Walker & Dunlop, Inc. (WD) Earnings Call Transcript & Summary

Good afternoon. I'm Susan Weber, and joining Walker & Dunlop's CEO, Willy Walker, today is Kate Moore, Managing Director and Head of Thematics Strategy at BlackRock. If you miss an episode of the Walker Webcast, you can find all our replays on YouTube. Just search for @WalkerDunlop. Thank you for joining us today, and now over to Willy.

Thank you, Susan, and good afternoon, everyone, and welcome to another conversation with my friend, Kate Moore. I'm extremely excited to have her joining me today. Let me do a quick background on Kate, and then we're going to start reviewing some of the things that we talked about in the spring of 2021, which was the last time that Kate and I talked on the Walker Webcast. So 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 is a member of the Human Capital Committee at BlackRock. She holds a BA in Political and Social Thought from 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.So Kate, last time you and I spoke, the 10-year was at 1.58%, and the Walker Webcast has been viewed by 700,000 people. Today, those numbers are 4.26% and over 7 million. I guess I love one of those stats and I hate the other stat. Some of the big themes from our last conversation, you started out on cybersecurity, and given that I had a long conversation this morning with my General Counsel, Rich Lucas, about a new SEC rule making that is going to force publicly traded companies to disclose cyber breaches at an ever-increasing, I guess, rate of disclosure, it certainly seems like that theme isn't going anywhere anytime soon. You feel pretty good about staying in the cyber security/technology space these days?

Yes. Willy, well, first of all, so good to be able to do this with you again. And let me just say that those stats in terms of your viewership and listenership are amazing. I agree the change in the 10-year has led to a really different investment environment, but I know we're going to dig into some of that later.

A lot.

Yes. The -- as you know, I'm a thematic investor. So I'm practically like a macro person who implements in equities, but around specific themes. And I do this in a highly concentrated way, usually expressing between like the view between 5 and 8 names. So I'm taking specific company risk, although trying to buy a bunch of the winners. Now the cyber theme is one that's been in my portfolio for like 3.5 years at this point, which is the longest, I think, I've held anything. Now some of the names have changed and I've like shifted the weightings and I've hedged at different parts of the cycle. But I have to tell you, as we sit here at the beginning of September in 2023, I feel highly, highly convicted that this is an enduring theme, not just because of the regulatory side but because there is incredible demand across every industry at this point for protection of data, like whoever owns and controls their data and safeguards it and is able to use it effectively will win against their competition. And cyber is critical to success across everyone. I think what's really interesting is, over the last 6 months or so, there was a lot of stress around whether or not a huge amount of demand had been brought forward during the pandemic for data protection and cybersecurity software. And so there were a lot of naysayers, maybe to start at the end of last year, say, a lot of naysayers saying like this is a trade that's over. But anyone who's paying attention to all of the rest of technology change, and again, the importance of data and operations of every company, understood that this was -- that cyber was just having a small air pocket and not necessarily a significant decline. And most of these companies have reported over the last, let's call it, month really since the beginning of August, and the numbers have been exceptionally strong for the first half of the year, with huge increases in forward guidance. So yes, in case you don't get it from my enthusiasm, highly, highly convicted that this is an investment theme we'll want to be in for the long term.

So the other one that you started with last time we spoke was clean energy, and I had our mutual friend, Kiril Sokoloff, both at the Walker & Dunlop Summer Conference where you have spoken before as well as we broadcasted that conversation on the Walker Webcast. And Kiril has a lot of conviction in clean energy and his -- he doesn't have an index fund, but he has his own sort of tracking fund, if you will, and it has done exceptionally well. You still feel good on the theme of clean energy?

Yes, absolutely. I mean when I think about themes, there are different buckets. There's like a long-run theme. There's something that gets sort of spurred by discontinuous change or a technology that gets introduced or something that's around the market cycle, business cycle. I would say clean energy hits those first two buckets. This is a long run change really spurred by policy as well as discontinuous change, which is inspired by technological innovation in the space. So this is another kind of theme that I think you have to continue to evolve your holdings in. It's not like I'm going to buy five companies and hold that exactly forever, but I think this is something that we have to continue to put our time and effort and research hours behind. There has been -- and we've certainly had this conversation internally at BlackRock and on the Street, a whole different set of blowback against people who are investing in clean energy. At BlackRock and even on my team, we invest pretty heavily in traditional energy as well as clean and new forms of energy, and actually don't find that there is that much of a separation. Many of the companies are integrated in both. So yes, I expect to spend a lot of my time there over the next 5 years.

So you also in -- coming out of the pandemic, in the spring of 2021, you talked about the strength of the consumer. And you really liked retail at that time, sort of on the theme of the great reopening. Fast forward to 2 years later. It's hard to believe that this was our last conversation and all this stuff, but 2-plus years later, how is the U.S. consumer doing? And do you still like retail?

