Decoding the Investment Landscape with
Kate Moore, Managing Director and Head of Thematic Strategy at BlackRock
Willy Walker: Good afternoon, everyone. Hi Kate.
Kate Moore: Hey, Willy. Happy Wednesday.
Willy Walker: Happy Wednesday to you. It's so great to have you back. I'm so appreciative of you taking the time. This is one of those conversations that I do a lot of work on, yet quite honestly, I know that the conversation goes in so many different directions all my research basically gets thrown out the door. Because things move so quickly. And also, you're so insightful on where the markets are going. Let me do a quick intro to those people who have not tuned in to listen to the two of us speak previously, and then we'll dive in.
Kate Moore, managing director, is a member of the Global Allocation Investment Team and head of thematic strategy at BlackRock. Her investment mandate includes identifying opportunities to exploit structural change, policy evolution, and dislocations across global industries. She's a member of the Human Capital Committee. She holds a BA in Political and Social Thought from the University of Virginia, where she currently serves on the Board of Managers of the Alumni Association. She also holds an MA in Political Economy from the University of Chicago.
Before I dive into numbers, Kate, you being on the Human Capital Committee makes me think back to my conversation last week with Joe Davis of BCG. Joe just published a book that's entitled Generous Leadership. And the two of us dove into, I thought a really cool conversation as it relates to genuine leadership and how you got there. But one of the things that I said to Joe, I rewound the tape back to when Joe and I were both on our first day at Harvard Business School. Joe was class of ‘88, so earlier than I was. But I went back to the fall of 1986 when Joe sat in his seat and I went and looked and saw that Joe went to Whitman College. And I realized that I didn't know anyone at HBS or going to Whitman College. I went and looked at only 28 people from Whitman College who actually went to HBS. And so I said to Joe for a moment, take yourself back to that seat where you were the only graduate of Whitman College in that room with Harvard, Yale, and UVA grads. How did you feel? And could you be a genuine leader? Could you bring your authentic self to that moment, or were you so freaked out about being the only one from Whitman College that you couldn't express yourself openly and freely, and the only thing you didn't want to do was screw up. And so, as a woman who has climbed the corporate ladder as successfully as you have, take us back to you entering investment banking after the University of Chicago and whether the true Kate Moore today that we see here talking about the markets and from BlackRock's perspective is the same Kate Moore as when I think it was Merrill that you went to immediately after the University of Chicago, if my memory serves me correctly.
Kate Moore: It was Morgan Stanley. Yeah.
Willy Walker: I'm sorry. I got that wrong. I'm sure they'd be very disappointed that I even thought you'd go to Merrill anyway.
Kate Moore: There's some things, of course, really that are the same about me regardless. You know me well enough to know that I'm probably more at home in my hiking boots and baseball cap than I sometimes am in then the fancy clothes I wear for finance. But actually, I have to say I bring much more of my authentic self to work today than I ever did. 20, 25 years ago. I feel this huge responsibility to be present for all the people who work for me, the people I mentor, the people I lead and coach, and also for myself. And that is being honest about when I'm burnt out, when I need more rest, when I'm out of investment ideas, when I need to take an emotional break. I want to really set that culture for people because I want the best for the people who work with me and for me and not an overall grind, which was maybe the environment I joined when I came out of graduate school.
Willy Walker: And you're a sci-fi reader, and that allows you to dream a little bit. What are you reading right now as it relates to sci-fi?
Kate Moore: I'm reading a series based on Middle Eastern mythology. The first book is called The City of Brass, and the second is The Kingdom of Copper. I'm on the second of this 700-page book, thinking about Middle Eastern mythology, and it's a great escape from the hard numbers, AI, policy, inflation, and geopolitics that I do all day long. So, I never miss a night of my reading, Willy.
Willy Walker: And do you read it all, or do you have audio books and listen to it as you're hiking in the mountains of Wyoming.
Kate Moore: I prefer to read a physical book before bed. I want to hold something. I have a no-electronic-devices-in-the-bedroom rule. That means no phones, no TVs, no nothing. So I really subscribe to the idea of great sleep hygiene and to really find ways to unplug my brain. But I will tell you, though, when I'm driving or sometimes when I'm on the go, I listen to an audiobook, and what I'm obsessed with right now, and I think I recommend it to everyone in my circle is Outlive Peter Attia’s book on longevity. I've gone back and listened to a couple of chapters over and over again. I've learned a huge amount. I'm at that critical age in my life where thinking about making decisions to extend my health span is very important.
Willy Walker: There's a lot of insightful stuff in Peter's book but chapter 17 on mental health and Peter's own sharing of his struggles with mental health, I thought it was for me the most impactful chapter. A lot of the stuff. I watch his podcast and listen to his podcast. But I heard a lot of stuff in there. But to your point, not only is the entire book fantastic but that chapter on mental health I thought was extremely insightful.
Kate Moore: Yeah, I have to say, when he was teasing the different parts of the book that he was going to go through in the beginning and he mentioned all of the different components of extending your health span. But then it talked about the importance of community and mental health which really resonated with me. I have found the times when I am the best version of Kate, whether that’s at work with my family or in between, is when I have the strongest sense of community. If I can create some of that community at work, great. But creating that community in the nonprofits and charitable work I do outside of BlackRock and the boards I’m involved in and my yoga community, by the way, I was with last night to celebrate my birthday. I feel that is really what fills my cup, and that's what makes me the best version of myself. So, I totally agree with Chapter 17, I love that you knew it.
Willy Walker: It sounds like I missed the opportunity to wish you a happy birthday. So sorry about that. All my research on you, Kate, I don't have your birthday up there. Happy birthday.
