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Mark Wiedman on Managing Money at BlackRock · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg
0:06
Speaker 1: Radio this week on the podcast strap yourself in for
0:11
Speaker 1: another fantastic conversation. What can I say about Mark Weedman,
0:16
Speaker 1: who has pretty much done everything at Blackrock. He started
0:21
Speaker 1: there setting up the Financial Markets Advisory Group, working with
0:25
Speaker 1: all sorts of giant institutions, before he ended up running
0:30
Speaker 1: the I Shares Group, which is responsible for the ETF
0:35
Speaker 1: and index business, which is just huge. It's a third
0:40
Speaker 1: of the ten trillion dollars that Blackrock manages. He was
0:45
Speaker 1: there from twenty eleven, running it to twenty nineteen, an
0:49
Speaker 1: explosive period of growth, and now he basically does everything
0:55
Speaker 1: as head of Global Client Business, where he works with
0:59
Speaker 1: black Rock's largest institutional clients, pretty much helping them map
1:05
Speaker 1: out strategy using Blackrock not just its products, but its
1:10
Speaker 1: tools and strategies. I found this to be an absolutely
1:14
Speaker 1: fascinating conversation, and I think you will also full disclosure
1:19
Speaker 1: My Farm Results Wealth Management not only owns ETFs and
1:23
Speaker 1: mutual funds from Blackrock, but last year we purchased a
1:26
Speaker 1: division of the company called Future Advisor with no further
1:30
Speaker 1: ado Blackrocks.
1:32
Speaker 2: Mark Redman, Gary it's a great pleasure. And you didn't
1:35
Speaker 2: mention that we also grew up in the same basic
1:38
Speaker 2: hood we did.
1:39
Speaker 1: I we'll talk. We'll get to that a little later.
1:43
Speaker 1: Let's talk about schools, because we went to different schools.
1:48
Speaker 1: You got a law degree from Yale. I got a
1:50
Speaker 1: law degree from a different school after a bachelor's degree
1:53
Speaker 1: in social studies. How does social studies and law lead
1:58
Speaker 1: you to a career in finance?
2:00
Speaker 2: So I think the great thing about how American education
2:03
Speaker 2: college education is set up is it's less about what
2:07
Speaker 2: you learn. It's more that you learn how to learn.
2:10
Speaker 2: So when I think about actually what shaped how my
2:14
Speaker 2: mind at least works, it was two things. It was
2:17
Speaker 2: one social studies, which is a department. I went to
2:20
Speaker 2: the undergrad that focuses on books, great books in the
2:25
Speaker 2: social sciences, and you learn how to read and write
2:30
Speaker 2: about a text. So I really studied, for example, Max
2:35
Speaker 2: Weber and Meil Durkhim, these are great sociologists, John Stuart
2:39
Speaker 2: Mill understanding their text, their concepts, and being able to
2:42
Speaker 2: write short, concise papers. Went to law school. But I'll
2:46
Speaker 2: tell you, Barry, the thing that actually I learned the
2:48
Speaker 2: most from was not law school. It was clerking for
2:50
Speaker 2: a judge. After law school, I worked for a judge
2:54
Speaker 2: in Chicago on the Federal Appellate Court there or the
2:56
Speaker 2: Seventh Circuit, and that's where I learned really how to write.
3:01
Speaker 2: Watch it because now you're writing for a proper audience,
3:04
Speaker 2: which is like the litigants, but also actually all the
3:07
Speaker 2: other judges who are trying to figure out what does
3:09
Speaker 2: this case mean? Figuring out how to be clear and concise?
3:12
Speaker 1: Really interesting. I had a similar experience. The thing that
3:16
Speaker 1: I took away from law school is how to think
3:19
Speaker 1: logically and clearly and then express it in the written word,
3:23
Speaker 1: which is always a challenge.
3:25
Speaker 2: I'd actually argue that that ability to to write, not
3:29
Speaker 2: to speak, but to write clearly and concisely, is almost
3:33
Speaker 2: the foundation of civilization. It is how we move forward
3:36
Speaker 2: is actually putting things in categories. Being precise and memos
3:41
Speaker 2: that boring topic are actually how you build civilization.
3:46
Speaker 1: Really interesting. You join the firm, You joined black Rock
3:50
Speaker 1: in two thousand and four where you set up the
3:53
Speaker 1: Financial Markets Advisory Group. Tell us a little bit about
3:56
Speaker 1: what led to that. Obviously a huge success for Blackrock,
4:01
Speaker 1: how did your prior employment lead to this new division?
4:05
Speaker 1: Within Blackrock Barry.
4:07
Speaker 2: Frankly, it didn't. I got hired to do a job
4:10
Speaker 2: I didn't want and I wasn't qualified for. Okay, but
4:15
Speaker 2: I a mentor of mine, a guy named Peter Fisher,
4:19
Speaker 2: who later ran fixed income for Blackrock, had been my
4:21
Speaker 2: boss at the US Treasury, and he went to Blackrock
4:25
Speaker 2: and said, why don't you just come and meet some people.
4:28
Speaker 2: I came over and it was the best management team.
4:31
Speaker 2: I met Larry Fink, I met Rob Capedo, our president,
4:34
Speaker 2: I met Sue Wagner, who's on our board, and these people.
4:38
Speaker 2: I walked out and I said, you know, this is
4:40
Speaker 2: the best team I've met. I'm in.
4:42
Speaker 1: Doesn't matter what I'm going to do. I just want
4:44
Speaker 1: to work with these people.
4:45
Speaker 2: Just want to work with these people. I figure I'll
4:47
Speaker 2: learn because you really can't predict how the future is
4:48
Speaker 2: going to go. You really don't know. But if you
4:50
Speaker 2: work with great people, that temps to work out. So
4:53
Speaker 2: what we started doing was building something which is basically
4:56
Speaker 2: advising financial institutions on balance sheet problems that were of
5:00
Speaker 2: a capital markets nature. So what does that mean? It means,
5:04
Speaker 2: for example, that imagine you were a global bank that
5:06
Speaker 2: had a huge toxic mortgage book during the financial crisis,
5:10
Speaker 2: or perhaps you were the New York Fed which got
5:12
Speaker 2: sattled with books like that from AIG and from bear Stearns.
5:16
Speaker 2: We helped work all that out. That's the kind of
5:18
Speaker 2: work that was a few years later, but that's conceptually
5:21
Speaker 2: what we were doing, which is helping our clients figure
5:23
Speaker 2: out how to manage complicated capital markets exposures.
5:27
Speaker 1: And when you say clients, this is government, sovereign wealth funds,
5:31
Speaker 1: central banks, financial institutions.
5:33
Speaker 2: This is the biggest of the big Yeah, we worked
5:36
Speaker 2: for and this is years ago, but we worked for
5:39
Speaker 2: and the business still continues at black Rock. When you
5:42
Speaker 2: work for anybody who has a big, massive exposure. We
5:46
Speaker 2: were particularly good at mortgages and structured finance. That turned
5:50
Speaker 2: out to be pretty handy in two thousand and seven
5:52
Speaker 2: into two thousand and eight, and basically, you know, when
5:55
Speaker 2: we started it, my question was what in the world
5:58
Speaker 2: do we have to offer to these institutions And it
6:01
Speaker 2: was pretty simple. One clear thinking, and two we had
6:05
Speaker 2: a risk management platform called Aladdin. That's the foundation of
6:08
Speaker 2: how we manage money at plock Rock, and we were
6:10
Speaker 2: able to actually run other people's assets through it and
6:13
Speaker 2: actually get some order out of chaos.
6:16
Speaker 1: So, since you mentioned the financial crisis, not long afterwards,
6:22
Speaker 1: after Freddie Mack and Fannie May did the face plan,
6:26
Speaker 1: Blackrock helped or is it you that helped the creation
6:29
Speaker 1: of Pennymac in two thousand and eight, which today is
6:32
Speaker 1: the number two mortgage bank in the US.
6:36
Speaker 2: It is so, this is a company, it's based out
6:38
Speaker 2: of California that we started. We did it as a
6:41
Speaker 2: joint venture with another firm, a guy who became a
6:44
Speaker 2: close friend of mine. It started off with a whiteboard exercise.
6:49
Speaker 2: The financial crisis had swept aside all the incumbent mortgage players,
6:54
Speaker 2: including Fanny and Freddy, and we thought, what is going
6:58
Speaker 2: to come like the little little mammals after the dinosaurs
7:02
Speaker 2: have been swept away, what will evolve afterwards? And we
7:05
Speaker 2: did a whiteboard exercise around a mortgage insure. We thought
7:08
Speaker 2: about a credit rating agency dot dot and we concluded
7:13
Speaker 2: actually where the money would be made, where clients could
7:16
Speaker 2: be served, was actually in buying distress mortgages. And that
7:19
Speaker 2: was the origin of what now is Pennymac.
