Larry Fink ('76) Talks Macroeconomics and Investments with Yahoo Finance
I'm. Here with Larry Fink CEO, of Blackrock at you slate UCLA, Anderson School of Management Larry great to see you Andy how are you so, let's, jump right in and start talking about the markets. What's. Going on with interest rates, and how. Will that affect, equities. Is. The long bull market over. Well. It's, always be it's always great to be back at my campus, so I'm really pleased to be back at UCLA, no, I don't know if the bull market is over but. We're going through a normalizing process, and interest rates I, would, say 2017. Was the anomaly we all forget that 2017. And we saw record low volatility, we, had interest rates really, even. With the Federal Reserve's raising, the short rates the the, intermediate, long rates really didn't move much and now we're, starting to see more normalization, go on and for big and important. Reasons we are, we, have three point nine percent unemployment, we. Are. We. Have indications. That we're starting to see real wage inflation. We. Have. Concern. About the scale and size of our deficits, and I think that's going to be the key, issues, at. The end of the fourth quarter last year we were excited about those you, know all the tax reforms, now we have to start paying for it and, and. And, so, there's. A deep and and, a, pretty, important. Worry about the, scale of these deficits, and with, these deficits, that, we are we're, facing now we're gonna see just huge. Supplies, of US Treasuries which, between. The supply of Treasuries, with with some widths of inflation with. More normalization, going on with the Federal Reserve with. Issues. Related, to China if, China does the big giant reforms, that they're talking about, when. I hear reforms, and if they do implement, the reforms I hear inflation, because reforms. Mean they're going to consolidate. All their state-owned companies, they're, gonna wring, out excess, supply. And they won't they, may, not be doing the dumping that people are accusing them of because. They're not going to need to do that and and so you're gonna start seeing China. Being. A country that instead. Of exporting, deflation. Maybe maybe. It's you're, not gonna see any any change, but it's not deflationary. And, it may become inflation, or you add all that up I think. The trend for interest, rates are to be higher and the, question is could. That derail, the US equity market not, at the moment. So you don't think we hit an inflection, point in the beginning of the year I mean a lot of people are saying that that you know burst in January, was was the end of the well that, was a.
Burst. It, it may become the end of the bull mark I don't think we have enough evidence clearly. We were having record earnings and record. Earnings are not are. Not. Stimulating. Higher prices, and I think that's a another indication, I would, also say Andy as you know we're seeing record M&A. Record. M&A, always. Tells you, that, we're at the last stage, of an economic, growth generally. When CEOs do these record amount of mergers. It. Tells you they're worried about their future growth and so they do these big giant mergers, now. That's conventional, wisdom the. The record amount of mergers just maybe as a result of the tax reform that now, most, companies are. They. Have it as much as 18% fewer. Less taxes, and so their free cash flow is enormous, so they could be using that for M&A so but. I, would say all historical, indications, that M&A is is, a late stage. Economic. Indicator. Not an early stage and so you add that up right you, know we'll see and a, flat yield curve are there opportunities, and risks there does a signaler, recession, no. I think I think, I, believe. The flat flattening. Of the yield curve was indicating, to me that, we still have record, pools of cash. And. If. You look at where US rates for the US 10-year rates at 310, if you look where a German rates and Japanese rates I mean, it is a. A great, advantage for foreigners, to be buying our rates and so that's, keeping, the yield curve flatter, than normal I don't believe it has any indication. Of a recession. And I think it's just the dinah sysm, of these of global, markets what. Could be a catalyst. For the next leg in a bull market or even further. Economic, expansion. Well. I think that's, going to be the next indication. You. Have the Atlanta Fed forecasting. A 4% second. Quarter economy. The. Capital, market is actually saying it's, not growing as fast but. If indeed we see, from. All the tax reforms, if. We. See the economy growing at 4%. Plus. Corporate, earnings as, strong as they are we will have another leg up now, if.
