BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Please welcome Andrew Ross Sorkin and his guests, the Chairman and CEO of BlackRock, Larry Fink.

Larry Fink is here. And of course, overseas, what is now, I want to say about -- almost about $8 trillion, give or take. There was a period in which it was about $10 trillion. I want to thank you for being here because you've been on this stage now a whole bunch of times. We appreciate spending time with you, in large part because I would argue that you have been a real pioneer on a lot of these issues that we talk about, ESG and the like. And that's why I wanted to have you here, especially this year because there has been, as you know so very well, a backlash about ESG and the like, and what it means, what capitalism is about and all of that. And I want to get to that, and I want us to have sort of a bit of a rager of a conversation if we could about it. But I want to start, because we had the Treasury Secretary here earlier, just to get your sense, also because you've been right more times than not, about where you think we actually are in the economy right now.

I hope you have invited me because you like me, too, though and did not -- Hi, everyone. I think there's many great things going on in the world. And the economy, obviously, it's been hit in the narrative and, obviously, the reality of really elevated inflation. Markets that are down 18% and equities down pretty close to 18% in bonds, the appreciation of the dollar. There's a whole reset in the marketplace. And the reality, the U.S. is feeling much less pain than other parts of the world because of the dollar appreciation and other issues. But I actually believe inflation will be abating very rapidly.

Will abate rapidly?

Yes. I mean is it going to go back down under 2% which is their objective? That would be hard. And that's the fundamental issue, where is an acceptable level of inflation? I mean in my 40-something years of being in the market, you would have dreamed for 3% or 4% inflation. So we set this target now of 2% of which can be debated why, too, and I've had conversations on that. My biggest worry is not that we are not going to see a falling of inflation back to 3% or 4%, my biggest worry is the world is losing hope. We are -- we have seen a collapse in birth rates, in demographics. We're actually going to enter a period of more, what I would call, malaise. We are all seeing the transformation of China. China going from what I would have called a very economic minded economy to more ideological economy. We're seeing the attended effects on that, and we're seeing the Chinese economy slowing down to a 3%. We have the European economy that has really fundamentally changed right now related to the Russian gas and the cost of energy and the fiscal support by governments. And so I believe after we get out of this real spike in inflation, we're going to be waking up to a world that's going to be a 2-ish, 3% world with maybe 3% or 4% inflation. And I think that's going to be the fundamental issue that we're going to be facing. And because of the situation that we saw just 6, 8 weeks ago in the U.K., there is a limit on how much fiscal stimulus governments can rationally do without having the marketplace rebel, that's what happened in the U.K. So after we get out of this burst of inflation, it is my fear that we are not going to have the ability for any fiscal stimulus for any time soon. Deficits do matter. And at the same time, the central banks are going to take years in which they're going to have to unwind all their quantitative easing, all their bond purchases that they did over the last 10 years and aggressively in the last few years. They're not going to be as fully equipped to restimulate the economy. So we believe we're going to have rates fundamentally higher maybe where they are today. They're not going to go down at the same time. We're just not going to have an economy that is based on a real growth that we are accustomed to.

So what does that mean? For everybody here who has a 401(k) or money in the stock market?

I would say for long-term investors, this is a great paradigm because...

But if the other side of it is some kind of malaise...

Yes, but Andrew, if you look at what it took to -- over 50% of our assets are retirement assets. And all I do is focus on how do we get to a long-term outcome, and all my letters are based on that long-term ideal. It is actually easier to meet your long-term liability, which everybody assumes about a 7% or 8% return over 20, 30 years, you're going to have a nice pool of money. It is actually safer to invest to get that return today because you have 2 years trading at [ 4.25 ], you have a 10-year credit you could buy at a 5%, 6%, return. I actually believe we're going to go from this hyper interest in growth stocks. We're going to have this hyper interest in earning coupon, hyper interest in investing -- Secretary Ellen talked about the IRA which we are very bullish on and what that impact will do. Those types of subsidies that are coming from the government to invest in decarbonization, it's going to produce 12%, 13%, 14% returns very easily. We've done investments like that already. And so I think it is actually going to be easier to meet your investment targets today than it was a year ago to reach -- meet your investment targets years ago, a couple of years ago, you needed to invest heavily in private equity, you had a short liquidity to get to the return. And now you're able to more safely invest in other things that are providing you a coupon to get you your returns. So despite all the doom and gloom, there is more opportunities to invest in the markets today than it was a year ago.

