Market Should Not Doubt' Mario Draghi ECB QE
Stock-Markets / Quantitative Easing Jan 23, 2015 - 12:25 PM GMTBy: Bloomberg
Larry Fink, CEO and Chairman of BlackRock, spoke with Bloomberg TV's Erik Schatzker and Stephanie Ruhle today at the World Economic Forum's annual meeting in Davos, Switzerland. Fink discussed the European Central Bank's asset-purchase plan and the outlook for the euro-dollar exchange rate, Federal Reserve policy and the U.S. economy. He also spoke about the Swiss National Bank's decision to abandon its currency cap.
Reacting to the ECB's quantitative easing announcement, Fink said: I think we've seen over the last few years you have to trust in Mario...the market should not doubt Mario. He's been able to pull this through...This monetary policy is going to keep the euro weak. And I think a weakened euro will allow European companies to improve. So I do think the European economies will be marginally better this year than last year."
Fink also added "I would expect the Swiss economy to go into a recession because it's going to have to take time to adapt to this currency level."
ERIK SCHATZKER: He's Larry Fink. He's the Chairman and CEO of BlackRock, the world's largest asset manager. And it seems like the logical place to begin, Larry.
LARRY FINK: I'm not sure I feel like the king though.
SCHATZKER: No, why not?
FINK: I'm cold.
RUHLE: All right.
FINK: Go on.
SCHATZKER: Quantitative easing --
FINK: Yes.
SCHATZKER: -- by the European Central Bank, what do you make of today's announcement?
FINK: I think it was very much expected.
SCHATZKER: Yes.
FINK: I think after we had the court here, and court case in Brussels ten days ago it set the ECB in motion that they were going to be allowed to do this. Before that it was a legal issue. So they were allowed to do this. I think we've seen over the last few years you have to trust in Mario. And I think Mario Draghi got what he -- what he was trying to propose.
SCHATZKER: And you trust Mario.
FINK: I think the market should never -- as we have seen that the market should not doubt Mario. He's got -- he's been able to pull this through. There was obviously much public debate whether this is going to be helpful. I think what we should all understand what this is going to is going to keep the euro weak. This monetary policy is going to keep the euro weak. And I think a weakened euro will allow European companies to improve. So I do think the European economies will be marginally better this year than last year.
SCHATZKER: Because of this, because of the euro.
RUHLE: So....
FINK: Well I think is one thing. And in addition you also had just recently we've completed the stress tests. The banking system is now over the deleveraging process. We have to understand the U.S. banks stopped deleveraging years ago because our stress tests were actually real, legitimate in 19 -- in 2009. Europe went through their third stress test, and this was actually legitimate.
RUHLE: And they finally had it.
(CROSSTALK)
FINK: So they got it right now. And so you have a banking system that is now actually re-leveraging marginally. You have a weakening euro. You have an aggressive stimulative policy by the ECB. And so this is all going to lead to a more positive Europe, but we're still not addressing some of the major structural issues. So I would call this -- this is going to give Europe more time to hopefully fix itself. I did not have time to hear the Q&A. I would hope Mario Draghi and all the governors of the -- of the ECB start talking about we need fiscal reform to really create a more vibrant Europe.
SCHATZKER: Before we get to fiscal reform, --
FINK: Yes.
SCHATZKER: -- are we going to see euro parity with the dollar?
FINK: I've heard -- I've heard view of that. I don't think so.
SCHATZKER: Why not?
FINK: Because I -- I'm a little more worried about the U.S. in the next quarter or so.
RUHLE: What are you worried about?
FINK: What am I worried about? I'm worried about a lot of things, but....
RUHLE: Well in the U.S. everyone is just so bulled up.
FINK: Yes, I know that. So I'm this contrarian. So let's talk about the marginal change. The marginal change in the United States is we've benefitted for the last four years by having a very weak currency because our central bank was the most aggressive in easing. Okay we are now talking about taking the foot off the pedal. Obviously we have. We're not doing bond purchases anymore. And there is conversation about a resumption of more normalization of our interest rate. But our companies are now being marginally harmed by the stronger dollar, so that's all marginal versus European companies.