So let's dive into the numbers for a second. It was interesting. I went back and looked at the last time you and I did this, and that was September 5th of last year. And some interesting data points there. On September 5th of last year, the ten years was at 4.26. It's 4.29 this morning. Three basis points. The VIX was at 13.9, and on September 5th of last year, it's at 12.9 today. But the one thing that has moved is that is no surprise to you because you called this the S&P has gone from 4496 to 5327, up 18.4%.
If I go back to that conversation in early September. If I said to you, we're going to have almost no movement in the ten year, and we're going to have a VIX that's going to be in the same level of basically no volatility in the market. And yet you're going to pick up almost 20% on the S&P. Would you say, “Yeah, that feels about, right?” Or would you say, “No way that ain't going to happen?”
Kate Moore: It's been a bit of a wild ride. Yes. Thanks for giving me credit for being pretty bullish over the course of the last seven or eight months. There were some squishy moments in the summer of 2023. And, of course, there's been a lot of gyration underneath the surface. I think one of the things that I didn't predict was the massive change in the macro narrative. I'm sure we're going to come to that and how that's impacted people's risk-taking. One thing I was really convicted of when we last spoke in September was that there were very strong companies generating huge amounts of free cash flow. And they deserve to dream premium multiples to their own history and perhaps to the rest of the market. And they have the potential to lead things higher. And another thing you might remember, at that time in September, we were at the end of what had been basically a rolling earnings recession across a bunch of different industries at different times. And yet the signals we were getting from the corporate sector, either talking to CFOs or the third-party data that we used to assess the health of the environment, were all telling us, “Hey, corporate earnings are going to look pretty good. We're in a good place.” And so that really underpinned our constructive view going into the end of the year and kind of carried us through here. I find forecasting the VIX or forecasting volatility is super complicated and difficult. There are so many different crosscurrents. But am I surprised we're not at Vol 20? No. Am I surprised that we maintain a sub-14? Maybe a little bit, given how much uncertainty we have. I'm sure we'll talk about this in the back half of 2024. And the thing is weighing on both investor, corporate and I'd say, additionally, consumer minds.
Willy Walker: You talk about how the earnings recession was a ‘23 phenomenon. But when you said that, that wasn't what most people thought. Most people thought that we were going to have corporate earnings lie for quite some time to come. What was it that you were seeing? You go back to Q1 ‘24. The commentary across the board in earnings releases, as well as commentary in calls is very positive. And that's now got the market in a very like, “Okay, coast is clear. We're not going to have a recession. And we'll see how this whole thing lands as it relates to rates and everything else.” But that was not the common theme after we came out of at that time Q2 earnings of ‘23. when we last fell midway through Q3. So what was it that you were seeing that said, “The worst is behind us as it relates to corporate earnings.”
Kate Moore: Yeah. So there were a few things I would say. And those that talk to me all the time. My team gets sick of me hearing this. But I pay really close attention to surveys of CEO and CFO confidence, and a couple of them, whether we're talking about the Conference Board or the Richmond Fed, a survey. They have a couple of different components looking for expectations and confidence around your own company versus what's going on in the overall economy. One of the things I observed that really started in the mid-point of last year, but accelerated towards the back end, was that confidence, not just about your own company, but confidence around the economy was improving for C-suite leaders. Just at a time where a lot of the sell side, for example, had forecast a recession in 2024. And that disconnect really raised some flags. I thought, okay, if companies feel good about their own businesses and they're saying they feel good about the strength of the U.S. economy, then the likelihood that they are going to be investing and spending, which will be quite good for earnings, would be very high. We were also seeing health on the consumer income side and no deterioration in all of the high-frequency data we track in terms of consumer spending. We can talk a little bit about some of the cracks in the low-end consumer that have emerged more recently. But in general, every piece of data I was looking at was constructive. And I said, “I think these earnings estimates are too low and subject to revision.” Now, obviously, a lot of that happened and was thanks to what happened in technology in the third quarter. But we've had a great broadening out frankly of the earnings trend of over the fourth and first quarters.
Willy Walker: The weighting of the big tech companies has been something that a lot of people you and I talked about a lot of people have been concerned about. The fundamentals inside the S&P, for instance, are really concentrated in those mega-cap companies, and NVIDIA is driving so much of the market. And I guess right now, the S&P is trading at about 18 times forward earnings. Am I right on that?
Kate Moore: That’s about right.
Willy Walker: Does it concern you that those big mega caps are trading at 21 times and that a lot of the bottom quartile is trading at more like 14 or 15 times? The weighting there was an article today in the Wall Street Journal, Kate, you may have read about by Bill Macintosh about the fact that those mega caps are making people forget about the rate sensitivity to the rest of the S&P. Does that concern you at all, or do the fundamentals behind all the S&P components feel pretty good for you?
Kate Moore: Oh my gosh, there's so much to unpack there. All my super nerdy equity market energy just spiked at the same time. So let me see where I can start. Let me start with the breadth question you're asking. Am I worried that we have a significant concentration in a couple of names? I would be a little bit more worried about Willy if those companies were not putting up true revenue and earnings growth. These were companies that weren't generating cash and they were growing as a percentage of market cap because of multiple expansion enthusiasm and speculation. I'd get a little bit itchy. And despite the fact that these companies take up the lion's share of the top market cap, we've actually had a decent amount of breadth. Over 140 companies I think my last count was in the S&P outperforming the market this year. And actually, at times, it's been even higher. So it's not that these companies have driven all the performance. There's actually better breadth and better idiosyncratic opportunity for investors than I think some of these headlines suggest. And again, if it wasn't fundamentally driven, this market cap increase, I'd get a lot more uncomfortable. But these companies are outstanding companies with great growth prospects.
