Planning for 2021 requires a deep understanding of the current markets and economic trends. On this week's Walker Webcast, Walker & Dunlop's CEO, Willy Walker, spoke with BlackRock Managing Director Kate Moore about the macroeconomic trends she is tracking, capital markets, and her take on what's to come in 2021.
Willy Walker is chairman and chief executive officer of Walker & Dunlop. Under Mr. Walker’s leadership, Walker & Dunlop has grown from a small, family-owned business to become one of the largest commercial real estate finance companies in the United States. Walker & Dunlop is listed on the New York Stock Exchange and in its first seven years as a public company has seen its shares appreciate 547%.
Kate Moore, Managing Director, is a member of the Global Allocation investment team and Head of Thematic Strategy. Her investment mandate includes identifying opportunities to exploit structural change, policy evolution, and dislocations across global industries. She is a member of the Human Capital Committee.
Ms. Moore’s service with the firm dates back to June 2016, when she joined as Chief Equity Strategist in the BlackRock Investment Institute. In that role, she was responsible for research on global equity markets, formulating tactical investment recommendations, and delivering thought leadership to both internal stakeholders and clients.
Prior to joining BlackRock, Ms. Moore was the Chief Investment Strategist for the Private Bank at J.P. Morgan and a member of the Global Investment Committee. In this role she set asset allocation and investment strategy for US discretionary multi-asset portfolios and managed a macro equity strategy for private clients. Before joining J.P. Morgan, Ms. Moore was the Senior Global Equity Strategist at BofA Merrill Lynch Global Research, an Emerging Markets Strategist at Moore Capital Management, and a member of the Global Strategy team at Morgan Stanley Investment Management, a team which managed several global asset allocation funds. Ms. Moore began her career as a strategy consultant for both Mitchell Madison Group and Silver Oak Partners.
Ms. Moore regularly contributes her macro and financial market views across a variety of global media outlets. She holds a B.A. in Political and Social Thought from the University of Virginia, where she currently serves on the Board of Managers of the Alumni Association. She also holds an M.A. in Political Economy from the University of Chicago.
If you have any comments or questions, please reach out to your main Walker & Dunlop point of contact. We are all available to answer questions and provide assistance. Additionally, if you have topics you would like covered during one of our future webcasts, we would be happy to take your suggestions.
Willy Walker: Thanks, Susan, and good afternoon, everybody. Really nice to have you all with us and I am thrilled to have Kate Moore joining me today to talk about the markets that we're living in today and what her outlook is for 2021 and beyond. Before I dive into my, both introduction on Kate, as well as our discussion, a couple quick notes on next week.
Next week before the Walker Webcast, I actually have the honor of interviewing David Rubenstein of Carlyle Group on a Bisnow webcast that's going to happen next Wednesday before the Walker Webcast. I've interviewed David twice before. Any of you who have either watched David’s show on Bloomberg or participated in the Washington, DC Economic Club dinners that David interviews luminaries across the, from around the globe, David is an incredible Interviewer and it's a real honor to be sitting down and being… kind of turning the tables on David…and I get to ask David the questions. So that's next Wednesday morning.
And then after that, next week, as I think many of you know, I have Aneel Bhusri, the founder and Co-CEO of Workday, joining me to talk about how Aneel and his partners, both built Workday and have turned Workday into one of the behemoth SAS software companies in the world, providing financial and HR software to many companies, including Walker & Dunlop.
So, Kate Moore is Managing Director at BlackRock, and a member of the Global Allocation Investment Team, and she's the Head of Thematic Strategy. Her investment mandate includes identifying opportunities to exploit structural change, policy evolution, and dislocations across global industries. She's a member of the Human Capital Committee. Prior to joining BlackRock, Ms. Moore was the Chief Investment Strategist for the private bank at JP Morgan, and a member of the Global Investment Committee. She holds a B.A. in Political and Social Thought from the University of Virginia, where she currently serves on the Board of Managers of the Alumni Association. She also holds an M.A. in Political Economy from the University of Chicago.
So, Kate, in BlackRock’s Global Weekly commentary from this week, under the title of, Why We Are Turning Bullish For 2021, your team writes, “The expected widespread rollout of COVID-19 vaccines in 2021 has strengthened our conviction in an accelerated economic restart. We have turned more pro-risk, upgrading equities to a tactical overweight. This pro-risk stance is becoming consensus, but the rest of our views are much less so. Among them, a ‘new nominal’ in which nominal yields are likely to stay capped even as inflation rises.” So, let's unpack that a little bit on both the equity side as well as on the debt side. Accelerated economic restart. Haven't we already seen the restart?
