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Fed Rate Hike - Yellen Nailed It!

Interest-Rates / US Interest Rates Dec 17, 2015 - 04:27 PM GMT

By: Bloomberg


Larry Fink, Chairman & CEO of BlackRock, spoke with Erik Schatzker, Stephanie Ruhle and David Westin on Bloomberg TV's "Bloomberg <GO>." He discussed the Federal Reserve rate increase, the possibility of dollar-euro trading at parity, and his economic outlook for 2016.

Fink praised Janet Yellen after the Fed raised interest rates yesterday: "I think she nailed it. It was not too hot, not too cold, right down the center. I think it was a very well scripted conference…And the most important thing, what she gave the market is clarity. I think the opportunity they missed in September, why the markets were so unsettled because we had no clarity on their actions. And in this case they really expressed exactly what they're looking for."

On growth in 2016, Fink said: "I think [Yellen's] going to be quite slow in raising rates going forward in 2016. My view is that the economy is decelerating. It is not going to be as fast as we want. We're going to be lucky to see a 2% economy in the first part of next year."

On a possible recession, Fink said: "I don't see a recession unless there's more problems in China, more problems in the world. We will not cause a recession. We may have a recession from other problems in the world. But I don't see it emanating from the United States."















ERIK SCHATZKER: I have 30 seconds’ time. I'm talking about BlackRock Chairman, Co-Founder and CEO, Larry Fink. The man who built the world's largest money management business with almost $4.7 trillion in assets. Larry it's great to have you here this morning.

LAWRENCE FINK: Really nice to be here.


FINK: Thanks, guys.

SCHATZKER: Before we get to you, Larry, if you don't mind, there's some people out there hungry for the news.

SCHATZKER: The Fed made history yesterday raising interest rates for the first time in almost a decade and putting the economy on target for tighter monetary conditions in the year ahead. Investors, as we showed you, could hardly be more approving. Stocks rally, bond yield barely budged. And volatility fell to the lowest level in more than a week. A week doesn't sound like a long time but if you've lived through for the past week what the market has lived through, you feel differently about it.

The biggest investor of all is with us here this morning. He's Larry Fink of course, the Co-Founder and Chairman and CEO of BlackRock who's $4.7 trillion makes it the world's largest money manager by far. Larry good morning once again.

FINK: Hello, Erik.

SCHATZKER: I suppose we should begin by talking about Janet Yellen. What she said yesterday. What the Fed said yesterday. Did she kill it or what?

FINK: I think she nailed it. I think it was just, it was like, it was not too hot, not too cold, right down the center.


FINK: Just right. I think it was a very well scripted conference. When she was in the Q&A, she had, I think she nailed every answer very well. You know, I think some people can interpret that she was a little hawkish; some people interpret a little dovish. I think it was right where she should be.

And the most important thing, what she gave the market is clarity. I think the opportunity they missed in September, why the markets were so unsettled because we had no clarity on their actions. And in this case they really expressed exactly what they're looking for. How they're looking at it. Their forecast going forward. And once again, she's going to say we're data dependent on the course going forward. But I think she gave such great clarity that I think the marketplace can be calm. And I think the marketplace can understand looking at numbers, how the Fed will operate.

My interpretation of what she said is probably a little different than others. I think she's going to be quite slow in raising rates going forward in 2016.


FINK: Well, our view is, or my view is that the economy is decelerating. It is not going to be as fast as we want. We're going to be lucky to see a 2% economy in the first part of next year. And the main purpose is we're seeing the two major components of the economy, that got the economy out of its problem in 2009, are now being hurt. And that's energy and that's farming.

Our farmers are getting killed and we don't spend enough time talking about it. Because our farmers are selling their products in dollars and in Brazil with the big real collapse that's the one sector of Brazil that's really benefitting.

So two major sectors are being harmed. Now most people would say the consumer is benefitting and they are worldwide, having oil at these prices. On the other hand it is my view the consumer is becoming a little more aware of the perils they have towards retirement.

SCHATZKER: But you still see a path towards higher rates? Because Sam Zell, for example, said growth may be slightly below 2%. Sam Zell was sitting here yesterday said he's looking at a recession in 12 months. David Rubenstein not long ago said he's looking at a recession in 18 months.

