The bull market keeps running…

Esta semana presentamos a Rick Rieder, director ejecutivo de Inversiones de Renta Fija Global y jefe de Asignación Global

Durante los últimos 10 años, los inversionistas han estado disfrutando de un mercado alcista en EE. UU. Sin embargo, se están presentando efectos bajo la superficie, producto de tensiones comerciales y geopolíticas, y demografías cambiantes en el mundo.

Pero, según Rick Rieder, director ejecutivo de Inversiones de Renta Fija Global y jefe de Asignación Global, aún hay muchos aspectos positivos. En este episodio de The BID, Rick habla sobre por qué no cree que habrá una recesión en el futuro cercano, por qué subestimamos el impacto de tecnología y el secreto detrás de dormir solo cuatro horas cada noche.

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  • Mary-Catherine Lader: For the past 10 years, investors have been riding a bull market in the U.S. Growth in the stock market has been relatively stable. But are ripples are starting to show beneath the surface? Trade and geopolitical tensions have created uncertainty. Easy monetary policy could be coming to an end. And demographic changes are creating more demand for income around the world. With these shifting dynamics, following the stock market could not be enough for any of us. So where should we look now?

    On this episode of The BID, Rick Rieder, Chief Investment Officer of Global Fixed Income and Head of Global Allocation at BlackRock, talks about why he thinks we underestimate the impact of technology on markets, just how many bullets are left for the world's central banks to use in monetary policy, and the secret to sleeping only four hours a night. I'm your host, Mary-Catherine Lader. We hope you enjoy.

    Rick, thanks so much for joining us today.

    Rick Rieder: Thanks for having me.

    Mary-Catherine Lader: You're the CIO of Global Fixed Income and you recently became the head of our Global Allocation Investment team as well. You're now responsible for about $1.7 trillion in assets. As that number has grown, has your thinking as an investor changed?

    Rick Rieder: I mean it has. I mean I think as an investor, you grow with the years anyway, you think about what investing is as opposed to what trading is and, you know, thinking about where are we going and how do you get there? So, I think it evolves quite a bit. And particularly in today's markets where volatility is higher, you think a lot about, "What's my core conviction? What do I want the portfolios to look like?" What is your big picture thinking, make sure your portfolio looks like that.

    Mary-Catherine Lader: So, for the past 10 years, we've been in a bull market, a stock market that's on the rise, and it's created a lot of confidence. It seems like you can invest in almost anything and make money. There's a persistent question now as to how long that will last. So, what's your view? How long do you think that will last, and can the bull market keep running?

    Rick Rieder: I think the world is changing quite a bit. Part of what I find energizing about markets now is, like you say, we've lived for years in this dynamic, that two things have happened. You know, post- I would say the financial crisis, economies were growing a bit. China was growing a tremendous amount, creating this tailwind for the world. People underestimate how big China is, particularly for Europe and how it was creating this extraordinary veil of growth is pretty good, and then simultaneously, interest rates came down dramatically. Central banks, any time you had a blip, the central banks were there underneath the surface. And like you said, this has been an environment where you just bought beta. Beta meaning, the upside or the sensitivity to the market. One of the things that the markets move based on the S&P 500 and then how sensitive you are to how the general market will move as opposed to idiosyncratic or an individual company's performance or security's performance. It was just, "Get me beta. Just get me upside potential." All of a sudden, that's coming to an end. I mean not to say, I think markets can still do well and I think markets, particularly equity markets will continue to do well, but it's all about dispersion of what I call, "Where do you want to be versus not want to be?" And it's quite frankly, as an investor, what's the most exciting thing you could do is not just making one decision, "Are we risk on? Do we like risk? Or risk off and temporarily not?" Now you think about a whole myriad of things that you could do in a market which is a lot of fun.

    Mary-Catherine Lader: And so, what indicators are you looking at today that you think are particularly meaningful? There's a lot of concern as to whether some data is a little less positive than it had been more recently, what that might mean for the economy for example?

