Laurence D. Fink, chairman and chief executive officer of BlackRock, discusses the challenges facing the global financial system.
This meeting is part of the CEO Speaker series.
MARIA BARTIROMO: Good morning, everyone. Great to see you this morning. Thank you for coming out and joining us today for the CFR meeting. Welcome to all of you. Welcome to our members. This, of course, part of our CEO Speaker Series. And we've got a really exciting and interesting morning for you.
Just a couple of notes. Please turn off all your cell phones -- don't put it toward "vibrate," because it does impact the actual transmission -- BlackBerrys, all of the wireless devices, to avoid any interference this morning. We appreciate that.
I'm thrilled to be here with Larry Fink, who, of course, is one of the great entrepreneurs and businessmen, financial titans, of our time. Larry started BlackRock first when it was a part of Blackstone. He then moved -- spun it off into its own firm and has managed to grow the firm really extraordinarily, now boasting assets of more than $3 trillion, the largest asset manager. So we really (will glean ?) great value from our discussion with Larry this morning.
So we will have a Q-and-A session. We'll open it up to all of you. Of course we have terrific brilliance in the audience, and we want to hear what's on your mind, and Larry's excited to take your questions.
But we'll begin with Larry talking to us about what's going on in the world today. He of course is the chairman and CEO of Black Rock. He leads the company's global executive committee. He led the firm through its entire two decades, founded it -- co-founded it. He was named CEO of the decade by Financial News in 2011 and has been named one of the world's best CEOs by Barron's each year -- each year -- since 2005.
By the way, he is also a member of the board of trustees of New York University, chair of the financial affairs committee and a member of the executive committee, the ad hoc committee on board governance and committee on trustees. He is traveling extensively around the world and has access to the great minds and deep-pocketed investors globally -- and, again, all the more reason we want to hear from him this morning.
So let me introduce Larry to give us his opening remarks
Ladies and gentlemen, Larry Fink. (Applause.)
LAURENCE D. FINK: Welcome, everyone. Thank you, Maria, and it's really nice to be here, especially with one of my mentors in my career, and that's Pete Peterson, who has been so influential in the council.
Pete, thank you for all the help. And much of my success is due to the -- those few inspirational years I had with Pete at Black Stone (sic).
I would like to welcome everyone today. I know it's morning. We're going to have inclement weather. So it's -- it's always nice to see such a hardy audience early in the morning.
So let me talk about my vision of the world and where I see it. Let us -- (I'd ?) like to just -- also just talk about -- it's really -- (audio break ?) -- to be a part of this session, with all the distinguished guests here today at such a great, respected forum. And it couldn't be more important today because -- and relevant today given how interconnected the world is and how we are so connected globally.
As daily headlines on European debt makes abundantly clear, the economic destinies of people across the globe are inextricably linked. It is no wonder that for all the record, recent, hopeful signs of economic recovery and rebounding markets, there's still a gnawing sense out there that things are just not right.
Every CEO I talk to -- and I talk to quite a few worldwide -- are telling me virtually the same thing: that business is actually a little better than they planned. It's -- it actually is starting move to dial. But they then cautionly say, but things just don't feel right; they feel, in some respects, really bad.
So lacking this confidence in the future, they're continuing to build their cash even as earnings improve. And from kitchen tables to trading floors to street protests in Athens, London or Manhattan, people are angry, they're frustrated, they're confused. They're worried about stagnant incomes and, of course, eroding savings. They're worried that government promises of secured retirement are simply impossible to meet, and they're looking for leadership, and they're looking for answers.
Fundamentally a broad crisis of confidence is paralyzing our ability to make long-term decisions. Much of the problem is our inability to look beyond the latest headlines as they change minute by minute, with every blog or every website. Whether it's about the Greek debt or whether it's about gasoline prices, in today's wired world people are bombarded with so much information and news. Even if much of the news is good, it's very hard to interpret the good from the bad. It's affecting the business decisions from everyone from the corner office to the corner drugstore and having a deeply unsettling effect on the markets with dramatic swings in trading. It's this shortening time horizon, not just for investors, but politicians and businessmen -- this fixation on the short term is also blinding society to powerful forces to -- in reshaping the world. This new world, if you will, is being defined by three far-reaching and closely intertwined trends that are disrupting markets, economies and many sectors of society.
The most -- the most sweeping, yet most overlooked is the great aging. According to the United Nations, the over-60 age group will roughly triple in size to 2 billion people in the next four years, growing more than twice the rate of the rest of the population.
This worldwide phenomenon is already placing major strains in the entire global system. Living longer should be a blessing, but many older people are now afraid of outliving their savings. In the United States alone, the combined underfunding of Social Security and Medicare over the next 75 years exceeds a shortfall of $40 trillion, according to the program actuaries. U.S. pension funds at year end were underfunded by an average of 33 percent, according to BlackRock. Also according to BlackRock, the average defined contribution plan is underfunded by over 40 percent, so even worse than defined benefit plan.
And around the world, we're facing an unprecedented simultaneous withdrawal of both financial and human capital from the system. Let's just look at Japan. It's long had one of the world's highest savings rates, which helped fund our government and many other governments' deficits around the globe. But it also has one of the world's oldest populations. But it also has one of the -- so Japan will soon shift from a net saver to a net seller of assets. This will have a profound impact on the -- on the world and on government deficits.