7:22
Speaker 1: And it's become pretty.
7:24
Speaker 2: Large to the number two independent mortgage company. After quickened
7:30
Speaker 2: Loans and they focused on basically rebuilding efficient access to credit.
7:39
Speaker 2: After the financial crisis when most of the big banks retreated,
7:42
Speaker 2: most of the big banks just left the market.
7:44
Speaker 1: So we'll talk a little bit about I Shares, which
7:46
Speaker 1: you ran for quite a while. But later in the
7:49
Speaker 1: decade twenty nineteen to twenty twenty two, you were head
7:53
Speaker 1: of International in corporate strategy. Sounds like a pretty big title.
7:58
Speaker 1: What is the head of national and corporate strategy do well?
8:02
Speaker 2: Effectively, it was minister without portfolio. My job really, I
8:07
Speaker 2: had other formal duties, but the real job was handling, managing,
8:12
Speaker 2: organizing the things that had no owner at the firm,
8:15
Speaker 2: as we.
8:15
Speaker 1: Did utility outfielders at it, that.
8:18
Speaker 2: Utility outfielder somewhere, you know, things that were not properly
8:23
Speaker 2: organized and marshaled. Somebody needs to step up in an
8:27
Speaker 2: organization and put it together. And that means, for example,
8:31
Speaker 2: a great example, we launched a joint venture with a
8:36
Speaker 2: singapore Ian entity called Tomasik, which is effectively like a
8:39
Speaker 2: sovereign wealth fund. It's actually not, but it's what they do,
8:43
Speaker 2: and what we did with them is build a joint
8:45
Speaker 2: venture to have our first growth equity strategy. There was
8:48
Speaker 2: no natural place for that to sit anywhere in black Rock.
8:51
Speaker 2: It's called Decarbonization Partners. We raised one point four billion
8:55
Speaker 2: in the midst of gale force wins against growth equity
8:58
Speaker 2: over the last couple of years. That all started because
9:00
Speaker 2: I had the free time to be allocated to that
9:02
Speaker 2: minister without portfolio. Organizations need them.
9:05
Speaker 1: That's interesting. I use that phrase for something else. It's
9:09
Speaker 1: the talking head you see on TV that don't manage
9:11
Speaker 1: money but hold well.
9:12
Speaker 2: Well, there's a bit of that too, Barry's you wonder
9:15
Speaker 2: when you were sitting in a seat like that, Am
9:17
Speaker 2: I just talking? Am I doing.
9:19
Speaker 1: Anything that's really interesting? And then, at this point in
9:24
Speaker 1: your career you have twenty years of experience in finance,
9:28
Speaker 1: you start teaching finance at various schools, at Princeton, at Stanford,
9:31
Speaker 1: at Yale, and at Beijing. How did you get interested
9:35
Speaker 1: in becoming a professor of finance?
9:38
Speaker 2: Well, Barry, what I actually really love doing is teaching
9:42
Speaker 2: and growing people. And so I've always either hit the
9:45
Speaker 2: lottery or simply got sacked. I think teaching would play
9:48
Speaker 2: an important part in my future. What I love about
9:51
Speaker 2: teaching is about something that I know about. I've typically
9:53
Speaker 2: taught about either something around exchange traded funds and the
9:57
Speaker 2: capital markets, or around the financial crisis. People are interested
10:00
Speaker 2: in that. It is basically is, how do you get
10:03
Speaker 2: across the core understanding of something very complicated, but make
10:08
Speaker 2: it simple, not simplistic. And if you can do that,
10:11
Speaker 2: people walk out understanding that a financial crisis is nothing
10:15
Speaker 2: other than an overdone bank run. If you really get
10:18
Speaker 2: down to it, it all comes down to people borrowing
10:21
Speaker 2: too much money with too short maturity. And if you
10:25
Speaker 2: understand that, then other crises, other panics, all make more sense.
10:29
Speaker 2: That's why I like teaching. I think it's fun.
10:31
Speaker 1: And Beijing, were you doing this remote or were you
10:33
Speaker 1: in China?
10:34
Speaker 2: So I lived in Beijing in nineteen ninety nine. I
10:37
Speaker 2: taught two courses, one on American business law, nothing extraordinary there.
10:42
Speaker 2: But I taught another class on the rule of law.
10:44
Speaker 2: And I have to say, twenty five years later, it
10:47
Speaker 2: is unbelievable that I taught a class at what was
10:51
Speaker 2: formerly a Communist Party training school in the rule of law.
10:56
Speaker 2: It is literally impossible to imagine that this would happen today.
11:00
Speaker 2: Back then, really, nobody bothered me as long as I
11:03
Speaker 2: didn't fement dissent. I wasn't. I just was doing academic
11:06
Speaker 2: teaching of what does the rule of law mean, what
11:09
Speaker 2: does an independent judiciary mean? The roots, for example, even
11:13
Speaker 2: in Chinese traditions. And I did this at a time
11:16
Speaker 2: when China was opening up. We in the West had
11:19
Speaker 2: the view that if we just trade enough with them,
11:22
Speaker 2: they'll liberalize and become at least a kind of quasi
11:24
Speaker 2: democratic society. Didn't quite work out that way.
11:27
Speaker 1: You never know when a strong man is going to
11:29
Speaker 1: take over a country, even one that is moving towards
11:32
Speaker 1: Western ideals. So tell us a little bit about the
11:35
Speaker 1: work you do. Focusing Capital on the Long Term or FCLT.
11:40
Speaker 2: So this is a group that brings together a set
11:42
Speaker 2: of asset owners, meaning like pension plans, some asset managers,
11:46
Speaker 2: and actually some companies. And the question is how do
11:49
Speaker 2: we in the public markets and in the private markets,
11:53
Speaker 2: how do we get investors the whole ecosystem focused on
11:57
Speaker 2: the companies focused on making money over the long term.
12:02
Speaker 2: Our financial markets, with daily marked to markets, do encourage
12:06
Speaker 2: a lot of very short term thinking. Companies are very
12:10
Speaker 2: focused on the next quarter's earnings. How do you get
12:13
Speaker 2: companies investors, asset managers to think years and years into
12:18
Speaker 2: the future, and how do you set up incentives to
12:20
Speaker 2: achieve that. That's what the group does.
12:22
Speaker 1: It seems like there are thousands of C level executives
12:26
Speaker 1: and millions of people running businesses. So the question is,
12:30
Speaker 1: you know who's your audience. If you're a tailor swift,
12:32
Speaker 1: your audience is global. If you're running a mid size
12:36
Speaker 1: publicly traded company, well, your audience is much more narrow.
12:40
Speaker 2: Well, there's a couple different angles can go in this start.
12:42
Speaker 2: If you're basically saying like, there's lots and lots of
12:45
Speaker 2: people in commerce who are making money at the upper echelon,
12:49
Speaker 2: including with stock options, as value creation happens within the
12:52
Speaker 2: stock market, So I think that's true. I think we
12:56
Speaker 2: just have to step back and like, how much do
12:58
Speaker 2: we think that the most success for people in a
13:00
Speaker 2: society should be able to take home. It's an open question.
13:05
Speaker 1: And there's a lot of moving parts to that. It's
13:07
Speaker 1: long dated stock options versus some shorter term stock options,
13:11
Speaker 1: it's broad tax policy. There's a million moving pieces there,
13:16
Speaker 1: and I think generally it's a much longer conversation that
13:19
Speaker 1: you and I want to have today. But I don't
13:22
Speaker 1: believe we disagree. I think we both think this is
13:25
Speaker 1: a really complicated issue.
13:27
Speaker 2: Is complicated. I think stock options are part of it.
13:29
Speaker 2: I think having restricted stock units that basically tie you
13:33
Speaker 2: to the actual stock price, even so it's always in
13:35
Speaker 2: the money, is important. And I think we also have
13:38
Speaker 2: to remember that anything that ties people to long term
13:41
Speaker 2: value creation is ultimately in the interest of the shareholders.
13:46
Speaker 2: It's probably also in the interest of the employees and
13:49
Speaker 2: in the communities they operate. The danger is when you
13:52
Speaker 2: have short dated trickery from compensation structures that aren't long dated.
13:57
Speaker 2: That's a place where I think, actually, as an investor,
14:00
Speaker 2: need to be careful.
14:00
Speaker 1: Yeah. Absolutely. Let's talk a little bit about I shares,
14:04
Speaker 1: which I have argued could be the stealthiest and greatest
14:10
Speaker 1: corporate acquisition of all time, certainly relative to the cost.
