WHEN: Today, Wednesday, January 16, 2019
WHERE: CNBC’s “Squawk Box”
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with BlackRock CEO Larry Fink on CNBC’s “Squawk Box” (M-F 6AM – 9AM) today, Wednesday, January 16th. The following are links to video from the interview on CNBC.com:
Watch BlackRock CEO Larry Fink break down the company’s Q4 earnings
Here are BlackRock CEO Larry Fink’s market predictions for 2019
All references must be sourced to CNBC.
ANDREW ROSS SORKIN: Welcome back to “Squawk Box” this morning. BlackRock just out with quarterly results, and we have the man behind them: Chairman and CEO Larry Fink. He joins us now to talk about the numbers and much more. Good morning to you.
LARRY FINK: Good morning everyone.
ANDREW ROSS SORKIN: We’ve got a lot to talk about. Before we announced the earnings or you announced the earnings and we reported them, during the tease, I had said, “More than $6 trillion.” And now –
LARRY FINK: -- It’s just shy –
ANDREW ROSS SORKIN: And now the number has come under –
LARRY FINK: Yes. Yes.
ANDREW ROSS SORKIN: -- $6 trillion. Missed --
BECKY QUICK: Apparently 5.98.
LARRY FINK: 5.98. Actually, today it’s higher.
ANDREW ROSS SORKIN: So, but just speak to what’s happened in the market and what’s happened in the marketplace. Because, clearly there have been outflows. Not to the extent of some of your competitors –
LARRY FINK: Well we had inflows. So we had inflows in the fourth quarter. We had $124 billion or $123 billion of inflows throughout the year. The industry had huge outflows. We had – I would say, the year was a year of records, good and bad records. We had, which even surprised us, we had record inflows in ETFs and iShares in the fourth quarter. And we had $81 billion of inflows in the fourth quarter in ETFs.
ANDREW ROSS SORKIN: How much of that, by the way, was in the last two weeks?
LARRY FINK: I don’t remember the last two weeks. But it was -- what I do remember is it was pretty spread out. And I could get into the composition of what happened there. And over the year, we had record inflows in our alternative space of $16 billion. And then in the center, that’s where we had outflows. So the -- you’re seeing the hallowing out of the center. You’re seeing the barbell of alternatives and index products becoming more and more dominant. And we’re seeing that throughout the industry. We estimate the industry’s mutual fund worldwide was -- had -- minus ETF’s had outflows of about $450 billion in 2018. And so, in addition, we had record revenue increases in our technology business, up 19%. So, where we saw the negative, we had about $90 billion of outflows in the index mutual funds, where people just take exposures. Now that’s a full year.
BECKY QUICK: That’s the low fee stuff, too, right?
LARRY FINK: Tiny.
BECKY QUICK: Yeah.
LARRY FINK: Even with that, our institutional business had net new revenues. So without the outflow – even with those outflows, because of the composition and more alternatives, we had increases in fees in our institutional business.
BECKY QUICK: That tells you the difference between the institutional and retail investor, or what does that show you?
LARRY FINK: Well, no. I would say across the board. And let’s step back for a second: investors have a real choice to pause, unlike the last ten years. They can put money in a money market fund, and earn close to 3%. That is another reason why we saw outflows and fixed income. You can be in a money market fund instead of having any duration --
ANDREW ROSS SORKIN: Right. Do you think that’s changed the psychology?
LARRY FINK: Totally. Absolutely. Because you are paid to pause. But overall, I think the biggest issue, as you discussed, Andrew, we had huge equity declines in the fourth quarter. We had commodity declines. We had about a 5% decay in our asset base; not because of outflows, just because the market fell.
ANDREW ROSS SORKIN: Right.