FINK: I don't see a cause to call for a recession yet. And I think the consumer is certainly benefiting from this. We are going to see rising wages. And we're starting to see beginning rising wages there. And I think this is one of the reasons that the Federal Reserve started the beginning their process of tightening.

We have 3.4% unemployment of men and women who have a college degree. So we're going to see the beginning of wage inflation. So I don't see a recession unless there's more problems in China, more problems in the world. We will not cause a recession. We may have a recession from other problems in the world. But I don't see it emanating from the United States.

WESTIN: A Bloomberg News piece said overnight that it's been 50 years since we've seen rate hikes while corporate earnings are falling. Does that give you pause?

FINK: Yes. Corporate earnings are falling because of the dollar principally. As you adjust your earnings downward. And so that's one of the big problems that corporate earnings are stalling corporate earnings are also stalling because global growth too is less than what we want. And I think this is why you're starting to see so many mergers.

I think we're going to see an acceleration of more mergers because companies are sitting with vast amounts of cash and they're going to try to become more efficient one way or another. Whether it's a Dow-DuPont merger and they're trying to restructure that. Which will present other issues, but that's a longer story.

RUHLE: Even though the jobs number is pretty good and it's improving, what do you think about the quality of employment? Many people out there who are back in the job market have jobs that they don't want and they don't have disposable income.

FINK: We've been living with that for the last 10 years. I think that's one of the major trends that we're all going to live with. Technology is uprooting jobs very rapidly. I think this one of the things while China is doing this whole transformation in their economy; I think we're going to see more automation, much greater. We're going to have--

RUHLE: Then doesn't that make the unemployment rate misleading?

FINK: Well, you still have to address the issue of 3.4% unemployment for college graduates. And we are going to start seeing wages increase. In many areas like we saw huge wage increases in technology, programmers. Their sectors of the economy are doing fine. There's no question there are men and women who have more capacity in building a better future.

So this is one of the issues that we've been talking about at BlackRock for some time. And we believe the biggest issue is going to be retirement. And I think retirement is going to become louder and louder and it is my view we're going to start talking about retirement next year as we have still anemic consumption by consumers. I think they're saving a little more.

And I think we don't understand the transformation out of defined benefit, defined contribution is so large. And the inadequacies so many families have because of poor allocation, and many people with defined contributions are sitting with cash in bonds for 30, 40 year liability, inappropriate kinds of products because they're frightened.

RUHLE: Or they bought high yield in the last two years because they weren't getting anything else. And that's where they're going to get burned.

FINK: Not if they hold it to maturity. I mean, depending on what they do. We have to make sure that we tell your clients who are watching right now. My clients who I'm helping them try to navigate this--

SCHATZKER: They're watching too.

FINK: They're watching too. That retirement is not, should not be impacted by the movements of the markets over the last six months. They should be focusing on a long-term strategy over a long cycle. And that's what retirement is about. We need to focus on outcomes, not the noise of the day.

RUHLE: All right, hold on. Matt Miller, it is 9 a.m. Let's talk breakfast pancakes, the flattening yield curve.

MATT MILLER: Yeah and maybe inverted yield curve. If you do FWCM on your Bloomberg, you can gauge investor expectations for yield curves going forward. And I've got it here for 1 year, 2 years, 3 years, 4 years, 5 years. You can see that the Treasury Actives curve anticipates an inversion in the yield curve. And that typically means that we're going to have a recession or at least an economic downturn in the future. I wonder Larry what you think about the fact that the market expects the yield curve to invert and what that means?

FINK: Well, I actually believe the yield curve is going to invert quite considerably from the 10-year to the 30-year. And that's mainly because we haven't focused on insurance companies who are sitting with liabilities longer than the duration of their assets.

So we believe, and if there is any more issues around devaluation of the yuan, other devaluation, the amount of liabilities that are in dollars their duration shortage in the world of dollar assets in my mind is going to create a more flattening yield curve and possibly an inversion from 10 to 30. There will be more demand than supply.

SCHATZKER: At the same time, you have an increasingly divergent set of monetary policies between what's happening here in the US, what's happening in Europe.

FINK: Well telegraphed. Well anticipated. I think there's too much conversation.

SCHATZKER: If it were that well telegraphed, why was it such a surprise then when Mario Draghi did what he did a couple of weeks ago?

FINK: I think what Mario Draghi did was perfect. I think he went right down the center too.