14:15
Speaker 1: So tell us a little bit about the division I
14:19
Speaker 1: shares and index investments that you were running from twenty
14:22
Speaker 1: eleven to twenty nineteen when it's growth exploded.
14:26
Speaker 2: So if you go back to twenty eleven, what you'd
14:29
Speaker 2: see is a world where the ETF, the exchange traded fund,
14:33
Speaker 2: which is nothing other than an index fund, bundled up
14:36
Speaker 2: as a stock was a small part of many people's portfolios.
14:41
Speaker 2: It was small in or non existent in most wealth portfolios.
14:46
Speaker 2: Most advisors weren't using ETFs. Most institutions weren't using ETFs
14:50
Speaker 2: back then somewhere, but most weren't. And what happened over
14:53
Speaker 2: the coming decade is pretty simple. Two forces drove the
14:58
Speaker 2: growth of ETFs and the ice business. The first was
15:02
Speaker 2: low cost investing. The basic recognition, as Warren Buffett has
15:05
Speaker 2: said quite publicly, most people are probably going to be
15:08
Speaker 2: better off just buying the S and P five hundred,
15:11
Speaker 2: and the cheapest way to do that is buying an
15:13
Speaker 2: I share, not what he named another product, buying a
15:17
Speaker 2: simple ETF that gives them access to the capital markets
15:20
Speaker 2: at a low price. The second force, and this is
15:23
Speaker 2: much more inside baseball and technical, but is actually really
15:25
Speaker 2: interesting if you're in the capital markets, is that it
15:28
Speaker 2: allows you to trade risk between a buyer and a
15:32
Speaker 2: seller without an investment bank being in between. So the
15:35
Speaker 2: market that has been revolutionized by the ETF, it's actually
15:38
Speaker 2: not the equity market, because that actually agency trading on
15:41
Speaker 2: exchanges has been here for a long time. The market
15:44
Speaker 2: that ETF's revolutionized was the bond market. The bond market
15:47
Speaker 2: was always an over the counter market where you went
15:50
Speaker 2: through a dealer always. And what the ETF does by
15:53
Speaker 2: bundling up risk in effectively like a set, is you
15:57
Speaker 2: can sell that set of bonds to somebody else out
16:00
Speaker 2: there in the world who wants that risk, but not
16:03
Speaker 2: have to go through a bank. And what that means,
16:06
Speaker 2: especially is that in times of stress or as banks
16:09
Speaker 2: get smaller and smaller as they are in their trading books,
16:13
Speaker 2: what that means is you can trade risk efficiently with
16:15
Speaker 2: a transparent price on exchange in a way that fifteen
16:19
Speaker 2: years ago was literally impossible. So it was those two forces,
16:23
Speaker 2: the securitization of risk in bundles, combined with low cost indexing,
16:29
Speaker 2: that's driven the Ice Shares business to three and a
16:31
Speaker 2: half trillion dollars today, up from about three hundred and
16:34
Speaker 2: fifty billion when we bought it when the firm bought
16:37
Speaker 2: it back in two thousand and nine.
16:38
Speaker 1: Ten x. That's real. That's really quite amazing. So you're
16:42
Speaker 1: talking about bonds, but in my own practice at my firm,
16:47
Speaker 1: the fascinating thing is the superiority of ETFs to mutual funds,
16:54
Speaker 1: especially in non qualified accounts. Taxable accounts because you get
16:58
Speaker 1: these phantom capital gains from mutual funds that you don't
17:03
Speaker 1: get in ETFs. And we found our best practices are
17:08
Speaker 1: mutual funds are great for four oh one k's or
17:11
Speaker 1: iras or any tax deferred vehicle, but for a taxable portfolio,
17:17
Speaker 1: it's hard not to go all ETFs.
17:21
Speaker 2: Fair point very that's a thoughtful observation about the tax
17:25
Speaker 2: efficiency of the ETF. So one reason that people that
17:28
Speaker 2: buy ETFs is they're cheaper than a traditional mutual fund.
17:32
Speaker 2: Sometimes there are great mutual funds with great managers, and
17:34
Speaker 2: they may be worth holding on that basis alone. But
17:37
Speaker 2: generally clients have shifted out of active mutual funds and
17:41
Speaker 2: they moved in dtfs because they get better value for money.
17:43
Speaker 2: But you're getting at is that you also avoid paying taxes.
17:47
Speaker 2: You postponed paying taxes effectively until the moment that you sell.
17:52
Speaker 2: The way it basically works is along the way with
17:54
Speaker 2: the mutual fund, you're paying all the taxes incurred by
17:57
Speaker 2: the underlying PM. Underlying portfolio manager he or she is
18:01
Speaker 2: generating the tax gains or losses, and the gains is
18:04
Speaker 2: what we're worried about. They come through and you pay
18:06
Speaker 2: them that year, as opposed to if you're holding them
18:08
Speaker 2: for fifteen twenty years, you pay the capital gains when
18:10
Speaker 2: you ultimately sell the fund. The ETF takes those gains
18:14
Speaker 2: and puts it off to the future. And of course
18:16
Speaker 2: there's always the happy story where you die and your
18:18
Speaker 2: basis gets stepped up, so joke, you don't want it.
18:20
Speaker 1: So arguably you're compounding more in identical ETF versus identical
18:27
Speaker 1: mutual funds.
18:27
Speaker 2: And in theory if because of the tax bass step
18:30
Speaker 2: up at death, ultimately you may be limiting all those
18:33
Speaker 2: capital gains to boil it down. You don't get those
18:36
Speaker 2: annoying capital gains charges at the end of the year
18:38
Speaker 2: for a fund you didn't buy or sell.
18:40
Speaker 1: Right, you recontrol, take control over the selling and the
18:44
Speaker 1: timing of.
18:45
Speaker 2: The timing of the taxes.
18:46
Speaker 1: So I totally appreciate what you were saying about the
18:49
Speaker 1: bond side, and towards that ends, Blackrock has become one
18:55
Speaker 1: of the biggest bond trading shops on the street, the
18:59
Speaker 1: bond side of black I know most people think of
19:01
Speaker 1: ey shares, think of equities, but you guys are every
19:05
Speaker 1: bit as huge in bonds as you are in stocks,
19:08
Speaker 1: We do.
19:08
Speaker 2: A tremendous amount in bonds in ETFs. We do it
19:12
Speaker 2: in active strategies, which are still very popular, and we
19:15
Speaker 2: actually manage huge sums of money for institutions. So there'll
19:18
Speaker 2: be huge insurance companies that will come to us and say,
19:22
Speaker 2: you know what, we think it might be more efficient
19:24
Speaker 2: for you just to manage our balance sheet for us
19:26
Speaker 2: the asset side. So we'll take over the entire balance
19:28
Speaker 2: sheet and manage all the bonds, the corporate bonds, the treasuries,
19:32
Speaker 2: the agencies that sit on those books. All that gets
19:35
Speaker 2: managed at a one big central book, and we get
19:38
Speaker 2: maximum efficiency for our clients as we trade, because there's
19:41
Speaker 2: really no other beast on the street that's bigger, and
19:44
Speaker 2: so therefore you can get the best possible returns for
19:46
Speaker 2: your clients.
19:47
Speaker 1: So, out of the ten trillion that black Rock is managing,
19:50
Speaker 1: how much of that is fixed income?
19:51
Speaker 2: I'm going to say it's around two to two and
19:53
Speaker 2: a half trillion. I don't know the number offhand, something
19:56
Speaker 2: around that.
19:56
Speaker 1: Yeah, that's kind of bullpark what I was thinking, Not
20:00
Speaker 1: not too shabby, two and a half trillion dollars.
20:02
Speaker 2: It's again, remember most of those portfolios are long term portfolio. Yes,
20:06
Speaker 2: that where clients have basically said build a portfolio. Individuals
20:09
Speaker 2: can come to us to actually say, build me a
20:12
Speaker 2: laddered munibook. Institutions come to us and hey, manage a
20:16
Speaker 2: hedge fund for us. So it's a broad broad range
20:18
Speaker 2: of clients. But fundamentally, bond trading is something where you
20:21
Speaker 2: do get economies of scale by bringing more and more together.
20:25
Speaker 2: The best bond houses tend to be quite large. Our
20:27
Speaker 2: best competitors are quite large.
20:29
Speaker 1: So let's stay with that idea because you're anticipating my
20:33
Speaker 1: next question. So you're now the largest asset manager in
20:36
Speaker 1: the world, but there are a lot of big competitors
20:40
Speaker 1: in low cost indexing and ETFs. What does Blackrough do
20:44
Speaker 1: to distinguish itself to differentiate itself from other low cost
20:49
Speaker 1: ETF or index providers.
