For that we bring in rick reader. He is the chief investment officer of global fixed income at blackrock rick. It is always great to catch up with you. Weve been talking a lot this morning about how weve been seeing equity strategists cut their s, p, 500 forecast, and there does seem to be a bit of a shift in tone and sentiment coming from strategists more broadly on the fixed income side. How are you feeling? I mean we do see kind of fixed income markets, take tapering expectations in stride. Up till now, so i mean i and thanks for having me yeah, so so id say a couple of things. First, i run around large equity portfolios as well so and that the the dichotomy between the two was pretty extraordinary. I mean, i would say first thing was: how is the fixed income market taking you know, tapering or i mean its? It is uh to say, and stride is an understatement: the amount of supply thats coming to market in, in investor credit credit. Last week, 75 billion dollars is priced in four days by the jewish holidays in there as well. The price that much high yield the loan market is pricing, immense amounts of supply, the treasury market, treasury of funding markets are having no problem with the fed paper. In fact, the fed taper and the discussion of the fed is so insignificant, rather were talking about 15 billion a month, and weve got 75 billion of riskier investment grade supply in four days its just not you know, people dont put the the sheer size of it.

You know, particularly when a fed is de linking rate from the quantitative easing program. Its just the markets are in good shape the demand for income, the demand for return, ive been doing this 35 years. Ive, never seen the extraordinary amount of demand there. So, by the way i do run big equity funds, i actually think the equity market. I think i havent read this global pc. You know were referring to, but you look at what revenue growth is you look at what these companies are building book equity at 20? 25 30 per annum and think about that gosh. My the intrinsic value of my stock is going up 20 25 per annum, whereas the 10 year note yields one percent with real rates at negative one percent. It just puts, in a perspective the paradox between value in the fixed income market and the equity market. Today, where i dont think equities are high uh by any measure, so rick what accounts for all of this demand that youre talking about i mean. Is it people like to point the finger at the fed, of course, and say, oh its because of all the liquidity in the system, and it needs a place to go? Is that whats going on here? Is there something more to it? It seems like it. Thats, a that seems overly simple, i dont know so i mean the fed is then no doubt i mean, in fact i think the fed is is creating an overcrowding dynamic, particularly in the front end of the yield curve.

Theres not enough collateral to fulfill the amount of the that the fed has to put into the system. So i do think the fed is, is over enhancing the amount of liquidity in the system, but its so much bigger than that going through a demographic evolution and a need for income and and by that is extraordinary. Pension funds. Insurance companies, by the way, not just domestically you look at japan, you look at other parts of the world that have a need for yielding assets. We dont have the inflation rates we have here that amount of money and by the way, as the equity market runs up, people look at balancing their portfolio and say gosh. You know my equity just became a bigger portion of my portfolio. I need to reduce that and i got to buy more fixed income, so the demand for yield and income and by the way this is not a temporary thats part of why, i would argue, the fed tapering would have a more than an insignificant uh effect on This in the near term, because, particularly since the system is overstuffed with liquidity, but the demand for income is going to be something that is going to be the hallmark of this investment decade. Um uh without question of me: i mean its just i mean, and when you look at the sheer size of wealth thats been created, i mean look at by the way the consumer today photo.

I think growth is better than people forward growth. Will we better than people think consumer has not only built up huge amounts of savings relative history, but has also paid down their debt, and their house is in uh is in much better shape than before, so consumers in great shape the need for savings and an Expenditure will be will be strong from here rick. Why do you think just looking at the equity component? Why do you think investors are ignoring some of these? Some of these correction calls weve gotten lately. So, first of all theres too much money. I mean the the amount of, and you know not only is there too much money, the alternative is not attractive at all and so whats happening and by the way, much of the way were running. Our big unconstrained portfolios is gosh. I dont want to own a lot of those quality assets that the fed is is putting it at rates at prices that dont matter make sense, so you hold more cash, but then you can get more equity, more equity upside, but also, i think, theres something historic That were going through when you talk about these companies building booked equity as fast as they are, and you look at the earnings yield to the equity market or the free cash flow yield. Even even what i think i im a i think, coming from a credit side, i, like free cash flow, yield better than anything i mean were seeing more and more companies throw off.

