to go in. I mean, nobody's ever seen anything. And I just don't think there is enough capital and there's enough grid. So obviously in the energy space, there's some really interesting things to do, both in debt and equity to finance it as well.

44:05And then trying to get into the businesses that are secondary, tertiary impacted that are how we're trying to navigate. And quite frankly, I think every day, me including yesterday, I'm meeting people that are in the industry that have an interesting way to do it, private versus public. It requires a ton of capital. And so we're going to be thoughtful about where we're putting the capital. What about internally in your process? Are you using AI to filter, to kind of put Rick in a box? as Paul Trudy Jones used to try and build this Paul in the box idea. But you know, this bottoms up process of analyzing all the balance sheets.

44:44Obviously, you enjoy doing it, but AI can do it pretty quickly and efficiently. So I had this honor of, I did a one-on-one interview with Sam Altman. And I thought, by the way, I realized how intellectually intimidated I could be. Anyway, he said something I thought was incredible. He said, you know, augmentation will happen much faster than people think, and automation will happen slower than people think. And I've been thinking a lot about that. The way we're trying to exploit the opportunity is, like, how do you use data to, you know, data assimilation? How do we get our information faster?

45:19How do you know, home builders are doing this. Like, let's get the information quickly. What is it regionally? What's happening? That's been huge for us. And then obviously you get all the data interpreted. Augmentation happens if you can interpret it faster and more efficiently. That I think is really big. Second, I think portfolio construction. Like we'd spent a ton of time to understand stress testing, scenario analysis. You add an asset to your portfolio, it contributes risk and return potential. How does it play in that sandbox with the other assets? Because it's got all sorts of different characteristics.

45:52Well, AI, I mean, you get this, you think about all the planes of when you build a big portfolio, what is every asset doing? AI, tech, and obviously compute allow us to do that more and more efficiently. So we've been spending a ton of time with it and trying to figure it out. And then, you know, and by the way, one thing that I've learned more recently, it's actually what questions to ask. Yeah. It's like, that's been a bit of a revelation. It's hard. So you've got to get your mind around how to ask it. And I think some of the, we're working with a group that's helping us do that, that it's not just that it gives you the information, but it's actually, are you asking the right questions?

46:32and that has been that has really been fascinating to me that uh that you know maybe we're you know maybe we're interpreting something in a way that we should think about it differently that's been pretty powerful you know what shocked me is i've started putting economic stuff into gpt by giving it charts and asking it to give some sort of forward analysis or analysis of where we are it's not bad i give it technical analysis charts with like deep mark analysis or whatever it is on it and it it kind of can read the charts really well i'm like this is very disruptive i don't want to see this you know because i'm an analyst as well and i'm just thinking bloody hell this thing is moving really fast yeah the value we could add you know the augmentation idea to people in this industry is huge it's it is it is uh you know i keep saying to my team you know i find like with any new tech, and I've learned over the years of entrepreneurs, usually the idea they started with, it's not what they end with.

47:32And it's pretty incredible how people tend to fail first. And it's almost like a badge of honor in tech if you fail, like, look at this. But it's because you learn and you go on a different direction. Whereas in finance, you try not to fail. but the um but but it's pretty interesting in the uh and i think it's i think it's a very similar thing here in terms of uh terms i think about that evolution and um i don't know it's uh it's pretty extraordinary about and so you know what we when i asked my team and what we've been working on is like we're gonna throw a lot of stuff on the wall against the wall and we're gonna try this and is this working out does that work because i you know whenever you're in the I call it operating in the haze.

48:17I haven't even found this over the years, but I find you can't make a lot of money on a trade or an investment until you're operating in the haze. Because if it was obvious, there's no money in that. No. You have to operate in the haze. And I feel like in AI tonight, we're operating in that haze. And we got to look at this and check that out and see if this is durable and what have you. And I feel like we're right in the middle of that now. Here's another question I want to ask you because something I've been thinking through. I think since 2000, there's been a structural shift away from credit as the main financing vehicle for new businesses to equity.