20:52
Speaker 2: So it's a great question because clients never buy from
20:55
Speaker 2: you because your firm is big. They buy because your
20:58
Speaker 2: product is good. So it's got to be each individual
21:01
Speaker 2: product has to be the best that the client can find. Now,
21:04
Speaker 2: part of that is a brand they trust. So we've
21:06
Speaker 2: reg recently launched the Bitcoin ETF. We've raised about six
21:10
Speaker 2: and a half billion dollars more than anyone else.
21:12
Speaker 1: So quickly too, in like thirty days. It was amazing.
21:16
Speaker 2: So why because it's a brand that clients trust. The
21:20
Speaker 2: pricing was also quite attractive. That's another part of what
21:23
Speaker 2: you have to be thinking about always in every product,
21:25
Speaker 2: but especially in the ETF world. And then last, you
21:28
Speaker 2: have to be thinking, how can you help clients build portfolios.
21:31
Speaker 2: Many financial advisors turn to us to help us figure
21:34
Speaker 2: out how to build their overall portfolios for their clients.
21:37
Speaker 2: We'll work with them on asset allocations. We'll give them
21:40
Speaker 2: what we call model portfolios. It's basically literally a model
21:43
Speaker 2: filled with ETFs, active strategies, RS and sometimes other peoples
21:48
Speaker 2: all in a mix, and it allows them to actually
21:51
Speaker 2: focus on what they do best, which is working with
21:53
Speaker 2: their clients. So that's another aspect of why clients might
21:56
Speaker 2: work with us, which is we help them actually build
21:58
Speaker 2: their own businesses.
22:00
Speaker 1: I want to talk a little bit about the growth
22:02
Speaker 1: that you've experienced over the past couple of years. A
22:04
Speaker 1: research report out of Morgan Stanley last year predicted in
22:08
Speaker 1: five years Black Rocks AUM would be fifteen trillion dollars.
22:13
Speaker 1: That's a fifty percent gain, pretty heady numbers pretty substantial.
22:18
Speaker 1: How do you get there? Is this by growing market share?
22:22
Speaker 1: Does the overall pie get bigger some combination? How do
22:26
Speaker 1: you fulfill those heady expectations?
22:29
Speaker 2: You start by recognizing how small we are relative to
22:32
Speaker 2: the universe. You talk about ten trillion dollars. I'd actually
22:36
Speaker 2: think in terms of revenue. Revenue is where you're getting
22:40
Speaker 2: client's attention. Okay, we are our only three percent of
22:44
Speaker 2: global asset management. In almost any other comparable industry like
22:49
Speaker 2: sales and trading and investment banking, for example, the leader
22:52
Speaker 2: there would be fifteen or sixteen percent. We're small. We're
22:56
Speaker 2: small fish in a very, very big ocean. So how
22:59
Speaker 2: do you get there? You recognize one, you're still small. Two,
23:03
Speaker 2: you've got to figure out the products your clients need
23:05
Speaker 2: in every individual market, and it differs. What clients want
23:08
Speaker 2: to buy in Swetzowan is not going to be the
23:09
Speaker 2: same as what they want to buy in Tokyo. And Third,
23:13
Speaker 2: you figure out how do you bring the strengths of
23:15
Speaker 2: the firm, our knowledge for global brand, global economies of
23:19
Speaker 2: scale all together to serve clients. How do you figure
23:22
Speaker 2: that out and yet make each client feel like she
23:25
Speaker 2: or he is important? As an individual financial advisor or
23:28
Speaker 2: a pension plan or serving well fund.
23:30
Speaker 1: So that's the trick. So you sound like the head
23:33
Speaker 1: of global client business, I hope. So, so what's a
23:37
Speaker 1: day in the life of the head of global client
23:40
Speaker 1: business at Blackrock? Like?
23:42
Speaker 2: So, the passions I have are the things that make
23:46
Speaker 2: me get up in the morning. Pretty simple. I love
23:49
Speaker 2: seeing clients, I love seeing teams, and I love working
23:52
Speaker 2: on problems that are really pretty interesting. So what I
23:55
Speaker 2: mean clients I sit down, for example, with the chief
23:58
Speaker 2: investment officer of a big global insurer. I can sit
24:02
Speaker 2: down with a financial advisor. I might be sitting down
24:06
Speaker 2: with somebody running even actually interesting competitors. A lot of
24:10
Speaker 2: competitors use our products. I learn a lot from talking
24:12
Speaker 2: to them. I actually think the top job of any
24:14
Speaker 2: executive is actually building great leaders behind him or her,
24:18
Speaker 2: and so actually spending time in meetings, but also individually
24:22
Speaker 2: growing them as leaders, helping them make great decisions. And
24:25
Speaker 2: then the last part is something I'm very interested in,
24:27
Speaker 2: is investing in the transition to the low carbon economy.
24:30
Speaker 2: What I mean by that is for various forces macroeconomic,
24:34
Speaker 2: microeconomic policy, consumer preferences. We are slowly decarbonizing our economy
24:42
Speaker 2: in the United States, in Europe, in Japan, actually also
24:45
Speaker 2: in China. And what's happening is that day by day,
24:48
Speaker 2: small investment decisions are moving future hydrocarbon expenditures in other words,
24:52
Speaker 2: spending on oil and gas in some future state, moving
24:55
Speaker 2: it today in terms of capital investments. And that's where
24:58
Speaker 2: we come in. Clients need us to actually invest capital
25:02
Speaker 2: into the transition. Long data cash flows that they can
25:05
Speaker 2: get that will pay for twenty years, thirty years for
25:08
Speaker 2: their pension plans. How do we help them invest in
25:10
Speaker 2: the right products, the right investments so they can get
25:14
Speaker 2: that money and meet their own financial objectives. And this
25:17
Speaker 2: transition to a low carbon economy is one of the
25:19
Speaker 2: biggest trends in the whole investment world. It will consume
25:23
Speaker 2: trillions and trillions of capital doing it thoughtfully consciously. It's
25:26
Speaker 2: why we just recently bought a company called GIP. It's
25:29
Speaker 2: a big infrastructure firm. It's our biggest acquisition in fifteen years.
25:33
Speaker 2: Because we see this trend of clients investing in infrastructure,
25:37
Speaker 2: especially around this transition to a low carbon economy. That's
25:40
Speaker 2: the place where we want to work with clients. I
25:42
Speaker 2: love that stuff. I love figuring out new products, new teams,
25:46
Speaker 2: new things we can do with clients.
25:47
Speaker 1: We're going to talk about mega forces in a little while.
25:50
Speaker 1: That comes up in that space. I want to talk
25:53
Speaker 1: about some of the trends that have been changing that
25:56
Speaker 1: have to be a challenge for your clients as well
25:59
Speaker 1: as Blackriduck. How do you help clients navigate market environments
26:04
Speaker 1: like we've seen so twenty twenty two we have inflation,
26:08
Speaker 1: stocks and bonds down double digits. Twenty twenty three we
26:11
Speaker 1: have disinflation and the Nasdaq is up fifty percent, the
26:16
Speaker 1: SMP is up twenty five percent. That throws a monkey
26:19
Speaker 1: wrench to a lot of people's thoughts about the future.
26:22
Speaker 2: So we've just gone through the biggest rate shock of
26:25
Speaker 2: our professional careers. If you live and work in finance,
26:29
Speaker 2: the first principle, the most important thing is what's the
26:32
Speaker 2: discount rate? What are the cash flows in the future
26:35
Speaker 2: worth today? That's what interest rates are. As that transformation
26:39
Speaker 2: happened in the last couple of years, where the rate
26:42
Speaker 2: shock and from central banks is inflation served. That has
26:47
Speaker 2: totally altered client's portfolios. In twenty twenty two, stocks and
26:51
Speaker 2: bonds we're both down about twenty percent globally, huge drop.
26:56
Speaker 2: What that led to is clients going into almost a shock.
