Blackstone’s Byron Wien sat down with Joan Solotar, Head of Multi-Asset Investing, to discuss his June market commentary. The interview focused on Byron’s annual Benchmark lunches, where a panel of business leaders and thinkers gather to discuss the key issues driving the macro-economic environment today.
Joan Solotar: Welcome to the Blackstone Podcast, our channel dedicated to the insights, conversations, and news from across our firm. I am Joan Solotar, Head of Multi-Asset Investing. Today, we will be speaking with Byron Wien on his September market commentary. Remember, you can subscribe to hear more Blackstone Podcasts on iTunes.
Byron, welcome back. Today, we will be discussing the benchmark lunches that you host alongside leading thinkers in business and finance today. To start, can you briefly introduce these lunches to our listeners who really are not familiar with the tradition? What is the purpose? What takes place?
Byron Wien: Joan, these are these lunches that started more than 30 years ago when Jack Nash, who was then Head of Oppenheimer invited me to lunch at his home in Water Mill, New York on Eastern Long Island. There were five people there. We talked about what was going on in the world. Over the years, I kept inviting other people to join.
When it got to be 14, he could not handle anymore. We split it. He did one lunch at his place. I did one lunch at my home then in East Hampton. But now the tradition has grown to four lunches at four different places and over 100 people attend. The people who attend range from Wall Street luminaries, hedge fund managers, and private equity leaders, and some academics, and real estate people. The idea is to flesh out what the problems are in the world and what that means for investment opportunity.
Joan: After this year's series of lunches, what are some of the themes and conclusions that you were able to draw out about the state of the global economy?
Byron: Well, in spite of all of the things that seem to be going wrong in the world, I would say the group was relatively complacent. The conclusion from the four lunches that I had is that they think that the intermediate future will be like the recent past. I have some reasons to question that.
I think that both the economies and the markets have been levitating on a sea liquidity provided by central banks. In 2007, the Federal Reserve, European Central Bank, the Bank of England, and the Bank of Japan had 3.5 trillion dollars on their balance sheet.
Today they have 13.5 trillion. That ten trillion dollars has caused the economies to live along in a two percent rate. But it has really pushed stock prices higher and kept interest rates low. I think that is kind of an artificial environment. We have been unable to really exceed two percent growth around the world. We are struggling with it in the United States. Productivity is low. Companies have limited pricing power. Revenues are growing only modestly. Average hourly earnings are increasing 2.6 percent. I think margins have to be squeezed.
I really question whether the outlook is as favorable as the group seems to think. Even in real estate, we could always count on the real estate from people to provide a favorable insight. But even they were somewhat mixed in their observations.
Joan: What were the biggest changes in views from last year's lunches?
Byron: I think last year; the group saw things that were going on that could go the wrong way. But they seemed to be in the distant horizon. I think here there are a couple of things that were the group that I view as new. One, there is more concern about the lack of productivity in the economic system, both around the world but particularly in the United States where productivity just is not growing. Productivity is the stuff that our standard of living rises on and that profitability is made out of. The second thing that people are worried about, which is a totally new phenomenon is populism.
Donald Trump, and Bernie Sanders, the Brexit vote in England all suggests that the public is dissatisfied with its leadership. That the direction that the major democracies are going – and they are looking for a maverick candidate to lead them. Somebody who will shake things up and make things different. The third is that people are now recognizing that slow growth may be as good as it gets. They are thinking about the implications of that for investment opportunities.
Joan: Maybe, let us focus on productivity, which is in an area that you have really looked into quite a lot over the last year or so. It sounds like some at the lunches believed that the measurement itself was misleading. Others were looking to rapid developments and innovations in technology. Then some others felt productivity numbers really just reflect our slow growth environment. As an investor, what can you make out of the uncertainty around this indicator?
Byron: Well, I think as an investor, what you have to look at is opportunities where margins can expand. When a company is doing something wrong or it isn’t recognizing a characteristic of the market that the company could take advantage of. This runs across many industries. This is really what our private equity business is based on; being able to seek out opportunities regardless of industry sector or location around the world.