For you know, the average of the index is over four percent earnings yield. Just above four percent free cash flow, we build those numbers are incredible and when you could build book equity as fast as you can, and then you think, okay, so whats my fundamental backdrop, you know people look at prices and say actually were at records and i Always find like a record, but if youre building book equity that fast and youre throwing up that much earnings yield, these multiples are not are not high at all. There are some stocks that are too high, but the uh, the overall aggregate. You know level of uh of valuation is not bad in an environment, particularly where a big part of how you build a balanced portfolio, i.e, safe quality assets is too rich, so theres a natural inclination. Let me get into uh into more of those assets, but i dont think theyre overpriced. Today, in general, i can find a few that that you wonder why people are buying rick. You can always find those i think rick whats, going to happen with rates before the end of the year and is that going to change the valuation picture of of stocks, because thats thats really one of the key areas, the the key risks that were hearing strategists? These days point to is that rates are going to go up and thats going to be bad for a lot of a lot of american companies.

So i mean you know we we agree, that rates should move moderately higher, but you know rates have moved higher this year from you think about where we started this year. I think the 10 year note got down to 51 basis points or so over the last 12 months, and so rates are higher than where they bet. I think rates are going to go higher. These real rates are not price right, i mean. If the fed you know, takes their foot off the gas. A little bit rates can move higher the treasurys issuing to fund the fiscal expenditure. You know the amount of coupon supply treasury supply is higher, so i think rates can move moderate layouts, but then youve got to step back and put in perspective how much higher rates going gosh. I think the 10 year old go up 30 basis points. Maybe next year we get a few more basis points on top of it. You go back and think about that. In time lets say the 10 year note is gon na is going to be at one and a half one and five eighths percent. You think about historically what that means, and particularly what that means relative to youve got two things happening. Well, youve got historically low interest rates, not as high as low as they were a few months ago, but pretty darn low and then youve got book value, accretion or return on equity growth. That is actually at all time highs.

So to move rates up 30 basis points is nothing i mean if it happened in a day or a couple of days. You know people take a step back and say: gosh ive got to readjust. I got to think about this, but its not going to come on the back side of the fed, announcing theyre going to taper. I mean you know each time the fed comes out quote unquote, more hawkish markets, that markets take about two hours to interpret it and then uh, and then they end up doing well again so gosh. These, i think you have to put in perspective this level of interest rates, and we just rates are just not going to go that high for me or theyre, just not eric switching gears a bit. I think we were talking to earlier in the year when, when blackrock was just studying or looking at crypto and how it might get involved, where does the firm stand at today? Where are you involved in it aggressively? Are you looking at it and where do you think prices can hit from here i mean i, i have small pieces in in a couple of my big portfolios and i view it as similar to what i, when i own a you, know venture capital or say You know we dont know a lot of venture but second stage a growth equity holding and so my portfolios gosh. I think it could have some real upside.

My sense is theres more buyers than sellers. It is an asset class that i think is durable. Listen, is it a hedge, not really it doesnt correlate with debt or equity and people say its a hedge or its a hedge, its a monetary policy, hedge dont know i mean i, i see answers for that that are on the plus side negative side. So we own small and small amounts of it, and you know its quite frankly, im glad i do because its helped me learn about the evolution of what i think will be a blockchain technology thats that will continue to grow so its something we, you know im Glad i got involved with, but its just, not its not driving portfolio return relative to uh relative, certainly my equities or my fixed income holdings. I love it that at your stage of career, you can invest in something as an educational opportunity. I think i think thats. I think thats great, i think its its a theres, a lesson in there for all of us. I think rick. It is great to catch up with you, um, and i hope well see you again soon. Rick reader is chief investment officer of global, fixed income at blackrack, and also the head of the blackrock global allocation team.

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