27:00
Speaker 2: And actually, for the last couple of years, if you
27:02
Speaker 2: look net global clients, global investors have at least from
27:06
Speaker 2: what we can see in funds, actually invested negative amounts
27:10
Speaker 2: and equities. Now somebody obviously bought some, but broadly the
27:13
Speaker 2: broad investor has actually reduced his equity position. He's even
27:18
Speaker 2: he's moved some into ETFs, but a lot into cash,
27:22
Speaker 2: a lot into cash, And so where clients have moved
27:24
Speaker 2: is in cash and saying when do I come back
27:27
Speaker 2: in now? Ironically, actually the market was up SMP was
27:30
Speaker 2: up hugely, largely fueled by the AI boom in the
27:34
Speaker 2: last year. So many clients of ours miss that. The
27:37
Speaker 2: question is how do you help them? It's the biggest
27:39
Speaker 2: challenge of their wealth manager like yourself faces. How do
27:42
Speaker 2: you help clients stay invested when they get afraid. That's
27:46
Speaker 2: one of the biggest questions we have is how do
27:48
Speaker 2: you work with them and figure out when to be
27:49
Speaker 2: in the markets and when not to jump out of
27:51
Speaker 2: the markets because they're a little, little, little nervous.
27:55
Speaker 1: Let's talk a little bit about the blackrock investment Institute
27:59
Speaker 1: which public wish this wonderful bit of research on the
28:03
Speaker 1: mega forces that are affecting everything, big structural changes that
28:08
Speaker 1: affect investing now and will be felt far off in
28:12
Speaker 1: the future. This creates major opportunities and risks for investors.
28:17
Speaker 1: Let's talk a little bit about this. What led to
28:20
Speaker 1: looking to identify mega forces?
28:23
Speaker 2: Barry? If you look around anywhere, every newspaper, every bank,
28:28
Speaker 2: they'll give you lots of guidance on stocks up, bonds down.
28:31
Speaker 2: Who knows, maybe this stock op whatever. The question is
28:35
Speaker 2: for a long term investor building a portfolio, where are
28:38
Speaker 2: there underlying economic forces that are shifting where value is
28:42
Speaker 2: created in an economy? Can you keep an eye on that.
28:45
Speaker 2: That doesn't mean you'll make money on it, because you
28:47
Speaker 2: have to actually also think it is already priced in.
28:49
Speaker 2: But understanding what are those big drivers? And we came
28:52
Speaker 2: up with a few that are driving the world. Clearly,
28:56
Speaker 2: central bank activity is huge, that's not what we mean.
28:59
Speaker 2: What we mean is something that has a ten to
29:00
Speaker 2: twenty year horizon. So we're talking about the aging of
29:04
Speaker 2: societies all over the world, huge impact on productivity. We're
29:08
Speaker 2: talking about the transition to low carbon economy and the
29:11
Speaker 2: huge capital sums that will be involved as we ultimately
29:15
Speaker 2: move a lot of future expenditure on oil and gas
29:19
Speaker 2: to actually investing in things like heat pumps and batteries.
29:22
Speaker 2: Today we're talking about dbanking, and we're talking about here
29:26
Speaker 2: banks actually getting smaller, their balance sheets getting smaller due
29:30
Speaker 2: to regulation, especially Basil three, and therefore actually where does
29:34
Speaker 2: that credit go? And we're talking about artificial intelligence, which
29:39
Speaker 2: we do see as a transformative technology that ultimately will
29:43
Speaker 2: give the rise of new industries. So these are the
29:46
Speaker 2: kind of forces where does capital go to work? And
29:48
Speaker 2: then also geopolitical fragmentation as we see supply chains moving
29:53
Speaker 2: away from high dependence on China to an minimum having
29:58
Speaker 2: an alternative in some cases actually saying let's invest much closer,
30:03
Speaker 2: like in Mexico, to a core market like the United States.
30:06
Speaker 2: These are forces that are actually like transforming our world,
30:09
Speaker 2: but they're day to day. They're not shocks, they're step
30:12
Speaker 2: by step. So when we talk about megal forces, we're
30:14
Speaker 2: talking about things that are changing our world's day to day.
30:17
Speaker 2: But you might miss it if you just pay attention
30:19
Speaker 2: to today's headlines.
30:20
Speaker 1: A little bit of Hemingway's suddenly than all at once right,
30:23
Speaker 1: You don't see it happen until hey, what look, how
30:27
Speaker 1: the world's changed.
30:28
Speaker 2: That refers to bankruptcy. Happily we're talking here about long
30:31
Speaker 2: term capital appreciation.
30:33
Speaker 1: But yes, it refers to bankruptcy. But it's apple to
30:36
Speaker 1: so many other things. I have so many examples where
30:39
Speaker 1: you don't notice the change and then suddenly you're in
30:42
Speaker 1: a different place.
30:43
Speaker 2: I think the toughest thing for a reader or a
30:47
Speaker 2: listener to media like this is sorting out what is
30:51
Speaker 2: today's hot topic that tomorrow people won't even be talking about,
30:55
Speaker 2: and where are there underlying seismic shifts that other people
30:59
Speaker 2: haven't paid a lot of attention to.
31:01
Speaker 1: The late great Laslo Burini used to put out this
31:05
Speaker 1: bound book of newspaper headlines and stories from the previous year,
31:10
Speaker 1: and things that you read in the moment that are
31:12
Speaker 1: so emotional and so important. You look back a few
31:15
Speaker 1: months later, it's ephemeral, empty nonsense. You just it was
31:19
Speaker 1: the emotion that grabbed you, not the line underneath it was.
31:24
Speaker 1: It's one of my favorite publications because it forces you
31:28
Speaker 1: to completely reevaluate how you think about things. It's really amazing.
31:32
Speaker 2: Sometimes I think of markets like Dory the Fish with
31:35
Speaker 2: a very short term memory. Dorry can't keep much in
31:39
Speaker 2: her head at any one time. Markets are a bit
31:41
Speaker 2: like that. They're very focused on rates right now. Two
31:45
Speaker 2: years ago, no one was talking about rates. Suddenly everyone's
31:49
Speaker 2: talking about rates. That's the nature of markets. I think
31:52
Speaker 2: it's relevant to be thinking about You have to know
31:55
Speaker 2: what's happening in the flow. But a long term great
31:58
Speaker 2: investor is thinking about the trends that are a little
32:01
Speaker 2: bit below the waterline, that actually fundamentally are where the
32:05
Speaker 2: boat is moving. The current is shifting the entire fleet.
32:08
Speaker 1: Right. You can't be a dog thinking squirrel, which is
32:12
Speaker 1: often how the markets react. It's like just total squirrel, right, squirrel,
32:17
Speaker 1: it's just solely distracting.
32:19
Speaker 2: You talked about distractions. I think that much of the
32:23
Speaker 2: investment universe is set up to actually attract, like look
32:28
Speaker 2: at the shiny ball. Look at the shiny ball, because
32:30
Speaker 2: a lot of long term investing is actually not that
32:33
Speaker 2: interesting day to day. It's putting aside a diversified portfolio
32:37
Speaker 2: and holding and not freaking out if you do that
32:41
Speaker 2: over the long haul, especially in US equities, has worked
32:44
Speaker 2: out pretty well.
32:46
Speaker 1: To say the very least. Let's talk about some of
32:48
Speaker 1: these ten to twenty year mega forces, starting with digital
32:52
Speaker 1: disruption and artificial intelligence. Where on earth is that going?
32:57
Speaker 2: So artificial intelligence is got to be the single biggest exciting,
33:03
Speaker 2: zesty thing of the day. We've got an active debate
33:07
Speaker 2: inside our firm on this question. On the one hand,
33:10
Speaker 2: artificial intelligence is a generalized technology that can spread throughout
33:13
Speaker 2: the entire economy quite quickly because of the Internet already.
33:16
Speaker 1: Has I mean, it's been used for so long people
33:18
Speaker 1: and it just didn't see the front end of it.
33:20
Speaker 2: Well, actually it's already been used from It's been used
33:23
Speaker 2: for many years actually in our own quantitative strategies. So
33:26
Speaker 2: large language models in investing is nothing new, Okay, we
33:31
Speaker 2: and competitors have been doing this for a long time.
33:33
Speaker 2: But how people interact and how we're facilitated by using AI,
33:38
Speaker 2: that is new. We're going to see what the impact is.
33:41
Speaker 2: There's one school of says it's going to completely change
33:43
Speaker 2: the world very quickly, and that's of course why stocks
33:47
Speaker 2: like in Nvidia have had a huge run. There's another
33:50
Speaker 2: school which says, take the long view that whether it's electricity,
33:54
Speaker 2: the telegraph, the telephone, the airplane, the car, the fax machine,
33:59
Speaker 2: or the Internet. It took decades for these technologies to
34:03
Speaker 2: actually really change the real economy and to actually have
34:07
Speaker 2: a real impact on how people work with each other,
34:10
Speaker 2: how they make things, how they trade. We'll see big debate.
34:13
Speaker 2: There is a there is a view that actually, while exciting,
34:18
Speaker 2: there is a view that investors are over emphasizing some
34:21
Speaker 2: distant fantasies around AI, when actually the real applications are
34:27
Speaker 2: going to take a long time for companies to figure out.
