The country is reopening and the economy is recovering from the pandemic, and while COVID-19 cases are down, prices for goods and services are on the rise. President Joe Biden’s administration says this phenomenon, known as inflation, is not a cause for concern, but CEOs of major companies are warning that they’ll probably keep raising prices.
The Bureau of Labor Statistics’ monthly Consumer Price Index release showed that inflation in June was much higher than expected, with prices surging 0.9% over May, the highest month-over-month inflation rate since April 2008’s 1.0% increase. It was fueled by big price increases for used cars, beef, and pork, and the government insists it should cool down soon.
Labor Secretary Marty Walsh told Insider in early July that he’s not worried about the increase in prices for goods, especially given that wages also increased in June.
“The one thing that we are not concerned about is … inflation,” Walsh told Insider. “We’re still in transition, so we’re not concerned about that. So I think anytime we can push for higher wages – and the president’s been very vocal on this – that’s a good thing for people.”
Treasury Secretary Janet Yellen said in May that the high prices should only last through the end of this year, and Biden said during a June press conference that the “overwhelming consensus” is that inflation should “pop up a little bit and then come back down” – similar to the consensus from America’s central bank, led by Federal Reserve Chair Jerome Powell.
The economics field is not close to that consensus. Former Treasury Secretary Larry Summers has pointed to Biden’s $1.9 trillion stimulus as the “least responsible” fiscal policy in 40 years, one that could potentially trigger the dreaded hyperinflation. Increasingly, executives are saying that price increases are here to stay. Here’s what else they’re saying:
JPMorgan Chase CEO Jamie Dimon
JPMorgan Chase CEO Jamie Dimon said during an earnings call on July 13 that inflation “could be worse than people think.”
“I think it’ll be a little bit worse than what the Fed thinks,” Dimon said. “I don’t think it’s only temporary.”
In June, Insider reported that Dimon said the bank was stockpiling $500 billion in cash in anticipation of higher inflation, during which he expressed the same concerns with the nature of inflation, in that it will be more persistent than what people are saying.
JPMorgan did not immediately respond to Insider’s request for comment.
BlackRock CEO Larry Fink
Larry Fink, the CEO of investment management corporation BlackRock, reiterated Dimon’s concerns on the nature of inflation in a CNBC interview on July 14.
“[Policymakers] are saying jobs are more important than consumerism,” Fink said. “That is going to probably lead to systematically more inflation.”
Biden has consistently touted job growth as a primary achievement of his administration so far, and Republican lawmakers have even cut off unemployment benefits early in an effort to incentivize people to return to work.
But Fink said that move takes the focus away from consumers, causing large-scale price increases.
“I’m hearing from every CEO that they have huge price increases, and they’re passing them on across the board, here in the United States and in Europe,” Fink said.
BlackRock did not immediately respond to Insider’s request for comment.
PepsiCo CFO Hugh Johnston
To help counter the effects of inflation, some business leaders are explicitly saying they’re raising prices for their goods on consumers. PepsiCo’s CFO Hugh Johnston is one of them.
“Is there somewhat more inflationary pressures out there? There is,” Johnston said on an earnings call on July 13. “Are we going to be pricing to deal with it? We certainly are.”
The CEO of industrial supplies company Holden Lewis echoed Johnston on an earnings call the same day, saying that “based on what cost is doing,” the company will have to increase prices on consumers.
Lewis said, though, that a previous price increase the company made was received “fairly well,” suggesting consumers might not be discouraged by increased prices.
Pepsi did not immediately respond to Insider’s request for comment.
BlackRock CEO Larry Fink told CNBC on Wednesday he doesn’t believe the surge in inflation gripping the world will be fleeting, and the way the Federal Reserve and other central banks navigate this environment will have great significance.
“I do not believe inflation is going to be transitory,” he told CNBC’s “Squawk Box” after consumer prices increased 0.9% in June, far higher than the 0.5% consensus estimate of economists polled by Bloomberg.
