Fink: Government shutdown will result in lower equities and lower rates

Below are the video and some excerpts from a recent interview BlackRock CEO Larry Fink did with Bloomberg Television. The interview here is mostly about the effect of the government shutdown and debt ceiling crisis on the economy and financial markets and on this score Fink said there was a negative impact. He also said that earnings will be negatively affected by the fiscal standoff, suggesting a drop in earnings in Q4 will be directly attributable to the fiscal standoff. He said, “I’m much more worried about the U.S. now than the last time I was on your show…We are going to see a lower equity market and a longer period of lower rates” if earnings start to deteriorate in the fourth quarter following the stalemate in Washington.

Note, however, that while the fiscal standoff has reduced economic confidence and led to a slowdown in hiring, it is the reduction in deficits that we should expect to most directly affect corporate profits. If the government’s net deficit position is contraction, it must be exactly offset by a contraction in the private sector’s net surplus position and the external balance. Given the low personal savings rate in the US and data showing that savings rates have stabilized or increased despite the wealth effect from housing, I believe we should anticipate net deficit reduction to lead to lower earnings growth or outright earnings contraction. Also note that the U.S. has had a number of technical defaults in the past despite Fink’s claims that the country has never defaulted (see my discussion from 2011 here). It is true that there has been no insolvency-motivated defaults of course since the U.S. delinked all of its sovereign bond obligations from gold and issues debt only in U.S. dollars. Fink’s view on lower rates rhymes with what Fed officials Fisher and Evans have said the impact that the standoff will have on US monetary policy.

Video and excerpts below:


Fink on the impact of the debt ceiling debate on the bond market:

“I think we are going to see more trepidation from foreign investors in our bond market. How we play out this next round of debt ceiling negotiation will truly change the course or move the motivations of investors. So we have to see how this plays out. A brush of fire, a brush of Armageddon — these debates are unacceptable. When you are a debtor nation, you should be working with your creditors and we as a nation believe that we have the ability to talk about default. When you think about other countries that have defaulted, we look worse towards those countries. There’s only two countries in the world that have never defaulted, that is the United States and Switzerland. Switzerland never had a conversation about the potential of defaulting though. We are a standard-bearer country. We are the standard for the world. People look up to us. People look up to our type of democracy and they are seeing worldwide how our democracy is not working as well as it should, how our democracy used to work a lot better. As a result of that, many of our foreign investors have had conversations with me and many at BlackRock about how should they think about investing in U.S. debt over the next few years. We are trying to calm them and give them a little more support. Frankly, we need to see movement in the next three months towards a full resolution towards our budget and a full resolution related to this constant dialogue about the debt ceiling.”

On why the markets have continued to rally over the past two weeks:

“The debate about default, simultaneously with the sequester and the lack of the federal government operating, we are going to see a very, very weak fourth-quarter. You’re seeing that in the movement of the bond market. It is our view today that the Federal Reserve is probably going to delay their tapering by three to six to nine months, maybe longer, because we are now looking at an economy that is going to grow at the slowest point of this year in the fourth quarter. Until we understand how the debate goes into the first quarter, we may see a continuation of an  erosion of our economy. That’s why you see a rally related to the bond market yesterday and today. In the equity markets there was a relief rally yesterday and now we are giving half of it back today. I am much more worried about the United States now than I was the last time I was on your show, when I gave a very large endorsement towards the equity market. I would tell you today the equity market is fairly priced, but if the economy and corporate earnings start deteriorating, we are going to see a lower equity market and probably see a longer period of lower rates.”

On whether BlackRock has been buying or selling Treasury bills and what the firm’s plans are for the next three to four months:

“We as a fiduciary needed to make sure across all our businesses that we would be protecting our clients’ money if there was a default. We had 12 different task teams working on — from swap agreements, collateral management, to Treasury bill maturities — we did a whole review of every component of our business. I think the media highlighted this issue related to T bills. That was a minor component of what we had to do in a review.”

On whether we’ll face another government shutdown in February:

“I will do my best to make sure that doesn’t happen. Whatever influence, if any, I have in Washington, I will try to make sure they understand this is extremely damaging to the economy. I think the fourth-quarter results will come in negative. This is as a result of the behavior of Washington. Let’s hope the men and women who are responsible for this will understand that it is unacceptable, and we have to move on and work in a bipartisan way of making this economy strong again and let the private sector operate.”

On who in Washington he will call:

“I’m going to call anyone who will pick up my call.”

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