Fed Interest Rate Hike: "I don't care. It doesn't really make much of a difference"
Interest-Rates / US Interest Rates Oct 05, 2015 - 02:43 PM GMTBy: Bloomberg
Steve Schwarzman, CEO, The Blackstone Group, joined hosts Stephanie Ruhle and David Westin for the debut of Bloomberg TV's new flagship morning program, Bloomberg <GO>. Schwarzman discussed the Federal Reserve, Volkswagen in the wake of the pollution controls scandal,2016, and Ohio State Governor John Kasich.
On whether there will be a rate hike from the Federal Reserve this year, Schwarzman said: "I don't care. It doesn't really make much of a difference. Interest rate hikes of 25% that people have been talking about for 2-1/2 years, I mean really. If you haven't discounted a lot of this stuff, they've got the issue that raising interest rates is probably a good thing. However their problem is that because the US currency has appreciated against almost everyone in the world, in effect, we've had the impact of an interest rate increase already through slowing of the economy."
On whether the Volkswagen emissions scandal could just threaten the company's very existence, Schwarzman said: "Doesn't seem to me that's the way it will end up working out. This is obviously a heroic problem, but this is a company that's got amazing consumer support. Not this week. Not this month. But ongoing, they make terrific products. And this will work its way through the legal system."
On the importance of the jobs report as an indicator of where we're going in our economy or globally, Schwarzman said: "It's important to the extent it's showing a trend. The US economy has hit a little bit a slowdown. We can see it in some of our businesses and it was stronger at the beginning of the year.”
On 2016 and Governor John Kasich, Schwarzman said: "I like John. He's done a remarkable job in Ohio. He won his last election by 30 points. I mean this is like, I've never heard anything like that. And he's quite experienced and he's a good person…He's a genuine person."
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DAVID WESTIN: I want to come back to Steve Schwarzman and let's take this all the way back to Friday. It seems like forever ago.
STEPHANIE RUHLE: All the way back.
WESTIN: All the way back to Friday. Jobs reports came out that were disappointing I think it's fair to say. I think it was 142,000 something like that. And also downward revisions on the prior two months.
STEPHEN SCHWARZMAN: Right.
WESTIN: How important is that as an indicator of where we're going in our economy or globally? Or is it important at all?
SCHWARZMAN: Well, it's important to the extent it's showing a trend. The US economy has hit a little bit a slowdown. We can see it in some of our businesses and it was stronger at the beginning of the year. But that should not be a surprise given all the things that have happened over the last few months with you know dramatic changes in currency values. Harder for Americans to export, all kinds of other issues that we're facing with China. Commodities generally going down. It all truncated into a very narrow window.
And the fact that these things happened over 6 weeks or 8 weeks it was like more than everybody could absorb. And the nature of that is that people lose a little confidence and they wait to see what happens. And so I'm more optimistic that things will go on a bit more of a positive trend. Because how much of this stuff can you take all at once?
RUHLE: The credit markets though aren't giving you pause? When you look at credit in the last few weeks it has frozen up. Double (INAUDIBLE) index going from 6-7.5%. The new issue market seems like it's disappearing. Deals that were clearing at 6% are now above 10% in the blink of an eye.
SCHWARZMAN: But that's sort of an interesting thing. People are fixated on what the Fed is going to do. In fact it's already happened. Certainly in the lower rated credit area there's less credit. And the cost of it is much higher whether it's leveraged bank loans or junk bonds or other access to capital. Even in real estate the access hasn't really been affected as much. But the interest rates are up a bit. Not nearly as much as in the corporate world.
RUHLE: But now what does that mean to you? As you look at what LBOs are going to look like going forward, seeing that credit has like just frozen, do you change your view in any way?
SCHWARZMAN: Well, what happens is this is not abnormal. You know we've lived through many cycles--
RUHLE: We haven't seen this in a, we can't say in the last 10 years how many times have you seen credit make a move this drastic, this quickly?
SCHWARZMAN: Well, this has been a big move in terms of interest rates on the corporate side. Not so much on the real estate side. And the answer is, several times.
