Larry Fink, Chairman and CEO at BlackRock, spoke with Erik Schatzker on ‘Bloomberg <GO>’ this morning.
Larry Fink said governments need to embark on fiscal stimulus to boost the economy: “If we continue to have what I would call a dependency on monetary policy worldwide, I think it is very grim. We are harming savers worldwide with low and negative interest rates.” He said monetary policy has “run out of runway” and called the Bank of Japan’s negative rate policy an “outright mistake.”
He said the Fed will raise interest rates “at best” by another quarter point this year because of weak corporate earnings and uncertainty about the global economy: “I would probably lean more towards a 25 basis point increase. Let’s see what happens with the Spanish elections in June, the Brexit elections in June, how the U.S. economy performs in the second quarter. And importantly, what is the consumer’s mood into the primaries and after the primaries?”
On China, Fink said: “In 2016, China will look way beyond what we thought it would look like economically, GDP-wise, in 2016. It may mean the bubble is bigger for ’17 and ’18.” When asked about the odds of a bubble burst, he said: “twenty percent.”
Larry Fink: Economy Not Growing as Fast as Fed Expected
Fink: 20% Chance China’s Bubble Could Burst
ERIK SCHATZKER: Larry, good morning to you.
Larry Fink: Hi, Eric.
SCHATZKER: Thanks for being here.
I found an obvious place for us to begin.
This afternoon, the Fed reports its statement on monetary policy.
What do you hope to hear from the central bank?
Larry Fink: I think it will be very similar to the last statements in January. I think conditions have deteriorated since December but improved since their last statement last month.
I think they are worried about corporate earnings. I think they’re seeing a real slowdown with U.S. companies. You still have global uncertainties, you have uncertainties of Brexit.
So I think they’re going to be on pause and they’re going to wait and see what happens in the world and how our economy plays out.
SCHATZKER: Are you worried about corporate earnings?
Larry Fink: Well, I think corporate earnings have shown a pronounced weakness. I don’t think it should be a surprise, we had a huge slowdown the first two months of the year.
A lot of fear, a lot of consumers pulled back. We have an election here in this country where I think there is more fearmongering than talking about hope and a renewed future. So I think onsumers will hold back.
And I think it’s evident — the economy grew at 0.6 percent or 0.8 percent after a very anemic fourth quarter. So I think it is all playing out that the economy is just not growing as fast as we expected, as fast as the Fed expected. So they will be on pause until they see an elevated increase in the economy and an elevated increase in corporate earnings.
SCHATZKER: Well, let’s talk about that for a moment. The dots, the dot plot tells us that the FOMC still plans to raise rates by 50 basis points this year. The market, according to Fed Funds Futures, tells us that we will only see one 25-basis point hike. Jamie Dimon, for what it’s worth, says he is worried that the Fed will have to raise rates too quickly to catch up with inflation.
What do you think?
Larry Fink: I think there’s pockets of inflation, especially in the high tech wage area. But I think around that, there is very little inflation.
Obviously we have seen an increase in energy prices from the very deep lows. I don’t see any evidence at this moment for inflation. But I can paint the scenario why inflation will pick up in 2017.
But I don’t think that is an issue for 2016. And they have essentially another seven months to determine that path. I would probably be in the camp of 25 at best this year.
SCHATZKER: At best and possibly flat?
Larry Fink: Yes, I would probably lean more towards a 25 basis point increase. Let’s see what happens with the Spanish elections in June, the Brexit elections in June, how the U.S. economy performs in the second quarter.
And importantly, what is the consumer’s mood into the primaries and after the primaries?
There will be plenty of time for the Fed to act. So I think it is appropriate for them to be on pause.
SCHATZKER: Is the inflationary scenario you see for 2017 the odds-on scenario?
Because as you know, the biggest private equity firms — I’m talking Blackstone, KKR, Carlisle — are predicting a recession within the next two years. A recession does not usually come with inflation.
Larry Fink: I think there are two very binary outcomes. And I don’t know what path that will be.
I believe — I have been saying this quite a bit worldwide recently — I believe what is happening in Spain with the lack of government since the elections in November, and they will push now the new elections in June, so there is not really any real government there.
You have the fear of Brexit in the U.K., we have the phenomenon of new party leaders in the United States with Donald Trump and Bernie Sanders. And I think all of this is an issue around how many people in these democracies feel like they have been left behind and they are worried about their children’s future.
So I believe all of these elements, this political instability is going to force whoever is the leaders of Spain, of the U.K. and the United States, we will see probably greater emphasis towards fiscal policy.
And I think this will be key. And if there was a major increase in fiscal policy — and I do believe that the candidates in the U.S. are Trump and Clinton — I think both candidates will be talking about fiscal policy stimulus in the form of infrastructure.
SCHATZKER: The problem of course is that most of the people who support these candidates whom you speak of, whether it be here or in Europe, want the government to spend more money.
If we were to look at the debt-to-GDP levels in places like France or in places like Spain, spending — here’s a chart — spending more money isn’t really an option, is it?
Larry Fink: Well, France, definitely, is progressively getting worse. Spain, no; but in the U.K., with its economy, and in the U.S., if you spent it in infrastructure, that will be front-loaded expense. But on the back end, it does produce positive GDP.
You are creating jobs, creating better and more efficient grid, better and more efficient roads, ports, airports. So you can get a mileage out of it. So I believe that is what we need in this country.
And I believe every politician is going to have to address this uncertainty, this political uncertainty of — you know, we have to ask ourselves, why are we seeing these phenomena in so many countries?
And I think that will be the narrative after the primaries.
SCHATZKER: OK, so,