But I want to get into this valuation thing because I think it's an important point. You checked with me. We're talking about 18 times forward earnings. Yeah. And the answer is, “Yeah, maybe.” And maybe the E that we talk about is people's forecast. It's our best expectation of 12-month forward earnings. We know that analysts have consistently been under-forecasting the earnings growth of technology companies. That's why when we look at these AI and adjacent themes over the course of 2023, and even for some of them in 2024, a significant amount of D rating, like multiple compression happened as they were outperforming. Because there was this recognition like, “Oh my gosh, the earnings are huge.” And they’re so much bigger than we had anticipated. And so the price move was really justified. In fact, we didn't see that big multiple expansion. So I like to look at these valuation metrics but also recognize that it's imperfect. And we're taking consensus. And consensus might be a little conservative. And especially after strong runs in the market, I think there's a tendency to not want to revise up their earnings in a huge way. And to take a more middle-of-the-line smoothed approach instead of recognizing we may be in a period of significant discontinuous change. So, I would say those two things to start with.
Willy Walker: So you said a forward look of 12 months. In the middle of that 12 months is an election that you've been very consistent in saying, “Since 1944, in every presidential election year, the S&P has been up.” But this one feels a little different. Why are you so bullish on the forward look, given what, by all estimations, is going to be a pretty challenging time for our country as it relates to the divide between blue and red?
Kate Moore: Yeah. So I'm going to make two forecasts right now, understanding that things could...
Willy Walker: Could you call the election for me too? So what's coming next to include that? That is number three. Go ahead.
Kate Moore: No idea about the election. Here's what I will say. We're going to probably have a decent ride of ups and downs until the end of the year. But I feel quite convicted that the equity market, regardless of the outcome of the presidential election, will end a chunk higher than we are today on June 5th. And so, this is a conviction based on the fundamentals in the market earnings driving things higher. And people recognize that equities as an asset class look pretty attractive. So I will say that. The second thing I will say is going into the election we traditionally see companies ask a few extra questions or pause a little bit when they think about their capital expenditure and their investment. Because they might frontload a bunch of capital expenditure in the first part of the year. And as they're getting closer to the presidential election. Also, this is critical, the congressional elections which I think might have an outsized impact on what policy looks like in 2025 and forward. They may just hold off and say, “I don't need to do any big projects that might be subject to change, or if my tax situation is slightly different, or if my ability to trade with foreign partners might be a little bit different, or if there's a different outcome for the dollar, like, let me just pump the brakes a little bit on things that are non-essential.” So I think we may see a holdback on some CapEx, non-essential CapEx. And that may mean that some of it is frontloaded in the first half of 2025 where there's a little bit more clarity.
What I will say though Willy is one area where I really don't expect to see a slowdown in capital expenditure is around AI and AI adjacent technologies. Companies simply can't afford to be left behind. And even if they don't know the perfect use case for all of the technology, if they are owners of data, if they are operating in a competitive industry, they can't afford to start making these investments now so that they can improve their efficiency, productivity and remain really competitive in the future. So some nonessential CapEx may fall off. But I think the AI type of CapEx will continue to drive earnings and that can help propel the equity market to even greater all-time highs.
Willy Walker: So there are two things in there that I got to come back with you on. And they're very different. Let me go with the election first for just a second. Your comments on the election make me think about Michael Lewis's book on Sam Bankman-Fried. And in that, he was working at Jane Street Capital at the time, and they decided they wanted to try… They were sitting around the room and they said can we figure out who's going to win the 2016 presidential election before anyone else knows? And basically, net-net they said, “Look, if it's CNN getting it off of some monitor on the side and their anchor walking across to his little board and putting up on the board, what county is gone for that?” We can do that better and more effectively. So, the person who was in charge of that effort, you may know this as Jane Street, was Sam Bankman-Fried. And they put together all the data feeds. They pulled it all together. And on election night 2016, they figured out that Donald Trump was going to beat Hillary Clinton before anyone else knew that Donald Trump was going to win. The problem was that they bet wrong. They thought that the markets would fall off when Donald Trump won. So they made this big, short on the markets which ended up costing them, I think it was $300 million, which is the biggest loss Jane Street Capital has ever had up until then. And Sam Bankman-Fried thought he was going to get fired and they were, “No, you did what we asked you to do, which was to figure out who was going to win the election.” Unfortunately, our trade was wrong.
So I guess my question to you on this is, is there some way… t we're missing that either an outcome of Trump or Biden could move the markets in a way that… I get asked all the time, “Who's better for commercial real estate than I have an answer to that on a number of different fronts that I won't bore you with now.” But the bottom line is net-net, from my standpoint, it's hard to say, one is definitely better than the other. Is there something around all of this that could make it so that there's something the markets aren't taking into account that would say that your point about they'll go up at the end once we settle this thing. What if it doesn't get settled?
