00:00Jeffrey Rosenberg joins us from BlackRock Today.
00:02How do you simplify this nuts finance world we're in right now?
00:08How do you bring it down for mom, dad, your kids?
00:12Well, the big question, Scarlett and I were talking about this before.
00:16You know, bonds have made it into the regular media, and people are wondering,
00:21what's going on, and is the bond market freaking out?
00:23And, you know, a very simple way of kind of understanding what's going on in interest rates
00:29is interest rates reflect the marginal cost of capital.
00:32There's an opportunity cost associated with them.
00:35And what we're seeing in the market is a reflection of a lot of demands for capital, right?
00:41We have growth that's accelerating.
00:43We have capital expenditures from the AI investment that are accelerating.
00:47We have record debt and deficits, so we have treasury indebtedness.
00:51All of this on top of our regular amount of corporate bond financing,
00:56mortgage-backed security financing, refinancing activity.
00:59And so this competition for capital is a big reason why we've seen this step function.
01:04Is it a permanent shift within our personal finance?
01:07Do we adjust?
01:08Scarlett's too young to remember this, but, Jeff, do we have to adjust back to what we knew,
01:12a higher interest rate regime?
01:14Yeah, we do.
01:16This is a structural change, and I think you really have to sort of associate the structural
01:20change with a longer history, right?
01:24Right. It's not the thing we got used to for a long time, which was zero interest rates
01:29and QE. The post-GFC era lasted 10, 15 years, and it gave us very low mortgage rates.
01:35It gave us incredible housing price gains.
01:39It gave us incredible private equity gains.
01:41Everything that was fueled by debt did really well in that zero interest rate environment.
01:46And we're clearly out of that zero interest rate environment.
01:49It's a higher real interest rate environment.
01:50That was the argument before real interest rates.
01:52What's the opportunity cost of capital and a higher inflationary environment?
01:55Let me bring up this morning, Moshe, so I'll jump into this with Jeffrey Rosenberg.
01:58This is Rick Reeder.
01:59He was on the short list to be the chairman of the Federal Reserve System.
02:03He, I believe, still works at BlackRock right now.
02:06The next phase, markets have benefited from a narrow set of powerful themes.
02:10The next phase is likely to require greater precision at how risk is allocated and where opportunities
02:16are sourced.
02:17I look at the yield curve and the five-year yield now gives you 5%.
02:22It's only the two-year and the three-year that's below 5%.
02:24So it's a good time to be a saver once again.
02:27And if you have a traditional pension plan, it's also good.
02:29But with higher yields, do we now say, OK, the 60-40 portfolio, oh, that works again.
02:35So you're really spot on to highlight both sides of this, right?
02:39The liability side, the mortgages, that's a little painful.
02:42But the opportunity side on the investment side is better.
02:45I don't think you can conclude 60-40 is back because there's another whole issue with bonds,
02:50which is how do they perform with equities?
02:53What's the relationship?
02:54And that relationship used to be very powerfully diversifying.
02:58We had an environment where bonds would reliably go up whenever there was a challenge to equities.
03:03That was an environment when we had too little inflation.
03:06So that's over.
03:07We're five years into too much inflation.
03:10When you have too much inflation, bonds aren't really a hedge anymore.
03:13They're good for income, as you pointed out.
03:14And that's the way to think about them.
03:16But for diversification, we're going to have to think about broadening our diversifier set away from just thinking about the
03:23traditional 60-40.
03:24We talk about it 50-30-20.
03:26And so what's that 20?
03:28It's alternatives and different forms of diversification to add into the portfolio mix.
03:33All right.
03:33So we look also at the bond sell-off that's taking place in the U.S.
03:37And we talk about it like it's the end of the world.
03:40Is the bond market freaking out?
03:41But it's not.
03:41I mean, because this is a global phenomenon.
03:43You see this in Japan.
03:44You see this in Western Europe.
03:47How much should we focus on the U.S.'s fiscal problems driving bond yields higher when it feels like every
03:53developed country has the same problem?
03:55Yeah, I would say not overly focus on the fiscal issue.
03:58The fiscal issue is real.
04:00Interest payments are higher.
04:02Debt outstanding is higher.
04:04But it's part of a broader story.
04:06A simple way to think about that, and I'm glad you brought up the global perspective.