Yes. The consumer is a completely mixed bag at this point, Willy, which I think you know, and it's really hard to make a clear and decisive call on consumers in aggregate, unlike in the spring of 2021, where consumers were flush with cash, where savings rates were super high. We were starting to really see wage growth come in across all different types of companies -- pardon me, workers and industries. But the corporate data, and again, I'm just going to go back to some of the reporting from the second quarter that happened over the last month, 6 weeks, the corporate data has been pretty mixed on the consumer. On one hand, you have a company like Dollar General, which really gears to the lower-end consumer, cutting their profits forecast and giving some warnings. Then you had Lululemon, which just reported last week. It lifted its full year outlook, it was very constructive. And then you have companies like Best Buy, who, again, when we talk about air pockets post pandemic, saw a decline in overall demand for their products as people had already stocked up on electronics, actually saying they think the worst is over and the post-pandemic lull in electronics purchases is done and they have a pretty constructive outlook for 2024. So a completely mixed bag when you talk to companies about what they're expecting the consumer to do over the next year. But we do know there are a couple of big pressures on consumers, and particularly lower-end consumers, over the course of the next few quarters. But one of them is that tax refunds to small businesses, which often are exactly like the regular consumer, are being cut off. And without that kind of tax support, you will see kind of decline in spending and a retrenching. The second, and this is something that's come up a lot, we have debates about student loan payments, but like at least it looks like the initial student loan payments are coming in meaningfully higher than original estimates. So that could have a really significant impact on the cohort that is expected to start paying after the moratorium.

They're coming in higher. Sorry to jump in. They're coming in higher in the sense that more are paying or that the actual calculated number is a higher number than projected?

Higher calculated number. Yes.

Yes. But the question I have on that is that the Biden administration said that they're not allowing for the federal government to report delinquencies to the credit bureaus. And so my question would be, if you aren't having that file back to whether your FICO score changes or not, why pay?

Well, I mean it's a great question. I guess it depends on how you sleep at night. But I think there are a lot of people who are going to make that decision, if they have floating rate student loan debt and it looks onerous, and it's going to impact their ability to pay their rent and their utilities and live a somewhat normal life, they may decide not to pay because it's not going to affect their overall credit score. And others who say, "Hey, this is an obligation I have. I've got this education that's afforded me this opportunity to have this job or this career. And so as a result, I will pay." I mean -- but I think it's going to be messy. And for those that do decide to pay, the actual bill looks higher, I guess, because of the adjustment in rates. So -- and then the third thing I was going to say is that oil prices are rising, which energy prices disproportionately hurt the lower-end consumer. And so we know that's going to be kind of an issue.

Well, one thing you didn't mention there, Kate, that I've been hearing a lot about anecdotally is credit card defaults. And I went to a very close friend of mine who was one of the very best bank analysts in the country and asked specifically about net charge-offs and delinquencies on credit cards. And his response to me was we're in a normal cycle, we don't view this to be anything other than a normalization of defaults after having historically low defaults, and we don't see this peaking at any level that is a problem to the banks or to the overall health of the economy. Are you in that camp? Or do you think that there is more to weakening consumer on the credit card side?

No, I think that's a really smart and fair assessment. And one of the things we've also seen, and this is data that came out of the personal spending for August was -- or pardon me, for July, grew at like 0.6% month-over-month. That's pretty big. That is supporting continued economic growth. And sure, savings have come down, and sure, some people are not paying all of their credit cards and delinquencies may rise in certain pockets. But in general, we've also seen very strong wage growth across all income cohorts. And maybe the pace of that wage growth is going to come off a little bit. And frankly, it should. After these last couple of years, it's unsustainable. But we are not seeing like in aggregate a consumer that is so stressed that we have to take down our economic growth expectations in the near term. And I think there's just going to be a lot of differentiation. I mentioned those 3 companies at the beginning, and it's going to be our work to dig in, say, what are the consumers? What are the customers of each of these companies doing? How is their consumption pattern changing? Where are they most stressed? And it could be a real opportunity for alpha, to be honest with you.

So there's both the good and the bad, and I'm going to come to a really, really prescient statement you made in our last conversation. I'm saving that for last. But on this one, I think you probably might have gotten this one wrong, but tell me, you might have been right, but you were talking about business services in April of 2021 coming back. As people get back to the office, the people who supply the offices and uniforms and things of that nature would reflate as we had a reopening of the economy. At least we both know that people haven't actually gone back to the office, but that doesn't necessarily mean that uniform supply companies and all sorts of other, I think you mentioned in our conversation, things like people going back to stadiums. And obviously, all the concessionaires and stadiums are all back at it in full form. So was that a good theme? Or did that one not play out the way that you thought?

Yes, I actually cut that risk pretty shortly, I think, like into the third quarter. So yes, it did not play out. That was this idea that we were going to have more of a shift back to urban centers and more of a shift back to professional services didn't really play out. There were a couple of names, and I'm going to like mention things like Live Nation, for example, that have done really well, where people have wanted to consume entertainment and do that. But you know commercial real estate much better than I do. And that certainly was not a place where we -- we weren't invested specifically in commercial real estate, but in like kind of secondary and tertiary benefits of people coming back into the office and reusing their commercial space. So that's one of those things where you have to say, "Hey, the data is not coming in as expected. You cut the risk right away and you move on and reallocate. I think that's going to be a continued -- I know there's a lot of debate around return to office. BlackRock is returning 4 days a week, beginning next week. There's a lot of debate about what that will look like in the future, and what types of workers need to be present in office versus can do their job equally well from their homes part of the time. I just don't think we're going to see the same spend ever again on those professional services.

