Chapter 1: What is the main topic discussed in this episode?
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Bloomberg Audio Studios. Podcasts. Radio. News. Data and earnings are painting a mixed picture of the economy. ISM services, ADP employment, they come in solid. Challenger job cuts, those jump to one of the worst Octobers on record, ruining these markets or the rally yesterday. Let's try to get a sense of direction.
Bringing us that now is Rick Reeder, Chief Investment Officer of Global Fixed Income at BlackRock. And Rick, we always have you on a jobs day, and today is decidedly a jobs day that should have been Are you just flying blind? I mean, this data, it depends what you look at. You can say the economy is great or things are falling apart.
You know, it's funny. Thanks for having me on, by the way. You know, it's a funny thing. You know, I found that the industry's obsession with these individual days, and by the way, the payroll report's a great, great economic indicator. The CPI report. There is so much information that comes through the system.
By the way, my favorite, I read tons, maybe too many corporate earnings reports, and I look at what's happening with hiring, inventory management, receivables, etc., So there's still, I mean, would I rather have the data? For sure. By the way, I think the markets become hamstrung. And I think part of why the markets are acting in this sort of paranoid, you know, what do people know?
What's the information out there manner today? I think the, but, you know, I feel pretty good about knowing the structural direction of travel. I think the economy's in good shape. There are parts of it, it's not operating on all its cylinders, which we're talking about, CapEx is great, high income is doing well, low income in the consumer side, not so much.
But I feel pretty good about understanding, and listen, I think we have a softening of the labor market that is quite significant, and you see that, as you mentioned, the Challenger jobs report, you see that playing out. You certainly see that when I look at all the corporate earnings in terms of that.
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Chapter 2: What insights does Rick Rieder provide about the current job market?
It's at the highest level, at least since 2000. And the same is true of the case, the Shiller case, A CAPE ratio, sorry. You can see this great chart here that shows you we're pretty highly valued on these two measures. Are you worried about the AI froth?
So, you know, there's something, by the way, this is a time of year you tend to get momentum gets chased out of the markets, particularly today where you have ambiguity around some trends that are taking place. So, by the way, I know, I don't think it's an AI bubble and I don't think there's too much froth.
And depending on where you go, if you look at some of the big hyperscalers that trade at 20 to 25, 26 times earnings and they throw off ROE, return on equity of 30, 35, 40%, And you look at their free cash flow. I've never seen in my career free cash flow generation. We can talk about top line revenue growth.
When you can have that much free cash flow generation, it allows you to do your CapEx, which is extraordinary today, build R&D, which is your future cash flow, and then you can buy back your stock. So what's happening, you have an unbelievable dynamic.
Chapter 3: How does Rick Rieder interpret the latest economic data?
And by the way, we're now about to open the buyback window.
that you have this dynamic you throw off immense amounts of free cash flow and so there's multiples are not scary there are parts I see it the private market and I see it in some places where you're seeing businesses that have no cash flow for a number years how much would you finance those so I do see froth in some areas but in the traditional big market cap stuff and I would say related to that in semis in health care technology where you're seeing a rapid change but real cash flow alongside a bit it is the exact
dichotomy of what you saw in 2002.
Why then do you have these large cap giants tapping the bond market to the degree they are and not just the broadly syndicate market, but also raising capital off balance sheet too. If they were so confident and have such robust cash flows, is that not a concerning turn of events that they're instead building up on debt piles?
So first of all, when you look at any measure, debt to EBITDA, you look at their debt to book cap, debt to market cap, these companies are under geared or under levered. Their cap structure is so low in terms of leverage, certainly relative to their market cap, but relative to their book cap. If you were running a big, mature company, you think about what does your normal cap structure look like?
and if you're gonna fund near-term capex over the next couple years if you can do it out the yields curve which is where you see a lot of that financing take place to say gosh I am thrown off a lot of cash flow but if I can lock in these rates and if I'm as a shareholder of any of these companies I say why in the world would you fund everything with equity or why wouldn't we put a little bit of debt get a little bit of gearing get your ROE higher so I just think it's a natural evolution of
Gosh, this is how you run a big company, and this is what a normal cap structure looks like.
I mean, we were just talking about global bond sales hitting $6 trillion, an all-time record. That's pretty incredible, and the return on fixed income has been great this year as well, finally. How could we be in a world with tight financial conditions when this is happening? It just doesn't make any sense to me why the Fed would want to be cutting into this.
So you got what are, I would argue, there's an immense amount of cash that came from, certainly years ago, we had fiscal monetary stimulus. So I don't think financial conditions drive, financial conditions are great for older savers in the economy. The interest rate tool today is incredibly powerful on parts of the economy that are really struggling.
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