Larry Fink: We Will See Higher Inflation, More Aggressive Fed Over Next Two Years

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Following are excerpts from a CNBC exclusive interview with BlackRock, Inc. (NYSE:BLK) CEO Larry Fink on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Tuesday, January 18th. Following are links to video on

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BlackRock CEO Larry Fink: We Need To Work With Hydrocarbon Companies, Not Against Them

BlackRock CEO: We Will See Higher Inflation, More Aggressive Fed Over Next Two Years

Fink On His Annual Letter

ANDREW ROSS SORKIN: Welcome back to “Squawk Box.” BlackRock CEO Larry Fink, its annual letter, it is officially out this morning. I wrote my DealBook column about it today and in that letter, Fink writes quote, “Shareholder capitalism is not about politics. It is not a social or ideological agenda. It is not woke.” I spoke to him and I started by asking him what he means by all this.

LARRY FINK: What I'm trying to say is, I mean, many people believe social values or environmental issues are political and woke. I don't believe that. And by the way, Andrew, we are connected with more and more asset owners than we've ever been before. I believe our voice resonates more and more with more asset owners as evident of now last week and as we have now over $10 trillion of client money. And it's about building deeper, broader connectivity with your, with your stakeholders. And for that you're building that durable profitability, and it's about having a voice though. I do write about that. In this divergent world, your voice has been hijacked at times by the media, by, by the extreme elements of society today. But I believe more consistency in your voice, a louder voice brings that connectivity to your stakeholders.

Fink On Environmental Issues And Letter Criticism

SORKIN: But at the same time, in this letter, there was almost a defense of capitalism as well, where he writes the following, “Make no mistake, the fair pursuit of profit is still what animates the markets; and long term profitability is the measure by which markets will ultimately determine your company's success.” So I asked him about whether some people who may be reading that sentence should interpret that as a bit of a walk back from previous claims that he's made.

FINK: There is no walk back. I've always said about a corporation and its purpose and those companies who have a strong purpose are going to have more durable profitability. If you read my 2019 letter when I talk about corporate purpose, I talked about the same essence about long term profitability, what animates the markets and moves forward. So, this is a theme that I've been saying quite a bit. I mean other people may be misinterpreting it but I’m repeating in that specific sense, I'm repeating exactly what I said in 2019.

SORKIN: So, one of the things that you have been very outspoken about and have singularly perhaps changed the conversation in boardrooms around the country and around the world is about the environment, and really pushing companies to focus more on the environment. But at the same time, you say in this letter this year, you say, “We focus on sustainability not because we're environmentalists, but because we are capitalists and fiduciaries to our clients.” And so maybe this is a chicken and the egg kind of thing here. But how much of this is your view that the environment really does matter? And how much of it is your view that the profits matter? And you think it's gonna come because people are focused on the environment?

FINK: I am just as much as a, as focused on environmental issues as I've ever been. And I believe we need to be moving forward. And I'm really pleased to say that $4 trillion of money has moved into more sustainable strategies and it's accelerating. I talked about in my, in my 2020 letter about the tectonic shift that we are seeing, we are going to see it if anything COVID and the way we live and work today has accelerated the investments towards sustainability. But that being said, I had a great deal of frustration in 2021 about the means in which we're moving forward. I wrote over the last few years about to move forward in a more sustainable decarbonized world, it requires a combination of government and private sector and that's just not happening. We are not seeing the totality of society moving forward together. We need to be working with hydrocarbon companies, not against them. We need to be working with the communities that are involved in hydrocarbons, not against them. But we also need to be working with all, with new startup companies to rapidly deploy and create new technologies so we can get to a decarbonized world by 2050. At the present pace, Andrew, we're not going to get there.

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SORKIN: How do you distinguish and how should the public and the investor class distinguish between a hydrocarbon company that you think is on the good side of being a hydrocarbon company and a hydrocarbon company that you think is on the bad side? Because right now, it appears but oftentimes these things are thought of in a very binary way. You're either a hydrocarbon company, or you're not.

FINK: Society is dependent on hydrocarbons right now. We are, you know, we will not survive with the society that we are talking to without hydrocarbons right now. We need to rapidly admit that and we need to have fair and just solutions about how do we utilize hydrocarbons as we move more towards a decarbonized way. We need to be advancing ideas about green and blue hydrogen. We need to be advancing new ideas and creating new mechanisms to decarbonize steel and decarbonize cement. We need to find technologies to, to so we can afford the sequestering of carbon. These are all going to be the tools in which we can create a more sustainable world, but it has to be done together. It's not going to happen overnight. If we want to just admonish the hydrocarbon companies today and say stop investing, get out of your business. We're going to have a very unequal outcome.