While Fink said he expects inflation to be more “systematic” over time, he is worried about the delta variant of COVID-19 slowing down parts of Asia and further disrupting supply-chain shortages.
“We are seeing a real disconnect between the countries that have been very vaccinated and moving forward on vaccination, and the countries that have been late in vaccination, but focusing more on isolation,” he said. “Isolation worked before we had a vaccination.”
That could lead to uneven recovery across the world. But with record amounts of monetary stimulus and cash still waiting to be put to work, the growth trajectory is eventually pointing upward, he said.
“I believe the trend line is still going to be upward, maybe not as fast, maybe it’s going to be very moderate for the next six months as we digest how the world is able to handle the Delta variant and the speed in which vaccinations occur throughout the world,” he said.
“That is just not part of the focus on retirement and long-term investors,” he said about demand for cryptocurrencies. “We see very little in terms of investor demand on those types of things, but quite frankly (many)may not come to BlackRock for that type of demand.”
He added BlackRock investors are more focused on building long-term returns over a long period of time, and “we don’t have those conversations.”
The real estate sector is on track to gain from higher inflation and lower-than-expected interest rate hikes, though the effects will be far from uniform, BlackRock analysts wrote in a market commentary note.
The analysts threw cold water on the notion that offices are on their way out, writing that big, new, green properties could see more, not less, demand as the economy reopens. Employees’ desire for flexible, dynamic workplaces alongside investors’ growing calls for deeper ESG commitments could buoy the right properties, especially in cities.
Conversely, small, less sustainable properties – and the companies that own them – could see their fortunes diminish. Overall, BlackRock expects a small, heterogeneous decline in real estate demand, rather than a real-estate bloodbath.
Logistics firms, with extensive investments in properties like warehouses, could get caught between two opposing trends. On one hand, growing ecommerce demand will likely benefit the logistics sector, yet many parts of that market are “nearing peak valuation,” according to the BlackRock note.
BlackRock flagged a more dovish Fed as a key factor behind optimistic real estate valuations, writing that the central bank seems poised to raise rates less quickly than during previous bouts of inflation. They project inflation to drive up rental income and lower interest rates to support property valuations.
Large-cap tech and healthcare stocks could suffer the most if US taxes go up or if a global minimum tax is enacted, BlackRock analysts wrote in a note on Monday.
The note examined effective tax rates for each sector of the S&P 500, comparing them to the sector’s relative market cap. The category with the biggest market value and lowest effective rate was information technology, including the likes of Amazon and Microsoft. Communications and healthcare also ranked among the sectors with the lowest effective tax rates.
Ongoing tax negotiations at the OECD could be particularly bad news for health-care and IT firms, which benefit disproportionately from international profit-shifting schemes, the BlackRock analysts noted. The OECD talks have focused on setting a global minimum rate that would prevent companies from using complex accounting tricks to lower their tax liability.
Another potential pain point could come with a domestic tax hike, as the Biden administration considers funding options for its bipartisan infrastructure package. Republicans have ruled out a corporate tax increase for the time being. But a Democrat-only spending package that might include a higher corporate or capital-gains rate remains possible.
The analysts suggested investors consider small- and medium-cap firms that are less exposed to international tax changes. They also pointed to ETFs and municipal bonds, which are tax-exempt, as options for coping with higher taxes.
BlackRock’s Rick Rieder doubled down on his stance that the Fed should consider rolling back its accommodative policy stance after key inflation data came in hotter than expected on Thursday.
CPI rose 5% year-over-year in May, higher than the consensus estimate of 4.7%. May Core CPI, which excludes volatile food and energy components, came in at 0.74% month-over-month and 3.8% year-over-year, well above the consensus forecast and driven higher by used vehicle prices.
The BlackRock chief investment officer of global fixed income said the data is just the latest sign that certain parts of the economy don’t have sufficient product inventory to supply the demand at current prices.
