00:00- The service economy is what drives this economy today. It’s not a goods-oriented economy. It’s not a commodity, it’s not an export-oriented, not a heavy-manufacturing– service oriented. So, most of what drives the economy is resilient to what is a goods–slowdown in goods. Second thing that I–that I wouldn’t have anticipated. I would have thought you’ve got more pricing transmission in, but it’s pretty incredible how companies moved and– now some of it, in the near term, companies took it into margin. Westin: So, give us a sense, Rick, of where this economy is headed, because if you look at the stock market, it looks really good. It’s really going places. At the same time, if you look at the markets, they say, “Well, we’re gonna have a rate cut or two this year.” Normally you wouldn’t cut rates into a robustly growing market. – So, it’s pretty extraordinary. I mean, it almost never happens in time. So, there are a couple things happening. First thing, I think all financial assets, there is an extraordinary amount of cash and money that has to flow somewhere, and the technicals and equities are great because companies are buying back their stocks. So, I think the equity market is reflecting really good technicals. Earnings have been pretty good. But I think there’s something different at play in terms of inflation, what’s gonna happen with productivity and innovation. Inflation is gonna come down. And the reason to bring interest rates down, which I’m a believer in, is the housing market is under pressure. So, the real impact of interest rates on the economy today, I don’t think it is in the historic sectors of who spends on CapEx, you think about AI spend, how the banks manage the risk. It’s about housing. And today, if you look at the housing market, and particularly what impacts lower income, the people that borrow today are lower-income and they’re adversely impacted– infected by where these rates are. If we get the rate down, you actually can bring home prices down. You build more houses, you’ll actually reduce inflation. So, I think it’s quite consistent to bring the interest rate down, even though the economy is operating at a pretty good level. Where we’re going is to a lower level of inflation, and I think we can bring it down. I mean, you think about inflation break-evens today, depending on which part of the curve, are 2 1/2 to 2 3/4. So, the funds rate, even if you bring it down to 3 1/4, you’re still above the rate of inflation. So, I think we got plenty of room to drop it, even though the economy’s operating well. Westin: Does the yield curve on the Treasury indicate we do have a bigger problem with inflation than we think? Look at the 30-year, for example. We’re significantly over 5 now. It’s hanging in out there. So, the short end–nice under control, long end–not so much. – So, I think the long end of the yield curve becomes untethered. First of all, the Fed generally can control the front end, and the front end stays tethered to the Fed funds rate. Long end of the yield curve has a couple of things that I think are not to its benefit. One, we’ve got to issue a lot of debt going forward. I mean, think about the size of the bill, the size of the deficits. We’re gonna issue a lot of debt. The long end is a hard place to invest. It used to be that the long end protected you against the equity market. If inflation ends up being higher, which I don’t necessarily anticipate, then what’ll happen is equities and long end will get hit. So, the long end of the yield curve today, given that you can get so much yield if you’re an investor in the front end, the long end doesn’t become that attractive. Westin: You said one of the problems with the long end of the yield curve is actually how much debt the United States government has to take on, and the so-called “One big beautiful bill” doesn’t seem to be helping that situation much. How big a problem is that, and how much of the problem right now are we seeing is really a term premium? People are starting to doubt a little bit whether we’re gonna repay it. – So, there’s only one way to de-lever the economy. You’ve got to outrun the debt. You got to outgrow it. So, there is a plausible outcome where you get nominal GDP running at 4 1/2 to 5. If we get that interest rate down to 3, gosh, now you could start to de-lever, but it takes a really long period of time. Listen, I think the one engine today, since we are gonna have a bigger debt burden and not only are we gonna have a bigger debt burden, you have to fund it domestically because international doesn’t buy as much. As long as we grow, then you could work through it. You know, what I worry about is, you get shocks to the system. Westin: So, how big is AI? I mean, you mentioned that’s CapEx, a lot of CapEx going for it right now. A possible engine for growth, I guess in productivity principally, right? – Yeah. Westin: How big could that be? – I think if you take with AI, you take robotics, you take automation, you take software, you take cloud, you take energy, you take cooling… I think people underestimate how dramatic this is gonna be. And I think our world a year or two hence is gonna see things that nobody’s ever seen before in terms of innovation, productivity. And you think about what happens, the things– you know, everybody talks about autonomous cars, but you talk about all the services, all the things that can be created at a lower price point, I think it’s remarkable. I think it’s remarkable. You know, part of why we talk about, you