34:29
Speaker 2: We don't know.
34:30
Speaker 1: So there's a contingency of people who insists on calling
34:33
Speaker 1: AI a bubble. What would you say to them if
34:39
Speaker 1: you know there they think it's just another shiny object.
34:42
Speaker 2: Time's going to tell I don't think it's all nonsense. Importantly,
34:46
Speaker 2: we do see the transformation of the economy through AIS
34:49
Speaker 2: a real long term force. When we saw a huge
34:53
Speaker 2: crypto boom a few years ago, are my view was
34:58
Speaker 2: we're in the midst of a bubble. Want to start
35:00
Speaker 2: growing some tulips. Like the Dutch in the seventeenth century,
35:03
Speaker 2: this is different. The question is when do the cash
35:06
Speaker 2: flows start moving for data centers, for processing manufacturing, processor manufacturing,
35:14
Speaker 2: when is start getting applied in real businesses and how
35:17
Speaker 2: they change their own operations. The answer is actually data
35:21
Speaker 2: centers are booming everywhere. People are trying to figure out
35:25
Speaker 2: how to use these chips. Whose businesses will rise and fall?
35:29
Speaker 2: Will firms like Bloomberg or Blackrock be disrupted by some
35:33
Speaker 2: attacker who uses AI as an attack vector. We don't know.
35:39
Speaker 2: We'll see. So there can be a lot of early enthusiasm,
35:43
Speaker 2: maybe even hype, But I wouldn't call it a bubble.
35:45
Speaker 2: To me, a bubble sounds like you're selling tulips. I
35:48
Speaker 2: don't think that's what's going on here. We're seeing a transformation.
35:51
Speaker 2: But we've also saw with the railroads in the eighteen forties, fifties, sixties,
35:55
Speaker 2: seventies that as they started to transform continental economies, all
36:00
Speaker 2: a lot of money was lost as investors got very excited.
36:02
Speaker 2: So it's a real economic transformation. What are the right
36:06
Speaker 2: investments that's a much trickier question.
36:08
Speaker 1: In people sort of lose sight of that, whether it's
36:10
Speaker 1: automobiles or internet companies. Even if you know, hey, this
36:15
Speaker 1: is going to change everything, it doesn't mean you know
36:17
Speaker 1: which is the company that's going to be the winner
36:19
Speaker 1: from it.
36:20
Speaker 2: You don't know which company, and you don't know when
36:22
Speaker 2: to buy. The railroad was obviously a transformational technology, clearly,
36:27
Speaker 2: I don't think anybody really disputed that. The question is
36:31
Speaker 2: how do you make money from it? That's not so obvious.
36:35
Speaker 2: Going back to the dot com boom, the Internet was
36:38
Speaker 2: a transformational technology, but many of the companies that sprouted
36:42
Speaker 2: back then were complete failures. On the other hand, there
36:45
Speaker 2: was one small company called Amazon that did actually manage
36:49
Speaker 2: to get out of just book selling into something slightly larger.
36:52
Speaker 1: So sometimes it's just bad timing. Pets dot Com famously
36:55
Speaker 1: blew up pets dot Com, but a few years later
36:58
Speaker 1: Chewy is doing great, and it's it's essentially a variation
37:01
Speaker 1: of the same business model.
37:02
Speaker 2: The tough part here. You can be really right about
37:05
Speaker 2: the long term trend, but if you get in at
37:07
Speaker 2: the wrong time, too early or too late, you can
37:10
Speaker 2: miss that. That's the tricky part in what we do.
37:12
Speaker 2: It's also what makes it fun.
37:13
Speaker 1: So let's talk a little bit about geopolitical fragmentation and
37:17
Speaker 1: economic competition. You know, obviously Russia, the EU, China big
37:23
Speaker 1: aspects of the global economy, but what about South America
37:27
Speaker 1: or Africa, which seems to have been left behind in
37:30
Speaker 1: the economic competition and when you talk about fragmentation, what
37:35
Speaker 1: does that mean in terms of global trade and relations.
37:39
Speaker 2: So for global investors, the big question is how do
37:43
Speaker 2: you build a global portfolio in a world that is fragmenting.
37:47
Speaker 2: Five seven years ago, even as recent as that, you
37:50
Speaker 2: built a global portfolio, and you could be an individual
37:53
Speaker 2: financial advisor, an individual investor, or a giant sovereign wealth fund.
37:57
Speaker 2: You built a global portfolio, sifying, looking for opportunities everywhere,
38:03
Speaker 2: and you didn't think much about political risk. Today a
38:06
Speaker 2: global portfolio has to put political risk at the center
38:10
Speaker 2: of his or her portfolio. You've got to be thinking,
38:13
Speaker 2: is this market actually too risky for the current price
38:17
Speaker 2: because of geopolitical events, whether it be war, we all
38:20
Speaker 2: live through a pandemic. These are forces that have rent
38:25
Speaker 2: at the globe fabric of global trade and of global investments.
38:29
Speaker 2: So five years ago China, China was the second hottest
38:35
Speaker 2: bell at the ball. First was the United States. Today,
38:39
Speaker 2: global investors they have no bid for China. Why Mostly
38:44
Speaker 2: domestic issues in China, but also US Chinese trade tensions,
38:50
Speaker 2: technology conflict. These are reasons where global investors are saying, hmm,
38:54
Speaker 2: perhaps I don't want to invest in China. They weren't
38:57
Speaker 2: thinking about political risk five six years ago, seven years ago.
39:01
Speaker 2: Now it's front and center. Not quite as big as
39:03
Speaker 2: as interest rates, but almost there. And so the question
39:06
Speaker 2: is how can you actually invest to make money from this.
39:09
Speaker 2: We're seeing clients around the world interested in investing in
39:12
Speaker 2: infrastructure and the winner countries who are the winter countries
39:15
Speaker 2: from China's ultimately losing some of its almost monopoly status
39:18
Speaker 2: in manufacturing. We're seeing Mexico, Vietnam, Indonesia, We're seeing India.
39:24
Speaker 2: All of these countries are trying to figure out how
39:26
Speaker 2: they capture it some of that mantle. I think as
39:29
Speaker 2: US investors looking at mexico's particularly appealing. It's nearby, it
39:34
Speaker 2: is relatively politically stable, and they have privileged access to
39:39
Speaker 2: the US markets and lower cost of production for stuff
39:42
Speaker 2: that would otherwise have been done in China. And we're
39:45
Speaker 2: seeing lots of clients want to invest into Mexico to
39:48
Speaker 2: actually participate, whether in infrastructure or manufacturing. We're seeing companies
39:52
Speaker 2: wanting to move investments there because it's close to the
39:55
Speaker 2: Great American market, but it's not China.
39:58
Speaker 1: So I'm kind of fascinated by outside non domestic Chinese investors,
40:03
Speaker 1: so US investors' European investors investing in China public stocks
40:08
Speaker 1: over the past twenty thirty years, returns haven't been great.
40:11
Speaker 1: At a certain point, it's going to become attractive, assuming
40:17
Speaker 1: outside investors are not treated as second class citizens with
40:21
Speaker 1: the B shares the way they have been over these years.
40:24
Speaker 1: But at a certain point China is going to become
40:26
Speaker 1: a screaming by We're just noway near that point.
40:28
Speaker 2: Yet, So by definition, you never know when the bottom
40:31
Speaker 2: is what i'd say is and perhaps this is a
40:34
Speaker 2: by signal. When I talk to global investors, sophisticated investors
40:38
Speaker 2: with major investments in China, they're scaling back, They're not
40:43
Speaker 2: scaling up. When I talk to our own teams in China,
40:47
Speaker 2: the general mood there is pretty dark. Again, It's mostly
40:51
Speaker 2: dark for domestic reasons. Property crisis, the wealth effect of
40:55
Speaker 2: declining property prices on consumption, consumer sentiment is terrible, and
41:01
Speaker 2: you see increasing concerns for young people getting jobs. These
41:04
Speaker 2: are actual things that dampen people's investment appetite, and they
41:08
Speaker 2: tend to actually go to cash or bank deposits, and
41:11
Speaker 2: so what we're seeing is very little bid for For example,
41:15
Speaker 2: Chinese equities from either inside of China or globally. However,
41:19
Speaker 2: at some point the falling knife hits the floor, and
41:22
Speaker 2: the question is when do you buy great question. I'd
41:24
Speaker 2: keep an eye as a global investor on that question
41:27
Speaker 2: because at some point China does actually become an attractive buy.