We talked to the Treasury Secretary about crypto. And as you know very well, we're going to talk later to Sam Bankman-Fried, so we think. BlackRock had an investment in FTX.

$24 million in a fund of funds.

$24 million.

Yes, it was in -- it was not in the core part of our business.

Okay. So what do you think happened there? And then I want to talk about the diligence piece. Because part of what's happening here is there's a lot of people questioning all of these fancy firms that everybody looks at, Sequoia, you, others, a lot of people invested in this company. And it appears that nobody was minding the store.

Well, I think people are minding the stores. The question is, I'm not -- we're going to have to wait and see and how this all plays out. I mean, right now, we can make all the judgment calls that it looks like there were some misbehaviors of major consequences. I assume, look at the long -- if you look at the Sequioas of the world, they've had unbelievable returns over a long period of time. I am sure they did the due diligence. Could they have been misled because they've done other things? Have we been misled in the small little investments we did? Sure. But until we have more effects, I'm not going to speculate...

Is it fair though to think about venture capitalists as self-regulators, if you will, of these types of companies? And the reason -- look, there's -- you can look at Theranos and you can look at all sorts of companies, and we don't know what this situation is in front of us right now. But it seems to me that in the venture world, the whole business model is actually not to do due diligence. The entire business model is, out of 50 investments, 40 are going to fail, and we know that in advance. So the cost of actually diligencing this all out to perfection may not even be necessary because what we're really doing is hoping that we hit just a couple of grand slam home runs, and that's just fine.

And that worked. It probably is not going to work in the future because I don't believe we need another food delivery company. I don't believe we need where some of all this money was going to go. I actually believe where more and more venture capital money is going to be going and more and more early investment is going to be fundamentally in decarbonization. It's going to be a different science, it's going to require really underwriting the science behind these entrepreneurs. I'm visiting young entrepreneurs who were trying to do whether it is sequestration or a better way of improving -- or improving farming by encoding seeds that already have the ability to create their own fertilizer, to reduce fertilizer. There are some amazing technologies that are being developed today. So I actually believe we're going to be seeing a transformation of where this money is going to go, it's not going to go to all this stuff that maybe provided us good utility to get food quicker or find a taxi sooner. But I actually believe it's going to be much more in hard science. And it would require a lot more technical understanding.

Has this changed your view of crypto at all? You now have a deal with Coinbase, and yet you were always sort of also, I think, a bit of a skeptic of all this.

I actually believe most of the companies are not going to be around. I still believe that. I do believe...

Because they're not real, they're frauds, they're what?

Well, I mean, think about FTX. I mean, you can look back now, FTX created its -- its failure was creating its own token. It was not a defi. It wasn't a ledger that was open to the world and wasn't distributed.

Closed ledger, right.

It was not distributed. So the whole foundation of what crypto is, it's supposed to be as distributed ledger that is across the system. I actually believe this technology is going to be very important. I am -- look at it, we have been part of a huge revolution in investing through ETFs. We believe that ETFs will be changing the whole way we invest. Many people still use it as a means -- all people are investing in for indexing. The majority of people who are putting money in an indexed ETFs are active investors that are buying exposure. The entire bond market is being transformed as we talk right now. I believe the next generation for markets, the next generation for securities will be tokenization of securities. We will -- and if we can have that distributed ledger that we know every beneficial owner, every beneficial seller, we all have our code of who's buying, who's selling, instantaneous settlement. And think about it, it changes the whole ecosystem. You don't need trust banks...

Does that disrupt you eventually because you are custodian all the...

No, we're not a custodian. We're not -- we don't -- we use third-party custodians in everything we do.

In everything you do.

We're not a custodian bank.

So your goal -- by the way, I don't -- [indiscernible] a custodian either, which is a separate issue.

I think they weren't. I don't know if there was a real custodian in that closed ledger, but that's a whole another story. You should ask them that question. No, I mean the transformation, think about instantaneous settlement of bonds and stocks, no middlemen. We're going to bring down fees even more dramatically. As for me, I don't have to vote on any shares anymore because the beneficial owner will do all the voting. They'll have...

And that's where I want to go with this conversation.