    Rick Rieder: Yeah. Let's start with what I'm not looking at. Traditional economics used to focus on manufacturing data and say, okay, the manufacturing PMI was this, and that's what was the influence on the economy. It's 12%. Arguably, it's less than that in hiring, it's less than that. It's been negative hiring for the last 20 years. But the thing that I watch really carefully is sort of the service sector and how that's doing. The service sector hasn't been in recession since the Great Depression. But I particularly watch the consumer. And the consumer is in really, really good shape historically. Net worth is up and income is up, inflationary conditions are lower. Consumption can change, sentiment can change, and people can pull back particularly in the equity market, but I watch that consumer data really closely and watch things like auto sales, housing starts in the U.S. And then globally, I watch China quite a bit and I think people underestimate how big it is in terms of global trade and particularly manufacturing and things around commodities, iron ore, et cetera. Anyway, those are the things that I watch pretty carefully.

    Mary-Catherine Lader: As you're watching the consumer in the most developed economies, the consumer is generally aging, demographics are changing. So, what implication does that have for you as an investor?

    Rick Rieder: So, I'd say there are two influences that I think are the biggest ones and I think if you just got these two right, it's the key to investing going forward. It's demographics and technology. Let's start with the demographic as you described. The aging consumer or the aging individual in the world, the fertility rate is not high enough, and so what does it mean? It has huge ramifications. Global growth can stay low for a long time, these interest rates will stay low for a really long time. Central banks have to keep rates low because you don't create enough organic growth, you can't pull forward growth like you used to. That's a really big deal. Second, we're in this amazingly historic period of time. The demand for income is extraordinary and it's not going to change any time soon, whether it's because of the aging dynamic. Pension funds, insurance companies, individuals need the income as they approach retirement because they have liabilities. That is a really, really big deal and I think people underestimate that's going to be with us for at least the next 10 years, 20 years. By the way, in this asset-like, capital-like world away from goods and manufacturing, we're not creating enough income. You just think about all the middlemen we used to have over the years in manufacturing processes and otherwise, the world's not creating enough income for the requirements.

    Mary-Catherine Lader: So, let's just get a little more granular. What does that mean for the aging consumer and how do they get that income? They're paying more and more for less income?

    Rick Rieder: Yeah. You take the fixed income market, usually typified by the Global Ag. I think the number is it's 25 trillion to get 700 billion, I think is the number offhand. It takes three times as many assets as it did 10, 12 years ago. That's a really big deal. Again, I think for a consumer generally, it's make sure that you're in the right industries, make sure you're in the right places. Make sure you're in those places that are not going to get disrupted because technology is changing so darn fast. The next five to 10 years, what people I don't think spend as much time with on technology, is technology does not grow in a 45-degree angle like a smooth graph. It stays low and explodes higher. Data transmission has created this unbelievable usage of internet GPS technology and now there's more to come. And so, be really careful about are you in – I call the fast rivers of cash flow, the places that benefit from technology and benefit in the right industry – but be really careful. Because if not – look at places like energy or hard retailing today. You've got to be really careful in going forward and that's not going to be any easier for the next five to 10 years.

    Mary-Catherine Lader: You mentioned fast rivers of cash flow. What exactly do you mean by that?

    Rick Rieder: There is something really different than anything you've seen in history that certain industries, you get this dynamic that they're doing well, they're at the right side of the technology spectrum and then because they're doing well and they're creating profits and cash flow, they can reinvest in their business and they can put money into R&D and innovation and go into different areas that are tangential to what they do. And so, every day we're trying to figure out, are we in the industries, whether it's technology – you know, things around the consumer are doing really well, parts of the healthcare market, managed care, et cetera. The businesses that are actually operating in, (a) the right technology, (b) attached to demographics or the right sector today. Your ability to continue to grow is tremendous. And then if you're on the wrong side of it, it's really hard today.