The Capital markets are right that the economy is just not growing as fast as. Maybe some people are forecasting. Then. I believe we have another. Leg down I think. This is where I, think we're entering a real pivot pivot. Point right now a real inflection, point now the. Problem is if we don't, have. An economy that's really driving faster. Growth then, the issue that I talked about earlier the deficits, actually get worse but. If we have an economy, that's growing way. Above trend lined and we're. Getting bigger, and bigger tax receipts, so that obviously the deficits, will be not as difficult. And maybe a little more manageable you. Have. When. The tax reform was passed there. Was from. The white house from, Congress, many, people stating, that this is we're going to enjoy a three-plus, economy, for years to come and that's. How we can afford the. Big, tax cut if, that, does not happen then. We have much greater problems, out 18, months and 24 months so, I am, not as fearful, that we are in an inflection point with a decline, in markets, today I'm. Probably, more worried out that 18, months and so I think we're going to be in a in a trading range this year but. We'll see we have a lot of it data that we're gonna have to digest we're gonna have to see how our trade. Talks. Chyna go we're gonna have to see how how. A strong, of. Transformation. We're gonna see from the sheet government in their reforms. We'll. Have to wait and see is there a NAFTA agreement I do, believe and II all that uncertainty is probably causing. Some people pulled back and, I should say one other thing. Japan. Had, a very, negative first, quarter Japan. Actually recorded. A negative point six and, that. Was not what. Everybody, thought Japan had for two straight years a positive, GDP. You're. Starting to see economic indication. In in Europe, just marginally. Slowing, down, and. So all of this you. Know all, of these issues are, giving. You mixed messages, until we have more certainty we'll. Know what where that inflection point goes are, you mentioned, NAFTA and China, Larry what do you make of the president's, trade policies, I'm. A globalist. And. I. Believe. We. Have you, know the majority, of the. World the majority of Americans, have, truly benefited. Through. From, globalization, not. All I. Do. Believe, there's. Legitimacy. In renegotiating. Some of these treaties. NAFTA. Is a treaty from 1994. Capitalism. Takes advantage, of law and, in. Many cases I think many people took more advantage. Of where we are. And. So there. Is it is proper, to relook, at a 1994. Trade treaty I think. Everybody. Can say. Positively. That China. Has. Probably, been more abusive, in terms, of their trade policy, they probably have not lived up fully to the WTO. I. Do. Believe the economic, team of China is. As strong as any economic, team in the world today, layha. Is now negotiating practice. Of presently today at, the white house on on on. A I guess a reconfiguration. Of our trade agreements. With China there's, legitimacy. For, I renegotiation. But. Let's be clear China. Has in my mind more cards than we do China. China. Is our banker okay. Generally. When you borrow, money from a bank I don't know. How, successful a. Strategy. Is when you try, to, harm. Your banker and they call. Your loan. The. United. States is in a very unusual position that, getting back to our deficits, ande, 40%. Of her deficits, are financed, by foreigners. That. Is not a good situation and, so if we now disrupt. I would. Say the. The. Ecosystem. Of the global economy. Could. A trading, partner be, so, upset that they're not going to buy our US, Treasuries, now that's a pretty.
Large. Thing, for any country to do especially China, because China is, so. They, spend. So much time focusing on their their valuation, of their currency, so, if they dumped. Their, trillion, dollars, which, they own of US Treasuries, it, would, push. Down the dollar the value of the dollar would raise the value of their currency and, so, it would be a very, difficult thing to. To. Manage. But, let's, be clear China, is, the owner of a trillion dollars of our debt I think. How. We negotiate there, are trade policy of them well is a delicate, matter and and. I think we. Should all be aware that not. Only I mean it's, true we have a three hundred and seventy, odd billion, dollar annual. Imbalance. Between what China, buys from us and what we buy from them I, don't. You, know they buy, they. Buy about a hundred and twenty billion from us and we buy clothes to five hundred billion for them and the net is that, you. Know we. Buy a lot of things from China because, it provided, cheaper, products. You. Know if we create these trading agreements, that ultimately, means higher, cost, again. So. The whole ecosystem could, change could we if China, does renegotiate. Many of this which means higher prices go. Higher tennis you prices higher, iPhone, cost and everything we we, get from China. Could. That mean higher inflation because, that mean higher interest, rates could, that mean then, they. Follow. The US equity market so these are not easy things to to. To. Negotiate, and the, outcomes, could be very negative right, shifting. Gears a little bit active. Versus, passive investing. You hear this a lot and, and I'm curious, what, you're thinking, is with regards, to the massive, amount of money Larry that's gone into passive, investing, and doesn't. That pose a, huge. And, potentially. Unprecedented. Risk, to the markets. Well. It's not that it's, it's the flows are large. But, passive. Represents, globally. About. 20. Percent of the overall equity, markets today, in the United States maybe it's 30 and elsewhere is 10 it's still not that large yet Andy and people. Are blowing it out a way out of proportion actually in. 2018. Blackrock, I could talk about other firms are getting positive, flows, and active mm-hmm. There. Is room for both. The. Key that I was talking to one of the topic active, managers, yesterday. There. Seems very. Good flows and the reason why they have much. Lower fees than the average mutual fund company inactive, and, so I think, what's going, on until. Many of the active managers, lower their fees and so. They could prove over time they, get outperform, after, expenses, you're gonna see more flows in the passive, I think, over time you're gonna see pressure, on one of those active managers they're gonna be lowering their fees and then. You're gonna have better, outcomes and active but, this whole notion of active and passive you, know Andy when we buy PGI in 2009.