The Federal Reserve has suggested that some of the price gains are transitory, and therefore it will not be changing its policy stance until there is sustained inflation. Rieder, who is also the head of the BlackRock global allocation investment team, said that framework may need to change.
“Ongoing adherence to the newly minted Average Inflation Targeting (AIT) framework in the face of a torrid 2021 economic recovery that is visibly supply constrained, risks upending the very stability that the AIT framework claims to seek to achieve,” Rieder said.
The Fed would be better served in fulfilling its mandate to begin to discuss the tapering of asset purchase and to attempt to avoid the ” destabilizing influences that can result from excessive use of extreme policy accommodation,” he added.
Rider also said the inflation data out today is an “overwhelming” sign that prices are moving too high in some areas as demand grossly outpaces supply.
“In our view, the pursuit of inflation merely for inflation’s sake poses a very real problem: That problem is that inflation in daily necessities is disproportionately felt by lower-income cohorts,” said the CIO.
BlackRock’s global fixed income chief investment officer, Rick Rieder, says the Fed should start tapering asset purchases “sooner rather than later.”
In an interview with Bloomberg on Monday, Rieder said he believes the Fed has done “an incredible job” rescuing the American economy amidst a global pandemic but thinks it’s “time to evolve the policy here” and begin tapering asset purchases.
The Federal Reserve, under the direction of chair Jerome Powell, said it will continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals” in a meeting back in December.
Rieder’s comments stand in opposition to Atlanta Fed President Raphael Bostic, who told reporters last week that he believes it’s too soon to consider changing interest rates or tapering asset purchases.
“There is a lot of healing that would need to happen before I would want to start to be thinking about us having made substantial progress,” Bostic said in comments to reporters after a speech at a Consumer Financial Protection Bureau conference.
“Right now, I’m not sure I am at a place where I would be wanting to force that (tapering) conversation at a committee level,” he added.
Rieder, on the other hand, said that markets are “awash with liquidity today” and that it’s fueling inflation concerns.
Some of those concerns may be transitory, according to Rieder, but some are more durable.
“If you said to me what’s going to be durable in terms of inflation, it will be shelter. It’ll be the fact that we don’t have enough homes,” Rieder said.
The BlackRock CIO highlighted data from National Home Builders Association shows lumber prices alone have driven up the value of the average new single-family home by over $30,000 since last April.
Rieder did say that he’s not sure if the liquidity dynamic in markets today will create the long-term inflation some market pundits are expecting, but also argued the Fed should begin moving away from its emergency policies either way.
“So if I were the Fed, I mean I would taper down the amount of buying they are doing in the front end,” Rieder said.
“Save some powder for continuing to be a buyer at the longer end of the yield curve in case people get too worried about inflation, but I would start to taper sooner rather than later, but you know, we’re going to watch how they’re going to think through that,” Rieder added.
Rieder also said that he doesn’t believe a mild tapering will hurt markets and noted that the last jobs report was not representative of the true hiring levels seen in the US.
“Hiring is going to take place, it’s got real momentum to it that won’t, because of the Fed tapering, will not slow down in any way, shape, or form.”
Rieder concluded by saying that he believes the Fed can evolve its policy and still be “accommodative” towards markets.
The cryptocurrency is up over 700% from a year ago when a single bitcoin was below $7000. This year, bitcoin is up over 100% after a February rally brought the cryptocurrency over $50,000 for the first time.
“We started from negative 1%. The history of real rates, on average the last 25 years, the average has been about 1.5% positive and usually, when you get this sort of economic growth, you’re talking about real rates that go to 3%, 4%, 5% positive,” said Rieder. “We may get to zero percent real rates, so you still have an extremely accommodative environment.”
Economic data suggests that the US will see an “explosive growth rate,” and markets are anticipating that yields will have to move higher.