48:58You know, almost nobody can borrow money anymore to start a business. I mean, try going into the bank saying, hey, I've got this idea to start a software business. I'll show you out the door and think you're a madman. but everything is raised by equity, which changes the kind of risk profile, as you were talking about, because these startups now, they lose equity, but there's no debt. So there's no other obligations attached to it. I also think that it means, you know, most new businesses bleed cash early in their life, in their life. And you got it because like you say, If you had a cushion of debt alongside you, you have more time.

49:37You don't have time now. If you're going to blow through your equity quickly, it's game over. So I think we look at a lot of these investments and we think about, we got to put equity in or we are putting equity in. You really got to think about, do they have contractual revenue on the other side? What's their contingent of liquidity? How are they paying staff? Can you stumble? You got to pay your staff. And when do they become frustrated and leave? So it's a very, very different. There's no cushion that like you used to have. It is, you know, and by the way, it usually also means that the equity, that the reward for getting it right is better.

50:15It is often just better because, you know, you're getting the equity at a more appropriate price. Do you think the IPO markets ever recover? Or do you think it is now a private-driven market where it either goes into PE hands or it just goes into one of the big tech companies or whoever the acquirer is? Do you think the structure of markets has changed? Wow, I don't know. I got to think about that. That's a great question. I don't know. I got to think about that. I think the nature of, you think about what drove in the SPAC market, I think some of that is probably put to rest for a long time. But I think durable business models will come to the market.

51:00It's a really good question because I keep thinking about this idea around time. Like in the private markets, the benefit of private markets, they give you more time. There's a closer interplay with who your sponsors are versus the public markets. Public markets need to see recognition quickly. They're brutal. and brutal. And I know a lot of CEOs quite frankly don't like the quarterly reporting. And so operating in the private can be much more helpful to thinking through your vision and managing your vision. So my sense is the IPO market is cyclical, but I agree. But I think there's some reasons that at least for the foreseeable future, it's probably not going to be what we've seen, what we saw over the last few years.

51:43And how much, you do privates as well, right there yeah how much how's that shift shifted as a percentage my guess is it's probably gone up for the same reason so i mean we're in a pretty i mean this is nirvana in terms of if you're i get why all the money's coming into private credit and i do i can't run obviously all private credit but i in some way depending on the fund i could do five to twenty percent less liquid assets or liquid assets or privates. And to exactly what you said, I've never seen the environment today, particularly in commercial real estate, that nobody wants to touch commercial real estate because office is imploded.

52:26But boy, there's some interesting things to do in hospitality, multifamily, logistics. So the terms you're getting today for that reason, in terms of cash flow sweeps, parent company guarantees, covenants, structural benefits, warrants attached that are pretty neat. And so it's a pretty good time to be a lender in the private credit, not just credit in the true form, but real estate, et cetera. So it's a good time to do it. So yeah, to your point, I've been moving more to that. And then what I got to do on the other side is I got to run more liquidity. But what's neat about today is because the risk-free rate is so high and spreads are tight in the public markets, it's like I can run a lot of really liquid assets because the risk-free rate is getting me so much yield.

53:20And even buying things like agency mortgages, like you're getting so much yield from agency mortgages or investment grade credit. then I could use my, you know, my, what are normally less liquid assets that are like EM or high yield, you know, like lower quality, high yield. How much do I need of that stuff? I'm not getting that much incremental yield. So I could run much more of a barbell and run, you know, own some privates. What was some liquid paper and keep, keep a lot of, uh, you know, keep your yield and your liquidity in good shape. Do you invest on the privates on the equity side as well?

53:52I direct investments. Yep, I do. And that has evolved. I would say the last couple of years, some of the stuff we've done in, we don't really do venture, but sort of the second stage, third stage stuff has been challenging, to say the least. But now there's some really, really good opportunities that are coming. And so we do it. It tends to be, for my business, it tends to be a smaller portion of what we do. But I did the same thing as we talked about earlier. It's a lot of fun to try and understand business models and the potential around these business models. And then, you know, it's interesting.