WESTIN: And does it create opportunities for you at Blackstone in the sense that when the credit price goes up the price of the property goes down? So there may be companies you could buy?
SCHWARZMAN: That's why you're seeing the linkage with the stock market right? Everything's gotten cheaper because credit has gotten much more expensive among other reasons.
WESTIN: But more globally, I mean, you pointed in this direction. Do you think that the global economy is growing at this point at a healthy rate? Or do you think it's all slowed down? How does that affect your business decisions?
SCHWARZMAN: Well, the economy clearly is growing on a global basis. If you start in the US we're probably somewhere in the 2s, Europe is growing around 1.5. And together that's 45% of the world's GDP. So that's a pretty good solid amount of growth.
China which is somewhere around 13% of global GDP is slowing down but if you saw the World Bank statistics today that area of the world they still think is going to grow at like 6.5. The lowest numbers I've heard in China are somewhere around 6. That could be wrong but--
WESTIN: Do you believe those numbers?
SCHWARZMAN: I think there are no numbers that actually can be believed. Not because people are telling you untruth, they may not have those numbers themselves. And so you end up looking at official numbers and then you end up looking at anecdotal things.
For example in China we own a lot of shopping malls for middle class people, not for the high end fashion malls. And we're up 15% this year.
RUHLE: How? It seems like that middle class, that consumer is getting hurt so drastically.
SCHWARZMAN: Well no--
RUHLE: Because he has the only right data.
SCHWARZMAN: It says that on television.
(LAUGHTER)
SCHWARZMAN: It may not say that completely in the real world--
RUHLE: So give that to us one more time. Tell us what China looks like that you can see that we can't.
SCHWARZMAN: China has some things that are going quite well in its consumer economy. It has some things like in steel and certain of its manufacturing and exports which are not going well. So it's more of a mixed economy. Two years ago everything was up. And it was up really big. Now portions of their economy are up really big and certain sectors are not.
WESTIN: But from your shopping mall experience, you would say that consumer demand remains pretty robust in China?
SCHWARZMAN: Yeah, the consumer demand middle class for certain types of things. In other words the kind of stuff that actually was keyed more to corruption. Some of the people who were spending money at the high end you know, those people have disappeared in terms of, you know, their source of money. But the regular consumer is doing pretty well.
And I think there's been this almost panic vis-à-vis China whether it was hard landing, whether it was recession. I don’t think that's going to happen. I was at a dinner that Hank Paulson had in Washington as part of the Business Round Table. And there were about 20 people around the table and everyone was talking about their business in China. The worst was an auto supplier who said their business was flat. And the auto sector was actually reported down a few percent right? His business was flat.
So as I sort of try and get a feel for this stuff, you know, China's got a lot of complex issues. Not just GDP. But they are moving ahead. And they're reorienting their economy away from exports to the consumer.
WESTIN: Go back to the Fed for a second. You mentioned the Fed. Is a rate hike off the table for the Fed for this year in your judgment?
SCHWARZMAN: Geez, you've got to ask Janet Yellen. People have been talking about this for three years, unproductively.
RUHLE: Do you care?
SCHWARZMAN: What?
RUHLE: Do you care?
SCHWARZMAN: I don't care. I mean--
RUHLE: That's so interesting to me.
SCHWARZMAN: It doesn't really make much of a difference. Interest rate hikes of 25% that people have been talking about for 2-1/2 years, I mean really. If you haven't discounted a lot of this stuff, they've got the issue that raising interest rates is probably a good thing.
However their problem is that because the US currency has appreciated against almost everyone in the world, in effect, we've had the impact of an interest rate increase already through slowing of the economy.
RUHLE: Would you have a different view if you didn't have money locked up for so long? You've got 10-year investors. There are hedge funds out there that have to offer monthly, quarterly, daily liquidity. Would you be singing a different song if you had to offer that kind of liquidity to your investors?
SCHWARZMAN: I'd probably be doing opera.
(LAUGHTER)
SCHWARZMAN: Instead of whatever popular song you're talking about. Because I don't like the idea of being subject to short-term volatility. And people tend to sell at the wrong times and buy at the wrong times. And our job is to be pretty dispassionate about these types of things. And you can't do it if people are rushing to take their money out.