So in our last conversation, we also talked about chips and the chip supply shortage at that time. You have to remember, this was April of 2021. Neither of us at that time knew that the CHIPS Act was going to be passed by Congress and signed into law by President Biden where $56 billion was going to go to onshoring, if you will, chip manufacturing in the country. But one of the comments you made was that given the supply shortage of chips during the pandemic that you were projecting that those industries that were very chip dependent might actually start hoarding chips. Two things. One, what's your take on the CHIPS Act and the onshoring of chip manufacturing and whether that's -- I'd be surprised if you said that's not good for the long-term viability of U.S. industry and also chip manufacturing. But then second, just the -- are we actually seeing hoarding at this point now that supply chains have freed up where companies are actually stockpiling? Or is it, if you will, just-in-time delivery to most of the major chip users in the United States?

Oh my gosh, I feel like we could talk about this for the next 3 hours. So I'm just going to try and simplify because this is an area I'm really passionate about and spend a lot of my time on as a more growth-oriented macro investor. So on the CHIPS Act, let me just say this. There will be an enormous amount of global demand for all kinds of semis and derivative products. Every country needs to be investing in their own production or creating very positive relationships with other suppliers. But I think there's -- the demand is going to be so great. If the U.S. doesn't make these investments, we will be in a really tough position. Do I think that means that all of our global ties get cut as a result of us building our own fabrication and putting money behind companies that specifically focus on semis in the U.S.? No. I mean I think there is -- again, like as we think about the total addressable market, this thing is going to get larger and larger and larger by the year. So we're doing this fun exercise on my team, and actually I'm going to run the meeting on this tomorrow, where we've asked people kind of like which sectors they expect to gain the most market share over the next 7 years, we're saying until 2030, and which sectors people expect to lose the most market share. They can just choose an industry as well. And in my vote, honestly, Willy, is semis. I mean I think this is a place that we're going to see a larger and larger market share of just the U.S. and global companies in the global indices. This is, as I said, an addressable market that is ballooning in size. And any policy that supports domestic investment, I think, is a good idea.

On the CHIPS Act, Kate, since you know so much about this, my understanding -- and we've got a number of plants being built in the United States right now, one in Phoenix, one outside of Syracuse, New York, all over the place. But that -- NVIDIA, which has become NVIDIA, which has become this incredible company, they're still having to go to Taiwan to get their chips manufactured. And so what we sort of have here is somewhat of kind of an Apple setup where the intellectual property and technology is being built in the United States, but then it's going offshore to actually be manufactured. Is there any visibility to the manufacturing plants that are being built in the United States that they will have the capability to actually manufacture the NVIDIA chips that are so important to AI and the growth of AI in the global economy?

I mean we're going to get there, Willy, but it's not going to be a 2024 or a late 2023 phenomenon. What you're referring to is that TSMC, which we think is one of the most strategically important companies in the world, does most of the fabrication for all these semiconductor designers and companies around the world, not just NVIDIA and other U.S. companies. It is -- TSMC is really kind of the linchpin in the entire global semi cycle. And even if they were to build, and they are, fabrication facilities in the U.S., that's not going to be enough. We need to continue to expand, develop our own expertise, and frankly, put a lot of both government and private resources behind building this industry. I just -- there's not enough money going into it right now, and I think we need both public and private participation there.

Interesting. And as it relates to sort of this move towards onshoring and bringing manufacturing back to the United States, let's park Taiwan for a moment in the chip industry. But I mean we've got -- I think it's Ford Motor Company that's running an ad right now just talking about the growth in manufacturing in the United States and how they're opening up plants in the U.S. How much of this sort of onshoring or near-shoring, whether it be Canada or Mexico, is happening sort of as a result of the pandemic, and how important to that is growth in the North American economy and also sort of a derisking of the U.S. industry to supply chains outside of North America?

Yes. As much as we don't think that we're going to have any event that will replicate the supply chain disruptions we experienced during the pandemic, it doesn't mean it's not going to have this incredible change or inspire this incredible change in behavior. So you mentioned nearshoring and onshoring, but there's also this concept of friend shoring, which is worth putting in this category. And it may not actually be an adjacent market, geographically adjacent, but it may be with an economy or a government that we or another country has a close relationship with. So I think that's also in play. There was so much talk about onshoring or near-shoring, even pre-pandemic. But the truth of the matter is, it's an incredibly difficult process. It's not just having like the plant, the physical infrastructure to make the production in. It's also about having the workers and a continuous stream of workers with the right set of skills for that production. And then there's all of these ancillary services and businesses that need to exist: a financial system, a legal system, a trade system and export system in that country. So that we sometimes could identify places where there was cheap and decently skilled labor, but we couldn't get the product, we collectively, out of the country or we didn't have the legal infrastructure that was necessary to execute trade, or there was constant issues around like the ports and the government wouldn't step in and yet it wasn't something like a private companies or private investors could solve on their own. And so there were all these sort of pockets of ideas, but no real like wholesale transition to new locations for production. I think the pandemic has inspired more focus on this. And -- but I also think the rising geopolitical tensions with China and the desire to separate out the technology systems through China from the U.S. are also catalyzing more money spent, more in sort of brain power spend on how to really get onshoring, re-shoring, and friend shoring a near-term prospect as opposed to a long-term goal. The other thing is we have to really think about who bears the cost of this. If the government is not offering subsidies or support or infrastructure, we're asking companies to do that. And yet they are really concerned, frankly, with their next quarter earnings or their next few quarters' earnings, and it's a huge significant increase in their cost structure. So companies that are managing to their margins that are worried about economic variability, who don't feel like they have great policy insight, like they just want to get their product manufactured or produced and out to their clients without incurring like a huge amount of cost. So we have to, as investors and in conjunction with the government, really incent companies to make these investments themselves.