Kate Moore: If it doesn't get settled, then I think we have a risk-off moment in the market. Let me be really clear. I think equity markets crave certainty. And even if it's not exactly the policy that a company has been living with or really like or that they would support themselves if they know what they're dealing with, there's a sense of relief. Everyone can operate in whatever framework. This is what I mentioned before. The Congress is so important. We focus so much on the presidential election. We have a generalized idea of what Biden or Trump would put out there as their policy priorities, but their ability to execute that is wholly dependent on Congress. You can get an executive order here and there, but the real structural changes have to come from Congress supporting. And if we end up having a very divided government that's going to be very difficult for any president to actually implement their entire policy program. So will we know immediately after the election? Probably not. Most of the political experts I follow and I use very closely to help map out our trading strategies, we'll say could be into December before we have clarity. And that I think we could have a bit of an air pocket in the market. We want clarity. You want certainty. You want to get a sense. Want to understand exactly when the president takes their seat in January and when Congress takes their seat, what is going to be front-loaded in terms of priorities? So from that perspective, I find it really hard to say, “There's a specific strategy.” I think a lot. There are too many different components, and I'm not enough of an expert on all the down-ballot races to say, “Where we're going to end up in January of 2025.” But I do want to say something. And I remember this. You mentioned this idea in the last question about the sensitivity of U.S. companies to interest rates and policy. And at the risk of sounding a little bit of a Pollyanna, from an interest rates perspective, we don't actually have a ton of sensitivity to higher interest rates from US large-cap companies. You look at the debt breakdown, for example, for the S&P 500 in 2007, something like 44% of the debt was long-term fixed rate. And today, it's more than three-quarters of that debt. So we don't have to worry so much about monetary policy. We do have to worry a little bit more around trade and fiscal policy. However, when we think about the risk, this is where companies are talking to us pretty consistently.
And one of those is when you look at what has contributed the most to the improvement in corporate margins. Let's say over the last 20 years two major things stand out. Number one, it lower effective cost of goods sold. And this comes mostly from global sourcing as companies have looked for cheaper people and cheaper goods and have globalized their supply chains. It has brought down their overall cost of production. And the second is lower taxes. Many people think that was around Trump's 2017-2018 tax cuts. know that only a tiny portion wise, it really is come from again that globalization. And the fact that most of the large companies in U.S. pay significantly lower effective tax rates outside of our borders. And so, as a result, globalization and a company's ability to have a global supply chain and to operate in different parts of the world has been a huge contributor to profitability. So one of the things I'm watching very closely when it comes to the election is how each of the candidates talk about the US versus the rest of the world. Their willingness to use tariffs or other tools, how much they want to cooperate with existing trading partners, how much they're going to try to encourage or sometimes really pressure companies to realign their supply chains, which is expensive and may lead to a change in that margin environment I'm mentioning. So that's one of the things I'm very focused on as we get into some of these debates around the election is the policy around globalization, the policy around foreign trade partners.
Willy Walker: So the fiscal piece of it all is something that I think a lot of people are not that focused on. We think that $32 trillion of U.S. debt is serviceable, and we don't need to dive down that rabbit hole. But I do think that it's interesting to think that Biden's running close to a $2 trillion deficit right now. And so a lot of people say the profligate spending that is going on today would continue in that administration. And then, if Trump were to extend the tax cuts that you just talked about, that's another $5 trillion on the federal debt as well. So both Biden and Trump, as it relates to fiscal policy, would add trillions of dollars to the federal debt. The one other piece to all that is Trump's talk on trade and his protectionist trade policies that he's been talking about, leading up to the election, which a lot of people are saying would be wildly inflationary. They may help U.S. manufacturers. But that leads to another one, Kate, which is the strength of the dollar, something that you and I really haven't talked that much about. But the dollar's been on a tear. And it's certainly helped our economy. I think about the dollar and I'm somewhat confused on a couple of things as it relates to the dollar if you can help here.
The first one would be that it's clear the U.S. is the reserve currency and there's nothing that's going to challenge us for that. To that point about our federal deficit, not only fiscal desk on an annual basis but our outstanding debt, until there's someone who's going to come along and compete with the U.S. dollar, and there's nobody even on the radar screen, much less someone who's actually vying for that today. You can say people are going to continue to buy U.S. treasuries. The rate obviously is going to be big, and we'll go to rates in a second.
But the other question I have for you is just that Trump is so big on U.S. manufacturing. You go back and think about the Plaza Accords with Paul Volcker and the mid-1980s and coming together and basically saying, “We need to drive U.S. manufacturing. Let's start to devalue the dollar.” And you watch the dollar at that point which is almost on par with where it is today. And it went down precipitously after the Plaza Accord. Do you think there's going to be pressure if Trump gets elected for us to potentially either put up the protective barriers as it relates to trade that he continues to talk about? But then I think more importantly as it relates to the dollar, because if something happened to the value of the dollar, to try and devalue the dollar, and boost U.S. manufacturing, which says great for wage growth and U.S. manufacturing, but not that great for the macro economy.
Kate Moore: No. You're right. These are all excellent points, Willy. Let me start off and say I agree with you. It seems the outlook for the deficit is up or up. And that's been the case across both Republican and Democratic administrations. I am hard-pressed to come up with more than a tiny handful of politicians who actively have a plan or at least discuss the prospect of reducing the deficit. And so I think we should expect that. But, of course, the composition is going to change.
But this question around what happens for companies that are pressured if we were to have a policy to pressure. By the way, I think this also happens in a Democratic administration. Trump may be very vocal about it, but I think there is a more inward look from both parties, frankly, at shoring up the domestic economy. This sense that manufacturing, because it worked in the past, is the thing that may be the savior of the future. By the way, like spoiler alert, I think the U.S. economy is in fine shape. Are there areas of friction? Are there areas of weakness? Of course, it's not a monolith. But in general, we are constructive on the economy, and I don't know that we need any massive overhaul to fix it. But you can, of course, debate that. The question around U.S. manufacturing. I think we need to recognize if we were to bring more production into the U.S., not only as you point out, would some of that be inflationary in the near term. There's a significant amount of spend that needs to happen on plant and equipment. And companies will make a concerted effort to pass on those costs to their consumers and to their customers. But that longer term, that's not going to be a net employment ad. And I just want to be very clear on that one. Every company we talk to about realigning their supply chain, whether it's the U.S. or to someplace with a marginally higher cost of labor than perhaps Southeast Asia, where they've been operating in the past, has talked about automation. This is one of my favorite themes over the medium term, which is industrial automation. Some of these companies that are going to put their best gear to provide the equipment, the technology, and the systems for industrial automation are not even based in the US. So we may see that the net beneficiary of these types of policies actually accrue to some Japanese companies, for example. But that's a kind of a sidebar. I will suggest, though, that the spend in that space is going to be inflationary and that may have some unintended consequences. The challenge is there's always this really big gap between an idea in the narrative and the actual putting things into practice. And just as we saw in the past with companies saying, “Hey yeah, of course, we're going to onshore, reshore.” Everyone came on with these headlines, which are actually just inflated versions of what was already in their current corporate plan, but they were trying to appease the politicians at the top. I think we may see something like that in the near term as well. People trying to talk about the projects they're doing domestically, even if it's actually no change in their corporate strategy. So, because they're going to do everything, they can to continue to control cost, to manage their margins, to maintain level profitability they've said at this point in the cycle, and it's going to be threading the needle, I think, for a lot of these CEOs and CFOs as they deal with the new administration, if we have one.
