Blackstone CEO Stephen Schwarzman: Investing In China For “Dialogue”

Blackstone Chairman Stephen SchwarzmanImage source: CNBC Video Screenshot

CNBC Transcript: Blackstone Group Inc (NYSE:BX) Founder, Chairman and CEO Stephen Schwarzman Speaks with CNBC’s “Squawk Box” From Davos Today

WHEN: Today, Tuesday, January 21, 2020

WHERE: CNBC’s “Squawk Box” – Live from the World Economic Forum in Davos, Switzerland

Following is the unofficial transcript of a CNBC interview with Blackstone Group Founder, Chairman and CEO Stephen Schwarzman on CNBC’s “Squawk Box” (M-F 6AM-9AM) live from the World Economic Forum in Davos, Switzerland today, Tuesday, January 21st. Following is a link to video from the interview on CNBC.com:

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JOE KERNEN: Good morning. And welcome back to "Squawk Box" live from the World Economic Forum in Davos. And we are waiting to hear from President Trump. He is here. He’s scheduled to deliver some opening remarks within minutes. And we’ll take that. First though, joining us now is Steve Schwarzman, Founder, CEO and Chairman of Blackstone Group, who I would say was one of the more prominent individuals in the front row of the signing of the China deal. I noticed that you were there. And you were smiling—

STEPHEN SCHWARZMAN: I got a nice shout out too, from--

JOE KERNEN: And you have a – I don’t know it’s a non-consensus view. Because I don’t know where we should look for consensus views. If you look for, you know, the media or people that don’t want Trump to succeed, it is a nothing burger. I’ve seen that word ‘nothing burger’ again and again about the China deal. You have a different take – that it actually is a transformative deal in a number of ways. Could you explain?

BLACKSTONE CEO STEPHEN SCHWARZMAN: Well, I think It is an important deal. You know, since 1949 when the People’s Republic was established in China, the U.S. hasn’t done a bilateral deal. And so, I think it is really important that that’ occurred. There is a lot of interesting things in the agreement, whether it’s on intellectual profit or financial institutions. And also, compliance and resolution of problems. And I think that China looks at this as a very important thing, because we were basically escalating to a very bad place between the two countries. These two together countries together, depending on how you do your numbers, comprise 35% to 40% of the entire world’s economy. There are over 200 countries. And so, when these two don’t have it right, it is a big deal.

JOE KERNEN: But even if there’s not a Phase Two? And that’s what we heard, is that, ‘Ok. We got a few things done in Phase One. We got some AG buys.’ And many people said, just getting back to where China was a few years ago on what China used to buy. And if we don’t get a Phase Two, we really haven’t accomplished anything. But then, when we look more deeply into it, there is IP things in there. There are ways of, it’s there’s noncompliance, the tariffs go back up. When people looked at the fine print, it seems like, you know, the notion that only in a Phase Two do we accomplish anything, that’s not the case.

STEPHEN SCHWARZMAN: I think – I agree with you on that, Joe. But, I also think that it is in China’s interest, as well as the U.S.’ interest, to do a Phase Two deal. And they think it is a good idea and important. Most of the tariffs were not rolled back in this Phase One. So, there is a lot of incentive, if you will, to get to Phase Two. And they are quite serious about that in China.

ANDREW ROSS SORKIN: So, we are going to be talking to Ray Dalio in just a little bit. He still talks though about the idea that the relationship has moved from cooperation to either competition or something much worse, confrontation. And so, the question is, is this just a pause button on that? Or do you really think this is a demonstrable de-escalation that has fundamentally rewritten the rules of the relationship and that we are moving back towards cooperation again?

BLACKSTONE CEO STEPHEN SCHWARZMAN: Well, I don’t think it is a fundamental rewriting of the rules. This is a start to rewrite. There are other parts of the relationship that are much more fraught, if you will, basically in technology. And that is an area that crosses over into national security and some other things. And so, that’s an area of, you know, real friction. I think over time in the trade area, it is in the interest of both countries to be in a more normalized position. And so, I think that escalation made it clear to everyone, this could be pretty unattractive. Not just for the two countries. It has been slowing down or contributing to the slow down to the global growth of the world. And that is not good either.

BECKY QUICK: Steve, I was going to ask you about that. Because what you focused in on I think is one of the big key issues. Huawei, ZTE, some of the security issues that have been raised and concerns about that, I think that’s a huge sticking point that continues to have big problems. We spoke with Steven Mnuchin last week. He said that’s on a separate track, that’s not going to be part of the negotiations.