Unfortunately, this great aging coincides with a great deleveraging. The financial and corporate sector and households across the developed world continue to reduce debt and derisk in the wake of the financial crisis. It will shape investment, returns and spending for years to come.
As The New York Times pointed out last week, anxiety about assuming long-term obligations is shifting in the United States from a nation of homeowners to a nation of renters, even as we witness rising rent prices and affordability for housing at -- almost at a record level.
And the global deleveraging is being compounded as governments around the world pursue austerity plans to address deficit spending. Governments won't be a source of job growth going forward, as it has been in -- for many years in the United States. So job creation will require a much more meaningful partnership between government and business.
And further complicating these challenges is the great migration of the engines of global growth to the emerging markets. Over time, this shift of economic opportunity will help create a more stable world, but for now it's fueling much more global anxiety. It's driving global disparity in income on both ends of that migration. Those adept at navigating a global economy have adopted and even benefited while many others have been left behind. So we shouldn't be surprised by the social unrest it caused, whether it's Occupy Wall Street or the Arab Spring, with its powerful economic undercurrents.
To sum it all up, we're in a perfect storm right now: aging population, deleveraging economies, shifting jobs, income inequality wrapped up in low growth and low yields -- just when people need better returns and a better economic opportunity.
So in the midst of the perfect storm, with everyone focused on the next change of the prevailing winds, with confidence so scarce and volatility so broad, I get asked the same question wherever I am. I could be in Abu Dhabi. I could be in Beijing, Sao Paulo, Zurich or right here in Manhattan. The question is simple: What do I do with my money?
Whether it comes from an individual, a corporation or a pension fund, my answer is all the same: You need to get off the sidelines and get your money working again. It's the only way individuals can achieve their financial objectives, the only way corporations will achieve growth, the only way pension funds will meet their commitments and the only way governments can address the great public policy challenges we face. Whether it's funding retirement, supporting education or rebuilding our infrastructure, all of that is really only doable if we reignite growth.
So to meet our global challenges in this new world, we must, at every level, turn savers into investors.
Worry about the future is driving up short-term savings. The FDIC data shows that bank deposits hit $10 trillion at the -- at year end, up from $6 trillion in 2004. They grew three times faster in the first nine months of 2011 than they did in 2010. In China, despite strong growth, investors are keeping far too much of their savings in short-term deposits, and if this trend continues, there will be a need from other sectors to finance growth.
In the same way nonfinancial companies in the S&P 500 held more than $1 trillion in cash as of the fourth quarter of last year, according to Standard & Poor's -- this is the highest percentage of all assets since the 1960s -- for CEOs sitting on much cash, this will ultimately push down their PE ratios.
So what do we do? How do we get all the money working again? How do we reignite long-term investment and growth?
First we must help investors adapt to the new world. It's in everyone's interest to bolster confidence in the long-term investments, but I'll be the first to say that the asset management industry has not done a great job in helping investors take a long-term view. We have to step up to offer guidance and provide answers. To finance longer life spans, we must convince individuals to start investing now, for the long term. But longevity should be an asset that can be levered, not a curse. They must understand that there's a cost to sitting in cash. No one talks about that cost. They talk about the cost of volatility, they talk about the cost of making the wrong short-term decision, but no one is talking about the cost of inaction.
We must understand that sitting in the cash, even in low inflation -- and we need to focus on that for individuals and for society -- people unable to afford retirement will continue to work longer, shifting economic opportunities for the next generation, pushing unemployment rates for younger workers even higher than they are today.
We need to educate investors about conforming -- confronting the growing gap between needs and resources for retirement. In particular, companies have a moral responsibility to educate their employees. Shifting from a defined benefit plan to a defined contribution plan doesn't absolve them of that responsibility.
That means getting investors beyond a now inadequate 60-40 portfolio mix of stocks and bonds. I personally have said many times I'd be a hundred percent in equities. That fits my risk profile and my views of the world, though obviously it's not appropriate for everyone. Most investors need a more diversified portfolio. But virtually every investor has to find ways to achieve a better return than they'll get in cash or government bonds for the foreseeable future.
Possibilities including looking at new sources of income, like dividend-paying stocks, higher-yielding corporate bonds, using both passive and active strategies, and alternative investments, which are now becoming more widely available for individuals.
At the institutional level, we need to help public and private pension funds face up to the adjustments necessary to meet their obligations to their members, such as revisiting outdated, overrestricted investment guidelines.
The financial community and government can help -- also help turn savers into investors by finding consensus on practical regulation that increases confidence in our markets. With Basel III, banks will be even more conservative in their lending, and we'll be even more reliant on the capital markets in the future.
So it's vital that the financial community and governments find consensus on practical regulation that promotes confidence in our markets. For example, a new regulation last month by the CFTC to protect the collateral that customers proposed -- when searchly -- when centrally clearing over-the-counter derivatives will promote greater confidence in these markets. In the coming months, I also hope that similar protections will be welcomed for future tradings.
We need financial products and disclosure that ensure individual investors know what they are buying, including real risks and real costs. We believe, for example, that in the fast-growing ETF sector, better labeling will boost investor confidence. We need a tax structure that encourages long-term growth, including a capital gains tax regime that rewards investments over multiple years. The holding period for an investment to qualify for long-term capital gains tax treatment should be extended to three years from the current 12 months, and the rate should decline the longer one holds that investment.
