Larry Fink: BlackRock's Bear Starts to Feel Bullish
Larry Fink, the mastermind of mega-investment firm BlackRock (BLK), readily concedes that he built his career by being bearish. But right now, while he stops short of calling a market bottom, he is sounding a whole lot more bullish. In recent days, Fink has been traveling around the world—China, Saudi Arabia, Dubai, and elsewhere. When I caught up with Fink on Mar. 11, I was in London and he was in Riyadh, and he lamented the fact that he "was missing all the fun" in New York, where the Dow shot up more than 400 points. But Fink, whose firm controls over $1 trillion in assets, has big-money investors to confer with as he plots his strategy for what he acknowledges are scary days on Wall Street. What he is telling major clients is that once stability returns to the markets, all the cash that's on hold will set off a massive rally. So act now.
How are you feeling about the credit crunch and unrest in the markets? Where are we right now?
LAURENCE D. FINK
Back in the fall I said markets cannot hit bottom until there is a capitulation or people begin selling. We're at a point where people are capitulating and selling. But these are frightening times. Every day you read about the impairment of one hedge fund or leveraged lender; about stresses with banks and security firms over their balance sheets. So the question is: How low does the market go until it finds a bottom? It's hard for me to tell you the bottom is here, but I'm telling all our clients worldwide that for long-term investing, the credit markets represent great values. Fannie Mae (FNM) and Freddie Mac (FRE) mortgage securities are at spreads we haven't seen in tens of years. And we're investing selectively in certain financial institutions' credits.
The Fed's action on Mar. 11 set off a rally, but we've seen that happen before and the rallies didn't last long. Why could this time be different?
The problems the Fed and our government are facing is that lowering interest rates has actually aggravated the credit markets they're trying to fix. We are experiencing a liquidity problem. But what the Fed did today was very different than any other action it's taken. It is proposing to offer Treasuries in return for other types of collateral to security firms. This is very important and is a strong statement by the government that it wants to fix this liquidity problem. They're saying that in exchange for Treasuries, they'll take in mortgages. So they are trying to reduce the balance-sheet stresses at banks and security firms over their mortgage holdings. In fact, some of the major catastrophes or bankruptcies or failures we've seen in the last few weeks involve entities that held prime mortgages.
But what about the subprime part of it?
Everyone is still fixated on subprime. Subprime was yesterday's problem. I don't want to say it's not still a problem. But the bigger problem today is in other asset categories—prime mortgages, leveraged loans, and other forms of leverage. I think we're going to see next week, with first-quarter earnings from Goldman Sachs (GS), Lehman Brothers (LEH), and Bear Stearns (BSC), that if they show any impairment—and I'm not saying they will or they won't—their impairment isn't going to be in subprime. It's going to be in bank loans. It's going to be in commercial real estate. It might even be in prime mortgages.
You've been traveling throughout Asia and now the Middle East. What are you seeing?
The U.S. is experiencing some difficulties. And because we are a large component of the world economy, we are seeing the impact worldwide. But Europe is facing the contagion, too.
They're sitting with losses on their balance sheets, but more important, a euro at 1.52 to the dollar is a very difficult level to compete with U.S. industrial companies. If anything, you could become even more bullish on the GE (GE)s and the United Technologies (UTX), on the IBM (IBM)s and the Boeings (BA) vs. our European counterparts. Everyone is focusing on the financial institutions' plight and the American consumer, but our exporters are probably going to enjoy a very solid year.
So you're bullish on those companies?
I am very bullish on some components of our economy. I think we are in a recession, but I believe our exports will probably make this recession less severe than it otherwise would have been. But getting back to the world, we are seeing a slowdown in the Asian economies, a tremendous slowdown in Korea and in Japan. We're seeing a slowdown from maybe 12% GDP [growth] in China to 8%. In the Middle East, we are still seeing a huge boom in infrastructure. However, the one contagion that we are starting to see in China and certainly in the Gulf region is an untenably high inflation. My worry is that inflationary pressures from the Gulf and China, combined with low interest rates the Fed has put in place, could create higher inflation in the U.S.
Do you buy into the idea that we could see a bubble in commodities?
I would say the biggest bubble is in U.S. Treasuries. I think U.S. Treasuries represent one of the worst investments in the world. If the global economies do slow down, commodity prices should slow down, too. [The runup] in commodity prices is because so much of our markets are being driven by hedge funds, and most hedge fund managers are momentum traders. So they're buying long positions in commodities because the momentum is for higher prices. I don't believe the economic activity we're seeing in the world justifies these commodity prices.
What's your reaction to what's happening with oil?
No one I have met believes oil prices should remain at current levels. They believe it's purely driven by speculation—not fundamentals.
Is it fair to say that you feel optimistic about prospects in the U.S. right now?
In the past eight weeks we have raised over $50 billion at BlackRock in our money market funds. This is money that customers are worried about investing in long-dated assets—equities, real estate, and bonds. They're just putting it in cash. And once there's a feeling of stability, you're going to see all this money—not just in BlackRock's money market funds—reinvested. When that happens, there will be a massive rally, and it's going to be too late. So what we're trying to tell our clients is that we believe at these prices, now it is time to start investing. Don't run away from risk. The market is paying you to take on some of this risk.