Fed shouldn't tie tapering of quantitative easing to unemployment—exec
By Kevin Olsen, Crain News Service
NEW YORK (Nov. 15, 2013) — The Federal Reserve's large-scale asset purchases are not the solution to lowering unemployment and will have a limited impact in the future, said Rick Rieder, managing director, chief investment officer of fundamental fixed-income portfolios at BlackRock Inc. (BLK)
The main concern of the Fed linking the tapering of quantitative easing to unemployment rates is that there is a "huge job mismatch" in the U.S. that cannot be fixed, Mr. Rieder said. There are as many jobs now as there were in 2006, he said. Technology is killing jobs, and companies are hiring more temporary employees or consultants so as not to pay rising pension and healthcare costs, he said.
Mr. Rieder added that all of the net hiring is coming from small businesses and new companies. Adding pressure to the employment statistics is that employees are staying in the workforce longer.
"The Fed can't do anything because their employment mandate is not realistic," Mr. Rieder said.
The "slack in the labor force" of people who stopped trying to find a job is not improving from monetary policy even though job openings are increasing and layoffs are decreasing, Mr. Rieder said. Instead, areas like education, training, research and development tax credits, small-business lending programs and entitlement reform will help reduce that slack.
With quantitative easing stripping out volatility and causing disruptions in the markets, monetary policies are the main factor to consider now when it comes to investing, Mr. Rieder said. When investors expected the Fed to announce tapering earlier this year, bond returns plummeted in May and June.
"We're going to be pinned for a long time," with the Fed closing all yield at the front end of the curve for the next few years, Mr. Rieder said. He does not expect much of a change in policy if Janet Yellen is confirmed as the new Fed chairwoman.
"There is a need to get yield at the front end of the curve," he said.
The big problem is that the Fed is "crowding out" other investors for the Barclays Capital Aggregate Bond index—buying two-thirds of the bonds—and the price volatility of investing in the bonds now exceeds the coupon, he said. The Fed should back off quantitative easing because it is creating distortions in the bond market, Mr. Rieder said. Investors have made a big move to unconstrained strategies to get "anti-Agg," he said. There could even be a need for a sliver of equity in fixed-income strategies now, such as a 2 percent position on call options, to enhance the returns, he added.
In the next six to nine months, Mr. Rieder expects a lot of changes with European banks selling off assets, which will provide more credit opportunities.
If a bond mandate is only to buy liquid assets, "you have no chance," he said.
The current environment harkens back to 2003-2007, Mr. Rieder said, when real estate and private equity performed great and bonds did not. "I think we're going through the same period, but with not as much leverage."
Despite record levels in equity markets this year, Mr. Rieder still thinks equity markets are "dramatically underpriced." Companies have high profit margins and little debt, which allows them to lever up and cause stock prices to soar. Companies also increasingly are issuing debt to buy back stock or pay higher dividends, he said.
There is a large "disequilibrium" between equity prices and the cost of financing, Mr. Rieder said. Buying investment-grade bonds is akin to subsidizing companies now, with no upside. The gap between cost of equity and cost of debt is at historic proportions and has to narrow, he said.
This report appeared in Pensions & Investments magazine, a Chicago-based sister publication of Tire Business.
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