    Mary-Catherine Lader: So, thinking about underestimating the power of technology as you mentioned, we've had a couple tech IPOs lately that have been disappointing. So, how do you think about what is and isn't technology, where those fast rivers of cash flows are or may not be?

    Rick Rieder: I hear a lot of people saying that tech is now overvalued or what are people going to pay for future growth. Some of those recent IPOs, maybe there was the assumption that the valuation was high and you'd grow into it and the markets are saying, you know what? The economies globally are more uncertain in the ability to pull forward that growth or growing into those valuations is a bit harder. But boy, I don't think it changes the dynamic around technology and it doesn't change the efficiencies. I look at companies; their returns exceed their cost to capital, look in Europe. And there's a huge amount of companies where the cost to capital, where their equity market is, even the debt costs are low. So, it means they can invest in R&D, they can invest in capex. So, I still think technology is changing the world and the amount of, I mean as we get into 5G, I think people are underestimating how big that transition is going to be and how big the winners are. By the way, you look at the cable companies and broadband and what they're able to generate today. If you do it in scale and you're in the right technology, your ability to garner cash flow is historic. And, just make sure you're getting into what I call those fast rivers.

    Mary-Catherine Lader: That's largely been concentrated in a number of really, really big companies. So, how do you think about the expansion of that opportunity set, of the number of companies either new entrants or existing companies who can take advantage of that rapid growth and fast rivers of cash flow generated by technology?

    Rick Rieder: So, I think there are a lot of those big companies making an awful a lot of sense. And you've got to keep an eye on regulation and you've got to keep an eye on how those businesses are going to grow and thrive going forward. But then I think they're all, we talked about cable companies, who is the supplier? Who is alongside of them in that dynamic? I think is really important. By the way, you look in the consumer sector. There are a lot of companies that are really proactive about -- have gotten themselves into the right technology. And I look in the retailing space and there are some companies that are cutting edge in retailing and all of a sudden you just see their share continues to grow and grow and grow, and then others that may still have the same similar, tired business model, and you just watch the chasm between them, is going to expand and continue to expand going forward. So, I don't think it's just the traditional technology companies as who is (a) in and around those big tech names, and (b) who are industries that have just figured out, "This is where my price point has to be, here is how I get there efficiently, here's how I brought my cost structure down," alongside of it. I don't think we've hit the end on new developments around technology, whether it's autonomous driving, whether it's things like drone technology and what it means for different businesses. Gosh, I think there's so many cool, exciting things that are still coming down the pike.

    Mary-Catherine Lader: So, it's not that you think we should avoid utilities, energy, industrials altogether. It's rather, who is adjacent to that growth who can take advantage of that growth, is that right?

    Rick Rieder: I think one of the most exciting things for investing for the last few years -- you think about what happened, last year's interest rates came down. People looked at equities and said, "Gosh, my utility stocks have done well" or, "My staples have done well." That's because interest rates came down dramatically. Should I be financing utilities and staples in equities or should I save my equity appreciation to the companies that are in the fast rivers of cash flow? Should I save them for tech or consumer or parts of healthcare? And again, some political risk, but into places like healthcare. And on the bond side, their bonds are cheaper. In places like utilities and staples, their bonds are cheaper. Why wouldn't I just buy those companies in bond form? And you think about the places like utilities are regulated industries. They're unbelievably stable and their bonds are cheaper than technology companies. Why would I lend to a technology company? I like the upside and I'll lend to a utility, I'll lend to a consumer staples company, and that makes a lot more sense. You can create efficiencies, build income in your portfolio, places that are stable, and then get your upside in places that have upside, have embedded organic upside in them.

    Mary-Catherine Lader: So, you've mentioned equities and bonds. What other asset classes do you think are perhaps misunderstood right now and how are you looking at them?