54:31And the exact point you said before, some of these business models, I think, are really good business models because they can't get the cash today, which is a bad state of affairs, are going away. I know. And what you're so lucky with, because you're forced to run such a big liquid side, when nobody's got cash to do the direct investments, you get the best deals because you've got liquidity. just by how you operate. Yeah. And by the way, it's a relevant point to what you said before, scale matters today too. If you can provide, we've had a number of situations where somebody says, listen, if you can provide the financing and I have certainty of financing, that's a really big deal.

55:12And they're willing to give you a lot of structural benefits for doing that because you functionally de-risk their enterprise. And so we try and not just and my fund, obviously we've drawn my funds and other funds across our firm. If we can use real scale, there's a benefit to that. So particularly today, where like you said, financing can be difficult. Well, because nobody, there's been no IPOs. So all of these private equity guys are all stuck and they can't release any capital. So the whole market's not doing well. People like yourself, it's a good environment. So what gets you excited going forward?

55:50What are you looking at outside of, well, let's break it down two things. Let's talk about the rates market. Your general view on interest rates over time. I think they're coming. So I think they're structurally higher because of all this massive spend we talked about in AI, infrastructure, climate, and the US government has too much debt, way too much debt. And so I think the amount of funding they have to do. So I think it's going to try to stay structurally higher. That being said, I think the Fed is going to cut rates, and I think they want to, and I think they have to because of the pressure they're putting on low income that we talked about.

56:25So I think they will, and I think their mandate is price stability. Everybody thinks a Fed's mandate or the ECB's mandate is two. It's not two, it's price stability, as long as you're close to the pin and the economy's operating. So I think they'll bring rate down. So I think rates will come down. If they don't, how do they finance the rollover of the debt? Right, because that's the other issue here. The elephant in the room is Janet's got a very big job to do, is to try and refinance all this debt. They can't. And I think the biggest risk in the next couple of years, the debt's too darn big. And I think we've seen the most immense movement of leverage from the private sector to the public sector.

57:04And it used to be, I was on the Treasury Borrowing Committee for a number of years. U.S. Treasury loves using Treasury bills because you manage the tax receipts of the country effectively, you toggle up and down bills. But we used to issue bills at zero to 1%. We're issuing them at five and change, 400 billion a week. It's too big. And it is so, you know, I worry about, part of why I think the Fed has to get the rate down is A, we don't have as many buyers internationally as we used to have. China used to be a buyer, Japan was a bigger buyer, etc. Banks used to buy, Fed used to buy. We don't have the buyers.

57:38And B, the debt service in this country is going to eclipse our military spend And we'll have no fiscal. The mandatory spend doesn't seem to move because we can't make good decisions on mandatory spend. So listen, have you said to me, what's the biggest risk of the next couple of years? That's it. Like, the debt's too big. How I see it is every central bank and government is now basically using liquidity. So they're basing currency to pay for the debts. We kind of see it at every level. You know, we've seen the game between the Treasury General account, the reverse repo, and QT. And they're pretending they're doing QT, but in fact, they're injecting liquidity into the system.

58:21It feels like that's the game. I mean, the Japanese have done it for a long time. The Europeans have done it. Pretty much everybody's doing it. So, I mean, think about it. At some point, like I think, I don't think it's going to blow up in 2024. for. And if the Fed is reducing rates and people feel good about the rates will stay stable, this is a tremendous amount of income you garner, particularly if inflation is down, your real rate of interest as an investor is really good. But I think over the next two or three years, there's going to be a point of time where the Fed will have to hike rates or rates for whatever reason are going higher.

58:54If you always say, I don't want to own it, Fed's going to have to put it on their balance sheet. You have this very similar paradigm to as you described in Japan. We were watching real time play out around the currency. The US is a reserve currency in the world. And the benefits you get from that are immense. I think it's a really dangerous thing. And I think policy, I've said it before, and I've said to a lot of policymakers, I think we need to address it. And I'm just not sure nobody's going to run for election and win on let's cut the debt in this country. So I think we're going on a dangerous path.