Kate Moore: No, we've seen bits and pieces of a restart. We've seen some areas of the country and some areas of the world return to something closer to normal-ish activity, or I'd say like pre-pandemic normal-ish activity. But we haven't really had sort of widespread reopening. We know this is coming -- and we're hopeful it's coming -- in 2021. But you know, I just want to point out something that everyone wants to go back to where we were in January or February of this year. It's sort of a convenient framework for a lot of people to use. But I would suggest we need to think about, you know, what parts of the economy have increased in size? Which behaviors have changed, on the parts of the corporates, and the consumers? And what actually, like, a go-forward economic, you know, activity might look like? The shape of the economy might be different, even if the size, sort of returns to pre-pandemic levels.
Willy Walker: So talk about, though, kind of restart versus recovery. Because I think that, you know, what we saw in the summer was a recovery back to, kind of, if you will, normalized levels in a very abnormal economy and world. But now we're getting into the restart. What are you seeing as it relates to… what differentiates a recovery to a restart?
Kate Moore: I think, yeah, there's a bit of a language here, right? So, when we think of recovery, it's often coming out of a recession that has sort of a traditional driver: financial; liquidity, you know, change in overall behavior, maybe leverage. But this restart really has to do with the different sort of recession, and you know, shutdown, that we had over the past year, which is really about a health crisis. So, it's a restart in terms of going back to, you know, healthy interactions, gathering in groups, and more normal activity. And I think that's kind of an interesting nuance here. Recovery implies a normal recession, but this is anything but a normal recession.
And kind of a restart also implies that we're going to go back to more service-oriented activity. And that's where consumption is going to shift over the course of 2021 away from, you know, a lot of goods purchases, and how consumers have really been behaving through the course of this pandemic. So, it's a little bit different. And so, it's one of the reasons I have a little bit of trouble when I hear analysts or economists or macro thinkers, you know, try and make a comparison to the financial crisis. You know, the causes of this slowdown in economic activity, the shutdown in some parts of the economy, and the change in behavior, is meaningfully different than we experienced a little over a decade ago.
Willy Walker: So, talk about the…when we do restart, BlackRock has talked about a turbocharged transformation, due to the pandemic in certain sectors such as tech and healthcare. What's shifted here?
Kate Moore: Yeah, so look, there were a number of really powerful trends that had been gaining momentum before the pandemic, whether it's around simple things: in consumption; online purchases for example, or you know, delivery to home, or in the case of remote working, in the software and systems and platforms that companies are investing in, in order to make their workforce just as, you know, efficient and productive as they would be if they were in an office. All of these things had been in place before the pandemic. But these trends really got supercharged, turbocharged (I like supercharged), you know, over the course of the last nine months. I don't think we're going back. There are some people who are suggesting that comps are going to be more difficult in 2021, simply because companies won't need to invest as much in order to compensate for the shutdown. You know, I disagree. I think we've been shown a new world, a new frame, and this is going to be a real opportunity for everyone to upgrade their businesses, their digital platforms, and the way they interact.
Willy Walker: So, the flip side of the sort of the restart on the equity side and the bullish view there, was what I said, a “new nominal” on yields, even as inflation rises. I scratch my head, trying to figure out how we get any inflationary pressure into the economy, given where we sit today. So, what's the BlackRock view on this “new nominal” and the bet, if you will, that inflation starts to come back into the US economy?
Kate Moore: Yeah, Willy, well you know BlackRock is a large organization. We have 16,000 employees, you know, many of whom work directly on investments and so, there are a lot of different views around inflation. But let me just sort of walk through the framing of a couple different views.
So, we know that coming out of any recession, whether it was caused by the health crisis, or financial or leveraged consideration and, you know, as I mentioned before, you know, you get an acceleration in terms of activity, and you get inflationary pressures as the pipeline, you know, may not be as wide as demand would otherwise want. And these are kind of largely temporary effects. Inflation picks up, the comps are lower, and the pipeline looks a little bit narrow as the economy reopens and growth kind of moves ahead of maybe where some of the supply pick up. You know, we think in the near-term, I mean, I think this is a universal view in BlackRock, but then I’ll go into where some of the nuance is; in the near term, we should expect a little bit more inflationary pressure. You know, as growth improves and as we get back to normal activity. I think that's something we can all agree on. But then there's a real question about what happens after that “pop”, after we sort of get past 2% inflation into the end of 2021 into the beginning of part of 2022. You know, how much constraint do we have in the economy, and how much leverage do companies have, in terms of their input costs and sort of leveraging their overall labor force before we actually get, or whether or not we actually get an inflation that sustains about 2% for a long period of time? And I think the really important thing here, and this is something that I really focus on as someone who tries to marry the top down and the bottoms up, is that companies have been laser-focused on their cost control. I mean, this is something that we have seen in living color in the second and third quarters. If you weren't a believer of it over the last 10 years you should be a believer of it, you know, in 2020. Even as revenue growth was really anemic, in many cases down, over year-over-year comps, companies managed to produce in many cases solid earnings growth because they managed their costs. I don't think that behavior shifts in 2021 even if growth improves, and that will likely put a little bit of a curve on longer term inflation.