Willy Walker: Rates you mentioned that I think not a lot of the economy is that rate sensitive. And there are two sides to that as it relates to my world, in the world where a lot of people listen to this focus on commercial real estate. But let's talk about it from the perspective of rates in the broader economy and where rates are going, and then also on the consumer and the underpinning of having long-term fixed-rate mortgages in the housing market. That is as your boss Larry Fink said recently on CNBC, is an incredible foundation to have the U.S. consumer sitting on this long-term fixed rate mortgage economy, if you will. And one of the things I've said for a while, Kate, that I haven't gotten a lot of traction on. But the fact that Fannie and Freddie still exist, and I've taken all this long-term fixed rate paper and put it into the secondary market and have given the consumer this great ability to continue to go back to target is something that the Biden administration actually needs to be talking about. And it's very esoteric that Fannie and Freddie exist because they were actually kept in place when the Republicans were saying, “Get rid of them,” and the Democrats are saying, “Keep them.” The Democrats haven't been able to take advantage of the fact that in 2012 when the Republicans were like, “Let's take them down and get them out of here, they're now providing this massive benefit to the American consumer,” which Larry said on CNBC. And what I proposed to the administration is spin them out, put them on the front page of the Wall Street Journal, and have the debate where Republicans can sit there and say, “Oh, no, they shouldn't be private companies. They're terrible. They screwed up in 2008, and they shouldn't be out there.” Get them on the record to do that versus just letting this esoteric thing of “Oh yeah, I'm really happy that I've got a 3% 30-year fixed rate mortgage, and I can sit back and keep going to Target to go buy things that I want to buy.” Anyway, enough on that soapbox issue. But I do think it's an important piece to the health of the U.S. consumer today, I heard you just say, “You don't think the US consumer is as strong today as it was when we last spoke, but you still think the US consumer is doing pretty well.” So go on that one. And then I'm going to go to the overall rate policy.
Kate Moore: So we ask this question all the time. And we have an internal investment forum of our senior investors. It happens twice a year. And actually the mid-year one is starting tomorrow. And I'm going to be talking about this a little bit with my colleagues. We ask this question all the time. Is the consumer all right? And so let me give you the stats that make you feel, “Okay, things are alright.”
You look at household debt service payments as a percentage of disposable personal income, and they're under 10%. This is considerably below the long-term average since 1980. And in fact, despite that dip that we had during the pandemic, everyone all of a sudden sat on a bunch of cash, we're at a pretty low trendline there. And there are these other two components of that. One of them is the consumer debt service ratio which is consumer debt. The other is the mortgage debt which you just covered. And both of those look pretty low relative to history. And so, you look at the aggregate data and the consumer looks all right. But I think what people were stressed about is as companies were reporting first-quarter earnings, you started to get mentions from a bunch of different consumer companies across discretionary and staples about the low-end consumer showing some cracks. You had a company like McDonald's mentioned that all income cohorts were seeking value or a company like Amazon saying, “Customers are still shopping, but in general you're seeing people trade down on price when they can and they're seeking out deals more deal sensitive.” And this goes on.
One of the places we're watching here to give us even more information is quick-service restaurants. Because this is a place where it's pretty easy for consumers to pull back on their spend if they're feeling a little bit pinched, stop going out so much to eat. And particularly since the prices have risen at a bunch of these quick-service restaurants. And that data is pretty mixed. You are seeing maybe fewer visits than in the past from some of the low-end consumers. The challenge, of course, is that the middle consumer and the high- household consumer is doing pretty well. And we know that they call it the upper two income quintiles. The top 40% of households by income contribute well more than 60% of spending. And they tend to be asset owners, not just real estate owners, but also other assets. And they tend to have higher cash balances which you and I know when parked in the bank right now or yielding north of 5% or close to 5%. So if you have assets, not only have they appreciated, but your cash is throwing off income as well. So your wealth effect is pretty high even in an inflationary environment. You're not seeing a significant decline in a propensity to spend. So you have that really holding up that aggregate data. And then you have the low-end consumer with higher debt service because of higher credit card balances. They're pulling back on things like travel and discretionary and the quick service restaurants trading on value. And while they are a smaller portion of the overall spending, no one wants to feel we're leaving behind big segments of the population in terms of policy. Because maybe it all leads into my comment here Willy, that being a Fed decision-maker when there are so many crosscurrents in the economy, is really challenging.
