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Stock Market Decline an 'Old-Fashioned Correction'

Stock-Markets / Stock Markets 2014 Feb 06, 2014 - 05:54 AM GMT

By: Bloomberg


Larry Fink, Co-Founder, Chairman and CEO of BlackRock, joined Bloomberg Television's Erik Schatzker and Stephanie Ruhle today to discuss volatility in global financial markets, the economies of the U.S. and China, and shareholder activism.

Fink called the stock market decline a "good old-fashioned correction." He also shared thoughts on China: "I'm surprised the market is upset the Chinese economy has slowed down in the short run... I don't think it's as problematic as some people believe."

ERIK SCHATZKER: He's the co-founder, chairman and CEO of BlackRock, the world's largest asset manager. Larry, I just have to remind everybody that BlackRock oversees now, what, $4.5 trillion?

LARRY FINK: $4.3 trillion.

SCHATZKER: $4.3 trillion. It's a staggering figure. I just love to talk about it because it is so -

FINK: I'll let you do it because I never talk about it.

SCHATZKER: I know you don't because you know -

STEPHANIE RUHLE: It's Austin Powers like.

SCHATZKER: He doesn't need to talk about it.

RUHLE: When I hear the number it's Austin Powers like it's so big.

SCHATZKER: Larry, let's talk for a moment of what's happening in the markets today, the past couple of weeks. The message you delivered about volatility was a couple of weeks ago already. Does it feel to you like we're beginning to bottom out? Is this just an old-fashioned correction or something worse?

FINK: It's an old-fashioned correction. We went so far. If I asked you and I asked everybody in January of '13 how much would the opening markets rally, we would have been really happy at ten percent. And really the S&P up went north of twenty, thirty percent.

SCHATZKER: Thirty almost.

FINK: Yes. And so we've come a long ways. And we just need to recalibrate ourselves. Now there has been more disappointing news. And my message in Davos is we can't rely on central bank behavior. We had the benefit for the last five years of coordinated central bank behavior that really stabilized the marketplace and gave you ample room to invest over a longer period of time. Central bank behavior is changing. They've done a lot of the work. The next round of growth is going to be coming from governmental policy.

So we are dependent on abenomics in Japan. Are they going to do the reforms? Are we - we're dependent on Chinese to get their reforms in order. We are dependent on the EU working towards reforms. And certainly we're dependent here. So the problem is politicians are not as systematic as central bankers. They were - they generally respond to crises.

RUHLE: But the problem is politicians, period.

SCHATZKER: But dependent on policy, yes. But as Stephanie likes to point out, we may be dependent on policy, but for the moment we're hooked on heroin.

FINK: And the heroin is what?

SCHATZKER: Quantitative easing.

FINK: No I don't - I don't - I wouldn't call it that far.

RUHLE: Really?


RUHLE: Think about how many investors in the last couple years have said to us fundamentally they see huge problems in the market, but when the S&P ran last year they all bought it.

FINK: So I think we have not seen any changes long, our long-term investors or institutional investors. We have not seen any behavior change. In fact we -

SCHATZKER: Really? So what we see happening this is really that has -

FINK: This is the unwinding of large hedge fund behavior. They really - the biggest problem, and I said this in Davos too, what I see of the problem is there are so many correlated trades worldwide. Everybody was long the Nikkei, short the yen. Everyone had those trades on and those trades have been very harmful in the first five and half weeks of the year. Most hedge funds are down five-ish percent who had those trades on. And but most importantly, some time when I last was here I talked about we could see a ten percent correction.


FINK: If you look at where long treasuries have gone from January 1st to now and where the S&P has gone, we have had a 12 percent relative value correction, 12 percent in six weeks, long bonds up -

SCHATZKER: Doesn't happen that often.

FINK: No, long bonds up about six percent and S&P is down approximately six percent. So that's a huge correction. So I look at this as good old-fashioned correction. There may be more in it, but we have not seen behavior change other than an unwind of what I would say the correlated hedge fund trade. We have seen some fear in the retail side. They're unwinding some of their positions so you've seen some outflows in mutual funds and ETFs, but I would tell you we're having as much dialogue today about investing more in emerging markets than we did two months ago.

RUHLE: Do you think this market correction or turmoil is going to affect the taper decision?

FINK: No, shouldn't. I don't see why it would. I do believe the U.S. economy is one of the highlights of the global world today, whether you think we're going to grow at two and half or three and a half I think that's a big boundary, but let's center in three percent. We are growing at a faster rate than we did last year. And so I think they have room to unwind.

Keep in mind last - the last two years we had a lot of fiscal drag because of the sequester. That has been behind us. So we have ample room for growth. We don't have the fiscal drag. We have a strong banking community. We have a - we have a rising economy due to our energy situation. So there are many positive things here. And so I think if it's not now I don't know how the Fed would unwind this. So I think they have room to unwind.