RUHLE: I'm so glad Larry's here. I agree. Erik doesn't. Matt doesn't.

FINK: I think it was perfect. I think--

SCHATZKER: I'm happy to lose that argument to Larry Fink.

FINK: If the ECB did what the market wanted to do, the dollar would have appreciated so severely that it would have put more pressure for the Federal Reserve to do what they did. I think he had to be, this is all interconnected. I do believe the behaviors of Central Banks have to be considerate of everything--

SCHATZKER: Hang on a second. They have to be--

RUHLE: Larry, did you get to--

FINK: Can I finish one more point? Because this is an important point. Since Europe is stimulating their economy, Germany has 1 million migrants there that are getting 400 euros a month. Because of the terrible incident in France, France is spending more money on national security. You're seeing much more of a fiscal stimulus out of Europe. And so I don't believe that the ECB had to be as aggressive as the market wanted to. But let's be clear, they still eased. It was just a little less easing. And what Mario said the next day I have huge ammunition that I can continue to use. And he didn't have to use it all at that moment.

RUHLE: Clearly, Larry has been watching "Bloomberg GO." I want to go back to the yield curve for just a minute. When we think about 1994 and that yield curve going flat, it was a disaster. How do we avoid that situation? If the yield curve flattens the lack of activity--

SCHATZKER: Disaster for financial markets but not for the economy.

RUHLE: Great point.

FINK: And let's be clear, if short rates are up 25, 50, or 75 basis points. It doesn't change anything. It doesn't change corporate behavior. Corporate behavior is, as Erik was just saying, that's a 10-year and 30-year. And if we can have a flattening yield curve, that's really good for corporations and financing and all that. So I don't have that worry.

SCHATZKER: Larry, where are we in the credit cycle? Is what we've seen lately in high yield something of a foreshadowing of more pain to come?

FINK: No, I think the high yield market was just confirming the energy market. I don't think the high yield market--

SCHATZKER: It contained in other words.

FINK: There's been much dialogue about the high yield market recently. A high yield market is, has about 30% of its outstandings in energy mining.


FINK: And we all know those sectors are under real pressure. And during the heydays when energy and mining was very high, a lot of debt was created. And that sector has been down you know, mid 20%.

SCHATZKER: But you feel pretty comfortable about the rest of the high yield world?

FINK: Well, you've got some retailers that are going to be struggling especially with warm weather. So you have some sectors that are doing poorly. But overall there are some components of high yield that are barely changed this year. So I'm not, I think we have to dissect all the elements and the components of high yield.

But high yield in our opinion will be very squishy for the next six months. We're not calling for a rebound because we think the energy sector still has room to go down. We actually think energy has room to go down in price. And we think we're going to see that in the first quarter.

SCHATZKER: You mean oil cheaper than $35 a barrel?

FINK: Yes, yes.

SCHATZKER: How much cheaper?

FINK: We need a good old fashioned blow off. We haven't had it yet.

SCHATZKER: What would it take for a blow off? $25, $20?

FINK: Probably. Yeah, we've had those blow offs before where you had big spike wards down. I was just in the Middle East two weeks ago. You know, they have to continue to pump. Our technology creation, we're creating new technology it's lowering the cost of our production. I mean even a year ago we would have said oh we can't frack at a price of $60 a barrel. And now we're finding no that's not true. With the new technology, it's profitable for some of these new wells at $40. So we're seeing new elements now, new technology, new sources. And I don't, I'm not, I don't think we've seen the bottom of energy. Therefore I actually think some of the high yield components are still going to be squishy and problematic. On the other hand we have, I have met with maybe 5 CEOs of insurance companies--

SCHATZKER: Larry, hold the thought for a moment. We will continue the conversation. A short break here on "Bloomberg GO." We're saying goodbye to Stephanie right now. Stephanie?

RUHLE: I've got a Christmas Pageant calling my name. I've got to roll. I love Larry, I have to say but I've got an innkeeper.

WESTIN: I hope it goes well.

SCHATZKER: David, you and I will continue with Larry after the break.


SCHATZKER: This is "Bloomberg GO" Larry Fink, the Co-Founder, Chairman and CEO of BlackRock, is here. And now so is David Cote, Chairman and CEO of Honeywell. David, welcome to the conversation.


SCHATZKER: Let's begin with this, Larry, if I could put words in your mouth for just a moment, Larry.