While this happens he anticipates there will be a “little bit of uncertainty” in the stock market and volatility may rise, but then stocks will “recalibrate.”
“I’m not that worried about equities,” Rieder said.
The bond chief added that there are some stocks with high-flying valuations that will likely pull back as yields move up. High-growth stocks like those in the technology sector are seen as particularly vulnerable to a move higher in yields. On Thursday the Nasdaq suffered over a 3.5% intraday decline.
Rieder mentioned that his team has been looking into specific areas of technology included AI and the semiconductor space, but they’ve also been adding outside the sector.
“We’ve added to financials. We like the cyclicals, we like the consumer space quite a bit. The adds have been bigger there than in pure technology,” Rieder said.
BlackRock, the world’s largest investment manager, has become an increasingly influential Wall Street player in Washington, DC as a poster child of the revolving door between finance and politics.
The firm has hired notable policy-makers over the years, and two executives with the New York-based asset manager on their resumes are now set to hold prominent roles in President-elect Joe Biden’s cabinet.
BlackRock investment executive Brian Deese is set to head Biden’s National Economic Council, effectively serving as his top advisor on economic matters. Biden has also tapped Adewale “Wally” Adeyemo, a former chief of staff to BlackRock chief executive and longtime Democrat Larry Fink, to serve as a top official at the Treasury Department.
1. BlackRock controls $7.8 trillion, making it the largest money manager in the world.
BlackRock manages a staggering $7.8 trillion in other people’s money. That’s more than the gross domestic product of every country in the world, except for the US and China.
For its largesse in investment management, it’s a new firm by Wall Street institution standards. BlackRock was founded in 1988 by Fink, who also serves as the chairman, and seven others, including BlackRock President Robert Kapito and Vice Chairman Barbara Novick.
BlackRock’s makes most of its money handling investments for outside clients, mostly institutions like public pension plans, endowments, and foundations.
As of September, 60% of its overall assets under management are for institutional investors, most of which is products linked to stock markets. It also has a $222 billion alternative investments business, managing products like private equity, private credit, and hedge funds.
2. It runs a massive technology platform that oversees at least $21.6 trillion in assets.
In 1999, BlackRock started selling Aladdin, which analyses and tracks investors’ portfolios, which can help professional money managers spot risks. Today, it is a juggernaut widely used in the money management industry and beyond.
“Vanguard and State Street Global Advisors, the largest fund managers after BlackRock, are users, as are half the top 10 insurers by assets, as well as Japan’s $1.5tn government pension fund, the world’s largest. Apple, Microsoft, and Google’s parent firm, Alphabet – the three biggest US public companies – all rely on the system to steward hundreds of billions of dollars in their corporate treasury investment portfolios.”
In February, $21.6 trillion in assets sat on the platform from just a third of its 240 clients, the FT reported, citing public documents verified with the companies and first-hand accounts. Firms try to replicate it as a product, but none have been able to do so at the same scale.
3. BlackRock has hired many former government officials into senior roles.
By the time Deese and Adeyemo got to BlackRock, they already had experience working in government. Deese was previously a senior advisor to President Barack Obama and served as deputy director of the National Economic Council, which he is now set to lead under Biden.
Adeyemo, who was appointed as deputy Treasury secretary in the Biden administration, had previously worked as Obama’s senior international economics advisor. While at BlackRock, one of his roles was Fink’s interim chief of staff.
Thomas Donilon, who is now chairman of the asset manager’s research arm, previously served as national security advisor to Obama. (Donilon’s brother, Mike, was Biden’s chief strategist during his presidential campaign).
BlackRock has hired other former policy-makers and regulators. Coryann Stefansson, who previously worked on bank supervision matters at the Federal Reserve Board and held senior positions at the Federal Reserve Bank of New York, joined BlackRock’s Financial Markets Advisory (FMA) unit in 2016. She left last year, according to LinkedIn.