Secondarily, the lower oil price in the long run is very powerful for the American consumer. In the short run it's negative for these companies. You're going to see a reduction in CapEx.
SCHATZKER: Yes.
FINK: You're going to see some layoffs. We already saw Schlumberger announce a layoff. So my worry is we are going to see -- we're not going to see the three percent economy or three and half percent economy in the first quarter. We may see that once this energy number really goes into the economy. So incrementally you're going to have a stronger Europe. You're going to have a marginally weaker U.S. from the trend line.
So I'm not -- I'm still suggesting we're going to have a strong economy, but the trend line is going to be -- is going to be slowing down a little bit because of the strength of the dollar, because of the short-term impact of the lower oil prices. And so and the question is will it slow down the Federal Reserve's behavior as Chairwoman Yellen has confidently said, this is all data dependent. So if I'm right that we're going to see an economy not growing at three percent, but maybe 2.8, and we see a little more unemployment claims because of what's going on in the energy sector, we most certainly we're going to see less capital expenditures as at $40, $50 a barrel you're going to see some of the fracking and the new rigs slowing down. And we're already starting to see rig count slowing down.
So what I'm trying to suggest, getting back to the original question, are we going to see parity, no, I actually believe much of the euro movement is behind us. Keep in mind we came from 1.40.
SCHATZKER: Yes.
FINK: We're at 1.14 and change.
SCHATZKER: 1.14 and yes.
FINK: Yes, can we see 1.10? Could see a downward trend to 1.05, even parity? Yes, but I don't believe it's sustainable.
SCHATZKER: What -- what about a Fed hike in 2015?
FINK: Well it's data dependent. My view will even if the data is incrementally weaker I think there will be an announcement of a 25 basis point increase. And I think then they're going to pause and wait. So I don't think you're going to see the normalization anytime soon. You're just going to have a little more discipline. If that's true, the dollar is not going appreciate as much as some of the people think. So I haven't -- I didn't -- it's too much of I never heard anyone talk about parity about the dollar. And now everyone is talking about it, just like two months ago did anyone say $48 a barrel? No. I mean....
RUHLE: We also weren't talking about the Swiss franc seven days ago.
FINK: No. We weren't.
RUHLE: All right, Larry, we have to take a quick break. We're going to have more with Chairman and CEO of BlackRock, Larry Fink, when we come back. And we're not going to let him put a coat on, so he'll really be on edge.
FINK: I am on edge.
11:39
(BREAK)
11:41
SCHATZKER: We're here in Davos, Switzerland with Larry Fink, the Chairman and CEO of BlackRock. Larry, it was a week ago that the Swiss National Bank dropped a bomb on Citigroup, on Deutsche Bank, on Barclays.
RUHLE: On Swatch.
SCHATZKER: By -- yes that's true, by allowing the Swiss franc to float freely for the first time in more than three years. Thomas Jordan's, Phil Hildebrand, works for you at BlackRock.
FINK: Yes.
SCHATZKER: How did that decision go down inside BlackRock?
FINK: I don't -- and first of all....
RUHLE: Did he call you or did you call him?
FINK: Who, Thomas or Phil?
RUHLE: Phil, yes.
FINK: Let -- let's....
RUHLE: I love that he gets to talk to both of them, by the way.
FINK: Let -- let's be clear about it. This plan -- this plan to peg the interest rate was only meant to be a temporary --
SCHATZKER: The exchange rate.
FINK: -- of the exchange rate. It was always meant to be a temporary exchange.
SCHATZKER: Sure.
FINK: And I do believe what Thomas was -- needed to do was that it was becoming more and more expensive for this country to -- to stabilize that currency. And somebody told me it may be over $1 billion a day of stabilization. And I think with what the Fed, the ECB did today it was going to be even intolerable. And I think -- I don't think he had any choice to do this. You could argue it could have been done in a more elegant way or not and that, but --
RUHLE: But a man's got to do what a man's got to do?
FINK: -- that's -- and that the debate is could there have been a messaging that this could have been done and the marketplace would resolve it? Or should you do it with one big bang, as you called it, and get it over in one day? I think the real test will be with the Swiss currency revaluing itself as much as 20 percent, is this going to lead to a recession in Switzerland? I mean I know all of the narrative from all the manufacturers, but these manufacturers have tended to be incredibly adaptable.