know, “Who do you own in the equity market?” These big cap companies that utilize data effectively. It doesn’t have to be necessarily the Mag 7, although they’re pretty good companies generally. Gosh, you think about the companies that utilize data to expand their mode and how they utilize, how the price points they can operate at, how they advertise, how they run their business efficiently using software, et cetera. Part of what I think this is the most exciting investment period I’ve ever been around, we’re gonna see more dramatic changes on Internet than really mobile telephony. It’s a pretty, pretty amazing time. Westin: You mentioned Internet, which is the last time I remember, at least, when there was really a substantial increase in productivity in the late nineties into the early aughts, we saw. Is AI bigger than that? – So, you know, there’s an interesting thing around. I’ve spent a lot of time thinking through this. Internet took some time to develop, and the adoption rate– and by the way, if you go back in time–electricity, telephone, rail–it all took a period of time. This is almost instantaneous, how fast. And by the way, you know, I think one of the incredible technologies the last couple decades was GPS technology. Part of why I literally get up every morning and in the weekends, and you try and think about which companies are gonna benefit from– And all these new companies that are coming about. Listen, I think it’s gonna happen faster and be more profound. You know, it’s hard to say. The Internet was pretty incredible. It’s hard to say it’ll be bigger, but it’s certainly gonna happen faster. Westin: But the market must be pricing in some of that already. We’re seeing a lot of the AI already. Why are you confident it’s not pricing all of it in? – You know, if you go back to the Internet bubble, you go back to ’98, ’99, 2000, you were putting multiples on no cash flow. Most of these companies today– so certainly when you look at the Mag 7 and you look at the multiples on those companies, actually they’re not that scary. I mean, when you assume their growth rate, these companies are throwing off 30%, 35%, 40% return on equity–or higher, for a couple of them. And you’re throwing off cash, which, by the way, allows them to buy back their stock. You think about those companies in the ’98, ’99, you were sort of hoping that they would take off, and most of them didn’t. These companies are well- entrenched and they thought– Now you go into other areas and you think about, “Gosh, you know, there are some parts of it that are a bit of a flier and there are some multiples on some things.” And so that you have to evaluate what is the business prospect, what’s the available market. But I would say that, you know, the big hyperscalers, the big semiconductor companies, the big software companies, and I would argue, you know, even the companies that utilize data efficiently, even the huge retailers, media delivery companies, my God, boy, they’re pretty, pretty spectacular as to their rate of growth and making money along the way. And that’s–that’s different. Westin: Given that view on the economy and the markets where they are, where they’re headed, what’s the best way to invest? Give us your perspective from BlackRock. – Yeah. Westin: What are you seeing that’s particularly attractive right now? – So, you know, I still believe in growth, in technology and equities. Uh, and I think, you know, running more of a barbell that is, you know, I don’t like a lot of the small cap equities that–you know, there’s some in some areas that are OK. I like these big cap, particularly in and around tech–by the way, health care technology, by the way, leisure and hospitality, I think that we’re all part of this. The derivative of AI is people have more time. Leisure, travel, entertainment, I think is a big part. So, that’s what I like on the equity side. While I think rates should come down, I’m kind of hoping they don’t because this environment, we can build 6%, 6 1/2%, 7% yielding assets, or portfolios, that don’t really have to stretch and that can stay in investment grade generally, on average. That–I mean, if you could buy growth and income and then, by the way, maybe a little bit of hard asset, whether that’s gold or some crypto, you know, not scaled to the size of your debt and equity, but I think that creates balance in a portfolio. Westin: You mentioned crypto, which has become quite the topic in Washington these days, and particularly stablecoin, because all of a sudden everybody wants a stablecoin, it seems like. Is that really fundamentally gonna change the financial system? – So, crypto or stablecoin or both– I mean, they’re, you know, related. Stablecoin, I actually think will be quite helpful in that it will utilize– “A”–there’s a benefit to the currency and the dollar utilization ultimately. “B”–it will soak up some of the– Do we have a lot of Treasuries? We’ve got an issue. It will soak up some of that, not a tremendous, but it will soak up some of that. So, I think that’ll be real utility. How we moved in the tokenized assets and tokenized investments, how we think about payments mechanism– I think stablecoin wil l be a very big deal. Crypto– I think general crypto– I actually think–I mean, I own some of the portfolios. You know, I don’t– you talk about volatility. I own it in moderate size, but it’s one of those things. The adoption rate around the world is so extraordinary.Stream Schedule:US BTV+
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