59:31Not with an aging population. I use the chart of the labor force participation rate and against it, look at government debt to GDP inverted. They're actually the same chart. So as the population ages out, the government debt goes up. I don't see a way around this. So I just think of the 1950s and it's like yield curve control is well japan japan have led the way on all of this so there's only one way out and i and i really believe this and nominal gdp has to eclipse your costs of the debt so the only way you get there is you have to bring a you have to bring down the cost of the debt which i think the feds got to do and i think we'll engineer that but b you have to find a way with a with a demographic us demographic is aging not it you know thankfully not as bad as japan was or europe is but it is to your point, the fertility rate is not fast enough.

1:00:24The other benefit, when it gets in a super controversial area, but immigration has actually helped expand nominal GDP tremendously. What we do with immigration, I'm not a big fan of illegal immigration, but we have to have immigration because like you said, otherwise you can't grow nominal GDP fast enough to offset the cost of the debt. And then because the US has this extraordinary ability to innovate in technology, If you can do things that are initiatives like R &D tax credits, accelerated depreciation in areas like chip development, like clean energy, that if you create enough fiscal programs that have velocity to them versus just helicopter money, keep nominal GDP up, allow appropriate immigration, and then keep the cost of the debt down.

1:01:12But it's hard. You got to have both have to happen. My view on this is that, yeah, if we think of trend rate of GDP is population growth plus productivity growth plus debt growth, let's say. Debt growth is pretty much broken now. So we've got population growth is falling negative in many places. But even the US has said the births, deaths is falling. Productivity because an aging population has gone down. So I see the battle on two fronts here. I see Europe saying, we are just going to throw stupid amounts of money at lowering the cost of electricity. And it won't be wasted capital. If we can do that, if you can get the cost of electricity from price 100 down to price 25, it's a 3x multiplier on GDP.

1:01:57So that's one. And the other thing is, I just think that the population problem gets solved by AI and robots. They're infinite people. are set in the end. In the end, we've got to get from here to there first. Well, that's your productivity argument. I mean, if you got some exogenous productivity enhancement, which I think you could, that is a really big deal. And you think about what that does. That brings down your costs, that should bring down your cost of debt because you brought down your inflation significantly. That is totally great. By the way, part of why wouldn't you, if that's right, which I think it is, why wouldn't you actually, if you're the government, why wouldn't you put money towards making sure you are globally competitive at that and you are running the most efficient forms of that energy, investment in energy, which is required, investment in chip development, etc.

1:02:54But yeah, I completely agree. I mean, nuclear has got to be one of the big answers here. But politics is slow. It was interesting, I was with a big family officer in Italy and they were speaking to the government. And it seems that in the background, most of the European governments are starting to understand that they can't do it without nuclear. Solar is great. It just doesn't scale because of the storage enough. It's pretty amazing in Europe and France and Germany and other places how the needle has swung. Amazing. And I agree with you. I think solar and wind are also, hydro, are also incredibly powerful.

1:03:29It's just really hard to scale at this point. They're really hard to scale the size you need it. That's right. So what's the one final thing that you're most excited about in the investment world? It can be any time horizon. I don't mind. I won't impose that on you. But what do you think? This just looks like people aren't seeing this. It's in the haze, but I like it. so i told me i'm gonna say so first of all the ai thing is pretty cool so but since that since that is people talk about it we talked about it i gotta leave that aside that's pretty that's pretty cool i'd say two other things that i find really interesting that i have one is there's a massive cultural shift towards experiences versus goods and i think i think that is an amazing evolution and you look at that prices for things for goods that have come down and you look at what people are spending on travel, restaurants.