LARRY FINK: And that’s what you saw in our assets. I mean, we have benefitted as a firm over the last ten years with rising equity markets. We believe over the next ten years, equity markets are going to be higher. But we are going to see those types of swings. Now, we all know the fourth quarter was a pretty severe down draft in the equity markets. And that reflects in our NAB. But we had organic growth, unlike a majority of the industry. And we are -- let me just say one thing. What I think is really differentiating us and, also, I think it’s changing the whole composition of the markets: we’re seeing in the wealth and retail side, investors move away from stock picking, moving away from buying a product to working on models and really now portfolio composition. We all know -- and all the academics will say 80% or 70% depending on the academic -- of the performances through asset allocation. Now, I’m not trying to suggest everybody knows how to do a proper asset allocation. But we’re seeing less focus on an individual stock, less focus on a product, and we’re seeing more of the wealth managers and their firms focusing on portfolio composition. This is how we have been always talking about it at BlackRock. We’ve talked about we’re a solution provider, we’re working on that. We have had many models for asset allocation. We have risk management tools. And so, you know, we are benefitting by that change. And I think 2019, I think we’re going to see some very large benefits by providing the risk technology. I think, we announced about Morgan Stanley, all our financial advisors now on Aladdin for wealth management. We had more demand for that product than almost anybody --
ANDREW ROSS SORKIN: That’s your technology platform, just so everybody knows, that’s clear.
LARRY FINK: Yeah. We announced last week that we are now using iShares as a technology with Royal Bank of Canada. Now they’re using the iShares platform for their own ETFs, so we’re white labeling our ETFs, they’re using our technology, it is going to say to their clients RBC iShares. We have –
ANDREW ROSS SORKIN: How much – do you have a big business doing that already?
LARRY FINK: This is just the first one -- beginning that I believe it’s going to be quite large.
ANDREW ROSS SORKIN: To do a white-label branded service for --
LARRY FINK: But also using our technology and then intersecting that, and it saves them a lot of money, too.
ANDREW ROSS SORKIN: But that’s – that’s not just a brand licensing situation.
LARRY FINK: No we are doing the manufacturing for them—
ANDREW ROSS SORKIN: Gotchya.
LARRY FINK: -- similar to what we have done, you know, with other firms.
ANDREW ROSS SORKIN: Speak to this, because I know a number of your employees and other people on the street want to understand it. You did announce a layoff plan.
LARRY FINK: Yes. We did it already.
ANDREW ROSS SORKIN: I know, but just explain what that’s about.
LARRY FINK: Well, it’s a painful moment for me. It’s a painful moment for many people. We have grown in our head count by 7% a year for five straight years. Not all of our businesses were performing at the levels, but most importantly, we needed to find -- we needed to reorient the organization. We needed to be -- we needed to have the capacity to invest in all the new areas that we see where we could we could invest. And we determined the best way to do it is to re-footprint some of our areas in the world.
ANDREW ROSS SORKIN: But that was mostly just across – wasn’t it --
LARRY FINK: It was across the world –
ANDREW ROSS SOKRIN: -- across the board?
LARRY FINK: It was but -- there was some concentration in some of the businesses where we believe, you know, there’s more to do. But from January 2018 to now, even after that, we’re up 3% head count growth. So it was just more of a reorientation that we thought we needed to do. We don’t have a culture that weeds out 5% like some other firms do. So we don’t have -- we believe that creates a negative culture. But, unfortunately, sometimes we have to do this. This is probably the third time in the last, I don’t know, 15, 20 years, we’ve done something like this. So, I don’t enjoy it. I went home depressed. But it is what it is.
JOE KERNEN: I’m going to ask you about bond and stocks. Because, I mean, I think that you’re like, obviously, from your career, you’re one of the greatest watchers of the bond market and interest rates and mortgages and everything else. But I think – I give you a lot of credit for stock picking, and just for the market as well. So I want to ask you about both markets, okay? Well, what do you want to do first: stocks or bonds?
LARRY FINK: Whatever you want to do, Joe.