Willy Walker: That one indicator that you said as it relates to food away from home. If you look at food in the Bureau of Labor Statistics data, which I'm geeky enough to go in and look at, the only place where you really see any spike in inflation on the food front is food away from home. It's not food at home. So in other words, buying groceries at the store and bringing them home. The big inflationary pressure, in other words, north of 2%, is out. All of those are single digits 0.9 or 1.3. The one place you see north of 2% inflation is food away from home. So that does make sense that if people are getting pinched, they'll pull back on that. Basically entertainment and discretionary spend in concerts and things like that as it relates to a theme you see happening. So even if the consumer pulls back, you still, like, I don't know, I'll use one that's at the top of my mind only because they're under a Department of Justice investigation. You like Live Nation not specifically as a company but as what Live Nation represents as it relates to people going out and getting experiential living, is that correct?
Kate Moore: Yeah. I think, in general, if people are going to be cutting their budgets, they're more likely to say, “Eat at home or pack their food, go and tailgate, and listen to a concert.” I think that overall experience is probably going to be higher valued. When we look at the credit cards band, this is something that we track quite closely by income cohort, the one area that seems to be doing pretty well with the least decline is around some of this experiential spend. Yes, there's been a little bit of a decline in terms of transportation and travel over the last couple of months, but it's not nearly as large as, say, the purchase of home goods or purchase of electronics or purchases at department stores or purchase at restaurants for the low-end consumer. Everyone's holding on to the experience. And in the summer season, I think that's where we're going to see the spend happen. So yeah, on a relative basis, I can’t comment on Live Nation.
Willy Walker: But I only threw that out there to try and make people understand what I was talking about, not so much that Live Nation is a specific stock. Point taken. You didn't make a comment about Live Nation, this company.
Let's talk more broadly about rates. I think you right now are still expecting two rate cuts this year. And I also heard you say, Kate, “If we get to 2.8 to 3% inflation, we ought to declare victory and call it a day.” Clearly, I don't think many people would think Jerome Powell on the Federal Reserve would call victory. I have an ongoing bet with a buddy of mine, Bob Nichols, where at the beginning of the year, he said, “Buy your conference in Sun Valley in July, which you've come and spoken at in the past, and I'm very appreciative of that. The ten-year will be at 3.5%.” And I said, “No way ten-year will be at 4.5%.” And he literally wrote to me this morning with the rally down to 4.27 and he said, “Hang on, it's coming my way.” And I said, “Dude, you got a lot of work to go.” But what's your thought as it relates to just rates, generally speaking? If it's still at 2.8 to 3.0, you may declare victory and call it a day. But that would say to me that Jerome Powell on the Federal Reserve Board is looking at raising rates not having two cuts.
Kate Moore: It's complicated. Okay. So let me say this. We, a lot of people, are waffling between the one and two cuts. Lot's going to depend on the data over the course of the summer. The one thing I'm really clear on, though, is that the Fed needs not just one or two months of data but a consistent trend because it does no one any good, including the low-end consumer who will, in theory, benefit the most from some of these rate cuts. If we have 1 or 2 rate cuts, then the Fed has to stop. It needs to be several rate cuts into 2025, at least at the start of the cutting cycle, that they expect can happen. And, really, project out that we think we're going to be on a path of taking rates down. They won't say this exactly. Of course, this is Kate speak, down 100 basis points over the course of the next 18 months, our expectation is that we'll continue to have disinflationary pressures, and all those things are great.
The thing I think that's a bit of a challenge is that there are few areas if we're really managing inflation, that the Fed can't touch, that this blunt interest rate tool does nothing for. One of those is across insurance premiums, which may not make a huge portion of your overall consumption basket but really stings when people receive a new annual bill or can't get insurance as it were in some areas of the country for their homes. And I think it really causes them to think, “Hey, what's my ongoing outlay going to be going forward if all these insurance premiums keep going up?” Can the Fed affect that? Impact of a natural disaster, I don't think so.
Another area is food. While the pace of food price increases is not as high as it was six or 12 months ago. Food prices are still meaningfully higher than they were certainly before the pandemic. Certainly, even rather than a year ago or two years ago. And that's the thing that many voters and many consumers think about. Do lower policy rates really impact food if there are weather and geopolitical issues having an impact on overall production? I don't think so.
And then the third thing I would kind of say is there's a lot of volatility potentially around energy and resource prices, some of it around geopolitics, some of it around supply. And the Fed can't really control that either. But that will have an impact. And these things go into the components of many different things that we consume. So the Fed's going to use this blunt tool. There are many different segments of the consumer having different experiences. And it's really hard to say that two cuts are enough or that one or two cuts this year will be justified if inflation stays elevated. And I think the Fed needs to be really convinced by the time we get to September that the path of disinflation is going to be consistent and persistent. So I don't know if I want to be a Fed voter. Basically, it's gonna come down.
Willy Walker: You talked about global warming and the impact on our climate change. Don't want to use a politically sensitive topic. But our climate is clearly changing. And insurance costs. And you don't need to talk to anyone in the commercial real estate or the single-family home Industry as it relates to the cost of insurance. What's the derivative effect? In other words, you sit there and say the cost of insurance is going up precipitously. Are you all investing in insurers because they have such great pricing capability today?
Just a quick side note. I was talking to some people at the Nature Conservancy the week before last and asking them about climate change, and we were talking specifically about insurance and insurance on multifamily. One of the interesting comments that this researcher at The Nature Conservancy said, “Look, we can't as humans do things to protect against stronger winds or hail falling out of the sky.” That last week here in Denver, Senator Hickenlooper said to me on Saturday night when we had dinner that he thought that the estimations were that there was $1 billion of damage in Denver last week due to a hailstorm on cars. $1 billion in one freak hail accident that hailstorm that happened quickly. You think about those adding up and the claims that go into the insurers. Those are just things that we can't protect against. You can't say it's coming right now everyone goes into a garage. But the one thing they did say was forest fires. And forest fires, you can thin the forest. Forest fires, you can set up perimeters around homes and around multifamily that we can actually protect ourselves from. And it'll be really interesting in what if you will. What we give up on as it relates to that is just the byproduct of global warming and climate change, by a freak hailstorm. And we just got to work it into our economics versus how much we really focus on fire and the ability to lower the losses based on fire. But where's BlackRock looking as it relates to derivative investments, if you will, on the theme of climate change?