WESTIN: Which may take us to Glencore which is going to be the next subject we talk about with Steve.
RUHLE: Well, we're not dispassionate about having you here. It is an hour. And Steve Schwarzman is with us for the whole hour. We have got a lot to cover.
****
WESTIN: There's an incoming chairman of the supervisory board at Volkswagen and he now is warning that this cheating scandal having to do emissions could just threaten the company's very existence. It is dealing with investigations by the United States and abroad. By the way I think it is 30 states or so so far investigating. And the claim is that they use software to fool regulators about true emissions of its diesel cars. But Credit Suisse is saying that it could cost the company upwards of $87 billion, which, according to my Bloomberg terminal, it tells me, its almost the net worth of the company.
RUHLE: You're making a face [to Schwarzman].
SCHWARZMAN: Doesn't seem to me that's the way it will end up working out.
RUHLE: How do you think it is going to work out?
SCHWARZMAN: This is obviously a heroic problem, but this is a company that's got amazing consumer support. Not this week. Not this month. But ongoing, they make terrific products. And this will work its way through the legal system some time and it just will be a very unfortunate for their securities. I can't guess how long it will be.
****
RUHLE: We've got to turn our attention to politics.
WESTIN: Yes.
RUHLE: You were very excited to talk Supreme Court. We've got to talk presidential election. Taxes and Wall Street have been a big issue for both the left and the right on the campaign trail. Here's Donald Trump speaking just last week.
(BEGIN VIDEO CLIP)
DONALD TRUMP (R), PRESIDENTIAL CANDIDATE: What ends the current tax treatment of carried interest, the speculative partnerships that do not grow businesses or create jobs and are not risking their own capital.
(END VIDEO CLIP)
RUHLE: Donald Trump is the front runner. Can you believe this a) or Jeb Bush a guy who supports doing away with carried interest, is he your guy?
SCHWARZMAN: Well, I think what Donald was saying, if I heard it correctly, is he was focused on exclusively financial activities that don't create jobs, don't create economic growth. And in the private equity industry that's what you do.
RUHLE: But no one seems to know that. Mitt Romney couldn't seem to articulate to America that private equity is a job creator.
SCHWARZMAN: Well, you're a job creator because if you grow your companies fast and you put leverage on them, you'll make much more money. Now firms like Blackstone for example, earn about double for their customers what the stock market earns. The only way you do that, it's not a mystery, is you have to have companies growing faster. Which--
RUHLE: Yeah, but then the mystery is the American people don't know that. No one has really told them that story. And they look to Donald Trump as the business icon.
SCHWARZMAN: But Donald said on his tax things, that he was against hedge funds that are basically, I guess in his view, just investing in financial products. And it's unclear what he wants to do with other types of business. But on taxes generally, you know, it's an important issue. And it needs to be addressed on an overall basis.
And it is interesting to me that many of these candidates are going to more of a flat tax and getting rid of more and more deductions. And I have always thought that to do that whether it's with two break points or three and getting rid of almost all deductions would be a very simple way of having tax. Everybody would understand it. There'd be an inherent fairness with it. And you protect people at the bottom you know with a safety net. And why is that not a good thing?
WESTIN: Yeah, Steve Rattner that makes sense on its face but also I think Donald Trump is saying that he'll cut $11 trillion out of taxes and grow the economy 6% a year. Which sounds--
RATTNER: Eight.
WESTIN: --which sounds a little, 8% a year, I'm sorry, I beg your pardon. I don't want to understate it.
RATTNER: So here's the incredible thing. So Donald Trump said yesterday that he had massive tax deductions. Massive tax deductions, so much so that he didn't know if he was going to benefit from his own $11 trillion tax cut. So I think if we ever get a look at Donald Trump's taxes we will see in living color all the things that should be changed in order to make the tax code more fair.
His tax plan is ridiculous. It isn't paid for. It can't be paid for. We can't grow that fast. And he simply took what Jeb Bush put out which was also probably on the aggressive end--
WESTIN: Right.