SCHATZKER: What if the market drops another five points and we are in a bona fide ten percent correction?

FINK: It depends on why. So if we saw a five percent correction because Friday's numbers was another 75,000 job growth, I think they would pause, but if we saw a five percent correction at the same time we saw 175,000 job created, I think they're not going to pause. I think it is going to be data dependent. Chairman Bernanke has already said it's data dependent. I am sure Chairman Yellen will be saying the same thing when she speaks.

RUHLE: Larry, you said in the first five weeks of the year it seems like many hedge funds are down around five percent. In 2013 a ton of hedge funds had a horrible year. Do you think we're going to see consolidation?

FINK: Well yes. There's already been consolidation. And they're going to continue to do it, but you're seeing some very successful hedge funds doing quite well. And you're seeing some of the other ones that are starting to struggle. So I don't find that to be a problem. That's the evolution in the marketplace. Winners take on more share. You see that in the mutual fund business. You're seeing that in the entire investment management business. I think the larger successful organizations are going to pick up more and more market share. And so I don't find that problematic.

SCHATZKER: Larry, you just said a moment ago that you still feel positive. Are you -

RUHLE: Hold on one second. And hold on, hold on. Are you in the market to buy any of these smaller funds that could be struggling?

FINK: Is BlackRock?



RUHLE: All right, just checking, all right.

SCHATZKER: I was just going back to -

FINK: No. So the fund happy where we are. And we have a great opportunity with what we have.

RUHLE: All right. Small guys out there, sorry, you were hoping at that moment that Larry is going to save you, sorry, tough luck.

SCHATZKER: You feel good about the U.S. economy and it's prospects.

FINK: I do. I do.

SCHATZKER: What about China? What about the other emerging markets?

FINK: So China is going through a tremendous change. They're going from a policy-oriented economy to a market-oriented economy. They've announced that. You're changing the entire way you think about directing governmental policy. I think it takes time to determine how you create the metrics for growth, how you establish the ways the market economy will grow and how you respond to it.

And so I'm quite surprised that the market is upset that the Chinese economy has slowed down in the short run because I think they're going through the recalibration of their economy, how to direct it. And keep in mind the Chinese have always been very deliberate focusing on the long term. And I don't think they're troubled with one month or one quarter of slowdown.

SCHATZKER: In the meantime though do you trust the numbers coming out of China? Does it matter to you whether Chinese GDP growth this year is six percent, seven percent, seven and a half, five?

FINK: Well I think the market would be very upset if we saw six handle.

RUHLE: But if you believe in that [sichee] - yesterday I was shown by Carson Block of Muddy Waters that don't believe a word you hear.

FINK: So I think - well I do believe - I don't - I would say their economical, statistical process is much improved than it was three years ago. They are much more reliant on global trade, much more reliant on global. So I don't think it's as problematic as some people believe. And I believe those who are probably speaking poorly about what's going on in China they probably have a short on. And I don't know who is -

RUHLE: That's who's talking there, yes.

SCHATZKER: What about some of the other global flashpoints right now?

FINK: The biggest flashpoints we have is we have growing instability, social instability in Turkey, in the Ukraine. We have problems in Brazil, Thailand. These are changes. And these are economies that you've had principally some bad domestic policy that has created these uncertainties. And these uncertainties are now translating into outflows in their economy.

SCHATZKER: But because they are domestic issues, do they have contagion potential? Or are they going to be contained?

FINK: So unlike the crisis we had in emerging markets in the '90s, the balance sheets of these economies are huge. The reserves of these economies are massive. So this is not a balance sheet problem like we saw in the '90s.

SCHATZKER: This is no '98, the cash flow issue.

FINK: This is - no. This is just the movements of money in and out. And this is that fast money. What I worry about is could you see governmental policy restricting how fast money goes in and out, because it's very hard to try to direct economy over a five, ten-year cycle and seeing these huge inflows and huge outflows. And so what I'm hearing, and in my private conversations with leaders and policymakers of different countries, they're very disturbed about this, the flows. Now they weren't - they didn't discuss the - how upset they were when all the inflows came in, but

RUHLE: They don't like that it goes out so quickly.

SCHATZKER: The Brazilians did.

FINK: Well they did. No question the head of the central bank there, Alexandre Tombini, was very upset he had to move interest rates around. So he's been a (inaudible) central banker, but these are big issues. And that even links into, I know you were talking about Lee related to activists. I actually believe we're at a tipping point.

SCHATZKER: You know what? Hold the thought.

FINK: Okay.

SCHATZKER: We want to ask you about activism -

FINK: Okay.

SCHATZKER: - and a tipping point -

FINK: Yes.

SCHATZKER: You wanted to make a point about activists. Lee Cooperman of Omega Advisors was on with us about half an hour ago talking about activists a little bit. He talked about Carl Icahn. He talked about SandRidge. What about - what's your view on activism?

