BlackRock, Inc. (NYSE:BLK) CEO Larry Fink joined Bloomberg Television’s Erik Schatzker and Sara Eisen on “Market Makers” today and said he does not see any inflationary risk in the United States. Larry Fink went on to say that banks may shrink balance sheets on rules requiring financial companies to have higher capital ratios: “If they shrink their balance sheet, we’re going to have a more aggravated problem in the future because banks are the largest owner of U.S. Treasuries.”

Larry Fink

During the hour-long interview, Fink gave insights on China, emerging markets, the bond market, the role the wants BlackRock, Inc. (NYSE:BLK) to play in the market, and his thoughts on Ben Bernanke, Hillary Clinton and President Obama.

 

Larry Fink on what CEO’s are asking him:

“In most cases, I am asking them a lot of questions. In terms of regulations and political figures, they’re asking me what we are seeing. I think the biggest question being asked today is where interest rates go. Another question is China going? Those of the two biggest uncertainties in the marketplace. It is funny – most people don’t ask the question about Europe. Europe is now third or fourth on the list of worries.”

Larry Fink On where interest rates are going:

Interest rates have backed up about 90 basis points. We have seen a drought on mutual funds in the past few days. We are still at a historical low. This is a problem that I see for bonds. We were at such historical low rates. Normalized rates are higher. Even government estimates for treasuries for 2015 is 5%. We talk about deficits – interest rates over the course of years will be higher…I don’t get frightened when you could forecast this out over years.

To me, it should not be a shock to anybody. To me, you know, rates are going to go higher. It will be dependent on economic information. So we’re going to see a buy toward higher rates…My view is the economy will continue to improve. Implement will continue to improve. Europe is stable in my view. We are going to see a rising interest rate environment.

Larry Fink On whether you can be 100% in equities in a timeframe of sustained higher interest rates:

“We need to see earnings for this quarter. It is my view for many reasons that being in equities and the suggested is the right trade. We have seen some very large moves. The long U.S. Treasury Market is down close to 10% year to day. S&P is up 16%. We have had a 26% change in valuation in six months. Obviously, a lot has occurred. For me to tell you equities will rally, I need to be certain that earnings are going to remain strong. From my conversations with many people, I believe earnings are not going to be missing estimates. Earnings will come in by and large bias. We saw that already with Alcoa yesterday.

Larry Fink On what his survival strategy is and his advice on what people should be doing:

“For those who have the ability to lose equities – I am using that as a mouthpiece to try to have people think about that. Most people cannot do that and most people should not do that. [Insurance Companies] are not allowed to do that. If you compare 1994 to this, it is different. There was much more flexibility. You had a 6% increase in interest rates. Much of the reason why it is muted today, most institutions are inhibited to own equities.”

Larry Fink On whether there is anywhere that is a better bet:

“There is going to be a great rotation in bonds. It is going to be within the bond universe. We have been talking to many pension plans, insurance companies to start thinking about moving away from bond funds that are targeted to duration. Most bond funds are core that are targeted to the Berkeley Aggregate Index. The problem of being targeted to this index, we have an aggravated problem, extended duration. At the beginning of the year, it has a duration of 4.8 years of risk. The mortgage prepayment issue that is embedded in the aggregate index is now five and a half years. It is riskier to own that bond fund today that it was in January. We suggest to move to unconstrained bond funds where duration is not targeted to the index.”

Larry Fink On the “well-known west coast bond fund manager” who has been betting on inflation:

“It is my view that inflation will be very muted. I don’t see any inflationary risk at all…I have a different outcome in terms of economic future. I think we are going to be in a two percent or three percent economy. We are going to have improving labor markets. Much as to do with energy in this country where we see a change in manufacturing in this country. We have a huge opportunities for job growth in the manufacture sector.”

Larry Fink On whether he feels that the bull market in bonds is over:

“I think I said that two years ago when I said you should be in 100% equities. It is my strong view that we are going to be in a cycle now whether it is five years or ten years. We are going to have rising rates.”

Larry Fink On whether he worries about a market that some say is addicted and hooked on quantitative easing:

“I think the two things that have happened why the statements aggravated the market so much. It is the change of direction. It is the beginning of a major change. We were accustomed to the old. That is upsetting to the world when you have a major policy change. I don’t think it will be as bad as people fear. The markets are not giving enough attention to this. I will be very surprised if the Treasury in the next few weeks announces a huge reduction in their need for bond issuance. At the same time, we may see a change in FED policy where they will reduce the amount of bond purchases.

At the same time, the Treasury is reducing its issuance. That is not on the market yet. There may be a timeframe for stability.  We could see a significant 20% or 30% reduction in treasury instruments. They will announce in the next few weeks or so. The CBO are confirming what other estimates came up with, a reduction. I would have been just as worried if the FED does not slow down purchases as the same time treasury reduces issuance. The FED would then be buying 130% of new issuance.

At the same time the FED is changing policies and people started running to reduce exposure in bonds, we have had regulations inhibit and in some cases prohibit activities by the market makers. So the Volcker Rule is inhibiting positioning by broker-dealers of bond holding to

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