So you mentioned a number of things that I'd love to just kind of dig a little bit deeper on. And it has a little bit to do with artificial intelligence, a little bit to do with the labor markets and the cost of labor with the -- and let me just frame it quickly on this. So autonomous vehicles, late 2008, '09, some real focus on autonomous vehicles. By 2015, we had Elon Musk saying that by 2020, we would have fully autonomous vehicles in the United States of America. Here we are in 2023, and there are now only two companies that are still focused on the autonomous vehicle market. They are both still doing testing in San Francisco. And after having had a board in San Francisco allowed them to move forward with their fleets, they had some accidents the following week and the DMV in San Francisco pulled them both back and reduce their fleets. And so the future of autonomous vehicles clearly has a question mark around it right now. But the implications to autonomous vehicles were, if you bought what Elon Musk said in 2015, that we would have fully autonomous vehicles by 2020, you would sit there and say, great, that might be a really good long play for someone like UPS where the technology is going to allow them to reduce the number of drivers they have at UPS, reduce their cost of goods sold, and therefore, UPS might be a great stock for you to invest in. And now all of a sudden here we are in 2023, autonomous vehicles are way the heck out as it relates to actually being widely used, and UPS just signed a new contract with their drivers that is going to pay a 20-year veteran driver at UPS $185,000 a year. And so just thinking about thematic plays here about where BlackRock is putting sort of your insight and ideas, if you made that bet, that one isn't paying off. At the same time, as we see AI become more and more prevalent beyond the fact that I tried to ask AI last night to write the script for our conversation today and it didn't do a great job on it, but beyond just writing that script, there's a lot right now as it relates to AI sort of disintermediating engineering jobs, entry-level engineering jobs. And what I find to be so interesting about that, Kate, is that the script was that automation was going to hurt blue-collar workforce. We're now very clearly seeing that, that automation is not impacting the blue-collar workforce, but it actually might be having a very significant impact on the white collar workforce. How do you view all this? I know there's a lot in this, but I think that right now, we're at sort of that crossroads where some past technological innovation made us think it might go left and it's gone right. And at the same time, the right, right now, is having some pretty dramatic impacts potentially on the overall economy.

Yes. So let me just start with the autonomous example that you gave and then we can delve into the AI stuff, which is like incredibly fascinating. When we think about something like the autonomous technology, there was a real tendency, and it's just kind of a knee-jerk reaction for a lot of people, to invest in companies who were promising autonomous vehicles. Like that was it, like we're going to invest in the end product. The approach I like to take is to buy companies across the supply chain, like, and get more vertically integrated. So a bunch of different companies that are working on semis that could be used in autonomous vehicles or sensors or the raw materials. And I think that's a smarter approach because then you're not betting on one specific technology working all the time, but actually all of these components that could have a really strong impact. I got to tell you, Willy, I love to drive my car. I mean I love to drive. I find it very peaceful and relaxing. I listen to some podcasts and webcasts, full albums, and you'll pry that steering wheel out of my cold dead hands, but that's just Kate. Okay. Let's talk about AI and I have to say, like a lot of people, I think we're in the very early stages of the AI transition, maybe not even, I hate baseball analogies, but I have to say it, like not even in the first inning. But we're not even in the first inning, I think, of investment implications for existing publicly traded companies. So here is a crazy stat I saw from a Citi report that came out recently. It took 5 years for Twitter, or X, to reach 100 million users, and it took ChatGPT less than 2 months. I mean the adoption and the curiosity is super high across individuals and super high across companies. Earlier today, actually, my team was talking about how do we interrogate companies when we speak with them about what they're doing around AI? And the idea was we need to ask that in every corporate meeting we have. We want to get a sense for like, here's where we're spending money or we don't have an answer or our competitors are doing x or y, because there's going to be a whole huge range of applications. And I think that the influence and application of AI will continue to expand. And I think harnessing the technology is going to really separate out the wheat from the chaff, the winners from the losers in every different industry. So we know this kind of first leg of the trade has been around infrastructure plays, the NVIDIAs of the world. There's really one -- only one NVIDIA, but there's lots of smaller players who also benefit from the infrastructure spend. I have to say, that is not over. There was kind of like a call for the death knell before NVIDIA reported earnings a few weeks ago and now everyone's like, okay, just kidding. We're going to continue to raise guidance, the demand is like somewhat insatiable for these types of chips, and literally every type of company from like Wall Street research firms to industrial automation are putting in millions of orders for these chips. And the next stage, I think, is going to be to own applications and software companies that adopt generative AI, which is like AI, of course, that enables users to generate new content from robotic data. So if you're a software company or an application with a ton of data and it's proprietary, and you have it and you can make much better use of it and exponentially improve your productivity and margins by harnessing that technology, I mean I think those are -- that's kind of the next wave to invest in across AI. You start to see some of that percolating in prices right now, but I think we're still at very early stages.