1:04:24And by the way, I think it's a pretty cool thing. I think it's a good thing. So from an investment point of view, I'm just trying to get in. I mean, what people are paying for Taylor Swift, I think it's just truly incredible. But it's a microcosm of what people will pay for a good experience and being together. So I think that's a big thing. The more digital we are, the more digital we are, the more we value those experiences. I agree. Here in the Cayman Islands, Christmas 2022 was a pretty bad time for the economy. Yep. Record tourist season. Totally. Because people were bringing their whole families with them because they wanted to get together.

1:05:00And I've observed the same thing. The whole experience of this economy is gigantic because we do so much of this Zoom stuff. Totally agree. And I think, by the way, I think COVID put that into high gear. Yeah. And I'd say the last thing that, because I've been around fixed income my whole career, like this creating, you know, it's torture when rates are at zero or the dumbest invention in history, negative interest rates, where, you know, like, oh, I got to buy high yield because I can get two and a half for it. Like that stinks. Like today, you can build these portfolios, six and a half, seven portfolios, sleep a night, marry them to your beta, your private equity, your private debt.

1:05:43Like that's pretty cool. Like today, I'm pretty energized by like seven is better than two. How long does it last when you try and lock in as much as you can now for the longest period of time? I think it's got some legs to it because of, you know, the Fed's going to take time. The ECB is going to move faster, but they'll take time. But I think it has some legs to it. But that being said, you know, I tell clients all the time, like, you know, buying, you don't have to buy 30-year paper. You don't have to buy 10-year paper. It's not worth it. But, you know, buy three to five-year stuff, just put it away.

1:06:15And then, boy, that's a pretty good environment. I think exactly what you were describing, we have to reduce the price, the cost of debt. For so many reasons, it has to come down. Hopefully through productivity and lower inflation, it gets there. but if that's right and um and the fed will have to get it there you know getting some of this yield on now makes some sense and it's uh it's a neat thing to get to be able to get income at these levels and also i love the idea that you had is that essentially you can make use of that yield and you can put it into risk capital totally which you couldn't do before you couldn't you didn't have that no and you i mean you know this better than me i mean so you always think about your buckets of risk.

1:06:57And if you said, gosh, I now can take my yielding bucket and I'm not using a lot of risk for it. It just allows me to use that bucket of risk for other things that have more convexity to the upside. And that's a pretty good investment environment. Not without some volatility to it as a downside, but that's a pretty good investment environment. Exactly right. Rick, listen, fantastic conversation. I really enjoyed it. Oh, it's great. I appreciate it. Yeah. And we'll get you back another stage and we'll chew through what's going on then. But let's see. Let's see how this all plays out. I'm with you.

1:07:28I think the Fed are forced to cut. Regardless of any other narratives, they just have to bring the cost down. They can't refinance this. No. Well, there's no way. There's no way. Think about it. If you're trying to raise the cost of the debt to deal with inflation, you're going to simultaneously reduce nominal GDP and bring your cost of the government up. It's like it doesn't work. It's going fully backwards. Yeah. Somehow we've got to get GDP up. All right, my friend. Great to see you. I really appreciate your time. Thanks for having me. I appreciate it. All right. Yeah. Really interesting conversation with Rick.

1:08:03How different we kind of approach some things. His time horizon is different. He's much more aggressive trader in some respects, but he's also very risk averse in other ways. He really is a very thoughtful person to speak to. He sees the very big picture down to what happens on the employment numbers. I mean, that kind of level is quite something. And some of the very best macro investors can think of all of those multiple time horizons. I tend to be longer term, as you know. I find it easier. It gives me an informational edge. But if you're as good as Rick, you can get down to short-term time horizons too.

1:08:39And now you can understand why Rick has been so successful and manages so much of other people's money. he really really has learned the lessons on his journey and really understands how to implement his strategies anyway see you next time on the journeyman now don't forget please sign up to the channel here the youtube channel if you've not done so just click on the button below it helps me tremendously also check out realvision.com it's free it'll help you unfuck your future it's really important there's all of the knowledge tools and network to help you succeed Within that, if you remember at the beginning of the video, I talked about the macro investing tool.

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1:09:58That's realvision.com forward slash free.