SAN FRANCISCO -- BlackRock Managing Director and CIO of fixed income portfolios Rick Rieder painted a bleak overall economic picture before an overflow audience at the Schwab Impact conference here Thursday. With Fed policy holding interest rates low, it’s unlikely investors in fixed income will see yields rise far above current levels anytime soon.
In this environment, he said, BlackRock’s position is that equities are a better value than fixed income over the long term.
Still, there are some early signs of a return economic health that could ultimately lift fixed income along with the overall economy, Rieder said.
“You can get yourself all worked up about the headwinds against economic growth, but companies are sitting on the most cash they’ve sat on for 40 years,” Rieder said in an interview afterwards. “The one area of the economy that is not over-levered is corporations. If you can create a trigger for confidence -- and a lot of that has to come through fiscal policy -- that’s where you can see things really start to improve.”
Rieder pointed out that Fed Chairman Ben Bernanke has said he would keep interest rates at zero through “at least” the middle of 2013. Rieder, a former member of the U.S. Treasury’s Borrowing Committee, said Bernanke believes that monetary policy should be stable and permanent through a downturn. If both investors and businesses can rely on a stable monetary policy going forward, Rieder said, then they will begin to spend.
Other positive signs he pointed to include small business lending programs and incentives to keep more R&D in the U.S.
As his firm’s chief investment officer for fixed income, Rieder said, he doesn’t like seeing interest rates held at zero, but right now it’s the best strategy.
“I don’t like it as a solution,” he said. “I like it as a bridge to more stable economic conditions.”
Much of his talk focused on explaining how unprecedented structural risks – or “headwinds” as Rieder calls them – are impeding overall economic growth. Those impediments include fiscal drag, unemployment and excess leverage. He described why he thinks unemployment can’t be fixed:
- In today’s economy people aged 55 and above are remaining in the work force longer, making it tough for younger people to find work.
- The lack of skilled labor to fill job openings. “This is going to take a long time to fix,” he said.
- Because of the expense of health care and pensions, he said, “It’s too expensive to hire a human.” As a result, temporary hiring is on the rise.
- Cash-rich companies are spending more money on software. Rieder said he calculated the number of productive hours that have been saved by software implementation nationwide over the past decade. It added up to the equivalent of 44 million jobs. “We have 148 million jobs in the country. Take 44 million jobs away from 148 million jobs and you can’t fix that. I think it’s a really big deal.”
Rieder also cited the European debt crisis and uprisings in the Middle East among factors that will continue to inhibit economic growth.
“I think the fundamental backdrop for the next few years is going to be slow growth at 1% to 2%,” he said.