41:31
Speaker 1: So you were hinting at demographics, Let's talk a little
41:33
Speaker 1: bit about that. We see not just China, but Japan
41:37
Speaker 1: and Europe with flat or negative negative growth rates. The
41:42
Speaker 1: United States growth rate has slowed but is still barely positive.
41:46
Speaker 1: How do you look at aging populations around the world?
41:49
Speaker 1: What does this mean for investors off in the future.
41:53
Speaker 2: So everywhere that is rich, women want to have fewer kids,
41:58
Speaker 2: even in the United States if you take outgration, barry
42:00
Speaker 2: or actually have a declining population. And in countries that
42:04
Speaker 2: don't have immigration or have much lower levels of immigration,
42:07
Speaker 2: Japan being most extreme, or South Korea or China, you're
42:11
Speaker 2: seeing birth rates plummet. So, for example, in China today
42:15
Speaker 2: the birth rate is approximately one baby per woman and
42:20
Speaker 2: replacement rate is more like two point two. So we're
42:22
Speaker 2: going to see a future where China in the end
42:25
Speaker 2: of the century will probably have I'm going to guess
42:28
Speaker 2: fewer people than the United States, because the US.
42:30
Speaker 1: Population contain by the end of this century.
42:33
Speaker 2: By the end of this century, we may live in
42:36
Speaker 2: a world where there, let's say, six hundred million Chinese.
42:39
Speaker 2: Do I think there will be six hundred million Americans
42:41
Speaker 2: in twenty one hundred, probably, So we're living in a
42:45
Speaker 2: world where these demographics are changing the long term destiny
42:48
Speaker 2: of nations, where having enough kids is actually like a
42:53
Speaker 2: long term question of productivity of staffing. Now, it's not
42:57
Speaker 2: all bad. If you look at GDP per capita, not
43:00
Speaker 2: just GDP, you'd see that actually the Japanese have done
43:04
Speaker 2: just fine for the last ten or fifteen years. But
43:06
Speaker 2: it does mean that you've got to look to a
43:08
Speaker 2: future where not only will there be fewer kids per adult,
43:12
Speaker 2: but also where robots are going to have to pick
43:15
Speaker 2: up some of the work. That's why I think robotics
43:17
Speaker 2: is being driven by demographic change. Is actually one of
43:20
Speaker 2: the most attractive places for long term investment, because one
43:23
Speaker 2: thing we know is demographics is destiny. If you have
43:26
Speaker 2: fewer babies today, you're going to have fewer workers tomorrow.
43:30
Speaker 2: This is a huge force we have to look at
43:32
Speaker 2: as relative among nations, there are some countries that still
43:36
Speaker 2: have demographic growth. India is the most prominent among them.
43:40
Speaker 2: Africa I put in a different sub Saharan Africa is
43:42
Speaker 2: in a different category because there's still continued population growth
43:44
Speaker 2: that's well over above replacement rate. The problem is there
43:47
Speaker 2: isn't actually any feasible path for economic growth to match that.
43:51
Speaker 2: That's a problem for the future. But for investors looking
43:53
Speaker 2: at the companies, the robotics companies that will serve the
43:57
Speaker 2: elderly Japanese of the twenty fifties, my peers I hopefully
44:02
Speaker 2: of that age. Who are those companies? How will they
44:04
Speaker 2: make money? I think that's a really interesting trend. The
44:07
Speaker 2: second healthcare healthcare for all these folks. And then also
44:11
Speaker 2: which societies figure out how to either attract through immigrants
44:15
Speaker 2: or through automation or able to elevate their productivity and
44:19
Speaker 2: which ones can't. Will actually help distinguish countries that actually
44:23
Speaker 2: have economic growth those versus those as shrink.
44:26
Speaker 1: So let's talk a little bit about the future of finance.
44:29
Speaker 1: We're in an unusual world. So not only did zero
44:32
Speaker 1: interest rate policy and QE end, but at the same
44:36
Speaker 1: time we've seen the rise of decentralization, all sorts of
44:42
Speaker 1: interesting apps taking place in the world of finance. I
44:45
Speaker 1: could venmo you money without a bank in between. That
44:47
Speaker 1: was unimaginable. I built a car in South America and
44:53
Speaker 1: I was using remitly to send cash to Columbia. That
44:57
Speaker 1: was unthinkable five ten years ago. You couldn't do that.
45:02
Speaker 1: So you talk about as one of the five mega
45:05
Speaker 1: forces the future of finance. Where do you see this
45:09
Speaker 1: go and how does private credit fit into that?
45:13
Speaker 2: A couple of big forces, one of which is the
45:16
Speaker 2: relentless growth of the capital markets relative to banks over time.
45:21
Speaker 2: This is largely different by regulation. Basel three an arcane term,
45:25
Speaker 2: but it just means that banks have to hold more capital.
45:29
Speaker 2: One of the things that regulators did after the financial
45:31
Speaker 2: crisis to say, yeah, we're not letting that happen again,
45:33
Speaker 2: and actually I give them big credit. Most big banks
45:36
Speaker 2: hold lots of capital. A's where despite an energy shock,
45:40
Speaker 2: a war in Europe, and a huge rate shock, the
45:43
Speaker 2: biggest in forty years, actually no major bank failed.
45:46
Speaker 1: Of that.
45:46
Speaker 2: We had a few smaller banks that were underregulated in
45:48
Speaker 2: the United States, but the large global banks which caused
45:51
Speaker 2: such a mass speck in two thousand and seven and
45:53
Speaker 2: eight actually came through fine. The problem is the credit
45:57
Speaker 2: that they create is gradually having to move some or else.
46:00
Speaker 2: It's moving into the capital markets. And one of the
46:03
Speaker 2: winners in that is what I would call private credit
46:06
Speaker 2: simply instead of actually in bond form, we're talking about
46:10
Speaker 2: a pension plan, an insurance company, or an individual investor,
46:13
Speaker 2: a wealthy individual investor who's invested into a so called
46:16
Speaker 2: private credit strategy, which simply means lending money out to
46:21
Speaker 2: some ultimate user, usually a company, and that money ultimately
46:25
Speaker 2: is a replacement for what otherwise probably would have been
46:27
Speaker 2: a bond. So insurance companies buy a lot of this.
46:30
Speaker 2: And where's why is this happening. It's because these loans
46:32
Speaker 2: are coming off of bank balance sheets and they're coming
46:35
Speaker 2: into this private credit strategies. This is going to be
46:38
Speaker 2: the big driver of the next five years of how
46:41
Speaker 2: the bank shrink and the capital markets grow. Private credit,
46:44
Speaker 2: I think your payments is something big. It's not where
46:48
Speaker 2: we directly participate as a firm, but payments, I think
46:52
Speaker 2: is the place where you have massive revolution. And you
46:55
Speaker 2: already mentioned the possibility of inter country transfers. That that's
47:00
Speaker 2: a place is massively inefficient. If you think about all
47:03
Speaker 2: of those immigrant workers, legal immigrant workers who are actually
47:07
Speaker 2: remitting funds back to their home countries, many of them
47:10
Speaker 2: are getting scalped on the way out. Imagine a world
47:14
Speaker 2: where instead of paying seven eight percent to some chain
47:19
Speaker 2: of intermediaries, instead they're actually paying almost nothing directly to
47:23
Speaker 2: transfer the funds back to their parents, their families, whatever.
47:27
Speaker 2: I actually think that the payments efficiency, that's a step
47:30
Speaker 2: forward in human liberation.
47:32
Speaker 1: So our last question on mega forces is, let's get
47:35
Speaker 1: into the details on the transition to low carbon. How's
47:40
Speaker 1: that going. I know that a lot of the solar
47:44
Speaker 1: panels and wind turbines are made in China. We're not
47:47
Speaker 1: really competing there, but it does seem we're making progress
47:51
Speaker 1: with coal and other things. Tell us about the transition
47:54
Speaker 1: to low carbon, it's.
47:56
Speaker 2: Pretty simple, Barry. If you look back at the energy system,
47:59
Speaker 2: what we're seeing is is because of the simple efficiency
48:02
Speaker 2: of renewables and batteries, just the simple efficiency not doing
48:05
Speaker 2: God's work, just simply efficiency, lowest cost production. We're seeing
48:09
Speaker 2: that coal plants are coming out of production very rapidly
48:13
Speaker 2: here in the United States, a little bit less quickly
48:16
Speaker 2: in Europe. We're seeing them being replaced by a mixture
48:19
Speaker 2: of natural gas, which is lower carbon emitting, and batteries
48:24
Speaker 2: with wind and solar, and this combination is actually just
48:28
Speaker 2: simply cheaper than operating a coal plant. That's why coal plants,
48:31
Speaker 2: which are very, very carbon intensive, are disappearing. We're seeing
48:35
Speaker 2: in transport cars that as evs get more and more efficient,
48:41
Speaker 2: that they actually and the costs of batteries drop step
48:44
Speaker 2: by step. We're seeing, for example, that in China today
48:48
Speaker 2: more than twenty five percent, almost a third of all
48:51
Speaker 2: cars sold last year, we're actually evs.
