Globe & Mail: A call for long-term thinking
BOYD ERMAN and TIM KILADZE - Tuesday, October 19, 2010
TORONTO -- Larry Fink worries that Americans are putting their economy at risk by neglecting the future.
The founder of BlackRock Inc., the world's largest asset management company, isn't keeping the concern to himself, either. "The biggest weakness I think we have in America is we have forgotten the long term," Mr. Fink said in a recent interview with The Globe and Mail.
From Washington, where political parties squabble and gridlock
dominates, to Wall Street, where mark-to-market accounting forces
investors, analysts and corporate management to concentrate on quarterly
results, short-term thinking prevails, Mr. Fink said.
Take the mark-to-market rules, which lawmakers originally hailed because daily or quarterly valuation allows a more accurate appraisal of assets than often-outdated book value. But while that may be good for investors, Mr. Fink pointed out that the emphasis on short-term volatility also discourages longer-term corporate thinking. "[Mark-to-market] is a double-edged sword," Mr. Fink said. "We have much more granularity and transparency, but we have a lot more 'short-termism.' Is short-termism good for a country to compete with China, which has 10-year and 20-year plans? We have to think more macro."
As head of a company with $3.15-trillion (U.S.) in assets under management, Mr. Fink also isn't shy about his prescriptions for government. He suggested the Obama administration adjust the U.S. tax code to provide "a sweeping taxation change to encourage long-term investment." At the moment, he said, CEOs try to please investors by boosting dividends without thinking much about their effect on future expansion. "Raising dividends - is that good for America? Is that good for a long-term policy of growth? I don't think so," Mr. Fink said.
He believes the Federal Reserve's low interest-rate policy costs the U.S. long-term investments as money managers seek higher returns outside the country. Some of that money seems to be finding its way to Canada, with Statistics Canada reporting Monday that non-residents bought $11.1-billion (Canadian) of Canadian securities in August.
"I worry about low rates," Mr. Fink said, citing the flight from long-term investments, such as 30-year U.S. bonds. But he doesn't blame investors for looking elsewhere because, "now they can't get adequate returns in the U.S." In the end, however, Mr. Fink acknowledged that the Fed's policy may encourage longer-term investing because chief executive officers will earn almost no return for sitting on their big cash balances, forcing them to get out and hire, build factories, or lend money.
Individuals may also benefit because the Fed's low-rate policy could stimulate a stock rally. In fact, Mr. Fink believes there's probably another 12-per-cent upside in equities. A stock rally would in turn create a "wealth effect," he added. "It will stimulate sales and it may stimulate CEO behaviour."
His advice for retail investors? Look to stocks. Across the main asset classes, "the only thing that has not re-priced is equities," he said. And he doesn't see any substantial fixed-income returns soon because interest rates will remain low to stimulate growth. "If you believe there is no risk of inflation, and there is a risk of deflation, you could argue these rates are going to go down a bit more," Mr. Fink said. Moreover, if you assume there will be modest economic growth, "you're going to have corporate spreads probably stay where they are."
In fact, the opportunity for equity returns is so much greater that Mr. Fink argues the conventional wisdom for someone his age - he's approaching 58 - no longer applies. Although baby boomers are often told to invest in safer fixed-income investments, he said they are now better off buying dividend-paying stocks of multinational companies than bonds.
"I know that's not a good asset and liability match, but we're at extreme levels," he said.
Tags: economy rates
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