Finally, governments too need to take a longer-term investment perspective. Just as individuals and institutions should understand that they cannot count on returns in one quarter or one year, governments should consider investments that may not deliver returns for years. We need government leaders willing to rise above partisanship and make forward-looking investments in crumbling infrastructure and basic research.
And probably the most important long-term investment society can make is in education, an antidote to today's short-term preoccupation, a means to filter the day's headlines and see longer-term policies and to adapt to the competitive demands of the information age, where even unskilled positions today require technology competence.
The transformational challenges and the resulting crisis of confidence that we face as a global society are daunting. But we are better-equipped than at any time in our history to respond. After all, we possess unparalleled knowledge and experience, financial and planning tools, technology and analytics, and we are connected across the world in ways that were just unimaginable a very short period ago.
In this new world, we can help build -- rebuild confidence. We can rebuild confidence in getting the markets to moving again, restoring growth and turning short-term savers into long-term investors. It is our responsibility as leaders of business, finance and government. All of us must come to this -- come to this answer, and all of us must come to the call right now.
Thank you. (Applause.)
BARTIROMO: Thanks, Larry. You made great points in terms of broad issues that we're all living through and facing. And before we get into sort of what that means to us and how to actually approach our financial lives as a result of the changes that we're seeing, let's drill down on a couple of those broad issues that you just mentioned.
And one of them, of course, is the government deleveraging, governments around the world deleveraging. This morning, of course, we did get news from the European Central Bank that the ECB is putting forth another lending facility for the European banks, the LTRO. Give us your take on the impact of that. Is this going to make a big difference in Europe?
FINK: In the short run I think it's absolving much of the problems. There are many facets that are going on in Europe. The crisis that we saw last fall was a liquidity crisis. You had the regulators telling banks that they have to conform to Basel II by this summer, and then you have the pending Basel III, which will be out in 2018 when -- (inaudible). And on top of that, you had failing markets. Markets were not able to respond. And actually, it was the banking system that was selling assets. And so you had a deterioration of all the sovereign credits that really jeopardized the stability of the euro community. You had yields over 6 percent for Spain and Italy.
This -- and so it was a liquidity crisis that we experienced in Europe, not unlike the liquidity crisis we experienced in the United States. By providing this liquidity facility, it stabilizes liquidity, and you're -- you just don't see the pressure from the banking community selling. Much of the assets the bank owns are two, three-year maturity. So by providing this lending facility, those banks don't have to sell. They're going to see those loans slowly roll off. And so it does absolve much of the problems in the short run.
But I think most importantly, by absolving the liquidity crisis of Europe, it is now giving the new governments of Greece, the new governments of Italy, the new governments of Spain time to fix their political situation and their economic situation. So in Italy and Spain specifically, you have two new governments who have now publicly stated, we're going to manage our deficits accordingly; we're going to have these austerity plans. That's only part one. Part two, we need growth. If we don't have growth in Europe in three years, this thing all falls apart again. So it -- this is not a -- this is not a fix. It's -- but it's a stability to give governments time to work their problems into a more favorable position.
BARTIROMO: I feel like part of the reason that individuals as well as corporations have been sitting on cash is because Europe has been a wild card. And we're really not sure how that spills over onto the United States. So as a follow-up, are you more comfortable today that the European upset is less likely to spiral onto the United States and impact this economy negatively?
FINK: Well, I think for 2012 I think we are going to see a stable Europe, even with Greece. I mean, you know, I would not be surprised to see some event that may force some change in the relationship between Greece and Europe. There may be some evidence of default sometime in the future.
But I believe that result is going to be less problematic. I think -- (inaudible) -- very successful in stabilizing and firewalling the rest of Europe, and therefore, if there was that event -- and I'm not saying there will be, but if there is that type of event, I think Europe even will be a more stable place. So translating that back to our shores, I don't think Europe is going to be a cause of concern for our economy. I think the only cause for our economy would be if, through these facilities, could we see a devalued euro.
Now, the euro has actually rallied because people are less frightened of the future of Europe, but if we had a euro that was pushed down to 115, to pick a number, that would have serious implications for our job growth. I mean, we benefited mightily as a country of having a weakened currency. And so I guess I'm not worried about -- I'm not worried about failure of Europe in 2012; I'm worried about success of Europe in 2012 and what does that mean for our shores.
Out 2014, though, if Europe does not find sources of growth, of economic growth, then we have a much more serious problem ahead of us, because, you know, they already did these lending facilities, and if we still, after a couple years time, cannot find a mechanism for GDP growth, then these countries' ability to -- you know, to afford these deficits become more problematic. And so we have two years in front of us to see if Europe can stabilize its future.
BARTIROMO: And under the umbrella of, OK, what does this mean to me now and what do I do now with my money, you mentioned longevity. You know, it seems like every time we discuss longevity -- I was having a conversation with someone in health care recently, and he said, you know, Marie, we're living longer and we are really facing a crisis.
And I said, whoa, whoa, whoa, stop right there. We're facing a crisis? Listen to what you just said. We're living longer. We're living longer. This should be a positive, not a crisis. Why do you point to that as one of the overall big issues that we face today, longevity?
FINK: I think we focus way too much on the directions of the market every day, and as I said, people are frightened of, you know, what that market behavior will do. And so we're seeing just many people are frozen. No one is asking the question, what is that cost of doing nothing? I don't hear any blog or news station or newspaper that talks about the cost of doing nothing. It is enormous a cost. And if you're a 35- or 40-year-old and still haven't been preparing for your retirement in any way, each year goes by, the deficit or the shortfall that you're going to have is huge.