And I think there's this other big part of it, which we sort of were touching on a moment ago, which is tech innovation. Tech innovation across every industry. Platform. Software. You know, systems. Inventory management. Consumer and customer interaction. All being enabled by digital platforms you know, is increasing productivity. And, you know, I'm a big believer in that productivity gain over the medium term, so I don't expect to see a 3% or 4% inflation for any sustained period of time, even if we had a sort of stronger print in the near term from very easy comps as well as you know, the pipeline opening up as the economy reopens.
Willy Walker: So you talked about productivity gains. The JP Morgan global manufacturing purchasing index reached 53.7 last month, which is the highest in the last three years. But as you know, much better than I do because you watch the jobs market so much, that incredible amount of both expanded capacity in and demand for manufactured goods is not being met with a commensurate uptick in employment, because manufacturing jobs don't come back in the same sort of, if you will, one to one ratio as service sector jobs do. So, as I sit there and think about, well, manufacturing might have lots of orders for it, but it's not getting any inflationary input from labor. We know fuel costs are almost at record lows. I again scratch my head and sort of say; Where is inflation coming into this picture?
Kate Moore: Yeah, so I think one of the arguments would be that there's a bigger geopolitical trend out there, right, to onshore or re-shore or bring your production closer to your end consumer. And that cost will end up leading to be a little bit more inflationary in the manufacturing space. I would argue that actually, as companies rethink their supply chains, they’re going to double down and maybe triple down on their investments in automation, which will improve their overall efficiency and productivity and also dampen, you know, any increasing costs. So I, you know, from that perspective, you know that that's one of the big arguments out there, but I will tell you that companies have talked about the additional investments they will make as they shift their supply chain.
But this question on manufacturing. You know, we pay a lot of attention to manufacturing data, right, there's, you know, lots of data released from the US government and from global governments around manufacturing. And it feels important, we consume a lot of goods. At the same time, we need to think about where the labor force really is. You know, at the current state, we only have, like, less than 9% of the US labor force working in manufacturing. You know, that's down from, like, over 13% in 2000. The vast majority of our workforce, well over three quarters, works in services, and that's across both the private sector as well as government. And that's where we should really be focusing, because we've seen this massive shift in terms of consumption over the course of the last year away from services, which has been, you know, our biggest area of consumption and obviously our biggest area of employment, and towards goods. As we've been all locked down, we’ve been buying more for our homes. We've been buying hard goods. We've been buying, and kind of consuming more physical things as opposed to services, experiences and entertainment. And that's someplace where I think we're going to see a real rotation next year, as the economy opens up, as we get vaccines, as people feel comfortable gathering together, we’ll move back towards services and it will regain the spotlight that it deserves.
Willy Walker: So as you talk about the breakdown between manufacturing jobs and service sector jobs, you were on CNBC last Friday, as you always are when the jobs report comes out. I would note to listeners that Kate and BlackRock accurately came in with a prediction well below what consensus was, and they were actually correct on their prediction of 200,000 jobs versus the projection of, I think, 440,000 jobs. But 6.9% unemployment sounds great right now, Kate, given where we've come from in the heights of the pandemic when everything was shut down. Some people may remember that when Barack Obama was re-elected in 2012, the unemployment rate was 7.9%, just to give kind of a historic perspective as it relates to where the economy was back in ‘12 versus where it is today at 6.9. But you didn't sound very bullish when you were on CNBC, on the jobs report or the unemployment number. Why the skepticism, if you will?
Kate Moore: Well, Willy, thanks for calling me out on that note. In truth, I think there are a couple of dynamics. First, I probably didn't sound that constructive, because I think the next couple months are gonna be tough in terms of labor gains. You know, December might be a little bit of a challenge. And, you know, Jason Furman, who was on with me on Friday, actually suggested we could have a negative print in terms of new jobs, in part because of the lock downs. And we see this in some states like California, but increasingly in counties and places of high, dense population. So, you know, there's a chance that we see a real slow down in overall hiring, plus we have this headwind where we're not getting as much seasonal hiring as we normally do at this time of year, because people are purchasing and engaging with goods and services differently given the pandemic. So the near term could be a little choppy. Let me just say that.
