Why Larry Fink Is Bullish on America

I was at the Buttonwood Gathering this week in New York, a wonderful conference put on by The Economist featuring some of the greatest minds in business and finance.

BlackRock (NYSE: BLK  ) CEO Larry Fink sat in for a short panel. Below is a summary of my notes.

Fink started off talking about "short-termism." The world has a preoccupation with the moment, without enough focus on savings and investments needed for the long term. This isn't just an American issue or a Washington issue; it's global. 

One of the biggest issues here, Fink notes, is inadequate retirement savings. The average American already has a severe shortfall in retirement savings. Overlay that with rising life expectancy, and you get a big problem. Fink notes that a 25-year-old healthy female can expect to live close to 100 years old. In that case, retiring at 65 literally means spending one-third of their lives in retirement. Very few people are financially prepared for that.

Fink says our preoccupation with the present, rather than the long term, is visible in our decaying infrastructure in America and Europe's inability to stabilize its finances. When people can't think beyond the moment, they become frozen, he says.

He told a story about having dinner with the manager of a big sovereign-wealth fund. The manager said his objectives running the fund were generational. So Fink asked him how he measured performance. "Quarterly," the manager said. It's a pervasive culture of short-termism. 

The press loves short-termism because it thrives on fearmongering. Fink notes that no one watches the Weather Channel when there's a blue sky, but they do when there's bad weather. It's the same with financial news.

Fink says the single-most important issue for the next president is how he manages the fiscal cliff. He was appalled that not a single question was asked about the fiscal cliff in three presidential debates.

He thinks the fiscal cliff will play out like this: a $300 billion to $400 billion agreement on deficit cuts during the lame-duck session and a six-month deferral of the tougher agreements. Fink said he met with a congressman last week and asked him to pledge to the American people that if Congress does punt the fiscal cliff down the road, they agree not to take a recess until it's solved. People need to see that Congress is serious about this.

Fink notes that Europe got itself into a mess not because countries spent too much money, but because it let its competitiveness erode. Since the beginnings of the euro, southern countries have seen competitiveness with Germany fall 40% to 50%. There has been progress recently, with German wages rising and wages in southern countries falling. That competitive convergence will take more time, but it's progress. When people ask Fink what Europe needs to fix its problems, he says "time."

With the exception of the fiscal cliff, Fink is "very, very" bullish on the U.S. for two reasons: the rise in domestic energy production and an impending housing boom.

He recently had dinner with the CEO of a German company that is closing a factory in Germany and moving it to the U.S. because natural-gas prices are so much cheaper here than in Europe. The CEO thinks the U.S. will have a manufacturing renaissance. Juxtapose that with Europe, where energy prices are rising. "That will make competitiveness in Europe even worse," Fink says.

On housing, he notes that we need about 1 million new homes a year to keep up with household formation and scrappage, and yet we had 8 million unsold homes at one point. That's how big the bubble was. And it just takes time for that to adjust. Overhang is working out, and we're seeing pockets where housing is turning around and prices are picking up. If you look at the chart of rental prices and home affordability, owning has never been more affordable, he says. But psychologically, people aren't buying because they're frightened at the thought of a permanent loss.

In Fink's view, if there's stability and the upward trend continues, there will be a flood of people back into the housing market as young families in need of a home regain confidence. He thinks that within a year you'll see Pulte (NYSE: PHM  ) announcing a new lot of homes -- and people lining up to buy them. 


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  • Report this Comment On October 27, 2012, at 7:24 AM, LarryBright29 wrote:

    Morgan,

    Thanks for sharing the briefings from Buttonwood Gathering this week in New York, by The Economist.

    Mr. Fink bullish stance on the U.S. is a good agreement with two 2013 S&P500 forecasts published on Seeking Alpha:

    http://seekingalpha.com/article/926141-2-s-p-500-forecasts-f...

    Good Luck!

  • Report this Comment On October 27, 2012, at 3:07 PM, thedoge wrote:

    Does Mr. Fink's enthusiasm for natural gas production take into account the costs associated with the large amounts of water required and the amount of methane released? I'm not saying those aren't solvable problems, but they do have costs associated with them, especially in an era of increasing competition for potable water.

  • Report this Comment On October 28, 2012, at 9:36 AM, Darwood11 wrote:

    Thanks for posting Mr. Fink's perspective.

    Short time thinking has all kinds of ramifications for our society. A lot can happen in 10 years. I recall an article here which quoted Bill Clinton sometime about 1993. A lot happened by 2003, and even more significant changes from 2003 to today.

    Isn't there something called "the miracle of compounding?" So small savings can accrue. Ditto for price increases or spending. Energy is also the same, as changes take hold. First the early adapters, and so on. The methodology is well known thanks to the PC computing revolution.

    On natural gas, this is a boon, but there are technological problems. Fracking a single well can require 4 million gallons of water. However, Chimera Energy [CHMR] has a fracking technique which it claims uses no water. Alternative techniques may not have the same yields of water based approaches, and may not be as cost effective. However, I think with some time and maturity developments will surface.

    One interesting possibility is the resurfacing of automobiles powered by natural gas. However, at this point, there is an entrenched group in the government backing what is basically R&D efforts. Solar, for example, is a drop in the bucket of our electrical energy. So too for electric cars.

    How about a natural gas powered automotive hybrid?

    As for Europe, it will need some long term realism. The ratcheting up of austerity measures has been disappointing. These too were short term solutions and in my opinion, counterproductive but to protect certain economies at the expense of others.

  • Report this Comment On October 29, 2012, at 3:20 PM, colleran wrote:

    My only issue with housing coming back are, first there are still millions of people under water on their loans. They are stuck were they are for at least a few years. Second, how are people going to afford new homes. I can tell you from personal experience that getting a mortgage loan is now an excruciating experience. You can't believe what I am having to do to get a loan. I have bought a number of houses over the years and have never seen anything like this.

    The price of new housing will have to drop somehow from where it is now for most people to afford a house. When the current glut of unsold homes is taken up, will the builders be able to build an affordable house? Will people be able to get a mortgage loan?

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