And so we are going to live longer. We have been able to -- lot of science is -- we've turned a lot of deadly diseases into chronic diseases. You know, if you are a couple in fairly good health in your 60s, the statistical probability, one of you is going to live to 92 now. And, you know, you're going to need an enormous reservoir of savings to achieve the lifestyle or the standard of living that you're looking for.
So I think we need to have a call of -- you know, call to arms right now that we need to focus on the costs. And we got to do it at the individual level so it doesn't become a bigger federal burden or state burden. Obviously, it still remains to be a big state burden, but I think it's a responsibility for every state fund, every corporate plan to help educate their workers -- and I mean part-time workers and full-time workers -- about what it takes to build the necessary nest egg. You're not going to be able to rely totally on Social Security, and so it's going to have to be through these private means. Other countries in the world have adopted some very sensible retirement plans, and in those countries they've addressed these issues, like Chile and Australia, where there are sensible plans in which people have to save for retirement.
BARTIROMO: Are you surprised that ever since the U.S. got downgraded, all this money has gone into Treasuries?
FINK: No, because a Treasury is a benchmark, you know. So if you think about a swimming pool and the volume of water in a swimming pool, and that the Treasury component of a portfolio represents, let's say, 30 percent of that volume of water -- and I'm talking about the volume of water and degrees of risk.
And so we got downgraded, and so definitionally now that volume of water of risk increased. So Treasuries went from that 25 percent volume of water to 30 percent of risk because it was downgraded. So you needed to sell other things if you wanted to keep your risk appetite the same. And so you didn't have to sell Treasuries. You -- if you wanted to keep your risk appetite the same, that means you had to sell other things, so Treasuries actually did fine.
BARTIROMO: Give us your sense of the secular shifts going on in the global economy right now. You're traveling all over the world. We're hearing a lot about Latin America, particularly Brazil and the vibrancy there. We're hearing a lot about, of course, the growth in China, even if it has slowed down. What's your sense how significant is the global slowdown, China having been the engine of growth for the world? And what's going on right now in Latin America or other places you'd like to mention?
FINK: Well, I think Latin America experienced a slowdown in the third quarter. You saw Brazil going from a 5-ish percent GDP in the first quarter of last year to zero and I think in the fourth quarter sort of turning back up. But we've seen a slowdown throughout the world.
I don't believe China is slowing down in 2012. I know I'm in a minority in it. I personally believe the present leadership of China have been very successful. I can't imagine them wanting to hand off the economy to the new leadership with the economy in a soft landing or hard landing. It doesn't seem that -- you know, you're not going to want to hand off after having such a great tenure of success. So I believe you're -- and you're starting to see evidence of their easing quite a bit to assure that the economy grows at 8 1/2-plus (percent) for 2012. In the last few weeks you've seen governments encouraging banks to roll over debt, and you've seen last -- I think it was last week -- the governments reduce the reserve requirements in China. So they're actually easing now to restimulate the economy.
BARTIROMO: So you're worried -- one of your big concerns is the fact that we are sitting on such low-interest-bearing money, and we're not putting our money to work. How are you putting your money to work, and what are you hearing from the many deep-pocketed investors that you're speaking all around the world in terms of how they're getting return?
FINK: Well, we're seeing some very large flows. So we are starting to see some money being put to work. This is obviously why we've had this rally here today where the NASDAQ is up 15 percent, the S&P is up 9 (percent), most global markets are up 9 percent. So you're seeing money starting to be put to work, and you're seeing the flows are in areas like high-yield. You're seeing huge flows, like record flows into high-yield funds here today. You're seeing record flows into dividend-oriented stuff. So I think investors are starting to look at these opportunities.
We're seeing -- but overall, there's still this sense of confusion. There is still a huge allocation in cash, huge allocation in bonds. So I just think on the margin, people are putting the money to work. We're seeing a -- we're seeing huge reallocation into alternatives, which actually gives me a more constructive view on equities as more money runs away from equities in some areas into alternatives.
So I -- it really -- investors worldwide are asking the same question: What should I do? And depending on their risk appetite, depending on their liability needs, you're seeing -- you're seeing behavior that is -- it's not behavior that you could say is uniform. It's individual behavior depending on the needs of each individual investor.
BARTIROMO: So you think that is appropriate to be looking at dividend payers, to be looking at these high corporate bonds? Is that what you believe is appropriate?
FINK: Yeah, I mean, if you -- let's talk about Verizon, a great New York-based company. It pays a 5.30 (percent) dividend. Their 10-year debt is 3 1/2 percent, 3 (percent), 3 3/4 (percent). Even let's talk about a bank that everyone was worried about only five months ago, Santander, big in the United States, big in South America, big in Great Britain and obviously the largest bank in Spain. It's paying a 9 percent dividend.
BARTIROMO: Do you think that'll stay like that, 9 percent?
FINK: Yeah, I do. Well, no, it's going to get -- I assume the stock price will rally, and then dividend reprice -- the dividend will be less. But I just think there's some great opportunities where you can buy stocks that are paying you a dividend that is far more rewarding than owning, you know, 10-year U.S. treasuries at 1.94 (percent).
BARTIROMO: I want you to expand on one thing you said in your -- in your remarks, and that was about Japan. You said we're about to see the Japanese become -- go from net savers to net sellers of assets. What's the impact? What are you expecting?