After the next month or two, I do expect that we'll see an improvement in the overall labor force. But I'm going back to that, you know, one of my learnings from studying second and third quarter earnings, which is, you know, companies are going to be slower to rehire, and there may be more people that are structurally unemployed as companies employ, pardon me, as companies invest more in systems and they want to really protect and preserve their margins. You know, I think that driving force from management teams to deliver on the bottom line, you know, in an uncertain revenue growth environment, is going to be incredibly powerful. It's actually been a trend that's been in place for over 10 years, but as I said, has really been highlighted over the course of 2020.
And another thing I just would kind of note here. You know, I pay a lot of attention to CFO, CEO surveys on expectations for overall revenue on CAPX, on hiring. And quite a lot of them that have come out in the fourth quarter thus far, have basically shown that CEOs and CFOs have greater expectations for full recovery of their revenues in coming quarters, and perhaps even over the next year and a half, but are more conservative in terms of their own hiring expectations. They'd rather see the business come back first, and hire later. So we've gotten through a big chunk of the rehiring, the people who were let go, or who were furloughed. But it's going to be, I think, a little bit slower work going forward. And while that doesn't feel good from a people perspective, you know, as an equity investor, I'd like the caution and conservatism. And I like the focus on the bottom line.
Willy Walker: You mentioned the CEO and CFO surveys; there was a really good article in Saturday’s Wall Street Journal by Sebastian Pellejero and Paul Davies, entitled, “Companies Stockpile Record Stock of Cash”. And it went on to say that non-financial companies grew their cash to a record $2.1 trillion at the end of June, which is up 30% year-on-year and surpassing the previous record of cash hoard of $2 trillion in 2017. This amount of cash has obviously driven liquidity ratios through the roof. So at this time, what’s your take as it relates to what all these corporations do? We were just talking about, you know, “slow to rehire”; are they going to repurchase stock? Are they going to increase their dividends? Are they going to invest in CAPX? Because your outlook seems to be very positive as it relates to the efficiency we’re getting, as it relates to the opportunities ahead as far as companies to start growing sales again, yet they're all sitting on all this cash. So do you think that they start to invest again? Do they buy back stock, increase dividends, all of the above or something different?
Kate Moore: Yeah, well, Willy, we had two incredibly powerful forces for US companies this year. Obviously the pandemic, which, you know, shifted the entire game. But also an election year. And actually, in election years, you tend to see companies behave conservatively anyway. CAPX tends to fall in the few quarters before a presidential election as everyone's waiting to see if there's going to be a major shift or change in policy in the next four years. And so that is a very traditional and expected behavior, hoarding a little bit of cash and waiting to see whether or not there's a change in dividend policy, what the new administration's reception is to buybacks, and other kinds of capital return to shareholders versus investment. So all that stuff is normal.
Of course, it got exacerbated by the pandemic, where companies became even more conservative in the environment. And so, you know, it made a lot of sense to hold cash that was coming in the door if you thought there might be a policy change or if you had no ability to predict the future of the economy, which, unless you're an epidemiologist and you're actually working on the vaccine and had planned out detail by detail the distribution yourself, was difficult to forecast. So all of those things, I think, led to the uptick in cash.
But I mentioned to you that I kept on paying attention to these surveys. And when it comes to capital expenditure, there are some indications that companies are gonna be willing to spend a little bit next year. You know, even if they're going to be a little bit slower to hire and bring on additional workforce, they may spend a little bit more. But the vast majority of that spend seems to continue to be allocated towards technology. And you know, you hear this from companies across every industry, that, you know, if they had a good digital platform, they want to secure the lead that they've had relative to their competitors. If they haven't had a digital platform, they’re going to continue to spend to make sure they remain competitive in a changing consumption environment, even post pandemic. So I expect we'll see CAPX, it’ll be a little bit more targeted and, of course, everyone's thinking differently about their physical footprint, their real estate and their office space and their manufacturing facilities.
In terms of, you know, buybacks and dividends, I think that's a little bit more up in the air. We still have some questions around tax policy that may get resolved after the Georgia Senate elections. And we may still get, you know, some reluctance to actually return a lot of cash to shareholders until we not just see the light at the end of the tunnel, but we can feel the light at the end of the tunnel.