FINK: So we have to happen to have a different view than - as the largest shareholder of public companies in the world, we're going to own these shares before activists are there, during activists there and after activists are there. So our needs, like most long-term investors, are going to really look at what the activists are looking for. And does that help a company over the long term? If it is for a short-term pop because they're buying back large scales of shares and burdening the company with huge amounts of debt that may not be the -

SCHATZKER: (Inaudible) private equity.

RUHLE: Is that how you view though the current rise in activism?

FINK: Well some are more talking about issuing large pools of debt to buy back shares. We're all in favor of making companies more efficient. We're more all in favor of making sure that we're - that whoever that may be a long-term investor or an activist is working with management to have the company perform better over a long term. If that's the motivation then we're very happy working alongside with them. If we find the motivation is just to get a real quick pop, and so the activist makes -

SCHATZKER: That's not long-term investing by definition.

FINK: And then so I can't be in favor of that.

SCHATZKER: What though - as you pointed out, BlackRock is the world's largest asset manager, among the largest shareholders of I think it's about 20 percent of the S&P 500. BlackRock is the largest investor.

FINK: I think it has to be more than that.

SCHATZKER: More than that possibly.

FINK: Yes. I don't know. It's just a -

SCHATZKER: So what is your view on wielding your might as a shareholder? Does - let's not call it activism. Let's just call it good corporate governance.

FINK: Well I think there is a line between what's definitionally good corporate governance and being an activist. I think we have - our - we have a huge responsibility with the companies, the pension funds, the individuals who have given us their savings and their retirement. And they expect to have a proper return over a long cycle. And we have to worry about all those outcomes. We talk about longevity and all the needs to having proper pools.

So we have - we believe that we have to be fully engaged with management. We established a number of years ago a full independent team to work with companies on proxy issues. And we were one of the first firms that did it. Every year - my letter will go out shortly about what we expect out of companies. We want to work with companies and management teams in terms of issues around proxy.

SCHATZKER: But what if they're obstinate?

FINK: I would say last year we voted 18 percent against management, and so about 80, which is so about 82 percent in favor. So if we are in a disagreement with the management team we'll vote against them.

SCHATZKER: Go to the board for that.

RUHLE: Have management teams reached out to you in the last year for advice and guidance on what they do?

FINK: We recommend they reach out to us. We recommend that -

RUHLE: But I mean and as they're really being attacked by all these activist investors that's not the relationship they've had with you. Is your phone ringing from CEOs saying, Larry, help us through this. What do we do?

FINK: No. They're asking us what can - can we get even more engaged.

RUHLE: Can you call Carl Icahn for them and do that now?

FINK: And that's not my responsibility, but my - and I actually have another call later today with a company CEO where -

RUHLE: [Levon Filison] where, yes, one.

FINK: Anyway, the - our job is to making sure that we're fully engaged in a dialogue with the management team continually. We want to be engaged with these management teams even if there's nothing activist. Our job is making sure the company is performing properly over a long cycle.

SCHATZKER: People like to say though that if you don't like it you can sell the stock.

FINK: I can't.

SCHATZKER: And see that's my point.

FINK: That's why I -

SCHATZKER: Hold on. Let him make that point though.

FINK: Yes. So activists or active investors if they don't like the management team they sell. And this is why we have a higher responsibility because a large component of our shares are in index funds and ETFs.


FINK: I cannot sell those shares.

SCHATZKER: So why not become more active? Why not use the bully pulpit that you have to do more than engage with management, and say maybe more loudly, maybe more clearly, more publicly this is what BlackRock, your largest shareholder, wants you to do because you're not acting in our best interests.

FINK: I believe - well I believe the best solution because we do wield a lot of shares is to do it quietly and constructively.

RUHLE: So are you saying that you've been doing this all along?

FINK: I think my team, because I personally am not involved.

RUHLE: You the universe of yes, yes.

FINK: My team are - have done this for a long time. And we have not changed our behavior. Our behavior is to have constructive dialogue. And it's important to have that constructive dialogue before a proxy. Come to us and talk to us about what are your issues. Come to us about what are you thinking about. Don't go to the proxy voting companies first. As their largest shareholder, one of your near largest shareholders, we want to be engaged with you.

RUHLE: You have the benefit of being those companies' first call now. You're the largest asset manager in the world. Turn the clock back 20 years if you were building BlackRock. Would you be singing a different tune and say I need to be an activist investor if I want to make a difference?

FINK: No. That's just not my personality. My personality is to work within the system, try to build long-term confidence between management teams and what we represent at BlackRock, because once again we're worried about long-term outcomes for our investors. We're worried about long-term retirement. I can't just focus on what will be good even for a year. I have to focus on what would be good for the company that we're investing and for the outcomes of our investors.

Copyright © 2014 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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