FINK: Well, first of all, it's just age, you know. It's been a great society of savers. And over the next 10 years, they're going to be retiring and they're going to have to start spending that retirement. And it's just pure math.
And it -- this should be a wake-up call. We have time, but it should be a wake-up in our country about making sure that we are navigating our deficits. I think most recent statistics will say that Japan is the second-largest foreign owner of our debt. And it's just pure math that will tell you that ultimately, these -- this nation of savers will have to be more -- spending that savings, and that will reduce their ownership of U.S. Treasuries.
So -- and so it should just be a long-term wake-up call, and we should be prepared for it. This is not a train wreck. It will be a train wreck if we don't prepare for it.
BARTIROMO: And amidst all of this, we are also sort of questioning and debating the regulatory environment.
BARTIROMO: You mentioned in your remarks the tax structure and some changes that are needed there. You mentioned Basel III. Give us your sense of the regulatory environment, how it may change. And do you believe that the current system is one of the reasons that companies are sitting on cash and unwilling to pick up the hiring pace?
FINK: Let me answer the latter part first. I think -- I think most CEOs want to put that money to work. They know keeping all that money in cash drags down earnings. These are rational men and women who are running our companies. They're basically saying, I -- you know, I know I'm dragging down my earnings by sitting -- keeping all that money in cash, but I'm not confident of putting that money to work, and therefore I'm going to drag down my earnings with all this money in cash.
We need to find a way -- and it's -- I don't think it's Basel III, which I'll talk about -- we need to either -- we need to build that confidence that spending that money is a better return on their investment than earning zero, that spending that money is better for their careers. We have to all remember, the average CEO in America has a term of five years. And so a lot of times, when you're building -- doing large capital spending projects, it's a drag during their tenure, and the results may not be achieved until someone else's tenure. So you have to feel very confident that -- spending that money with a short horizon. So we -- you know, I didn't say in my speech, but we should also understand the horizons of leadership is shortening now too, and -- which has an impact on how you spend your money.
Basel III is just -- you know, to me, Basel III is no different than Dodd-Frank. It is society saying our banking system was too risky; we need to have buffers so governments don't have to stand in between the failure of a bank and society.
There's cost associated with that. So the men and women who run banks worldwide -- they're rational people. Their capital has gone up; therefore their cost -- their need to make a return on equity has to go up, because they have more equity capital. And so by definition, they're going to have to charge more for their services. So that means all of us -- all the pension funds, all the investors -- we have added cost.
So the -- so if we don't use our capital markets and enlarge our capital markets, you know, the banks are going to charge you more for their services to make the appropriate return on equity that shareholders demand. And that's what -- that's what society wanted with Basel III. That's what society wanted with Dodd-Frank. And so this is -- so for us to reduce those added costs, we need to have a more fulsome global capital market, so corporations can fund and governments can fund and grow.
BARTIROMO: Are you expecting the Volcker rule to be implemented in July? (Laughter.)
FINK: I think some form of the Volcker rule will be implemented. I think the Volcker rule has some holes in it. We are not in support of it. We sent the letter as a firm. It's very hard for me to understand how to navigate the Volcker rule. What is proprietary trading? What is flow trading? It's going to be very definitional.
But I do believe the Volcker rule gives the Federal Reserve a lot of latitude. And so I do believe the Volcker rule will be effective in July. We won't know how it's going to be manifested by the Federal Reserve. How will they interpret flow trading versus proprietary?
So if a securities firm, a bank buys a bond from BlackRock or -- and they can't readily sell it, but they sell another instrument to hedge it, definitionally will that be called flow trading? Or definitionally will that now be called proprietary trading -- therefore, it's an illegal action? And so it's going to be up to a huge amount of interpretation. And this is why it's so confusing, and this is why I think it's so debatable, because it's very -- you know, it's very hard to understand how will the Federal Reserve navigate this.
BARTIROMO: And you're -- and you're saying, look, you need to be active and not passive. And you need to control your money and make your money work for you because the forces around us are still in place, whether it be this uncertainty around regulation, whether it be these low-yield environments, whether it be the pressures from longevity or whatever else. So tell us your plan, in terms of navigating all of these issues? In straightforward way, what are you doing as the largest asset manager today?
FINK: What I try to tell all our investors at BlackRock is, one, try to filter out all the noise. We are going to have more regulation of some sort. We're going to have more uncertainty. We're going to have issues around Europe or China. We're going to have elections in France in May, which will have a pronounced impact on where Europe goes. We're going to have elections here in this country. So we have all these different issues.
But inaction is just the wrong decision. And as I said earlier, the sooner you start putting that money to work to earn 5, 6, 7 percent returns, the sooner you start navigating a horizon beyond 10 years for retirement. You can't focus on the minute. You can't focus on the noise.
Now, I'm not trying to suggest we could have -- you know, we may have the market fall back another -- you know, back to where it was at the beginning of year, so I'm not trying to suggest when or where the entry level is. But the longer you have a view over a long horizon to meet a target -- and this is really critical -- the longer you have this view and a need -- so if earning 5 percent is the right amount of return you need to get to your nest egg that you need, it really doesn't matter, your entry level. And so I'm trying to get around day trading, trying to getting around the notion of, when should I jump in? The markets are going to move up and down.
BARTIROMO: Don't time the market.