But Kate, on that, let me just -- one quick question I have as you talk to your team about how do we probe in company's use of AI. And let me just -- if you were trying to invest in the automotive industry in 2015, the question would have been what are you doing to invest in autonomous vehicles, not what are you doing to invest in electric cars. That would have been the question. Like the theme in 2015 was autonomous vehicles and what are you doing to make your vehicles, regardless of what the engine is, actually drive themselves and driverless vehicles and not necessarily the clean energy electric car phase. And clearly, the clean energy electric car is what has won now 8 years after 2015, and the autonomous vehicle is off. So what is it about AI that makes you and your team so convicted that every company needs to be investing fully in the implications or the applications of AI?

Well, I mean the autonomous vehicle, right, for auto industry is very specific. Autonomous vehicle was a very specific product that eliminates drivers, right? Whereas AI or these large language models like are able to process huge amounts of data in every industry. By the way, I was thinking about this like a few weeks ago, as we were having a conversation internally about what my life would have looked different like as an analyst, or like over the last 25 years of my career, if I had access to some of these large language models or AI. And one of the things that kept coming up was like the bazillion hours I've spent in my life creating decks, like presentations and charts. If we like successfully created a data feed into all of the charts, and then I could just like pick and choose and create these slide decks and we didn't have to worry about all of the manual editing, I mean I think I could get a couple of years back of my life and a couple more years on the ski slope, Willy, but that is -- that's something that I think is going to be revolutionary. You mentioned this in terms of like professional services, I mean or like kind of knowledge workers, that does seem to be the fastest and easiest place to adopt AI. And there's a lot of different things there, whether it's content writing or code generation, health care, building, industrial technology. All of these things where workers could be freed up from the repetitive tasks, I think that would be amazing.

So -- but I mean so as it relates to BlackRock being the world's largest asset manager, there are clearly hedge funds like Renaissance Technologies that use quant trading and the computers actually make the trading decisions. At a firm like BlackRock, how much of the investment decisions is still made by human beings versus technology? Because if you tell me that 80% of the decisions at BlackRock are being made by technology, I can buy into that, but my tummy tells me you all use the technology to inform your decisions, but it's still human beings who are making the investment decisions.

Well, I have like a lot to say on this one as well. So we do have teams, systematic teams and systematic platform that actually is much more like some of these systematic hedge funds you're mentioning and really uses signals to drive process. But then some of those teams also have an overlay of very experienced investors helping to kind of redirect which signals should be up-weighted and down-weighted. On my team on global allocation, we have a whole systematic team as well that works on these types of signals. But the one thing I will say is, if you were to try and invest all of your money all of the time using largely historical data, you would have missed some of the great disruptions and changes in technological advancements that have driven the market over the course of my career. So I think that historical stuff is important, but these are not crystal balls in AI, right? They're not going to tell us exactly where the ball is moving. And so as a result, I think these systematic tools are important but shouldn't be the primary or exclusive driver of your investment decision. I say that as an active investor, all love to my systematic colleagues at BlackRock. But I just think it's one of these things where there has to be a combination. Make me smarter by using this data, but also recognize that I'm going to see things that a data set or a historical data set in particular can't capture.

So the final sort of playback from our previous discussion that I want to end on as it relates to going back and using that conversation as sort of a launching pad for what we're talking about right now in the present day is that I asked you about interest rates. And here's where you were wildly prescient. First of all, remember, the 10-year in the spring of 2021, was at 1.58% when we spoke. And I said, where do you think it ends the year, and you said I don't really know that I want to put a pin on that one, but you said it's closer to 2% than it is to 1%, and you were certainly correct on that. And then I asked you to pick, if you had a commercial real estate asset, would you put floating rate debt on it or fixed rate debt. And remember, where SOFR was in April of 2021, you could basically borrow for free on floating rate and you had the huge 1.58% 10-year treasury at that time, and you said, "I would fix." And I can guarantee you, Kate, there are plenty of our customers who wish they'd listened to you at that moment and fixed their financing in 2021 rather than floating. So as we sit here now, and the final thing that you said, which I thought was really interesting, was I said to you, what's the thing we don't see or that makes you nervous about the market. And to quote you, you said, near term, a very sharp adjustment in rates would make me very nervous. And lo and behold, we had a very sharp adjustment in rates and it made all of us very nervous. So as you look at the 10-year in the debt markets, I want to talk a little bit about the shift from equities to fixed income. I listened to a clip of Larry Fink on CNBC last month, I believe it was. And his comment was that in December of 2020, there was $18 trillion of fixed income around the globe that was earning negative interest rates. And today, 80% of fixed income is earning a 4-plus percent interest rate. And so that shift from that amount of negative yielding debt to now people sitting there saying, "Wow, I just sit back and make 4.22%" or wherever the 10-year is today is really quite a dramatic shift in the market. But what's your sense on the 10-year right now, Kate, as it relates to why are we seeing this sort of continued sell-off in the 10-year market. I mean it kind of rallied back down to about 4%. But do you think that, that is because of fears about Powell continuing to raise? Is it the U.S. fiscal situation of either running a $65 billion budget deficit in the month of July or the $31 trillion of U.S. debt outstanding? Or is it more of just general weakness in the overall economy that says, you know what, a 4% to 4.50% 10-year is where we ought to settle in, we're going to find this range and we're going to stay in there. What do you think is driving the sell-off in the 10-year right now?