48:55
Speaker 1: Wow.
48:56
Speaker 2: Europe is trending in that same way. US actually charges
48:58
Speaker 2: few lower gas tax and so actually it's slower here,
49:02
Speaker 2: but it's still growing. So what you're seeing are all
49:04
Speaker 2: these steps that are actually moving hydrocarbon intensive activities in
49:08
Speaker 2: other words, things that burn or use oil and gas,
49:11
Speaker 2: and actually shifting things to something that is electrified and
49:15
Speaker 2: lower carbon. So that transformation consumes a lot of capital.
49:19
Speaker 2: Investors around the world want to participate, but it means
49:22
Speaker 2: building pipelines, it means build deepening the electric grid, putting
49:25
Speaker 2: up battery storage were actually built. The largest battery in
49:28
Speaker 2: the world is in Australia. It's a grid stabilizer outside
49:31
Speaker 2: of Sydney. We're working with clients who want to invest
49:35
Speaker 2: in startup companies, growth equity companies to build something like
49:38
Speaker 2: a heat battery. I don't even know this existed. A
49:40
Speaker 2: heat battery is for industrial processes often use a lot
49:45
Speaker 2: of heat. Typically, the only way you could do that
49:47
Speaker 2: is burn oil or gas right there to get that
49:51
Speaker 2: kind of intense heat, very hard to do with electricity.
49:53
Speaker 2: A heat battery takes the heat generated through renewables electric
49:59
Speaker 2: electricity coming in converted into heat stored away as a
50:02
Speaker 2: heat sink, and then releases the heat as needed directly
50:06
Speaker 2: into industrial processes. We just invested in a small company
50:10
Speaker 2: that actually builds these batteries. If somebody can figure out
50:13
Speaker 2: how to do that at scale, perhaps this company, it'll
50:16
Speaker 2: actually transform a whole bunch of industrial processes that today
50:19
Speaker 2: have no alternative to using hydrocarbons. And one of the advantages,
50:23
Speaker 2: especially for non Americans, because America has a lot of
50:25
Speaker 2: oil and gas. If you're a European or a Japanese,
50:28
Speaker 2: if you can find ways of actually reducing your dependence
50:32
Speaker 2: on imported oil and gas, you increase your national security
50:36
Speaker 2: so these are all coming together as forces that are
50:40
Speaker 2: decarbonizing the economy and investors can actually make a lot
50:43
Speaker 2: of money along the way.
50:44
Speaker 1: Last decarbonization question. We all always focus on transportation because
50:49
Speaker 1: it's so visible, but what is that fifteen percent of
50:52
Speaker 1: our emissions and private cars are half of that, so really,
50:58
Speaker 1: you know, even if everybody goes ev great at seven percent,
51:02
Speaker 1: what about agriculture that seems to be a really big
51:05
Speaker 1: source of carbon emissions and other problems that have environmental impacts.
51:11
Speaker 2: Very super astute question. Agriculture is the most underappreciated aspect
51:18
Speaker 2: of where we as a society emit lots and lots
51:22
Speaker 2: of carbon and methane. So the question is how do
51:25
Speaker 2: you decarbonize agriculture massively fragmented by definition fields for pasture
51:31
Speaker 2: or using up land that otherwise would be for trees
51:35
Speaker 2: or other carbon stores. A lot of people encourage eating
51:39
Speaker 2: less beef. Frankly, I find that hard love beef, but
51:43
Speaker 2: that is one piece. What we're finding is there are
51:46
Speaker 2: ways of capturing the methane emissions from cows, for example,
51:50
Speaker 2: and actually using those methane emissions to actually create energy elsewhere.
51:55
Speaker 2: So we've invested, for example in a company that picks
51:59
Speaker 2: up cow chips. All right, Long Island, we didn't have
52:01
Speaker 2: cow chips, but that means cow dung. And you actually
52:04
Speaker 2: figure out how do you actually take that cow dung,
52:06
Speaker 2: pick it up basically a nuisance for the farmer, turn
52:11
Speaker 2: it into a biomethane, and then ultimately you can use
52:14
Speaker 2: that methane that otherwise just simply would have admitted you
52:17
Speaker 2: burn it to create electricity, to create heat. That is
52:21
Speaker 2: an example of the ways that we can decarbonize agriculture.
52:24
Speaker 2: But you're absolutely right, agriculture is the trickiest part of
52:28
Speaker 2: the global economy to decarbonize.
52:30
Speaker 1: So let's jump to our favorite questions we ask all
52:34
Speaker 1: our guests our speed rounds, and we'll get you out
52:36
Speaker 1: of here in a couple of minutes. Starting with what's
52:40
Speaker 1: keeping you entertained these days? What are you watching or
52:42
Speaker 1: listening to, either on Netflix or podcasts or whatever.
52:47
Speaker 2: So I am listening to Dune, the nineteen sixties novel
52:54
Speaker 2: by Frank Herbert, because it's still one of my favorite books,
52:58
Speaker 2: and Dune Emperor is coming out in just a couple
53:01
Speaker 2: of weeks.
53:02
Speaker 1: So I didn't know think of you as a sci
53:04
Speaker 1: fi head.
53:04
Speaker 2: Is that your I confess to a big science fiction
53:08
Speaker 2: and fantasy enthusiasm.
53:10
Speaker 1: Tell us about your mentors who helped shape your career.
53:14
Speaker 2: I think my biggest mentors were Peter Fisher, who was
53:16
Speaker 2: my boss at the US Treasury. Sue Wagner is one
53:19
Speaker 2: of the founders of Blackrock, and Larry Fink has actually
53:22
Speaker 2: played a pretty big role in kicking me around and
53:25
Speaker 2: growing me.
53:27
Speaker 1: Let's talk books. What are some of your favorites. What
53:29
Speaker 1: are you reading right now?
53:32
Speaker 2: Well, my favorite business book of all time is a
53:35
Speaker 2: book called My Years with General Motors by Alfred Sloan.
53:39
Speaker 2: He's the man who actually really built the modern General
53:42
Speaker 2: Motors and actually really the modern global company. I'd recommend
53:45
Speaker 2: reading that for anybody, anybody interested in business. I am
53:50
Speaker 2: met reading Dune, and I have to say Pride and
53:55
Speaker 2: Prejudice one of my favorites. Reread it during the pandemic.
53:59
Speaker 2: Always great that, mister Darcy.
54:02
Speaker 1: We're down to our final two questions. What sort of
54:06
Speaker 1: advice would you give a recent college grad who is
54:09
Speaker 1: interested in a career in either investing or finance.
54:13
Speaker 2: Be curious about the world. Read the Economist, learn about
54:17
Speaker 2: something bigger than the microtechnical thing you're being asked to
54:20
Speaker 2: do long term. That pays off in having a broader mind,
54:23
Speaker 2: because fundamentally, fans is nothing other than thinking about the
54:26
Speaker 2: future and the cash flows in the future.
54:29
Speaker 1: And our final question, what do you know about the
54:31
Speaker 1: world of investing today you wish you knew thirty or
54:35
Speaker 1: so years ago when you were first getting started.
54:38
Speaker 2: Investing in public markets involves two separate mental moves. The
54:44
Speaker 2: first is thinking about where ultimate long term value is
54:48
Speaker 2: going to be created and then second thinking about who's
54:51
Speaker 2: going to pay for it tomorrow, and those are very
54:54
Speaker 2: different things. The first is really a private investing question.
54:58
Speaker 2: The second is what makes great public investors great. And
55:03
Speaker 2: understanding that distinction, I think actually is we talk often
55:07
Speaker 2: in investments as if actually it's just the first one,
55:10
Speaker 2: but the truth is that second one is actually what
55:12
Speaker 2: drives a lot of portfolio returns when you get in
55:15
Speaker 2: and out of security. Understanding that from the beginning, I
55:17
Speaker 2: think that would have been helpful to understand better.
55:19
Speaker 1: Huh, really really interesting. Thanks Mark for being so generous
55:23
Speaker 1: with your time. We have been speaking with Mark Weedman.
55:26
Speaker 1: He is Black Rocks head of Global Client Business. If
55:31
Speaker 1: you enjoy this conversation, well check out any of the
55:34
Speaker 1: five hundred plus discussions we've had over the past nearly
55:40
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