    Rick Rieder: For the first time in a long time, many years, we're actually excited about gold again. People don't realize, there's only $6 trillion worth of gold in the world. There's only enough to fill two Olympic-sized swimming pools. Actually, there's not a lot and it has no industrial purpose which is perfect because it's got a history as a currency, and when you depreciate the currency in other parts of the world because you just print money or negative interest rates, gold tends to work really well. I think there are parts of the real estate market that I still think are really attractive. I think the residential real estate market, whether it's a direct investment, whether it's tangential in a homebuilder. The equity in people's homes is the highest its been in years and years and years. You've got a consumer that's in great shape. So, anyway, that's another place that we think is exciting today.

    Mary-Catherine Lader: What about geographically, which markets are you particularly interested in? It sounds like some of what we're talking about sounds a little specific to U.S., but for example, that demographic trend in homebuilding, that could be a lot of different countries?

    Rick Rieder: Yeah, totally. The best demographic in the world sits in India. We've spent some time in India and it's not without risk. And whatever you go into, whether it's political or fiscal, India just cut the corporate tax rate. It's the best demographic and I'm convinced demographics -- they're not necessarily the trade for the weak, but they tend to win. Parts of China, you always think about risk-reward. Take some pieces in China. China, particularly in technology, is at the cutting edge and arguably beyond the U.S. So, there are some things to do there. Europe is tricky. There's no organic vibrancy to that economy. I was looking at the number of unicorns in Europe in the last few years, has been close to nothing. So, be a bit careful there. And you know, Latin America, I like the rates market in Latin America. I think Latin America is going to continue to grow. Brazil has done some things on fiscal reform, Mexico as well. So, some opportunities in LatAm are going to come up, definitely on the rates side today. They're going to keep cutting interest rates.

    Mary-Catherine Lader: Focusing on monetary policy for just a moment. We've talked a lot about rates on the chase for income. It sounds like your view is that monetary policy can't continue to be the salve for the economy. What's your view as to the extent to which governments and central banks can continue to cut rates and how effective or ineffective that will be?

    Rick Rieder: I think it depends where you live. I don't think Europe and Japan can do much at all on monetary policy. I think it's over. I think negative rates is the dumbest invention in the history of the planet to start with, and I wish they'd go away. And I don't know how they're going to go away because it's so hard to come back from when your economy is not going growing that fast and your debt is too big. So, they need to get fiscal, particularly Europe, and I think you'll get a transition to some fiscal, but it won't be satisfying. I think the Fed has a lot of bullets left. When people said the Fed is out of bullets is because we're close to zero interest rates, it's not true. A) We're not at zero interest rates. The Fed still has a number of moves they can make. They can do them quickly too and you can shock the system by moving quickly when you move rates, particularly as you get to the zero bound and particularly when you're easing, you want to be fast and aggressive. And then people forget the Fed's balance sheet is only 19% of GDP, the ECB's is 40% and Japan is 104%. The Fed could buy a lot of assets. You know, it's within the Feds' purview to buy municipal bonds. People think, "The Fed buying munis?" But if you want to stimulate infrastructure in this country, the Fed could turn around, buy munis. I mean the Fed could buy trillions. I mean you have a $20-trillion economy; the Fed can buy a lot of assets. So, I think the Fed has become the central bank to the world and it's part of why I think the dollar is so critical to economic conditions globally. When the Fed stops raising rates, starts cutting them all of a sudden, emerging market countries can then cut rates, it's a really big deal. But I think more and more Jay Powell has a lot more on his shoulders because the other central banks, particularly in the developed world, are out of tools and it's a really big deal.

    Mary-Catherine Lader: So, it sounds like you sort of think the bull market is going to continue in the U.S.?