FINK: Yeah. And yet, you know, we have, you know, hundreds and hundreds of people talking about market timing and when to get in and when to get out. And that to me is a noise that we have to remove. We have to ask ourself each individually, each company, what is right for you? What do you need?
Some person who has a lower standard of living need may only need a 4 percent return. I could live with that $1,200 a month of monthly income. I could live very successfully. Another person would say, gosh, I need 3,000 (dollars) a month or 4,000 (dollars) a month. And so you have to work backwards.
Now, obviously, inflation will erode that future value, and so you have to add some type of inflation quotient in there. But I really do believe we need to start asking these easier questions about, what do you believe you need to have the standard of living you need to? And stop focusing on the noise.
The noise is confusing. And in most cases, the noise, in my opinion, is a healer. The noise is not -- should not be considered destabilizing. The noise, in our democratic society, creates movement, and most of the time the noise actually resolve(s) most problems.
BARTIROMO: And there's a lot of -- and then a lot of noise out there.
We're going to open it up to the floor. We want to hear from our members. But before I do that, the NASDAQ being up 15 percent and the 9 percent on most major averages, is that appropriate, in your view, given the economic backdrop in the United States?
FINK: Well, if you just answer the -- in the -- if you put it in the context of where we had in the last two years, it's -- we've had so much derisking going on that you're just seeing now people going back into the market.
Let me just say one last point about why I think it is appropriate. Because of the credit crisis, most financial institutions have shortened up the maturity of their assets. Most people don't talk about this. But at the BlackRock Investment Institute, we calculated insurance companies to have $600 billion of purchasing power this year. That means they have $600 billion of assets that are rolling over. I'm not even talking about the banks.
So you add up, just because of shortened duration of portfolios, and the rollover of insurance companies, the rollover of banks that need to put money to work, on top of all the cash that's sitting in corporations, all the other cash that's sitting around, you know, I still believe the marketplaces have a lot more movement upward. And also, I believe this answers the question why rates are staying so low, because the amount of money that's sitting there is so enormous.
So if you add up this continuation of deleveraging that's happening in our country, even with the federal deficits, we're going to have $200 billion less outstanding debt as a nation. Last year we had $300 billion less debt. So we are seeing this deleveraging happening as a society at the same -- you know, so at the private level, we're seeing a huge deleveraging as the public sector deficits are $1.2 trillion.
So even with this $1.2 trillion deficit, we are seeing less outstanding debt as a society. So you factor in the less outstanding debt as a society, coupled with a short duration of maturity that banks and insurance companies -- it doesn't surprise me that we continue to have low rates. We're going to continue to have low rates, which from my perspective gives me a foundation to believe that equities are going to be a great place to be.
BARTIROMO: Question from the audience. Dan?
QUESTIONER: Good morning, Larry. Daniel Arbess from Perella Weinberg Partners. Your observations about investors not achieving their return hurdles are, of course, of great concern. We're in a global debt deleveraging, where central banks are effectively practicing financial repression on all kinds of savers, pushing people into riskier assets.
My question follows Maria's last question, which is, the notion that you can get a higher return on equities is an interesting notion, but we all know that equities are much riskier, as well. So the environment that we're in, characterized by a lot of contentiousness around austerity, taxation, et cetera, et cetera, is not really conducive to robust economic growth. At what point do you say equity valuations are going to be stretched so that there's as much risk as there is potential enhancement and return going into the asset class?
FINK: So I would argue that, you know, equities, despite this rally, are unchanged in 10 years. We have P/E ratios that are hovering around in the 12s. You know, we had equity markets hovering around the 12s in 1980, too. We had 10-year Treasuries at 9 and 10 percent, and now we have 10-year Treasuries at 2 percent.
I think we have a long ways to go to make equities look expensive. And I do believe our corporations are in unbelievable shape. Their balance sheets have never been stronger, certainly a lot stronger today than they were in 1980, certainly their ability to navigate with low interest rates really allows them to do things they would never have been able to do. And so at this time, looking at long-term valuations, I think equities are the place to be.
Now, that's my personal view. And, you know, I believe you're paid to own equities, especially when you incorporate not only the P/E ratios but the dividend returns that you're getting in equities.
BARTIROMO: And that is always U.S. equities? Are you more poised to put money in the U.S. right now or outside the U.S.?
FINK: I would say what I personally like the most is buying multinational companies that are less dependent on one country. I like multinational companies. They may have 40 to 60 percent of their engines of growth in the United States, but I do like the diversification of being more global.
BARTIROMO: We've got a caller coming in, national member, Ben Wolf from Celfin Capital, in Santiago, Chile, right now, asking: You mentioned the success of the Chilean privatized pension fund system, which has not only provided an excellent retirement system but has also contributed significantly to the development of mature and deep capital markets, which in turn fuel growth. Do you think there is any prospect that the U.S. or any other advanced economy adopts a similar system either in whole or in part in the medium term?
FINK: I hope so. I think as we -- I said earlier, if you look at Chile or Australia, they're going to have a pool of resources to provide the capital to build infrastructure, to build -- to build these countries. You know, when we tried to do that I think three, four years ago, they called it -- when I think Secretary Paulson was talking about the privatization of Social Security, that's basically what they were trying to do, creating a mechanism in which investors had choice.
