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, Larry, when we come back, I want to take that view and translate it to markets and investing.
We are speaking with Larry Fink, he is the chairman and CEO of BlackRock, the world’s largest money manager with $4.7 trillion in assets.
SCHATZKER: This is BLOOMBERG <GO>. I’m Erik Schatzker here at Bloomberg World Headquarters in Midtown Manhattan and I’m speaking with BlackRock’s chairman and CEO, Larry Fink.
Larry, you were just telling me how you see the economy evolving and, frankly, it is not a pretty picture. But there’s this silver lining that you’re talking about, fiscal policy. Here’s what I would like to know.
If the economy is growing at 2 percent or less — and that’s what the Fed tells us and that’s what pretty much everybody else tells us — how constructive can you be in the stock market?
Larry Fink: If we see a path towards more fiscal policy and more investing in infrastructure going into 2017, we can see a second leg of the rally in equities. We can see monetary policy changing rapidly.
And if that’s the case, you would see rising rates, faster than we forecast. We would have industries that probably have underperformed out-perform. You would have bank stocks doing very well in that scenario. You would have many of the commodity companies that have done very poorly, especially the cement and all those types of — for manufacturing and infrastructure investment, you will see those types of industries doing much better.
SCHATZKER: That’s a big if though.
What if it doesn’t happen?
Larry Fink: If we continue to have what I would call a dependency on monetary policy worldwide, I think it is very grim.
SCHATZKER: What is grim?
Larry Fink: Well, grim is we are harming savers worldwide with low and negative interest rates.
SCHATZKER: You’ve been speaking out about this.
Larry Fink: Well, I think we have forgotten why people save. They save for their rainy day, they save for events, the events of buying a house, the events of their children’s advanced educations. They save for events like retirement.
When you have low or negative interest rates, it forces you to save more to get to that necessary pool of assets you need at retirement. And I think monetary policy was meant to be a two- to three-year gap to bridge the economies. And I think they did a very — I think the central banks were very courageous.
But I think for governments to be so dependent on monetary policy as the sole means to stimulate the economy, to rebuild the economy, especially at a time when technology is advancing more rapidly; it is destroying jobs very rapidly — in our country, we are using the mantra that it is global trade that’s doing it. It is more technology than just global trade.
SCHATZKER: So let’s put some numbers to grim.
What is the bear case?
If we don’t get this fiscal injection, if we don’t get this infrastructure spending, what happens to the stock market?
What happens to Treasuries, which are now 190 on the 10-year, what happens to credit spreads?
Larry Fink: We will have a very anemic to declining equity market. It doesn’t —
SCHATZKER: Will we have a recession?
Larry Fink: We may if we see more fear, more hoarding of cash.
I think the biggest surprise by central banks, they talk about hoarding of cash. I don’t call it hoarding of cash. I call it saving because they need to save more because of slow and negative interest rates.
We need to understand that the psychology of retirees — and we have aging population — the psychology of people who are near retirement is fear, is fear that they are not earning enough to meet the needs of their lifestyle that they so desire.
SCHATZKER: You believe, though, that this fiscal injection is coming.
So when you mention bank stocks, is that where you see the greatest value in the market?
Larry Fink: Well, I think bank stocks, especially the banks that are trading 0.6, 0.7 of tangible —
SCHATZKER: The Citigroups, the BofAs…
Larry Fink: — the Barclays — I mean, we could go across the world and select some stocks —
Larry Fink: — so I think if we had that type of stimulus that I’m talking about, we would have — the central banks could take their foot off the pedal. It would mean they could moderately raise rates, maybe at a more accelerated rate, and that would be very good for savers. It would be very good for financial institutions’ earnings, very good for insurance companies to offer annuities again.
SCHATZKER: But that is not happening right now.
Larry Fink: No, it’s not.
SCHATZKER: So tonight, Mr. Kuroda and the Bank of Japan are meeting.
What on Earth does he do?
Because the last time he doubled down in January going negative —
Larry Fink: It was a mistake —
SCHATZKER: — right?
Larry Fink: — it was a —
SCHATZKER: The yen strengthened. The Nikkei sold off 13 percent —
Larry Fink: — it was an outright mistake. And that was one of my points of information that gave me this change of use related to fiscal policy. Monetary policy has run out of runway. And it’s —
SCHATZKER: So when he tells the government we could still go to 0.5 negative?
Larry Fink: But keep in mind, Abenomics has not even begun. We talk about Abenomics and we talk about the three arrows in Japan, Abe has not even begun the his third arrow and that was — the whole process of what Japan was trying to do was restimulate the economy through aggressive monetary policy but the second phase, the third arrow —
SCHATZKER: But if you’re Kuroda, what option do you have right now?
Larry Fink: Kuroda has to go talk to the prime minister and say I ran out of runway.