Ajit Pai from the FCC has told me that he is going forward with looking at them as a security risk. If that’s the case, what kind of potential fallout does that risk? What kind of backfire could that mean for our American companies that sell technology there? And what does that mean even for other players in the region who don’t want to be told ‘You have got to pick between United States and China. Pick sides’?

BLACKSTONE CEO STEPHEN SCHWARZMAN: Well, the whole technology area, with the start of China 2025 or at least the translation of the document talked about China wanting to dominate the world with all of the modern computer science-based technology really triggered a wake-up call for the United States and other countries. It is normal for China to want to develop by itself. It is normal for the U.S. that sort of has had the lead position in technology over my lifetime, you know, to look at that with some trepidation. And these two countries are each moving forward.

BECKY QUICK: To the point that you’ve invested money at MIT to make sure that United States stays on top.

STEPHEN SCHWARZMAN: Well, you know, I’m American. I think we should, you know, maintain an edge. But make no mistake, the Chinese are very capable now and are developing their own ecosphere to move forward ultimately in a more self-sufficient basis.

JOE KERNEN: Steve, you have a close relationship, I really would say, with China and Blackstone. And Schwarzman Scholars. And you’ve dealt with the CCP in a lot of different ways. That has become more strained in the last couple of years, given the focus on the Uighurs and human rights and Hong Kong and all these things. To the point where, even a speaker that you had at one of the events for Schwarzman Scholars, it came into all kinds of controversy. You’re – we have all benefitted from our relationship with China. Are you looking at it, given recent events, and wondering how close you want to be with the CCP, with some of their--

BLACKSTONE CEO STEPHEN SCHWARZMAN: Actually, not the purpose of the program.

JOE KERNEN: To try to open to things up.

STEPHEN SCHWARZMAN: It is to facilitate sort of the dialogue.

JOE KERNEN: It seems a lot more—

ANDREW ROSS SORKIN: So—

BLACKSTONE CEO STEPHEN SCHWARZMAN: So, as to our program, Joe, we haven’t been affected. You know, and we have a special status in China. And China wants that connection with the outside world.

ANDREW ROSS SORKIN: Do you think the connection, though, and it’s interesting, because I have praised your program and I love your program in so many ways. But there now is a huge debate in the academic world here in the United States about whether we should have Chinese students, whether they are effectively stealing IP or whether American students are going to be allowed to be in some of these Chinese institutions. How would that work?

STEPHEN SCHWARZMAN: Well, I don’t know that anybody has answers to that one. China going to the U.S., issues on research and knowledge transfer. There are about 370,000 Chinese students that come to the United States a year.

ANDREW ROSS SORKIN: Do you think the biggest academic and most successful academic, prestigious academic institutions in the United States should shut that down?

BLACKSTONE CEO STEPHEN SCHWARZMAN: Well, it’s interesting. They--

ANDREW ROSS SORKIN: Some of them are talking about it.

STEPHEN SCHWARZMAN: Yes. But they want to keep that open.

BECKY QUICK: They make a lot of money.

STEPHEN SCHWARZMAN: Because they also have some terrific students that come from China. And they look at knowledge differently than we do in the commercial area. They view, and academics view, the production of knowledge as a global commodity. Building blocks for further developments of knowledge. And so, their attitudes are much different than a company and much different than a country, actually.

JOE KERNEN: But it almost reminds me of dealing with MBS at this point. I mean, organ harvesting? We have Kyle Bass telling us, you should hear the way he talks about the CCP, the Chinese Communist Party. And it has come into focus. And you have done a lot of business with China over the years. Is that going to continue given that there is so much pressure for reform in a lot of areas where there hasn’t been much progress?

BLACKSTONE CEO STEPHEN SCHWARZMAN: Well, you know, we’re not a one-person reform bureau. These are giant forces at work. There’s a rebalancing of what is going on in the world. I mean, 40 years ago, China’s GDP per capita was $300. You can’t get much poorer than that. Now it is $10,000. Their GDP is somewhere around $14 billion, $15 billion. Ours is $22. They are the second biggest country in the world.

There is almost no one in third place. And so, when you have these types of geopolitical changes, there are other things that go with it. I think in the future, you know, there is going to be some type of spheres of influence and you know, a sort of coexistence that have to be done. There are a lot of positive things that these two countries, if they choose to act together, can do for the world.