RATTNER: And he just put it on steroids.
WESTIN: So is anyone, we know that you've been a supporter of the Democrats in the past. But is anyone on the Republican side making sense in your view about their economic plan?
RATTNER: We don't have too many economic plans out yet. We have Bush's tax plan, we have Trump's tax plan. I'm not sure we have really many other specifics from the Republican candidates. I think people like John Kasich make a lot of sense when they talk generally about how; he was Chairman of the Budget Committee in the House--
WESTIN: Right.
RATTNER: --for a long time as you know.
WESTIN: And has done a pretty good job in Ohio as far as I can tell.
RATTNER: He's done a great job in Ohio as best anyone can tell. So I think we have some sensible people out there. But they've not yet put out their tax plans.
WESTIN: What about John Kasich? You just met with him didn't you?
RUHLE: He met with him.
SCHWARZMAN: I like John. He's done a remarkable job in Ohio. He won his last election by 30 points. I mean this is like, I've never heard anything like that. And he's quite experienced and he's a good person. And he also worked at Lehman brothers like Steve Rattner--
(CROSSTALK)
WESTIN: There's a theme through the morning, Lehman Brothers. A small group.
RUHLE: Let me ask you, David, you have a different background than we do. In the media world these candidates, many people are saying John Kasich who is he? How quickly can a candidate amp up the volume, turn things around, that they become front and center? People have known Donald Trump. He's been a celebrity businessman for years.
WESTIN: Well, when you come to the nomination, first of all, he's from Ohio which is relatively important when it gets down to the election. I mean Ohio, Florida still with maybe Colorado are going to help determine the election. So that's pretty important.
He also, and I know him some, not terribly well, but I know him some. He also strikes me as having a lot of Jeb Bush's strengths in being a sensible person, sort of relatively moderate. But he also seems unplugged, he seems genuine. When you saw him in that first debate, when he was asked the question about same sex marriage. It felt like a very heartfelt response. Where he said he personally would object to it but he would love any relative that was part of that. He seems like a genuine person to me, from what I know of him Steve.
SCHWARZMAN: Yeah, he's a genuine person. Actually so is Jeb. You know he tells you what he thinks and he's very deliberate about it. He hasn't gone up as much in the polls as he can. But as to Stephanie's question what does it take to break out, I think you have like 18 people trying to figure that out, at least. And they just happen to be candidates. And look what Carly Fiorina did with just like one debate performance.
So we live in a world now, a television world, where if you have a good night you know it could be a good career.
RUHLE: Does that mean though that the media has a disproportionate amount of control right now? If you actually watched the debate, Carly Fiorina did fine, she did well, she did really well. But the next day the massive support the media gave her, it almost made me want to watch it again.
WESTIN: I also think there's media and then there's money.
RUHLE: Ahhh.
WESTIN: One of the truths in politics and running for president is you run out of money before you run out of votes. And so the real question is who's got the money to stay the distance. And Jeb bush clearly has raised a lot of money. Hillary has raised a lot of money.
RUHLE: Jeb Bush has got the money but he doesn't seem to have the voice these days.
RATTNER: But remember, it's a little different this time because of the Super PACs. If you have, as Newt Gingrich actually had, last time one very wealthy donor prepared to fund your super PAC which, they're fraying the lines between the two kinds of money, to basically pay for your travel, pay for your events, you can stay in a long time even if you're sitting at 1, 2, 3%.
RUHLE: You know who's got the money?
SCHWARZMAN: Yes.
RUHLE: Blackstone. You just rang your 30th anniversary. As you look back, tell us what do you think? What do you think about what you've created? What would you do over again?
SCHWARZMAN: Actually, this is pretty astonishing from my perspective. We started with two people and $400,000. And we never put any more money in the company. And a few months ago before the markets decided to go down, we had like a $52 billion market cap. And we're the largest in the world doing the alternative investment business, private equity and real estate, hedge funds and credit. And about half the size of the entire industry in terms of public companies.
And so it's been really an amazing thing. But, you know, it's sort of like any sporting event. You win it one play at a time. And what you have to do is always protect capital.
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