Kate Moore: That's an insane stat. Around $1 billion in auto damage from that hail. I saw some pictures of it. It looked pretty brutal. I would not have wanted to be out walking my dog when that thing hit. I hear you on the fire. I think we also need to talk about flood, which is another issue altogether. And in some areas, we're continuing to see significant migration, particularly to places on the southeastern coast, for example, flooding is an issue. And we hear insurers talk about that as well. So it's fire, it's flood, it's earthquake. It's everything in between. And, of course, as you well know, these insurers are trying to spread their higher costs out across everyone in all areas of the country, even if you're not facing a lot of imminent climate change-oriented risk. So what are we doing at BlackRock? We have a lot of different investment teams on the private side. We're looking at a bunch of opportunities. I talked to our insurance analyst, a fair amount, and it's a pretty mixed bag. It's not that insurers are doing particularly well because they're raising premiums. Most of them are trying to dig out of holes that they were in having to pay for something like a huge confluence of events at the same time impacting all of the people and companies they ensure. So, I don't think that we can say, “Hey, they're just printing money.”
By the way, this is a little sidebar in terms of inflation that's just worth flagging. We were talking about companies having to raise prices to accommodate higher costs in the case of food. There was a social media campaign against some of the consumer packaged good companies who were raising money on some of their products after grains prices and transportation costs and everything had been going up consistently. Their margins were shrinking to barely hair nails, frankly. And they had been absorbing all of that because it takes time to push through higher prices to consumers. They need to change their production, their marketing, and their distribution. And, you hear a lot of people say it's unfair that these companies are doing it. Meanwhile, they're paying much higher costs for grains. They are paying much higher costs for transportation. They're still trying to provide the product. And it's frustrating. I want to say I hear it's frustrating, but we need to recognize all of these forces that are outside of our control. That is going to put a strong floor on inflationary pressures for the foreseeable future.
Willy Walker: When we're talking about the derivative effects to climate change. Blackstone made a very large investment in an infrastructure company back in January, and BlackRock made a big investment in an infrastructure company back in January of this year. A fund that invests in infrastructure. And one of the things I've heard you, as well as Larry, talk about is that the AI economy can't really get going until we have the infrastructure in place to be able to support the AI economy. So that made me think about things like Tesla charging stations, it's really cool to go make the Tesla, but until you've built out the charging station network, your Tesla was good as a car to go around Denver, Colorado for me, but not great for me to hop in and go on a road trip at the Sun Valley, Idaho and stop in Jackson Hole and say hi to you. So the thing I'm asking you there is, as people think about derivative investments on AI, sure go by NVIDIA, go by HP that just came out with strong earnings based off of or Best Buy, who also had a strong print because people are going and trying to buy the new PC and they're carrying a lot of PCs that have new updated AI chips in them. But anything else that we need to be thinking about? Most people can invest in data centers, although there are a couple of plays on data centers. But what's the other one? What's the one that people aren't thinking about, Kate?
Kate Moore: Look, there's been a lot of discussion around data centers. The cooling that's required at the data centers, companies that provide cooling equipment. Because to run all this data it's an extremely hot business as it were. You need software and cloud services that help to support the data centers. So there's other technology infrastructure that's part of it. And to be honest Willy, I don't even think we know about the full scope of the AI derivative trades right now. We have a sense that this technology is going to be transformational. We don't have perfect use cases for every company, every industry, and every consumer that's going to use them. And we do know we need a lot more silicone. We need a lot more data centers and power. We need a lot of cooling equipment to make that hot transition happen and we need eventually to have consumer devices that are going to be able to run these AI programs, and much of that stuff doesn't exist at this point. So, I just want to say I think we are not even at the very beginning stages of what is going to be a multi-year and multi-tiered investment theme around that. And I agree there's a lot of talk around the data centers and the power, but there are very few pure plays, which is why more people have been going into the private market on that space.
Willy Walker: And whether you buy into the AI craze or not or any derivative investments, you still really like cybersecurity companies, technology companies focused on that part of the market?
Kate Moore: Totally. Some of them have taken a little bit of a hit more recently as the entire software complex has come under fire. Let me just say a comment there. The software has come under fire because this AI investment is incredibly expensive and, if effective, will improve the efficiency and productivity and very potentially the headcount for a lot of companies. So people say, “Okay.” If the spend is going to rotate more towards the AI-oriented areas of the technology market, and in a couple of years, these companies who are making the investments are going to have fewer headcounts, i.e., fewer software licenses needed. I'm not really sure I see the same revenue growth in the software space that we've seen before. So you've seen everything sell off. The exception, though, and I feel very passionately about this is around the cybersecurity software companies, especially the platform companies that can offer a myriad of different solutions that are all interconnected. If you are a company that has proprietary data, and if you're a company that doesn't, you're in very big trouble. But if you're a company of proprietary data you need to make sure you're safeguarding the data, particularly as you're putting more stuff onto the cloud. And as you're using AI tools, you want to make sure that no one can hack in and disrupt your business operations, and no one can take your IP. So, I think that that's an area that's more tech long and in terms of spend than other areas of software where there's more of a question mark about that medium-term growth. And a very big platform cybersecurity company reported after the close yesterday with outstanding numbers and a big beat in raise, which I think really buoyed those stocks today.