In Australia, you have the superannuation funds in which you either -- you have eight or nine options how to invest, and you choose how to invest. But it's a government requirement for part-time and full-time to withhold 12 percent of their disposable income. Now, if we did this in this country, we'd go -- we could go right into a recession. You know, and so there's -- there has to be this balance of how much money are you putting away, and how much money are you -- are you using for consumption.
So it's not an easy thing to go from a nation that is probably only putting, you know, 6 (percent) or 7 percent away, which is inadequate right now, where you really don't control it in the DB side. On the DC side, you have choice. But you know, as I said, in these other countries, you have fewer choices to go into -- you know, different structures that help the individuals. I've seen in Australia how it's been done. The individuals are actually -- see if you save this much money, here's what you're going to be having at the end of the -- and you know, when you retire; this is how much money you could have at 65 or 68 or 70. And it gives -- it gives you a lot more clarity.
BARTIROMO: Well, it's sort of mapping it out, mapping out the plan.
Yes, right there.
QUESTIONER: I'm Susan Davis. I lead a nonprofit organization called BRAC. And I was intrigued by your perspective or call to arms for us to take a longer-term perspective, investing in infrastructure and education. And I wondered, is there a -- in looking at equities, what's your firm's perspective on impact investing? And in the context of this systemic failure, do you look at equities or companies -- business as usual, or are you factoring in the climate change crisis, global poverty, the tensions that are causing the Arab Spring and other factors?
FINK: (Chuckles.) Yes. (Laughter.) No -- all these social issues are -- you know, are very difficult to navigate. Depending on each individual company, you have to -- you have to pay attention to these issues. There's no question that we all have a responsibility. We have a responsibility to our country. We have a responsibility to certainly our employees. We have a responsibility to our community and to -- and navigating those issues are difficult. The pressures of earnings is one that's very hard for a lot of companies.
But getting back to me as an investor or how we -- as BlackRock as an investor in terms of how we look at these things, we look at impact investing; we look at social issues as a very important component, especially as we think about proxy voting. You know, we just sent out a letter under my -- under my name to 600 companies worldwide about proxy season. And as a shareholder, we are taking a much more -- interest in how companies perform. And we believe it is our fiduciary responsibility to take an active view, especially in light of so much of our assets are indexed money. We have to own these companies. Whether we like them or not, whether we think they're doing the right thing or not, we have to own them.
And so therefore the only power we have is our vote. And we're spending a great time now -- which I'm not involved in; I can't be involved at all. We have a special committee that is involved in terms of making those decisions on issues that you brought up and how that impacts our voting. And what we wanted to do through this letter, to tell all our companies that we invest our monies with, our clients' money with, that our vote is going to be important, and we are not going to allow our votes to be influenced by proxy voting services, which I do believe -- too many investors rely on proxy voting services and not spend enough time on taking their own responsibility of voting on behalf of their investors.
So I don't have a straightforward answer, but I can tell you we are taking a pretty deliberate view on these social issues, and we will express that one by one in the proxy voting season.
BARTIROMO: And one of the priorities that you've been mentioning this morning is a return to growth, reigniting growth, but we walk such a balance in terms of reigniting growth and putting austerity in place, even in the United States. How worried are you about the $14 trillion debt in the United States? Should we be prioritizing cutting back, putting austerity in more so than we are? Or is putting enough stimulus out there to reignite growth really the preferred priority?
FINK: Well, that's the big debate today, about how much stimulus we need to re-engage this economy. Of course we worry about the $14 trillion of debt, and the debt's growing a trillion-plus (dollars) this coming year and probably another trillion dollars next year. So we have not -- you know, despite all this noise, we have not addressed our deficits at all as a country. We -- you know, there's been very little in terms of bipartisanship in terms of navigating these deficits, and that's going to be a priority for 2013.
BARTIROMO: Can the U.S. turn into Italy?
FINK: No, because Italy actually has more savings than us -- (chuckles) -- plus the --
BARTIROMO: But I mean, you're talking about 120 percent debt to GDP -- I mean, everybody's trying to make a comparison --
FINK: Yeah, from -- but they actually have so much savings there that, you know, the difference between -- you know, the difference between Italy and the United States -- 80, 90 percent -- I don't know the exact statistic, but a high percentage of Italian government debt is held by Italians. We don't have that problem. We have -- as I said, we have Japanese and Chinese and a lot of foreigners owning our debt.
And so, you know, we have -- we have a problem. As I said, it's not a train wreck problem. It's not something happening now. It's a problem that you could actually, you know, look out and --
BARTIROMO: A plan --
FINK: -- if you don't address this in the next few years, it's going to be a hole that is going to be very hard to navigate.
BARTIROMO: Jacob Frenkel.
QUESTIONER: (Audio break) -- thank you. Jacob Frenkel, JPMorgan. You described the global deleveraging like -- as the major -- as one of the major dangers that we have. And indeed governments all over the world have tried to mitigate the consequence of the global deleverage of the private sector by creating excess leverage of their own books, and that's the budget deficits and the debt, and central banks have expanded their balance sheet in an unreasonable way.
So question number one: Is it obvious that excess leverage of the public sector is better than the excess leverage of the private sector, which it is supposed to replace?
And the second question related to it is, given the extraordinary low interest rate, which you spoke -- as a challenge to private investor, is there also a big challenge to the macroeconomy of negative real rates? Do we plant the seeds of the bubbles and the next inflation?