Fink On The Economy And Federal Reserve Policy

SORKIN: Welcome back to “Squawk Box” this morning. BlackRock CEO Larry Fink's annual letter is out this morning. And Fink argues that in this letter that it is not woke for businesses to think beyond profits, the world's largest asset manager now overseeing $10 trillion under management, the firm announcing its latest quarterly results last week and I asked Larry, where he sees the economy right now and his outlook on Federal Reserve policy. Let’s hear what he had to say.

FINK: You have supply chain problems. You have real big increases in capital goods spending. You have inflation that was created by some of the sustainability measures by not focusing on demand and more on supply mitigation. And we also have an economy that's paying the cost right now of having less immigration, and we have rising wages. Now rising wages in many cases is a blessing and great. But many companies, companies having the ability to pass on those rising wages and rising inflation or are they going to be absorbing them in their earnings? Do they have ability to keep their margins high and absorb all this through better operating successes? So, all this is going to be transcending into, you know, are we going to have higher inflation or lower inflation in the next year. I believe we're gonna have higher inflation. I believe we are going to have an aggressive Federal Reserve over the course of the next two years. But Andrew, I'm not worried about that. I mean, I actually believe having a two and a half percent short term rate which means, you know, what does that that's 10, that's 10 tightenings if they had a two and a half percent short term rate is going to help a lot of savers, finally earned money in their savings. The big question that we all have to understand though, if we had a two and a half percent short term rate, what does that mean, what does that mean for the 10-year rate? Does that mean the 10-year rates gonna stay at two and a half, does mean the 10-year rates gonna be two, or does that mean the 10-year rate is going to be at four and a half? The shape of the yield curve is going to be the critical issue that's going to determine the economy. And there has been a lot of noise about that a lot of people think the yield curve is going to be very steep. I don't believe that and I think I've said that in your show in the past. I think the yield curve is going to be flattening, you know, and I can even see if the Federal Reserve is very aggressive, I can see a, you know, a negative yield curve. But, you know, I do believe we will find ways to arrest inflation over the course of the next year or two, but we're making all these adjustments right now and we are in an inflationary period right now, you know, when last was 7%. So this is something we're all gonna have to adjust and we're all gonna have to live with but that does that mean the equity markets have to fall.

SORKIN: So what, what does it mean to the equity markets? I mean, we've already seen multiples compress for example in the world of technology, clearly.

FINK: Well, unquestionably, when your discount rate from zero, you know, having high PE and, you know, it makes it easier when you have a discount rate of two and a half, it changes valuations, it changes the growth trajectory. So I think this is all kind of an adjustment. Some companies are going to be benefiting from this and some companies are not that, you know, and we're seeing a big rotation out of growth into value. In my case, my view that might be overdone a little bit, but I'm—

SORKIN: Why do you say that? Why do you say it's over, overdone?

FINK: Well, I actually am a steel believer in great companies continue to be doing great things. The great technology companies or big pharmaceutical companies, the great consumer companies continue to do great things. Now maybe their PEs have have, have expressed that already and it's priced in in some cases, but in some cases I think they're going to be surprising on the upside. So, I'm not terribly worried about the direction of the stock market do but I don't believe the stock market has the same type of upside that we witnessed over the last three years. It's going to be a lot more muted until we have better certainty. And I think the key thing related to the stock market is what is the shape of the yield curve, and that will tell me where the equity markets are in a year.

SORKIN: I asked Larry what this market environment means directly though for his business, if that's the case.

FINK: And a big stimulus checks from the fiscal stimulus at the same time in both cases the states have had witnessed huge tax increases. This is why the municipal bond market has done so fantastically well over, over the last two years because tax receipts have been huge. Now the real question is, what does that mean going forward? You know, you asked about states and higher interest rates. The bigger question, you know, I believe deficits matter. And there has been a narrative over the last two years that deficits don't matter. And the question will be is what will, you know, what does this mean for our future deficits if short term rates are, you know, up two, two and a half percent, and whatever that whatever that means for the long end, I mean, that's going to add a huge amount to our deficits versus what we're paying now for interest cost.

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