Yes. I think there are a couple of things, right? We know the 10-year yields are not up tremendously since the start of this year, but there's been a huge move since those April lows, right? And I would just note that like last year, I know we're not -- we're not going to talk about bonds now. But last year, the narrative was equities are selling off because bond yields are rising. And this year, equities have massively outperformed bonds as bond yields have risen. So it's not always a neat playbook, and we always want to have these rules, but they -- investing is an art, not just a science. I think there are a couple of reasons actually why the 10-year has moved the way it has. And I would say two primary, and you kind of touch on these. But I think the first and most important has been that there's been a meaningful upgrade in terms of people's growth expectations over the course of this year, and particularly since those spring lows. We were in a camp of more constructive growth, I think, than some of our peers, certainly than some on the sell side, and that we were kind of positioned more for better growth. I wouldn't say outstanding growth. I wouldn't say like, blind market rally, but like we were positioned for better economic growth. And part of that was because we talked to companies who combine the macro and the micro. It's not like just looking at the data, but hearing what companies are seeing on the ground. And I think the surprise that we've had to economic growth data has really driven a good portion of the higher yields. Yields like lead to the upgrade in economic forecast, a reduction in the recession odds. And there's been a real change in terms of what's priced into the market in terms of how many cuts we'll have by year-end 2024. I think at the start of this year, it was almost 200 basis points of cuts and now it's like 100 basis points of cuts. And that's just kind of an acknowledgment that the U.S. economy has adjusted, by and large, to higher policy rates, that the fractures and the disruption that many people expected from coming off this period of like no rates to something that looks like a more normal from a historical perspective was just going to like completely upend consumers and businesses in every industry across the board, and that hasn't played out, right? I mean it's been a beautiful thing. It's like you should feel great about the resiliency of the U.S. economy. We should all feel really great about it. But the second thing that I think that has driven higher rates, and you mentioned this, is the issuance. Markets are getting excited about the scope for higher term premium. And like I think that the expectation of higher issuance through 2024 is having an impact. But a lot can change between now and like 16 months from now, but that's how I would kind of explain the rise more recently for a very good reason that the resilience and maybe like a less good reason, which is the updated guidance on issuance.

So right now, if you look at sort of prognostications across the Street as it relates to the 10-year a year from now, the median is at 3.59%, the high is at 6.85% and the low is at 2.63%. As you look out a year from now and think about prognostications on potential Fed cuts, the resiliency of the U.S. economy, et cetera, if you fast forward, are you thinking that we're somewhere around that median, about 3.59%, or are you more towards the high end of that or the low end of that?

The high end of that, that we just quoted, which is closer to 7%, I'd say like no. I'm more in the like, we could hover around the 4% space, high 3s to 4% at this time next year. I think that's realistic. You could have a great outcome here, which is that inflation continues to cool, and I will tell you that like our forecast for CPI, core CPI by the end of this year is around 3.4%, obviously subject to revision. We had strong ISM prices paid today, and we're going to be watching CPI super closely next week. But we expect inflation to come down, right, but not like crater. But there's a possibility that we'll have reasonably okay growth and cooler inflation, and it will allow the Fed actually to cut rates a little bit on the margin, especially in the back half of 2024, that continues to support the economy. That's kind of a great Goldilocks-ish scenario. But it's not -- just because it's Goldilocks, it doesn't mean it's a zero probability event. And against that backdrop, you could see rates staying relatively high to recent history, so like in that high 3s, maybe 4%. And again, all of our forecasts of these things tend to be like art, not science. But that's not a bad environment for all asset classes. And actually, I think if we were right on the growth side and right on the rate side and right on the guidance we're going to get from policy, you'd want to stay risk on.

And Goldman just lowered their chance of -- talking about sort of technology telling you things, they lowered their chance of a recession from 20% to 15%. I appreciate that's 5 percentage points, and that's big. I'm sure there's some computer model that came back and said, "Well, it's now been revised from 20% to 15%. We better tell everyone in the world that it's now 15%." But is BlackRock's view similar to Goldman that the chance of a recession in 2023 is almost off the table?

I would say we were more in the Goldman camp than not. But I would say the 15% that Goldman's quoting is actually like a long-run probability for 12 months forward. So when you look at a forward 4-quarter economy, the average recession probability is 15%. Some people say it's up to 20%, 25%, but it's still pretty low. But it's never zero, right? And so they just kind of reverted back to what their long run model was instead of making like a huge pronouncement around some sort of reacceleration. But I will say like GDPNow casting models are expecting pretty good growth. The third quarter expectations for the Atlanta Fed's GDPNow model is at 5.6%, and I'm just going to contrast that with Wall Street forecasts for the third quarter, which were at 2.1%. Even if it's some place in the middle there, that's much stronger growth than many people were expecting, certainly, like 3 months ago or 6 months ago or at the start of this year, and so it feels to me that given the data we're getting, that Goldman is more likely to be right than wrong at this point.

Does politics play in any of this, Kate? I've had plenty of people say to me the Fed's going to hold off on cutting until the beginning of next year, and then they're going to start cutting from a political standpoint, not necessarily an economic standpoint, through the election in November of 2024. Any chance that there's politically-motivated economic activity that happens in 2024 that is outside of what the fundamentals would tell us?

Yes. I'm not a buyer of that idea. In fact, I would say, if anything, Powell and the Fed are going to try and demonstrate their independence from the political cycle. And maybe that causes its own disruptions. I'm not sure. But given how under fire the Fed has been and how critical, frankly, both sides of the aisle have been around policy decisions over the last couple of years, I think continuing to assert independence, continuing to demonstrate data dependency and forecast dependency instead of anything around politics or policy will be really critical for the credibility of the Fed going forward. And that's what Jay Powell has done. I mean I think he has shown himself to be an incredibly credible leader.