I agree with some of the people who are critical of the measurement process for productivity. But I would point out a couple of factors. One, there have not been any major productivity-increasing developments comparable to the Internet, the fax machine, and the cell phone. Probably the greatest productivity improvement of all time came from air conditioning, and that is a low tech idea that took place half a century ago.
We have not had anything like the Internet since then. We have permutations of it in terms of applications. But I do not think that they are dramatic. Furthermore, almost every new idea that comes about in technology eliminates some jobs. And if it eliminates jobs, it eliminates buying power. It has a negative effect on GDP, even though it may have a positive effect on some aspects of productivity. I am willing to acknowledge that it is not measured right. But I still think it is a problem.
Joan: There is a lot of cash still sitting on the sidelines. With interest rates as low as they are, it is really difficult for companies, entities, and individuals to get any kind of meaningful return. When you couple that with what you talked about in terms of productivity potentially peaking very slow growth in the economy. Yet equity markets at all-time highs. How does that play out? Does it still make equities more attractive than other alternatives? Would you expect that cash that is sitting on the sidelines at some point capitulates and starts to get invested?
Byron: I think the market has been benefited from two things. One, interest rates are so low. From a fundamental point of view, you could argue that at low rates, you should have high multiples. Because stocks are relatively attractive compared to bonds. Bonds are as unattractive as they have been in my lifetime. That is a long period of time. More than half of the stocks of the New York stock exchange yield more than the ten-year Treasury.
On a yield basis and on a valuation basis, stocks look attractive. The thing that worries me is the earnings outlook. Earnings have been flat since 2014. The earnings outlook in my view is not favorable. You have companies with limited pricing power and very modest revenue growth with average hourly earnings increasing 2.6 percent year-over-year. I think margins are going to be squeezed.
Therefore, the outlook for increasing earnings is diminished. If we are in a flat earnings outlook, it is hard to expect a multiple expansion. If the fed, and there is plenty of argument about whether the fed is going to tighten in September or December. But there is no question about the fact that they are going to tighten sometime so that the fed does not have a friendly view of the markets.
As a result of that, if you have fed tightening, earnings disappointment, and margins compression – compressing, I think you have to be a little skeptical about equities. On the other hand, there are many people who are buying them because there is no alternative. The so-called T.I.N.A. philosophy, but I question that when it becomes too prevalent. You are already seeing in the post Labor Day period in the market fluttering a little bit. I am worried that the fall is going to not be as good as the first nine months.
Joan: You mentioned that most of the attendees that you can draw consensus are looking for the near and medium-term outlook to be pretty similar to what it has been in the recent past. Yet, in many ways, you would say that we are living through really unprecedented times whether it is politics, or a technology, social unrest, low interest rates, very protracted slow growing economy. You have had these lunches for over 30 years. Looking at the tone of not just this year's lunch, but also lunches past, would you agree with the assessment that it is the uncertainty that is just drawing folks to say we are going to continue the trend? Or, do you think it is something else?
Byron: I think your question is rooted to the populism issue. Remember, most of the people attending lunch have had very favorable careers? They have done well. They live well. I do not think they have sufficient sensitivity to how much pain there is out there. Populism erupts out of people feeling that there is no hope. There is limited hope. They either have a job that does not pay enough to meet all of their expenses. They do not have a job at all. Or, they have a good job. But they are worried that it is in jeopardy in some way.
I think there is a lot of pain out there. I think the people attending the lunches are insufficiently sensitive to that pain and to the political implications of it. The inequality gap has widened particularly since 1980. I have a chart in my new handout that will be introduced at the webinar in October. It shows that. I think that the fact that people are worried about the outlook is going to have enormous political implications going forward, maybe as soon as November.
Joan: Yes, we are clearly seeing that everywhere in the world. Byron, thank you so much for your time and your insights. You can find Byron's full commentary on Blackstone.com; and can subscribe to the Blackstone Podcast on iTunes.
The views expressed in this commentary are the personal views of Byron Wien, Vice Chairman of Multi-Asset Investing at Blackstone, and do not necessarily reflect the views of Blackstone itself. The views expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone undertakes to advise you of any changes in the views expressed herein.
Neither this podcast nor any of the information contained herein constitutes an offer of any Blackstone fund.