Met. Most people, if not all people said that was a bad transaction. Nobody. Can have active and passive in the same organization. And. We said why our. Clients head back both active, and passive why can't we offer products. Agnostically. To. Our client and that's, actually worked, and that's what the. Big transformation for Blackrock. And so. Yes. We still see large flows and passes. We're. Seeing many active, managers, using passive instruments. And actively. Managed so that's another thing people are missing people, are many people are not buying individual, stocks they're, actually buying and index, and getting exposures, so Andy if you wanted to buy China. I could. Give you an etf of China if you wanted to buy India you wanted to buy semiconductors. You wanted to buy the SP, you, could actively, manage. And navigate. Those. Exposures. By. Using passive instruments, and so we're, seeing many active, managers, using passive instruments. And that's another reason why we've seen this big boost up in passive, so, the, answer I don't see. A. Point. At this time where, it's gonna create a. Real. Problem, but, and. As a leading passive. Manager we care about this okay we, we need to perform we. Have a huge responsibility, we. Manage more retirement, assets than anybody in the world we. Have to do our job every day, we, don't believe we're in an inflection, point at all we believe passive. Strategies can still take more market share so we, are here at your lovely alma, mater and, you've. Endowed the Finke Center for investments. And finance. Finance and investments, got to get that name right and I. Just. Wonder I want to ask you a little bit about higher education you know higher education is under assault it's sort of always under assault yeah but people, are questioning the value of it and I, wonder, what your thinking is about how. Business. Education in, particular should, change how. Can it an adapt I think business education evolves. With society, maybe it evolved slower, than society once at times and that's a push and pull but. Let's, be clear. Those. Who are who, had advanced. Education, have much higher compensation, than those, let's, also be clear only, a 30%, of Americans actually graduated. College. We, are number 27. I believe in in the world in college, graduates. Now we're, actually falling, behind I don't actually, understand, that overall, debate, I, do you know if, you have a an. Education. You have higher probabilities. The. You know we could ask the question about the cost of education, that's a whole big. Issue and, that's, a legitimate issue when, I went to you something it was far cheaper than it then than it was than it is today but it's doing a relative base it's still a great value today versus, some of the some, of the other schools. Business. Schools I. Think.
Business Schools are adapting. Well. To society's. Issues, as. You know I write my corporate letter every year I talk about purpose, I talk about. Corporations. Need to have purpose I do believe I. Believe. We're. Seeing rising populism, worldwide, and we talked about this quite, a bit this past week in many of the meetings have been and that, could be the real pivot in the whole world as rising population. Populism. Grows we have a election, in Colombia in two weeks the populist, candidates ahead we, have a very. Important election in in. Mexico. In five weeks the, populist, candidate, is ahead we, saw, that the five star movement. Has. A dominant. Role in Italy, they are talking about leaving the eurozone so we have some uncertainty now in Europe so you have this populist. Movement, moving, we. Cannot turn our backs to, these issues and what people are saying and it gets back to this idea. Corporations. Need purpose, beyond. In my mind beyond just, profitability. I believe. If you don't have, a purpose, if you don't have a purpose, it's hard to, have sustainable, profitability, over a long period of time these. Are the some of the what. I would say concepts, that have to be a major component of business goals not. Just finance, not just a county not just marketing, not. Just economics. And. And, modeling. It had there, has to be a, component. Of a, responsibility. And, I believe. In. The last 15, 20 years the. Conversation, about responsibility. At. Times, have been missing. You. Know we moved and, there's one of the biggest issues of facing America today and II as. Corporations moved, away from defined, benefit plans to. Define contribution. Plans the entire retirement, responsibility. Falls on the individual, now and so. They feel actually more, detached and the, big question, is how, do we. How. Do we build the deeper partnership, between the employee and the companies, how. Do how, do we build. Greater. Long-term ISM so. People can focus and, be, less fearful of the future there was a poll I forgot who did, it I think the Pew, poll, came. Out I think, two three weeks I don't know and they, asked a question and. The question was do, you believe your jet will your job exist in ten years and, seventy. Percent of the Americans, said no, no. I don't believe it will be that large, but. That's an, enormous. Issue. That's, really impacting. This country, that if you believe, your job will not exist. You're really frightened of that for your future, you. Know if you're a truck driver you're definitely frightened, of your future, because you read all about autonomous, trucks and what does it mean you. Know we could go on and on talking about different industries and. And. So I think this is one of the reasons why I have the rise of populism and as, I said in my last in this this year's letter. There's. So many people who believe. Government's. Not I'm not talking about the US but plural. Are. Not helping, as much, and that's why we're seeing these rise of populism, and I. Believe it's going to be incumbent. On. Business. And business. Schools to. Focus on, the. Totality of responsibility. Not. Just not. Just, the. Number one objective which is profitability, so I'm not trying walk away from my number one objective and our number one responsibility, is to make profits for our shareholders but, beyond that. Making. Sustainable, profits. I believe. It has to a company has to have a purpose a purpose, that the employees, connect with a purpose. That, that. Their clients understand, and connect and then most importantly, a purpose. In the community, and where you where. You operate so, I always, say for Blackrock, where we have a big business in Mexico we. Have to be Mexican, in Mexico, we're the largest retirement, manager, in Japan we have to be Japanese, in Japan as we, grow in China we. Have to be Chinese and. In. Our home country, we definitely have to be American right. Right, well, it's a lot to chew on a lot to work on we, are at a time ok Larry Fink CEO, of Blackrock, here. At UCLA, Anderson, School thanks, so much Andy thank you.