BlackRock's Larry Fink Sizes Up the Market

September, it is often said, is the cruelest month on Wall Street. With the markets and business focused on what looks like an uncertain fall, will that be true this year? BlackRock CEO Larry Fink, whose firm will control close to $3 trillion when its purchase of Barclays Global Investors is closed, is cautiously optimistic about the performance of the stock market in the near term.

MARIA BARTIROMOThere's obviously lots of exuberance in the market. How do things feel to you?

LAURENCE D. FINKThings are healing. You know we had, essentially, five months of total fear, starting with the nationalization of Freddie Mac (FRE) and Fannie Mae (FNM) and the failure of Lehman Brothers. Then going into the first part of this year, we just went from worse to worst. Now people are more confident that we've seen the bottom. But it will be another two or three months until we can be sure that the economy is really on a stable footing.

Is the market—and the money that's been on the sidelines and is moving into the market—expecting too much?

I don't think so. There's so much money sitting and earning zero or close to zero. I think it doubtful the market can go up another 20%, but I believe we can go a little higher because there's so much liquid money. I don't believe the Federal Reserve is going to raise interest rates anytime soon, and so putting some money to work in equities is probably a responsible thing to do.

How are you investing right now?

We are constructive in equities. But I believe for the markets to do substantially better, we're going to have to see validation in the economy. And I don't think we're going to see that much of it in the near term. We are still in an environment where employment is going to struggle. We believe unemployment will be over 10%. I think CEOs are reluctant to hire because our memories are still pretty vivid about how bad it was just five months ago. And there is great uncertainty among CEOs and management teams about raising the income tax, about cap and trade, and about how the health-care bill will end up. And we believe the next wave of employment problems is going to be in state and local governments. You know, people ask me, "Is this a V economy? Is this a U economy?" And I like to call it the swish economy. It's almost like the Nike (NKE) swish. It's just going to go up very modestly for the next few years. It's going to be better, but it's not going to be what we expect after a very severe recession.

NYU economist Nouriel Roubini would say it could be double dip because of worries about the exit strategy of the Fed and what happens with inflation or commercial real estate.

I think inflation could be a problem out two or three years, but I'm not terribly worried about that at the moment. In terms of commercial real estate, bubbles generally blow up because people are not paying attention to the problem. There is no one who's not paying attention to commercial real estate. So I don't think it will be the cause for another dip in the economy.

What do you worry about?

I worry about the dollar. I worry about our competitiveness as a nation. Look at what Brazil is doing now in terms of lowering taxes for companies and building long-term infrastructure projects. You see what's going on with the stimulus package in China. Almost its entire $700 billion stimulus package was towards infrastructure. And I see other countries spending more time working with business in building a better and brighter future. We are still too focused as a nation politically and in business on the next quarter, and we're not responding to the long-term issues of this country.

Do you think we need an agency to oversee consumer credit?

I think there's a great need to protect consumers more than we've done in the past. Mortgages are a great example. We had a mortgage system that was out of control. I believe we need a system in which we protect our citizens so they feel they're not being misled. We'll have a better, more robust economy once consumers start feeling they are protected.

How have things changed in the year since the Lehman failure?

Well, we have more government involvement and a rising populism about the nature of the financial system. We have a more conservative business environment. We have an investment community that feels burned by so many poor investments over the last few years. But there are many positives from the change. I believe our system is healthier now. Our banking system is going to be much healthier and less reliant on leverage. But probably the most important change is to our psyche. I think today people have a much deeper appreciation of liquidity, a much deeper appreciation of leverage. Because of the nature of where we are, people are focusing on longer-term investing.

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