04:10Globally, what we've seen is an increase this year in nominal GDP forecasts.
04:15My friend, colleague, and mentor Tom Parker points this out, and we'll be writing about this shortly.
04:19If you look at global average end GDP, nominal GDP, so what does that mean?
04:25It means take the real rate of activity and add the rate of inflation.
04:28That's basically like current price level of economic growth.
04:32What were the changes this year globally on average?
04:35An increase of about 50 basis points, half a percentage point relative to forecasts at the beginning of the year.
04:40That matches almost exactly the average global bond increase.
04:45So global bond rates, they track nominal activity.
04:49So this isn't the bond market freaking out.
04:50This is the bond market recognizing that, hey, growth is higher in nominal terms.
04:55But a huge body of people who aren't sophisticated go, okay, it's a roaring, it's a boom.
05:01Nominal GDP is up.
05:02Do you just presume, Jeff, that for the average guy out there with a retirement plan, the punch bowl ends.
05:09The party ends, and nominal GDP comes down, and we are harmed in our personal finance?
05:16Well, okay, so in a shock scenario where nominal GDP comes down, it's coming down because there's disinflation.
05:24It's coming down because real growth is going down.
05:26That's a recession scenario.
05:28Okay, but away from that.
05:29Away from that, if it comes down to a lower level, depends on whether that's real or inflation.
05:35Right now, the hope is—
05:36What's your bet on that?
05:37It will start with inflation.
05:39That's the expectation if and when we stop the geopolitical transference into inflation from oil prices.
05:47If we can get through that, we can see inflation come back down.
05:50Right.
05:51Two and a half, 2.6 percent from 3.3, 3.2.
05:54That will bring nominal GDP down, and that will help to take the edge off of what we've seen in
06:00inflation.
06:00You're too young, you're too young.
06:01I remember the raging debate over actuarial assumption.
06:05My first question at Bloomberg was to Rick Wagoner at Generous Motors about the shift in their pension obligations.
06:12Are we so out of whack, Jeffrey Rosenberg, that we're going to have to change our so-called actuarial assumption
06:18to a higher regime,
06:20and that upsets our retirement and upsets our wealth management?
06:24No, I mean, those adjustments are happening in real time.
06:28They happen as the rates go higher, and it's asset liability matching.
06:33So two things are happening.
06:34One, the liability actually goes down when that happens because you're discounting those future payments by a higher interest rate.
06:40And two, you're more able to defies, that is, kind of immunize that liability at a higher interest rate environment.
06:47The problem on the pension side isn't the 5 percent interest rates.
06:51The problem was the 0 percent interest rate.
06:53That was the problem when we were looking at pension deficits because you were blowing out the liability,
06:58and you didn't have income-oriented fixed income instruments that could help you to offset that liability.
07:04So it's actually a much better environment from that asset liability.
07:08This is what Yardani says in others.
07:09In John writing at Bring Capitals, it's the same thing.
07:12We should celebrate that we're back to a normal yield within our wealth management.
07:17Because post-GFC, it was so abnormal for so long.
07:19But people think in the short term, and people think based on what they know,
07:23we know that this White House does not like higher borrowing costs.
07:26Scott Besson, the Treasury Secretary, has tried to do a number of things.
07:29What's left at his disposal?
07:31I mean, if he were to intervene in some way.
07:33Does government intervention work to lower bond yields?
07:36Not without a real change in the fundamentals.
07:40You can do some things.
07:41There are some bigger things that can be done, but it requires the Federal Reserve's balance sheet.
07:45We've seen that, right?
07:47We've seen the impact of quantitative easing.
07:49And you can implement very powerful policies.
07:54We've seen those policies happen in our past, where the government decides it wants a certain kind of interest rate.
08:00That was the financial repression era.
08:02No one is really expecting that kind of thing.
08:04But you asked the question, what could be done?
08:06But that doesn't necessarily mean you can solve the ultimate problem of how much debt deficits that you have.
08:12How you can do that over the long run is by raising nominal GDP relative to your borrowing rate
08:18and relative to your change in your rate of borrowing, which is your deficits.
08:23Those take real fiscal changes that we haven't really seen the political ability to implement.
08:31And so we're going to have to price the anticipation that there's going to be a permanently higher level of
08:36debt and deficits.
08:37That's going to increase the term premium and the cost of financing.
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