ANDREW ROSS SORKIN: Can we pivot to – a moment -- to your take on investing? Where we are right now. One of the questions I wanted to ask you specifically, and you know, I’m doing a panel with David Solomon from Goldman Sachs in just a little bit about unicorn valuations, but the private market that you live in, there’s a major question right now about whether all of these valuations for all of these companies, not just technology companies, are actually inflated, relative to where the public market is. What do you think?

STEPHEN SCHWARZMAN: Well, I think all markets have gone up pretty dramatically, you know, over the last few years. I guess the S&P is somewhere around 19 times. And if you pay a premium to that, that is pretty high. That is partially justified to the prospect of growth. Partially justified by the fact that interest rates are so low. And our--

ANDREW ROSS SORKIN: But, do you think that most of these product funds are marked up right now? Or do you think that they’re – when in fact people exit, they’ll exit on par with what the marks look like?

BLACKSTONE CEO STEPHEN SCHWARZMAN: I don’t think the funds, Andrew, are marked up too high. Because you don’t mark them up to exit. You have a cash flow model. And so, those marks don’t change dramatically. What changes is when you exit. And when you exit now, you’re getting higher prices than you expect because everything is up. The more interesting issue is the issue of purchasing things now. Because they are pretty expensive. And to buy something, you have to see something reasonably remarkable in terms of your ability to improve the operations of a company.

BECKY QUICK: Does that mean you are stepping back and not making purchases like you had been a few years ago?

STEPHEN SCHWARZMAN: Well, I wouldn’t say stepping back. You know, this is like a hockey game where you used to have 35 shots on goal of things you could buy. Now, it’s like five. So, you have much fewer things that are worth your time to analyze. That doesn’t mean that those things won’t happen. But your opportunity set is significantly reduced.

BECKY QUICK: Is there more competition for those items, too? Just because of the liquidity around the globe right now.

STEPHEN SCHWARZMAN: There’s always competition. I don’t know that there is more. You know, we are in the large end of the market. There have always been seven to 10 competitors. The names change sometimes. But you know, that hasn’t dramatically changed.

JOE KERNEN: As a billionaire, would you like to comment on any of the Elizabeth Warren or Bernie Sanders programs or prospects during the election? Just get on the record so we can get another fight started?

BLACKSTONE CEO STEPHEN SCHWARZMAN: Joe, it’s always good to be here on a lowkey type of topic. But, you know, this election is really pretty remarkable in terms of the differences on the democratic side.

ANDREW ROSS SORKIN: --Make it complicated for you. Between President Trump and your friend, Michael Bloomberg.

JOE KERNEN: Yeah, who would you vote for?

ANDREW ROSS SORKIN: Both are friends.

JOE KERNEN: Who would you vote for?

STEPHEN SCHWARZMAN: Well, I’m a Republican. And, you know--

ANDREW ROSS SORKIN: Bloomberg used to be one.

STEPHEN SCHWARZMAN: He’s flexible.

ANDREW ROSS SORKIN: So is the President.

BLACKSTONE CEO STEPHEN SCHWARZMAN: That’s true, too.  I think the President has done a really good job with the economy. I think Mike is a really capable person and a long-time friend. And I think it is fascinating what is going on now with him showing up, you know, with huge amounts of money to play the game out on Super Tuesday in March to see where he can get. There’s all kinds of views of how successful he can be.

BECKY QUICK: Would you like to see him succeed? Just to mean, you’ve got two capitalists running against each other?

STEPHEN SCHWARZMAN: Well, you have, you know -- I don’t think there is a lot of love lost on the democratic side with the other candidates who have been out there for the year. With Mike, you know, who has clearly got more operational experience running in New York, creating a great company. And you know, he’s a very capable person. But the issue of him, you know, showing up with all of these ads and so forth, I think creates some dissidence with other candidates and also with the media. On the other hand, we’ll see what happens. I anticipate that if he does really well on Super Tuesday, game goes on. If he does not do well, I would be surprised if he continues.

JOE KERNEN: So, Andrew, what was the answer. Bloomberg or Trump? Did you?

ANDREW ROSS SORKIN: -- Trump still. This is my final question for you, though, and we’re looking at a live shot—the President is going to be speaking in a moment. Do you have any early intel on what he is saying?

STEPHEN SCHWARZMAN: No. And it wouldn’t matter anyhow. Because he tends to change things.

JOE KERNEN: When? I haven’t seen that.

BLACKSTONE CEO STEPHEN SCHWARZMAN: Haven’t seen that one, Joe?

JOE KERNEN: Steve, thank you. Thank you.

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About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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