4. The firm played a significant role in aiding the Federal Reserve this year.
The FMA unit, which is effectively BlackRock’s consulting arm, separate from its investment management operations, had a significant role to play in the US government’s coronavirus pandemic response this year.
After an analyst said on an April earnings call that investors viewed BlackRock’s mandate as a “bailout” for his firm or the exchange-traded fund industry broadly, Fink called the question “insulting.”
5. The Federal Reserve tapped BlackRock during the last financial crisis, too.
The investment manager had been there before, defending its connection to the Federal Reserve. During the global financial crisis of 2007-2009, the Federal Reserve Bank of New York asked BlackRock’s FMA division to handle assets of Bear Stearns and AIG, both on the verge of collapsing.
“They have access to information when the Federal Reserve will try to sell securities, and what price they will accept. And they have intricate financial relations with people across the globe,” Republican Senator Chuck Grassley told the New York Times at the time. “The potential for a conflict of interest is great and it is just very difficult to police.”
BlackRock has emphasized that the division handling Fed mandates, the FMA, is distinct from its core money management business to prevent conflicts.
6. Fink has been vocal on matters of climate change, urging other companies’ leaders to consider the associated risks.
“Climate change has become a defining factor in companies’ long-term prospects,” he wrote in his open letter to chief executives in January.
“Disclosure should be a means to achieving a more sustainable and inclusive capitalism. Companies must be deliberate and committed to embracing purpose and serving all stakeholders – your shareholders, customers, employees, and the communities where you operate,” he said.
The firm rolled out related initiatives, like exiting investments that carry sustainability-related risks and launching new products that screen for exposure to fossil fuels.
7. But his firm has been scrutinized for its record on supporting shareholder requests for climate-related disclosures.
In a September report, Morningstar, a firm that analyzes fund information, said it found support for those type of requests rose at asset management giants Fidelity, State Street Global Advisors, and Vanguard, but fell at BlackRock compared to the year prior.
“While 2020’s results mark a higher level of support than BlackRock had given such proposals from 2016 through 2018 – when its backing never made it to double digits – the 2020 level of ‘for’ votes was down to 14% from 25% in 2019,” analysts wrote of the 14 climate-related resolutions shareholders requested this year.
8. It has long been rumored that Fink himself will head to DC.
BlackRock Chief Executive Larry Fink was reportedly under consideration by 2016 presidential candidate Hillary Clinton to run the Treasury Department. He was also rumored to be under consideration for Biden’s administration.
But he has squashed that chatter. Last month, private equity founder David Rubenstein asked Fink during Bloomberg’s virtual New Economy Forum how he would respond to a request from Biden to serve in his cabinet.
“Thank you for that honor, but I’m very happy at BlackRock. I’ve committed to my employees and to my board and to my family already. I’m staying in New York for the time being,” he said, according to a transcript of the event.
9. BlackRock has made lots of acquisitions.
Think of BlackRock as a firm that has gobbled up lots of competitors in its path over the years.
The firm has purchased legacy businesses and fintech startups, looking to keep an edge as traditional money management isn’t as profitable or unique as it once was.
Last month, the firm said it would acquire a California-based investment provider called Aperio for approximately $1 billion in cash. Last year, BlackRock acquired eFront, a French startup that runs alternative investments management software, for $1.3 billion.
In 2009, BlackRock acquired Barclays Global Investors in a deal that included Barclays’ iShares ETF business; and three years before that, the firm acquired Merrill Lynch Investment Management.
President-elect Joe Biden campaigned on tackling climate change while simultaneously creating jobs – and one of the latest picks for his administration shows his intent to intertwine environmental policy with economic.
On Thursday, Biden tapped Brian Deese as director of the National Economic Council. The Obama administration alum has been at turns hailed for orchestrating the Paris Climate Accord, but also drawn ire from progressive groups for his work with BlackRock, one of the world’s largest investors in fossil fuels.
The position does not require Senate confirmation.