JOE KERNEN: On December 24th, did you get the feeling that every -- that -- were you at that point wondering -- I think what we needed to convince most people was you can’t just assume this is a garden variety correction, you better be ready to run for the hills. And that’s the kind of feeling you need to make a bottom. Do you think we made that bottom on December 24th? Or do you think that there’s something on the horizon that means we’ll go back and test those, and maybe go lower? I mean, in your gut, what do you think?
LARRY FINK: I think in the short run we probably hit a bottom.
JOE KERNEN: That lasts how long?
LARRY FINK: Well, it really depends on what happens geopolitically. If you can give me an answer of where we are going with our trade negotiation with China, what is going to be the ultimate outcome of the U.K.? We also have a lot of noise around our shutdown. You know, and all that just produces some uncertainty. And whether it’s a CEO who is going to defer a purchase or that individual who is going to defer a purchase, you know, you are seeing the seeds of a global slowdown. So we have never believed we’re seeing the seeds of a global recession.
JOE KERNEN: Right.
LARRY FINK: And I know there are people who believe that. We believe that the U.S. was going to contract anyway. The birth of the tax cuts. We’re going to normalize. But now we have all this uncertainty, which is probably accelerating this.
JOE KERNEN: But sentiment wise, do you think we run enough complacency out of the average person to where you can make a decent bottom? I mean, did you feel nervous at that point and say, “Whoa”?
LARRY FINK: You know, I think that pervasiveness of negativity would give you a –
JOE KERNEN: Okay. Let’s go back. You know what we’ve talked about so many times – you worry about savers and retirement and everything else. So you wanted higher rates. Are you surprised that two and a half or two and three-quarter percent dip that that actually -- that started actually having an effect on the global economy? I would have thought we could go back to four or five before.
LARRY FINK: We got up to 320 and –
JOE KERNEN: On the ten-year. But on just – can you admit, are we – this is a new normal, if you will, a new normal.
LARRY FINK: So I said this on this show: I think some of the changes which creates, I think, an accelerant, I think our cap on the deductions is an accelerant. Because we know the blue states have already been hurt by this cap because of state and local taxes. But as you start beginning to see rising mortgage rates, rising interest rates, that cap starts impacting even other parts, even in some red states where you have high property tax. And so I think there’s different things that create probably more of an accelerant of slowing down that we’ve seen other times. Because, I think you are right, Joe. It’s hard to explain. We got up to 320 in the ten-year, and, yet, we had this global –
JOE KERNEN: I mean, are you okay with the Fed stopping here or one or two hikes after this?
LARRY FINK: I think the Fed talk right now is appropriate. Most Fed governors are talking about it’s appropriate to pause. And I, you know, I was surprised when they did their last tightening. I thought the language would be even more dovish, and I think that’s what caused it.
JOE KERNEN: It costs nothing to be dovish.
LARRY FINK: And so the –
BECKY QUICK: It does, when you want to raise it.
JOE KERNEN: Well, it does when you have to raise it.
LARRY FINK: And they said they -- maybe two more tightenings. I was surprised at that statement. I think since then they have now changed the narrative.
JOE KERNEN: Autopilot. That didn’t help.
LARRY FINK: Yeah. I mean, so I’m -- I was surprised at that. And I think the market reaction was probably appropriate. Because I think you’ve seen enough, you know, uncertainty in the world, whether it is China or what’s going on in France and Germany and the U.K., all the issues around the U.S. This is giving more and more people reasons to pause.
BECKY QUICK: We’re going to continue this conversation with Larry in just a moment.
ANDREW ROSS SOKRIN: We’ll pause for a second.
BECKY QUICK: All right. Welcome back, everybody. Let’s get back to our conversation with BlackRock Chairman and CEO Larry Fink out with earnings today. We’ve talked about that but we’re also talking about markets and what you see there. Larry, we know the fourth quarter, December particularly, was really chaotic. But what are you seeing in January? Are retail investors coming back in? Is this a -- We know the indexes have come back sharply. But what are you hearing from investors too?
