BlackRock's Fink: 'Inflation Is Real,' Not Transitory

Larry Fink, the founder and CEO of BlackRock, is "very frightened of inflation." In an appearance at this week's Schwab Impact 2021, Fink said, "Inflation is real. It is not transitory and I think the market is trying to digest what that means."

The market has responded with a surge in long-term bond yields. By midday Thursday, the 10-year Treasury yield was 1.66%, up 35 basis points from a month ago and almost double the yield of a year ago.

Fink, who heads the world's largest asset manager, with over $9 trillion in assets, said rising inflation could send the 10-year Treasury up to 2% to 2.5%, which would be a "big test" for the market.

It could also be a big test for the Fed which has maintained that rising inflation is transitory even as inflation is running well above its 2% target. The Core Personal Consumption Expenditure (PCE) which excludes food and energy and is the Fed's preferred inflation indicator was up 3.6% in the most recent reading, for August.

Fink said he will be focusing on how inflation is affecting every corporate earnings report for the third quarter, especially the impact on margins. "Until earnings season is over we will be in this uncertain period of time," said Fink, referring also to the global market and global economy emerging from the ravages of COVID.

Rising Oil Prices

One reason for rising inflation, according to Fink, is the huge shortage of hydrocarbons due to governments putting pressure on companies to restrict new investments in that energy source.

Energy prices have been soaring, but not only because of those pressures.

"It is inaccurate and misleading to lay the responsibility at the door of the clean energy transition," said a recent report from the International Energy Agency.

The report attributed the rebound in energy prices to "an exceptionally rapid global economic recovery (the fastest post-recession growth in 80 years), a cold and long winter in the Northern Hemisphere and a weaker-than-expected increase in supply."

Governments haven't been pushing hard enough to adopt strong enough policies to scale up clean energy sources and technologies to fill the gap, according to the report.

Fink agrees. The world needs "to urgently invest in new technologies to bring down the green premium," said Fink, adding that too rapid a push toward a carbon neutral world will "lead to a very unjust transition," with high inflation.

Also needed, said Fink, is a focus on not only energy supplies but also demand, help for emerging economies transitioning to cleaner fuels, and more public-private partnerships addressing climate transition and climate risk and less deficit financing, akin to the financing for the space race in the 1960s.

"Governments are doing the easy stuff but they're not doing the hard stuff," said Fink. Even the $1 trillion U.S. infrastructure bill falls short because only a small part of it focuses on new technologies, according to Fink. "We will never get to a net zero world … we're greenwashing if we don't look at it comprehensively, including the emerging world."

Diversifying Portfolios Into Private Markets

Fink sees private market investments playing a greater role in portfolios, many of which have too much liquidity, as the value of their public equity and public debt assets have exploded. He spoke of a "whole revaluation" of liquidity in overall portfolios and the strong returns from investments in private companies involved in new technologies and new industries that will either go public later on or stay private.

BlackRock is recommending that investors change their allocations from traditional 60/40 stock/bond split to 50/30/20 with the last 20% representing alternative investments, including private equity and private debt.

"We're calling for the private markets to play a bigger part in portfolios," said Jon Diorio, managing director and member of BlackRock's Product and Platform Group.

The firm forecasts that over the next five years publicly traded stocks will gain about 6% a year compared to over 19% in private equity and bonds in the public market will earn less than 1% compared to 9%-10% gains in private credit.