That's one of the positives of Switzerland. We've had -- we've witnessed over tens of years how adapted this small nation is. You think about the power over this nation and compared to its population. It probably as a nation of this scale it had as much influence as any country in the world. So it's a very adaptive nation. It's a very -- that's a big compliment. The big test will be will this lead to a recession or not at this point. And if it doesn't that's more --
SCHATZKER: That's --
FINK: -- that's more problematic for me if it doesn't lead to a recession.
SCHATZKER: That's just for Switzerland though. What some people say, and I can kind of get the argument, is that a decision like that undermines trust and confidence in central bankers.
FINK: I don't agree with that. They always said it was temporary. It was very expensive, could have been done in a more elegant way by messaging that this is going to end soon, yes. But it could have been -- it may have caused more volatility. By doing it one time there was a lot more pain.
Let me get to my point. My point is I would expect the Swiss economy to go into a recession because it's going to have -- is going to have to take time to adapt to this currency level.
SCHATZKER: Wow.
FINK: If it doesn't go into a recession and the economy continues fairly nicely, what does it mean for another economy a little north of here? There's always been a debate, should Germany be in and out of the euro. One of the big reasons why Germany is -- and people have said obviously Germany is very committed to the euro, and I'm not trying to suggest that Chancellor Merkel is not, but one of the arguments has always been about Germany is it would be suicide if they walked away from the euro because it would have a currency that would be revalued 20 or 30 percent.
Now if Switzerland doesn't have that revaluation and it doesn't have that -- that impact on its economy with its revaluation....
SCHATZKER: In other words, if it's not suicidal.
FINK: Yes. And I do believe it will lead to a large debate within Germany from the right wing about look what Switzerland did, it was not so dramatic. And why aren't we considering that? And so I'm going to spend a lot of time over the next year to follow the Swiss economy. I think that's more essential whether was the Swiss action last week elegant or inelegant, because I don't think that matters.
RUHLE: All right. Well you are -- you are one of, if not the biggest client to the Street. When we have that extreme volatility you are the guy interfacing with the sell side. Given how regulated banks are right now, you watched market action last week, can the banks fully operate when you have extreme market moves now that they're so regulated?
FINK: So in one day, no. But the markets calibrated itself over a couple days, it's fine. I mean I think it's very clear regulators worldwide want banks to use less of their balance sheet. And the one thing that I heard from a regulator, without naming him, today he said....
RUHLE: But it was a man.
FINK: It was he. He said, we had a taper tantrum, a taper tantrum. We had the oil crisis. We had all these all these other big one-day crises. And this regulator is able to see daily positions of the banks in his jurisdiction. And he said, you know no one really lost that much money. And unquestionably he can say today banks are less risky for society than they were. Now --
RUHLE: And that's the goal. That was the goal.
FINK: -- that was the goal. But he would also say that will mean over in the short run we are going to have a less liquid world. And over time, and this is one thing BlackRock has been supportive of, we need to have more electronic markets. We need to have more things done. So we're in this period of time where we are going to witness periods and bouts of illiquidity. We had a 24-hour period of time where there was a whole revaluation, but in the scheme of things it's not that meaningful. I mean it's good noise for you guys to report.
RUHLE: In disco terms, the beat goes on.
FINK: Yes. And no one is going to lose much sleep. Now the manufacturers in Switzerland and obviously....
RUHLE: I'm pretty sure people lost sleep last week, Larry.
FINK: I lose sleep all the time. What's wrong with losing sleep in a one-day event? I don't see that -- that's not a meaningful impact over the world over a long course of an economy.
RUHLE: Don't let Arianna Huffington hear you say that. You should never miss sleep. Larry, thank you so much.
SCHATZER: Larry, on that note we have to end it.
FINK: Thanks.
RUHLE: Such a treat.
FINK: Thank you, Stephanie.
RUHLE: Larry Fink, who's the Chairman and CEO of BlackRock
Courtesy of Bloomberg Television
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