FINK: You may.

WESTIN: You can take them back.

SCHATZKER: Said something pretty close to Janet Yellen could hardly have done better yesterday.

FINK: Yeah.

SCHATZKER: What do you think?

COTE: Oh I like what she did. And I'd say based on the market reaction I'm hoping she does it again. That's a joke, that's a joke.

WESTIN: I laughed. I knew it was a joke.

SCHATZKER: Higher interest rates they certainly encouraged investors as you pointed out. Are they good for you?

COTE: I was listening to Larry earlier. I would agree with him in terms of industrial company going from zero to .25 or .25 to .50 doesn't make that big a difference. I'm not going to change my behavior. And I don't see demand changing out there as a result of it. So I was very supportive of the move.

WESTIN: But what about the effect on exchange rates? On FX? Because that must affect you.

COTE: Exchange rates do.

WESTIN: And the divergence between the ECB and the Fed is--

COTE: At the end of the day, though, we've all been expecting this for a while. And I've had our guys over a year ago, start planning for parity in 2016 and 90¢ in '17 because--

WESTIN: Really?

COTE: Yeah, I want us to make sure that we're really thinking ahead. And we hedged at about $1.25 for this year and hedged at $1.10 for this coming year. And I normally don't hedge. But I was just really uncomfortable with everything that was going on. And said while you can never have a guarantee it seemed like the high probability outcome was going to be exactly what we're seeing.

FINK: I don't see it going below parity myself.

COTE: I hope not.

FINK: Like I said, my view, I actually believe Europe is going to grow at 2% so Europe is going to surprise us next year in growth. And the US is going to surprise us modestly in the downside. So I would say there's just as great a likelihood of the dollar being $1.12 than parity now.

SCHATZKER: I have to believe that the reason--


FINK: Yes.

COTE: I'm with you, man, I hope that happens.


SCHATZKER: I have to believe that the reason people like you, Larry, and you, David, feel good about what we heard out of the Fed yesterday isn't just because of the outlook Janet Yellen painted for the economy, but the idea that she is taking us and this economy towards normalization. What is normalization? What's it going to look like when we're back to normal and how will we know?

COTE: Well, it won't look like the last six years. But I do think, the way we're thinking about the next three years is it's slow growth.

SCHATZKER: For three more years?

COTE: Yeah. I don't see a recession. I don't feel like there's a recession even though people will do the long in the tooth analysis. I just always feel like there's never really been a recovery other than 2010. We haven't really had that kind of boom that we normally expect to see. So I feel like there's going to be this kind of slow growth environment.

Over the last five years, the only time I've been wrong in my forecast in terms of how we were going to think about things was this year when I was more bullish the beginning of the years. And if I'd stuck with that kind of slow growth mantra with my folks I think we would have been better off.

SCHATZKER: Better off?

COTE: Yeah.

FINK: I think the only chance of real recession if China's leaders miscalculate their needs and China slows down more rapidly. Or China with their need of reinforcing their economy devalue their currency more rapidly than we all expect. That would call disinflation worldwide. And that would cost a higher probability of some form of recession.

SCHATZKER: What does normalization look like to you?

FINK: Well, I'm going to say, David said normal is not the last six years but I would say normal was not 2004. So I don't know what normal is.


FINK: You know it when you see it, I guess.

WESTIN: We’ll ask the question a different way. You invest a lot of money.

FINK: Yeah.

WESTIN: For a lot of people.

FINK: Right.

WESTIN: As you look out there, given this slow growth model, what assets are underpriced and what assets are overpriced? Where are there bargains?

COTE: Honeywell, Honeywell.


FINK: No, overall I would say the high yield market right now is, even with the energy sector problems, the high yield market is mispriced if you believe we're going to continue to have 2, 2-1/2 percent economy. The high yield market is basically saying we're going into a recession in some areas. Now like I said a major component of the high yield market is in a recession and maybe even worse.

I believe you're going to do fine getting back to my whole mantra about investors for retirement. You're going to do fine owning equities over a long cycle. Maybe next year equities are flat. Maybe equities need to catch up. We are trading at 18 PE which is you know, modestly on the high side of average. And you know if the dollar does revalue upward more that's going to put more pressure on earnings. I don't see it that big--

WESTIN: Larry? Larry, thank you.

FINK: Oh good!

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