FINK: I don't see any -- let me go from the back first, Jacob. I don't see any risk of inflation for the next few years. Until we start seeing some real growth in employment in Europe and the United States and more stable, growing economies, I don't think we're going to have that much inflation. Now we may have spiked inflation if there's any crisis in the Middle East related to oil and things like that. But I'm not -- and I do believe our central banks have time to navigate a change of policy if there was any (whiff/width ?) of employment, which would translate into an increase in inflation. So I don't see an inflation bubble in the next one or two, three years. I think there is time for that.
(Audio break) -- one can argue -- (audio break) -- we had proper regulation, having the leverage in the private sector is probably more sensible, because we have shareholders who attack it every moment, whereby it's very hard to attack government. And so one can argue having this increase in deficits in the public sector is more difficult to navigate, outwardly.
On the other hand, there is a role of the public sector to try to stimulate economies and to try to create a(n) environment where our economies can grow. So I believe it's a balancing between the public sector and the private sector.
Now, obviously, you're correct in saying all the growth in the deficits are in the public sector, whether it is in the balance sheets of a government or in their Federal Reserves or central banks. I do believe there is -- we have time to navigate those risks if it's done sensibly. But I do believe we need to really make sure that we are -- that we have a system in which we don't have crises like we had in 2008 and 2009. But I don't think we understand the cost of those mechanisms.
And so I do believe we're all going to have to be living in a future with a more regulated approach. And if we don't develop our capital markets -- not just here in the United States, but if Asia doesn't develop their capital markets, their problems will be just as severe as our problems in the future.
BARTIROMO: We want to have one more question. I -- all the way in the back, right over there.
We want to keep everybody on time, so briefly want -- actually it was the person in the back.
MS. : Very back.
QUESTIONER: I'm Rob Dieterich from Bloomberg Markets Magazine. I just want -- earlier you said -- you made a direct connection between the current crisis of confidence or lack of confidence and our inability to make long-term decisions and sort of long-term thinking, I believe you were saying. But I want to sort of challenge that or ask what the connection you're making is. If you look back to, say, circa 2007, when I think we probably arguably had an excess of confidence in the system, I don't think we were making long-term investment -- (inaudible) -- decisions at that point either. So what's the connection you're trying to make between the current crisis of confidence and our inabilities or our problems right now to make long-term thinking?
FINK: Well, I think -- in 2007, we had certainly over -- we had -- we had confidence that was obviously, as you said, way over our (skis ?). We had -- we believed that leverage is not a pernicious problem in society. So that overconfidence was that we believed, you know, a couple dozen men and women could navigate credit risk in 30- and 40-1 (leverage ?).
Unfortunately they were wrong, and regulators were there too. So it's not like -- and shareholders were there too, I mean, nothing was not -- let me restate that: Reporters were there too. So -- (laughter) -- we were all guilty of overconfident that we could navigate that type of risk. But I think it's the backlash -- the other side of that problem is the -- is the causal lack of confidence today.
I think, you know, we could look back today and say, how on earth did we think a firm can navigate 30- or 40- or 50-1 leverage? And we have regulators saying how on earth have we -- did we not, you know, protect society better? And so we are -- we have moved the pendulum way too far the other way. And I think now in an era of low-interest rates to navigate, you know, our way out of this problem, hopefully through low-interest rates, we do stabilize the situation, but most importantly I think we haven't changed our behavior.
Because of the fears of the precipice of the result of '08 and '09, I think people are just standing there, mostly (uninvested ?), sitting in (too ?) large of low-yielding instruments and they're not addressing their longer-term issue and that is, what do I do with my money? How do I prepare for my future the same way I prepare for my health future, (right ?) ? There's just too much commentary, maybe not enough on your health, but there's no commentary about how to have a standard of living that meets your future needs.
BARTIROMO: So barring people just hearing what you're saying and saying, OK, look, I need to make a change in my own financial life, do you see -- as we wrap up here, do you see a catalyst on the horizon that will trigger growth, reignite growth, reignite that money moving into -- and to make it work for us? For example, will the election in November be a catalyst for the economy?
FINK: That's a long ways away. In -- I think we're starting -- you know, I think if we continue to see stability in financial markets, I think on the margin, you're going to see a behavior change. And through that change of behavior, you're going to -- you will see some form of job growth.
You're starting to see that now. You're starting to see, on the margin, an improvement in jobs. We have to remember 2011 we experienced 30,000 fewer jobs per month on average because state and local governments cutting back. And so much of the problems last year of anemic job growth was the public sector -- of paring down their payrolls.
BARTIROMO: Is that still going on?
FINK: Well, we have -- we will still have those pressures. That is why I said in my speech we need to have this partnership between government and the private sector. If we are going to have above-trendline growth, it's not going to come from the public sector. It's going to come from the private sector. You know, we've lived in a -- in a nation in which the public sector has grown in jobs. The public sector, as we saw in 2011, started shrinking those jobs. That will continue, and so we need to find -- you know, we need to have a more vibrant private sector to continue to build jobs.
You know, I could go on in many other ways that we -- I think we could do that, whether it's -- you know, there's a proposal for tax regime changes, which I don't wish to get into. But among those things are ways to stimulate job growth.
BARTIROMO: And these will be catalysts, then?
Extraordinary that we're actually seeing, by the way, leadership change possibly in France coming up, in China, potentially in the United States --
FINK: Germany next -- early next year.
BARTIROMO: Germany as well. So really a world leadership change.
Larry, thank you so much.
FINK: Thanks, Maria. Thank you.
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