    Rick Rieder: I don't think when people say the equity market is high, it's not high. I mean you may think it's going down, but it's not high from a free cash flow multiple, it's not high from a P/E ratio. P/E ratio, meaning price-to-earnings for a company or roughly what you're paying valuations-wise for their current earnings and their future earnings flow. On a P/E ratio, it's about average versus where it's been, but it's also interest rates are the lowest they've been by hundreds of basis points. So, I think that what's happening, because there's not enough bonds in the world, because there's not enough income in the world, I think you can continue to see the equity market appreciate. It's going to be a straight line? No. And personally, I'd actually like to see it go down first to get some better valuations and to buy some things, but I don't understand. There's no doubt, earnings are going to be flattish, not terribly exciting. Margins may be under a bit of pressure because of wages. But I don't think we're going into a deep recession and people have suggested we're going into a deep recession, stay away from equities for a while. Am I okay taking some equity risk? For sure.

    Mary-Catherine Lader: So then, what would be a sign to you that a recession might be on the horizon?

    Rick Rieder: I mean it has to be the consumer. Let's just say whatever reasons, an exogenous shock, a geopolitical event, a political event, and the equity market goes down 15, 20%. That would hurt sentiment and you'd get the consumer pull back saying, "You know what? I'm just going to wait for a bit. My net worth has come under a bit of pressure." If all of a sudden, they really increase the savings rate because they were worried about what was happening around them, that would be something that would give me some concern. Otherwise, people say, "Manufacturing is coming under pressure" so the next thing that happens is you'll see layoffs. Manufacturing doesn't hire anybody these days. It's in a secular decline, so that doesn't impact my thinking. But the service sector, healthcare, education, leisure, business services generally have been pretty buoyant in terms of hiring people and income levels are good, but that is service sector consumers, I'd watch quite a bit. The U.S. is also a closed economy, and not that tariffs wouldn't hurt the consumer, they will. But people say, "Look at what's happening to trade or the global economy." The U.S. is incredibly, of the top 20 countries in the world, it's the most closed from a trade perspective. Meaning, the U.S. can still grow if the global economy is soft.

    Mary-Catherine Lader: So, you think these concerns about the impact of trade on the stock market for example are a little overblown?

    Rick Rieder: Well, if the stock market is still -- I mean, we haven't traded off that much in stock. People talk about it a lot, but when you sit at close to the highs, I don't know. I think it's weighing on sentiments. One thing I will say about trade that is important is we do live in a world where we have an open global system and China is so darn important and Europe is certainly important in the global economy. If the global economy was moribund, it wouldn't hurt the U.S. from a growth perspective, but it would be something that we'd worry about a bit, but more from China and the impact of China in trade. You have to keep an eye on it for sure.

    Mary-Catherine Lader: So, just listening to you talk about global markets, different asset classes, it sounds like a pretty exciting time to be an investor. How would you characterize what makes this time different from the many other decades, the periods in which you've also been managing money?

    Rick Rieder: Exciting also means blood pressure rises at times. It's certainly not a straight line and it's certainly not without volatility and certainly not – your operating environment, whether it's trade or issues, people about the president or Brexit or the global economy slowing, it's not like there are not things that are out there that don't concern you. This is a different time for a couple of reasons. One, with interest rates where they are, you got to figure out how do I get income in the portfolio. Create balance, create balance, create balance. We're not going to be like we were certainly at the beginning part of this year, where rates worked well and equities worked well, we got to create balance in the portfolio. You got to get income in the portfolio and do it efficiently. And then within a market, that's jumpy, I don't believe when people say, "We're at the end of the cycle, end of the cycle." We've been saying we're at the end of the cycle for four years. And I don't really believe there's a business cycle, like a traditional manufacturing, close the output gap, inflation rises. But growth is slower, we had a big fiscal tailwind, now it's a headwind to some extent. You have a big election uncertainty with incredible dispersion of opinion and policy. You have to have balance in a portfolio because anybody tells me, "Here's what the election will look like," not just in this country, around the world. They'd be lying if they say knew. Anyway, it's why we like balance.

    Mary-Catherine Lader: Sounds straightforward but very hard to execute.

    Rick Rieder: Day in and day out is hard for sure. And quite frankly, it's hard separating yourself from the news flow, whether it's social media or Twitter or what have you. But anyway, you just got to commit to, "This is where we're going to be," and you know the portfolio will work out well. Just keep that corpus of your portfolio head in the right direction.

