Rick Rieder: Bullish On US & Tech

Things are much better than many people appreciate. That's the key takeaway from Rick Rieder's luncheon keynote at the 2015 Inside Fixed Income conference at Newport Beach, California.

Rieder, speaking to an audience of a few hundred at the Island Hotel, is the chief investment officer of Fundamental Fixed Income at BlackRock. But his views extended well beyond the bond market to equities, to currencies, commodities and other areas.

Bullish On The US

Of the three points Rieder emphasized, perhaps the most salient was his strong bullish stance on the U.S.: "When you look at the hard data, it's an economy that's running at a very high level. You created more jobs in the last 2 1/2 years than the prior 13 combined."

Rieder said that if you look at volume and price separately, it paints a much more constructive picture of the economy than simply looking at GDP. The volume of production in the economy has been strong, but prices have been held down due to factors such as technology.

Technology Transforming The Economy

Indeed, technology was a major theme of Rieder's presentation, and one reason he was particularly bullish on the U.S. Tech is spurring a transition away from a commodity and manufacturing to a services world and helping us do things we did before at a fraction of the cost, he said.

Rieder used the example of the iPhone, saying it would be worth $1.5 million back in 1980 based on the functions it can do.

He also said that while in the past it would take 30 to 40 years to get full implementation of major technologies, today it happens incredibly fast.

Demographics A Worry

The flip side to his enthusiasm about technology was Rieder's concern about demographic trends. "Demographics are having a bigger impact on the economic ecosystem than many give it credit for, and the aging population reduces growth in the world," wrote Rieder on one of his data-filled presentation slides.

Two regions with negative demographic trends are Europe and Japan. Rieder expects the European Central Bank and the Bank of Japan will do a lot more with monetary policy to offset those negative trends. Ironically, the potential for more stimulus in the system may be a bullish factor for those markets.

In terms of emerging markets, Rieder was particularly concerned about China. He sees that economy doing better in the near term, but views it as a potential tail-risk longer term.

For EMs as a whole, he thinks they've come under far too much pressure recently. In fact, when looking at sovereign debt, leverage in emerging markets is much lower than it is in the developed world. However, corporations in emerging markets have leveraged up significantly in recent years, which is an area of concern.

Liquidity

The final theme that Rieder touched on was liquidity and volatility. He said that leverage has built in the system because of low interest rates. "Everybody is in the same trades," searching for yield, and that's the reason for the intense volatility seen during August and September when everyone tried to get out at the same time.

Rieder expects higher volatility to continue going forward. "We're not going back to an 11 VIX [CBOE Volatility Index]," he said.

Investment Takeaways

Taken together, Rieder's views underlie a bullish outlook for many markets. He thinks Treasury inflation-protected securities are attractive. He also likes investment-grade credit, which he's been buying.

Rieder says that high yield is in much better shape than many people think, especially if you strip out problem areas such as energy and materials.

On the equity front, Rieder says stocks will "do OK," even as the Fed raises rates from levels near zero. In his view, the economy has been strong enough to weather higher rates for some time now.

Contact Sumit Roy at [email protected].