I think it’s evident he ran out of runway; negative rates is —
SCHATZKER: So, in other words, Bank of Japan monetary policy no longer works, in your opinion?
Larry Fink: I think it has not worked recently and I think it’s going to continue to not work. And Japan is a great example. We should be looking at what happened in Japan.
Japan is a nation of savers. Most of the savings are in bonds. And, as a result of that, the savers are now saving more; they are pulling back — consumption has not met — all the forecasts in Japan. And it’s a fact because if consumers in Japan are pulling back — at the same time, Japan’s benefiting by all the Chinese who are coming there for tourism and buying food and other items.
And still, Japan looks like it is going to be zero — an economy with zero GDP. So it’s failing.
SCHATZKER: What about China, then?
If it’s these Chinese tourists who are coming to Japan, Japan may be benefiting from that.
Larry Fink: China is putting their foot on the pedal as fast as any economy right now. China, I think — I have been in China twice so far this year. I think China was — I think the Chinese leaders have done a better job in trying to reboot its economy than most leaders of the world.
We are in the fourth year of the Xi government 10-year plan. It is about reorienting the economy from — moving it away from an export manufacturing economy to a domestic service-oriented economy.
Unfortunately, that takes tens of years and it is not without many hiccups. Ad it looked like there was going to be a major hiccup and there was some very bad communication by the Chinese which led to the market fall in January and February.
I think they re-stabilized their effort related to their messaging. And I do believe what they are doing now is doing very aggressive monetary policy in China right now.
The banks are lending at a rate that they have not done before. So indeed, 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. But in this year, especially in light of the Chinese are the host of the G20 in September, they will want to make sure that their economy is a beacon of strength, not a beacon of —
SCHATZKER: The bigger the bubble, the bigger the burst, though.
Aren’t you afraid of that?
Larry Fink: It could happen.
SCHATZKER: It could happen?
Larry Fink: It could happen. I would — first of all, the economy is still growing at 6-ish percent. It could — when you grow at that rate, you can navigate out of this problem if the next phase of growth is not by a ballooning balance sheet.
SCHATZKER: But if not, you get the bubble bursting. And I’m sure you’ve seen the estimates, that if that were to happen, given the levels of bad debt already on bank balance sheets in China, that the losses in the Chinese financial system could be 4X what they were for U.S. banks during the subprime crisis.
Do you believe that?
Larry Fink: I don’t know if it’s that large. But I do — you know, I think many of our hedge funds believed it was going to be an event in 2016. They’re going to need to devalue. And I went out publicly and said that is not going to happen and it’s not going to happen in 2016.
Am I worried about in the manner in which they are accelerating their economy? Yes.
Does it mean there is more potential for a bubble and a burst? Yes.
But it may not happen if they navigate this, if they reorient it, if you see more —
SCHATZKER: What do you think the odds are?
Larry Fink: Twenty percent.
SCHATZKER: Twenty percent of the bubble bursts. So 80 percent that China makes it.
Larry Fink: Yes. But I don’t like the 20 percent.
Larry Fink: But I think in 2016, you’ll will look back and say, I wish I was in China.
Larry Fink: I think the equity market will do fine this year. I’m not telling you it is a great long-term trade.
SCHATZKER: Larry, we talked earlier about political extremism and how it is driving leaders and candidates to make certain decisions and take certain positions. It has been a tradition in this country for the presidents to reappoint Fed chairmen, even if there’s been a change of party in the White House.
Reagan did it for Volcker. Clinton did it twice for Greenspan.
What is going to happen if there is a Republican in the White House?
Will Janet Yellen get kicked out?
Larry Fink: I don’t know. I haven’t thought about that.
SCHATZKER: What if she did?
Would that be bad for markets?
Would that be bad for the economy?
Larry Fink: It may be bad. It depends on who would be the replacement, the degree in how this is being messaged —
SCHATZKER: But the mistake is stability. That’s why it was done before.
Larry Fink: It would probably be thought of as bad.
Keep in mind, the transition from Greenspan to Bernanke was considered a frightening moment and then from Bernanke to Yellen — if you get a qualified chairperson, you will end up being fine. And I’m — I think Janet Yellen has been a fantastic —
SCHATZKER: — before I run out of time.
Given the climate and what we’ve heard from the candidates, can any president right now, Republican or Democrat, pick a Treasury Secretary from finance or Wall Street?
Larry Fink: I would hope whoever is the president would pick the most qualified person, whether it is finance, manufacturing or somebody who has had a long career in government. We need leadership more than ever to guide our nation forward.
SCHATZKER: Larry, I thank you very much for spending time with us here on BLOOMBERG <GO>. Larry Fink is the chairman and CEO of BlackRock, the world’s largest asset manager.