And as it relates to that number that you cited as it relates to potential 5% growth on GDP and the Street being down at 2.6%, so let's just swag it and say it's 3% to 4% GDP growth, which would be an outstanding number, a lot of people's concern on the equity markets has been that it's been a thin market. Apple's market cap is almost $3 trillion, and NVIDIA and Apple and a couple of other handful of stocks have really been driving the market. How broad-based does BlackRock see the equity markets today in the sense of, is this really just those few stocks getting more and more investors, which is holding up the averages? Or is it a more broad-based recovery and a more broad-based health in the overall economic system?

I'm so glad you asked this question because this is like center of the debate for the equity market right now because the overall S&P is up high teens, 17% or so. And the equal-weighted S&P has like 1/3 of those gains year-to-date. So there's been a lot of stress about the leadership and how concentrated the leadership has been. I did a little exercise for our team looking at the concentration of the top 10 names over the last 25 years. And we are at one of the highest levels of concentration where about 1/3 of the market cap is dominated by kind of the top 10 names right now. But it's even more than that, right? It's not just about the market cap dominance. It is also about like the amount of airtime certain companies and certain stories get over the rest of the broad market. And so it's like natural to be a little anxious about it and to say like, is this sustainable? These numbers look huge. But look -- and for people who missed out on the big names, which is I think we're hearing a lot of noise from them, they've missed out on those names, it's been a real concern about like, hey, should we be really worried about the market. And by the way, they want people to be worried about the market so they have a chance to like re-up on some of those names. But our systematic team did some great analysis looking at whether market concentration should be a risk to the overall returns and whether or not it's even a trading signal, right, like high market concentration, high leadership means like you sell the market. And actually, the data doesn't play out that way. Historically, it has not. So it's not been a massive risk when we've had high concentration in the past, and kind of that simple directional trade, sell when concentrated and buy when less concentrated doesn't work. So we're not overly stressed about it. We're watching it, of course. But I think the companies that have led the market are outstanding companies, by and large, who have been able to grow through all parts of the economic cycle, who have resilient balance sheets, strong and broad business lines and have been raising their guidance. All of those things are incredibly positive.

So you mentioned previously, Kate, oil, and oil has crept from $71 a barrel in 3 months ago to $87 a barrel today. Interestingly, a year ago July -- that's the only number -- I can't do a year ago off of September 4th or July 6, but I can do a year ago off of July -- oil was at $110 a barrel, and it came down dramatically to $70 and obviously, it's had a huge impact on removing inflationary pressure from the economy. We're now at $87 a barrel. We've got Saudi Arabia and Russia coming out today or yesterday saying that they were going to extend their restrictions on both pumping as well as exporting oil between now and the end of the year, and that's added additional pressure to the cost of oil. How concerned should we all be? I mean if we saw oil go from $87 to $100 a barrel, does that take a lot of what you and I have talked about so far today as far as it generally kind of a Goldilocks scenario as it relates to GDP growth and where interest rates are going to be kind of off the table?

I think [ $100 ], and I spoke with some of my oil analysts about this so I don't like get totally offside, feels like a ceiling. I mean that feels like kind of the upper end of where we could go.

Wait, that's $100 or $87?

$100. I mean could we creep past $90? Totally. And I think your point around what the Saudis have done and the Russians have done in terms of extending their cuts of 1.3 million barrels a day throughout December or through December is a signal, and it's a signal that probably the floor for oil is somewhere around $60 to $70 a barrel and maybe even a little higher, closer to $80. Remember, it's not just the production cuts, but it's also been like relatively robust demand, not just out of the U.S. but like diesel demand out of China and things like that. So you had both supply and demand supporting this move up. And frankly, a lot of skepticism that it is sustainable because there have been so many recessionistas out there. And there have been so many people who've been freaked out about economic growth. Just there's other things to kind of keep in the back of our mind. I mean the Saudis are likely to want to continue to support prices. The government and social spending programs look for about like an $80 a barrel breakeven in order to finance them. And there are plenty of other countries, and Russia, of course, is in this camp as well. They desperately need the oil dollars. So I think we're going to see a lot of these moves on the margin to support overall domestic spending. And so prices may be range bound, but I would expect $100 to be kind of the ceiling. I think that's a point where given where the dollar is and given what would happen to demand disruption at that point, we couldn't sustain.

The VIX right now, Kate, is at an extremely low point. The VIX is like, I just looked at it yesterday, it's like at 13 or something, and it was 25 a year ago. It strikes me, you look at global politics, you look at big tectonic plate shifting and what's happening in the world, is a 13 VIX sort of because everyone's been in Nantucket on summer vacation and not really focused on what's happening in the world? Or is that a true indicator of the fact that we really don't have a whole lot of -- I mean it obviously is the volatility index. So I'm not trying to say the number's wrong. But it just seems to be with everything going on in Ukraine and everything going on with China and an election 14 months from now in the United States and a bunch of other pretty hairy issues, that a VIX in the low teens seems to be unreasonably low, if you will. Is that -- am I reading too many headlines that are scaring me and should actually look at the fundamentals?