Willy Walker: And so on, a general investment thesis standpoint. You're fully allocated to equities. You're a little bit below where you were in March, but you're still, if you will, all in on the equity market. You haven't gone to the duration of debt yet. You're still at the short end of the curve as it relates to the debt portfolio. From a market standpoint, predominantly U.S. and Japan haven't really looked at emerging markets or thought that there's a great trade and maybe an emerging Europe pick on any one of those three we're long equities. We haven't gone to the duration of debt, or we like the U.S. and Japan right now as far as anything else you want to highlight in those thematic things that you're talking about.
Kate Moore: Yeah. Let me just highlight a few things that I'm focused on over the next year, which is number one, if we end up having stability in the U.S. economy, inflation comes down. That's going to end up being a better environment. Particularly the fed is comfortable with a more than one or two rate cut path. That'll be a more supportive environment for the small and mid-cap companies, which at this point, I'm not a buyer of. In general, they have much higher debt costs. They finance a lot more of their businesses through floating rates and actually more bank loans. So that's a more challenging space. They also tend to be the price takers when it comes to supply chains. And I'm a little bit more cautious in that space. I think the underperformance of the small caps has made sense. But if we end up getting stability in the economy, lower policy rates, and a continued disinflationary trend, I see that as a big positive and a place to potentially add. But not there yet.
The other place I'm watching, and of course, we've had a lot of volatility in the Indian market over the last few days around Modi's reelection and the forming of a coalition government. I think there's probably going to be more volatility over the medium term. That said, “we see huge structural tailwinds to investing in India.” And that's a place we have added to risk a lot of the corporate reforms that are really supportive for both the credit and the equity investing are not going to be subject to change even if there was a more moderate kind of coalition government. And the demographic story, the investment in technology looks really interesting to us. So those are two other places, I would say. Small caps, not yet I think they're still impaired, but I'd love to be excited about them in the future. And India is a place that will be opportunistic as far as volatility around the election.
Willy Walker: We've avoided talking about Bitcoin in the past.
Kate Moore: Yeah.
Willy Walker: And you all now have the world's largest ETF. Bitcoin is at $71,000. I guess my quick question is, how can Bitcoin be so strong? Also, the U.S. dollar is so strong because I always thought that Bitcoin was a play against the dollar. But it clearly isn't. If you've got the dollar and Bitcoin both going up in tandem.
Kate Moore: Willy this is one of the reasons why I avoid talking about Bitcoin. Because it's one of these assets, you can say there are many different reasons why someone would want to own the asset, as maybe it's a hedge against the dollar, maybe it's a hedge against geopolitical uncertainty, maybe it's this, maybe it's that. Because it's not a really clear supply-demand market, as some people would like us to believe. There are lots of different types of buyers and owners of Bitcoin. I find it really hard, personally, to make a call. So it's a market I'm watching really closely. I think it's very interesting what's happening across all blockchain technologies. But I'm just not an expert.
Willy Walker: I find it to be interesting in the sense that when you all didn't have your ETF, it was somewhat easy for BlackRock to say, “We don't play there.” We don't whatever. It's similar to Jamie Dimon who said, “We don't we don't focus on Bitcoin. We don't do Bitcoin trades.” When I called my banker at J.P. Morgan to say, “Let's go buy some Bitcoin.” He wrote me back an extensive memo saying, “We can't buy it here for you. Here's the way to go about setting up your own account.” That was $19,000 a coin. I called him up a year later when it was at like 45 saying, “That was a pretty good trade we put on, thanks to me.” He said he didn't get my memo. He didn't open up your inbox, but I can't buy it for you. So it's not in your account. But I guess now you know J.P. Morgan can. And so it's interesting how it has moved into the mainstream while many people still are skeptical of its use case or just the overall valuation of it.
Kate Moore: Yeah, I think that's right. This is why I'm going to watch really what happens across all of these blockchain technologies, the assets tied to them and their liquidity. I think we're going to see that really broaden out over the next couple of years. And perhaps I'll be smarter on it, Willy, next time we talk. Obviously, I watch it, but we got a tiny position more as a placeholder for us to watch. It can be a counterbalance in our currency for books. That's great. If it can be a counterbalance for overall risk at some point, that's great too. But we're just not there yet.
Willy Walker: So if I were to summarize what I've heard you say here today, equity markets by the end of the year up from where they sit today. Interest rates are on the short end of the curve, down with two cuts, and on the long end of the curve down, up?
Kate Moore: Down a tiny bit. I don't think we're going to move.
Willy Walker: Look, that's one of the things that's continued to confound me is everyone sits there and says, “once the Fed starts cutting the ten years going to, you know, come down significantly. And I'm at some point we got to get a normalized yield curve here. And if the Fed did two cuts and let's just say that they're 25 each, we're at a 4.75 Fed funds rate and where the ten years is going to collapse to 3.75. And we still got 100 basis points of negative leverage. I don't get how the ten-year can move in lockstep with the Fed funds rate. And people think that the ten years are coming crashing down. But anyway, we shall see.
And you're not going to give me who's going to win the election. So I guess the final thing is, what are you most looking forward to this summer when you're out in Jackson Hole?
Kate Moore: Willy, I'm a huge golfer, and I could not be more excited for golf season. I spent the week in Ireland playing the Southwest right before Memorial Day. It was a much-needed break after a really tough four and a half months in the markets this year. So I'm most excited about my golf game.
Willy Walker: Sounds great. I'm sure there are a lot of people listening in who are also excited about their golf.
Kate Moore: Come play with me.
Willy Walker: Exactly. Kate, it's great to see you. Thanks for taking the time. I always love our conversations and greatly appreciate you taking an hour to talk to me.
Kate Moore: Awesome, Willy. It was so good to see you, and I look forward to seeing you in person.
Willy Walker: I look forward to it. Take care.