Like many other notable key appointees and nominees to the incoming Biden administration, Deese worked for the Obama administration as senior advisor for climate and energy policy.
Deese was previously a policy director for the Obama campaign, then later a member of the economic policy working group of the Obama-Biden transition team. He also held roles in the Obama administration as deputy director of the Office of the Management and Budget, and as the deputy director of the National Economic Council.
Robert Stavins, a professor of energy and economic development at Harvard’s Kennedy School of Government, where Deese was once a senior fellow, told Business Insider in a statement that Deese will bring “his abundant and diverse experience from the Obama administration to this new position as Director of the National Economic Council” and is an “excellent appointment.”
Though Biden didn’t fully embrace the progressive movement’s Green New Deal, this past summer he proposed to spend $2 trillion on climate-related initiatives, and listed climate change as one of the top priorities for the US.
Most recently, he announced a new position on climate change on the National Security Council, which former Secretary of State John Kerry will fill.
Environmental activists are skeptical of Deese’s decision to work at BlackRock
Biden noted in a video that Deese will be the first NEC director who is a “true expert on climate policy,” and said in a statement that Deese is a “trusted voice” to help “end the ongoing economic crisis, build a better economy that deals everybody in, and take on the existential threat of climate change in a way that creates good-paying American jobs.”
Deese echoed Biden’s sentiments, and said in a tweet that “the climate crisis, racial inequity, and our economic recovery are inextricably linked. Our government must reflect that reality-and that is the perspective I will bring to the National Economic Council.”
But some progressive groups have expressed concerns about Deese’s current role at BlackRock, where he has been the Global Head of Sustainable Living for three years.
BlackRock is the largest investment manager in the world. The firm, which manages $7.8 trillion, has been scrutinized for its investments in fossil fuel companies. Last year, the Institute for Energy Economics and Financial Analysis said in a report that the company “continues to ignore the serious financial risks of putting money into fossil fuel-dependent companies,” Business Insider’s Sinéad Baker reported.
Earlier this year, the CEO of BlackRock announced that the firm would emphasize climate change in its investment strategy. Noting that “investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk,” the firm said it would exit investment from thermal coal producers. While some environmental activists lauded the decision as progress, others were skeptical of real change, Business Insider previously reported.
“He went to BlackRock because of the resources they had to address problems he cares about,” a staff member on the Biden-Harris transition team told Business Insider.
A spokesperson for BlackRock told Business Insider in a statement that Deese “has been instrumental to helping investors around the world understand the risks that climate change poses to the economy and to their portfolios.”
Deese is getting mixed reviews from some lawmakers and activists
Environmentalists are split on whether Deese’s time at BlackRock should warrant concern.
The Sunrise Movement Political Director Evan Weber criticized “the revolving door between Wall Street and the White House,” and said in a statement that “there are many diverse, qualified people that can help Joe Biden and Kamala Harris Build Back Better who didn’t choose to work at predatory investment firms.”
When asked about criticisms expressed by the Sunrise Movement, the staff member on the Biden-Harris transition team told Business Insider that a lot of the criticisms were “things that fall outside of his portfolio.”
One petition campaign called “No Corporate Cabinet” urged Deese to not be included in Biden’s cabinet, and said it “seems clear that Deese doesn’t care about climate change or the future of our country at all.”
Meanwhile, Deese has received support from some lawmakers and activists.
Sen. Ed Markey, who alongside Rep. Alexandria Ocasio Cortez has been leading the push for a Green New Deal, said in a tweet on Thursday that Deese’s appointment meant there will be an “effective climate policy leader driving a climate-centered economic agenda.”
Bill McKibben, the founder of international environmental organization 350.org, said in a series of tweets that while he respects some of those who criticized Deese, that he himself did not think it’s “remotely correct” that Deese is “not progressive” or “doesn’t care about climate change.”
Deese did not immediately respond to Business Insider’s request for comment on this story.