No. I mean look, I think the macro investors in general tend to read too many scary headlines. And then there was a joke that we'd like had before, which is sort of macro and fixed income investors like to be right and equity investors like to make money. And so -- which means we do have to tend risk when there's uncertain information or like incomplete information. On the VIX though, I think a couple of those things that you said do make sense, right, like there was lower volumes in August. Does that alone contribute? No. People are more sanguine on the economy. That contributes. And very importantly, this isn't an indicator I watch really closely, are earnings revisions and specifically, the earnings revision ratio. That's the number of upgrades relative to downgrades. Not -- you can look at it by sector and industry and by country. But globally, earnings revisions are improving. People are feeling better about risk and better about growth, which I think is contributing to lower vol. And historically, when earnings revisions are at these levels and continue to improve, that's been quite good for risk asset markets. We see vol like can stay pretty contained when the grind is higher instead of lower.

So that's a really interesting one as it relates to earnings revisions and then the overall sentiment in the market. One of the data points that Larry mentioned when he was on CNBC was that you all, just BlackRock, have $7 trillion of money in money market funds today. And my question when I heard him say that was what happens when people have conviction on the market and that $7 trillion comes out and actually gets put into the market?

Yes, I mean that would be phenomenal. Look, I have a confession to make, and I'm like a super honest, open book person. I own a bunch of money markets in my PA. That's because my entire life is geared to the rest of asset market, so I have to do some hedging there. But it's pretty awesome to get 5% for doing absolutely nothing, although on a real basis, inflation adjusted, it's not like as amazing as it looks at the headline, right? It's true. There's a huge amount of scope for reallocation out of money market funds into other riskier assets, and bonds are riskier than money markets, of course. I can't speak specifically to some of the BlackRock flows. Some of that data we're not meant to share, but I'll talk about the EPFR flows, which are really important. So year-to-date, there's been something like $87 billion of net new money put into equity funds. But that's mostly into ETFs because there's been a withdrawal from actively managed funds. You always see that after a year of poor market performance, people take their money out of higher fee products and just like if they're going to...

Save those fees, right? Exactly. It's so short-term focused, it's ridiculous. Anyway, I know you guys do really well with that, but it always flabbergasts me that people say, actively managed is the wrong place to be because I had a bad year. And it's like, why are you looking so short term on this one. But anyway, that's my one bit for active managers.

I know BlackRock does well, Matt as well, but I sit on the active side of the business. So that's where I've hitched my cart for sure. And -- but then there has been this phenomenal inflow into bond funds, and equity funds, it was like only 40% of the overall bond inflows this year. But of course, bond returns with yields going up like this haven't been great either. So I just think there's a lot of volatility in the flow. And what happens is the Street and like financial advisers and these private wealth organizations come out with a call, like bonds are back. And so there's a lot of flow -- there's like a trailing amount of flow that goes into that. And -- but there's a lot of room if people regain confidence in the economic outlook, don't think the summer rally was a blip, but actually, we could see a grind higher in equities and inflation comes -- starts to come down a little bit, you could see a reallocation into more risk assets. And by that, I mean not just equities, but also into credit.

So final question for you, Kate. Last time, I asked you what's the one thing that we're sort of not focused on that would concern you, and you made the prescient comment of any significant change in the rate environment would unnerve me. Now we're here with a 34 500 Dow, and I know you look at the S&P more than the Dow, but that's the number that I had on the top of my head. We've got a 4-, 20-, 10-year, you're looking at GDP growth in the back half of the year in the sort of 3% to 4% if you're taking the average of the two numbers that you gave earlier, pretty Goldilocks scenario. What's the thing that makes -- keeps you up at night as it relates to your team focusing on one area that could say, hey, that moves. Is it oil? Is it credit card defaults? Is it commercial real estate default? Is it the banking system? What's the thing out there that you all are focusing on that could be the canary in the coal mine that says that the outlook isn't going to be quite as rosy as we're projecting?

Well, one of the things I'm really watching, Willy, right now is the disconnect between small business optimism and large business optimism. So you know that small businesses are the majority employer in the U.S. And there's this huge disconnect. And there's lots of different surveys you can look at. I love the Richmond Fed data, and they ask two questions of those cohorts, which is like what is your expectation for growth for your own company versus what is your optimism level for the economy? And for large companies, there's been a big spread actually for the last, like, 4 to 6 quarters, where companies are much more constructive on their own company than they are in the economy. But both -- for large companies, both the optimism around their own prospects and the economy has started to improve. And for small companies, it's deteriorated. Like the tightening financial conditions has had a really significant impact on expectations for our future growth for these companies because they say like, I may not have access to the financing going forward that I need in order to make my investments or increase my payroll or whatever the heck it is. So I worry about this disconnect between small and large, like we may have a very different experience in the stock market and large companies than we will have like for smaller companies, which are really important for the economy. I'm not -- it's not keeping me up at night but it's something that bears watching.

Kate, it is always fantastic to spend time with you and get your insights on the market. They're so well formulated and they got so much data behind them. It's been a real pleasure. Thank you so much for spending the time. It's fantastic. And I know you're still in Jackson Hole. As you head back to Gotham, good luck reentry into BlackRock's 4-day-a-week policy as well as coming back to New York. Thanks, everyone, for joining us today. We'll be back -- I think I'm taking next week off. I'm on vacation next week. And so a week after next, we're back with another Walker Webcast. So Kate, thanks again, and I hope everyone has a great day.