LARRY FINK: We see money being put to work. We have $13 billion of inflows in our iShares platform month to date. We have seen pretty good flows. I want to annualize it, but we’ve had pretty good flows coming back into the market. So we did see -- we are seeing elevated inflows from what we saw institutionally in the fourth quarter. Hopefully that carries on. Hopefully our iShares flows carry on. So we are seeing money put to work. And we’ll see. But I would say more clients than ever before are asking questions, what should they be doing, where should they allocate money, how should they be positioned. You know, we had a huge downdraft in emerging markets. And then the last few weeks, as the dollar started weakening, we started seeing new inflows back in. And we’re still seeing that now too. Now, to carry on to Joe’s question, are we seeing more and more money being put to work? Do we believe now with the Federal Reserve slowing down their tightening and maybe they’re pausing for a long time -- That would be an indication the dollar would be on a path from weakening from its very large strengthening of last year. If that’s the case, you are going to see elevated flows into emerging markets. That fear in emerging markets is going to be reduced. And with all the uncertainty about Europe, you may see flows back in a more stable area like some of the emerging markets. But until we have better uncertainty on trade and on China, I think we’re not going to see super elevated flows. But I do predict, if there was a resolution between the U.S. and China related to trade, we would see a surge in investment sentiment.
BECKY QUICK: Does it have to be a real resolution? Can it be something they just say, ‘Okay, we agree to call off the dogs and we’re not going to actual resolve some of these issues’ or --?
LARRY FINK: I think if they -- if trying to reassert its desire to purchase more U.S. product and they set targets on what they’re going to be purchasing and they don’t come to a resolution related to technology intellectual capital, but they’re working towards a resolution, that will call off the dogs and it just reduces the tension. We don’t believe China is going into a recession. But could we see China going from a mid-6 growth rate to low 5?
BECKY QUICK: To a negative? Oh, okay --
LARRY FINK: -- Yes. Is that bad? Not really. It’s just -- as Joe was framing his question, the negativity in the fourth quarter was so severe, so many hedge funds, as we now are seeing, were offside.
ANDREW ROSS SORKIN: Right.
LARRY FINK: And I think the biggest issue we saw in the fourth quarter was huge deleveraging from the hedge funds. It was a mini 2008-’09. Wait and see large institutional clients sell tons of assets at any one period of time. And so I do believe that deleveraging has occurred. So we have built a base, a foundation for probably better two-way flow.
ANDREW ROSS SORKIN: In such a fractured world, do you ever see a risk that sovereigns say, “You know what, we actually don’t want to use a BlackRock or we don’t want to use an American so-called company in this sort of grander trade war”?
LARRY FINK: So I believe more and more companies are going to report consumer preference changes. I mean, we saw that with Apple’s announcement. I think you’re going to see more companies suggest -- that may be a reason for declines.
ANDREW ROSS SORKIN: Have you seen that in the financial world?
LARRY FINK: I have not seen that in the financial world. But, Andrew, as you know in my last year’s CEO letter, I talk about having a purpose in every community. And I assert that you have to be, you know, Mexican in Mexico, you’ve got to Japanese in Japan. I strongly believe, and I said this in my last year’s letter, global -- this anti-globalist views of the world now, this protectionism that we’re seeing, is accelerating the need for every company to making sure where they operate, they prove their reason of operating or they prove their purpose in the communities where they operate. I think that’s going to be -- that is a real key element for the success of any company today. So obviously when I talked about purpose last year, I talked about having purpose to your clients, to your employees, to other stakeholders, but I said communities and countries. And I think what you’re seeing now in 2018, or what we saw in 2018, you need to show that you are doing -- you’re helping the community you’re operating in, whether it’s Italy or China or wherever you are, or America.
BECKY QUICK: Larry, want to thank you for being here. We appreciate it. Larry Fink of BlackRock.
ANDREW ROSS SORKIN: We will see you in the Alps.
LARRY FINK: Yes, we will.