    Mary-Catherine Lader: I'm going to end with a rapid-fire round of slightly more personal questions. Are you ready?

    Rick Rieder: Yeah, I think so. I'm not really good at rapid fire, so I'll try and keep them brief though.

    Mary-Catherine Lader: So, you notoriously only sleep about four hours at night?

    Rick Rieder: Yeah.

    Mary-Catherine Lader: What's the secret? Is that nature or nurture, and if it's nurture, what have you done?

    Rick Rieder: Nobody tells me it's a good thing. I just think every year, I take another half hour off. There's so much going on, I feel like sleep is a waste of time. I'm sure have a lot of medical people, including my brother, who's a doctor tell me I'm crazy, but I know I feel like there's a lot going on and I have a lot of energy.

    Mary-Catherine Lader: That's pretty inspiring. So, you're also a technology buff?

    Rick Rieder: Yeah.

    Mary-Catherine Lader: What's your favorite gadget?

    Rick Rieder: So you know, actually, the new one I've gotten into, I've talked every time about obviously phones and AirPods and autonomous driving, but I've gotten into this WHOOP that I wear now. I think the physiology of the human genome is really interesting about how days, you talk about how I'm not sleeping. Well, some days I don't sleep at all and that tells you. But I think monitoring your insides, in terms of whether it's blood flow or dispersion or you're having a good day, not a good day, I've really, really become intense in trying to think about what drives performance in any given day. It's why you're seeing a lot of athletes now that are monitoring their daily conditions to determine what their exercise regimen should be, et cetera. I mean we've done it with machines for years, why can't you do it with humans?

    Mary-Catherine Lader: Have you noticed any trends? Is there anything you do differently now that you know?

    Rick Rieder: Well, it's actually horrifying when I look at how many nights I don't sleep at all because I'm up watching markets. Particularly, I noticed that on the weekends, I get considerably more deep sleep than during the week. There's something going on there, particularly when the news flow is high. I figured I've got to sleep more in the weekends.

    Mary-Catherine Lader: What's the book at the top of your recommended reading list right now?

    Rick Rieder: I'm reading a book called Factfulness. I just started it, but I think it's a pretty good book, it's a pretty optimistic view of things. But my favorite book that I've read in the last five, 10 years is one called Capitalism without Capital that tells you so much about the economy that we don't need capital, we don't need hard assets, et cetera. But to give you some sense for why certain countries grow, why certain don't, why certain industries are going to thrive, why others aren't. Anyway, it's fantastic.

    Mary-Catherine Lader: So, one of the many perks of your job is that you get to meet a lot of extremely interesting and really famous people. Who's the most interesting or perhaps most famous person you've sat next to at a dinner?

    Rick Rieder: Larry Fink.

    Mary-Catherine Lader: That's the right answer.

    Rick Rieder: I enjoy sitting next to Larry actually. I don't know who's the most famous. Two people I've gotten to become friends with that's been a huge honor for me are Paul Ryan. We debate social issues all the time, but I find him fascinating economically and thoughtful. And I've gotten become friends with Rory McIlroy, the golfer and he's got a lot of tips for me since I can't seem to fix my golf game and he's had a great year.

    Mary-Catherine Lader: One last question. Most exciting or scariest, you choose, moment of your career as an investor?

    Rick Rieder: '08. I mean if I live for 50 years, going through ‘08 was incredibly daunting and how it played out and scary -- if you think about what could have happened or what did happen. Since then I would say, as the business has changed, we don't get a ride every day, but there's some neat things we're doing in building analytics and technology around it. Some using artificial intelligence that I thought, gosh, would never use in investing. There's some really cool things going on right now that in the next few years could be not without risk, but a lot of fun.

    Mary-Catherine Lader: Thank you so much for joining us here, Rick.

    Rick Rieder: Thank you. That's fun, thank you.

    Mary-Catherine Lader: It's been a pleasure.