Willy Walker: Just on that as far as the Georgia elections, is there any… You watch the political world closely. Right now, what's the, if you will, the BlackRock position? Is the Senate controlled by the Republicans or is there a chance that the Democrats take both seats and have Kamala Harris as the split vote?
Kate Moore: Yeah, we think it's exceptionally close. We're watching a lot of a similar data that everyone else has. But you know, my DC contacts and my network tells me that it's exceptionally close, and we have a couple weeks to go, so I’m loath to predict, because you know that polling has been, well, to say the least, inaccurate over the course of the last few elections. The one thing I think is really clear, though, is that, you know, for Democrats that did win seats away from Republicans, it was often in hotly contested races. And in order to kind of keep their seats, they’ll probably have to be a little bit more moderate, you know, and a little bit more middle of the road. Listen to their constituents who are both Republicans and Democrats. So I don't expect any of the newly elected Democrats, for example, especially in these hotly contested races, to be particularly progressive.
Willy Walker: Yeah. If you look at Mark Kelly in Arizona and John Hickenlooper in Colorado, there's two case in points as it relates to Democratic Senators who won being much more centrist than many of the other candidates that were up.
So, you talk there, Kate, about CEOs and CFOs potentially continuing to hoard a little bit of cash, maybe not being that bullish. But what about the consumer? I mean, we sit here and we look at a 30,000 Dow. We look at Bitcoin at 19,000,. We look at Tesla at 630. And while Elon Musk says that Tesla is going to be at 2500 bucks a share before we know it, and I heard Matt Harris from Bain Capital, on a call I was on last week, talk about Bitcoin getting to 50,000 in 2021 and he was affirmed by another person on the call, too. It wasn't as if Matt was out there in some dream scenario, trying to push up his own bet. But I think that there's this sense amongst the individual investor right now that markets are hot, markets are high, and maybe taking that point of view of a CEO or CFO, saying, “I’d kind of like to hang onto my cash right now.” And yet at the same time, BlackRock’s bullish on the markets. There's $5 trillion, is the number I understand is sitting on the sidelines waiting to be invested in the markets. So how does somebody get conviction on these markets, given these lofty price levels?
Kate Moore: Yeah, okay, a ton of points you just made there, Willy, so I'll try to unpack as much as I can. So it's not just companies and management teams sitting on cash, and you mentioned, it's not just average investors. I mean, a lot of asset allocators are looking at the suite of investments they can invest in right now and say, like, “Well, what is the hedge to my equity risk?” I mean, I think that is one of the most important questions that we asked on our team and I think across our whole platform, is, you know, we feel convicted in equities and risk assets. We like what companies are doing in terms of delivering earnings. We see some really powerful and exciting business models out there taking market share, all that stuff gets us excited. At the same time, the traditional tools we would use to hedge our equity risk just aren't available. You know, sovereigns, globally, not just treasuries, don’t offer the same kind of ballast that they have historically. We can sit on some cash, but if you're a benchmarked investor, you have to ask yourself, “Is that the right and prudent thing to do? What are some of the other assets we can own?” I mean, we think about this, you know, from diversifying geographically. Where are there, you know, markets and assets that move, you know, out of sync with our core US equity holdings? How do we diversify that way? And China comes up as a great example there.
And then you look at these alternative assets. And people, of course, have turned to precious metals, they turn to things like Bitcoin, and it looked to add a little bit of diversification into their portfolios. I would note, whether it's precious metals or an alternative currency like Bitcoin, it's never a large enough portion of your portfolio to really hedge all of your risk. But it's important that we're having this conversation, because the tools that many of us have used for the last couple decades are just not available to us in portfolio construction anymore. And so this is going to be one of the big questions: what is out there that people have confidence in, where people can predict supply and demand or at least, you know, buyers’ versus sellers’ imbalance, in order to have enough conviction to hold big chunks of that in portfolios? There's not a lot out there right now. And so, this is a real challenge for asset allocators.
Willy Walker: So, but, so we get zero yield out of the fixed income world. We've had corporates go out and raise tons and tons, issue a ton of debt at historically low yield. So, all the good companies have already issued all their debt and it's a yield that nobody really wants and so, you know, people are sitting there saying, well, my typical equity fixed income allocation would be, I don't know. I mean, I had a phone call this morning with a friend of mine who's in her 60s, and she said, look, I'm 90% equities and only 10% fixed income and it's scaring the hell out of me. What do I do? And I said, well, you can call up your money manager and go to a 60/40 allocation, but he's going to tell you that he's not going to get you the, the overall return that you want to because that 40% in fixed income isn't going to yield you what you want it to yield. And so, you've talked previously about some of the defensive stocks that potentially people have considered in the past like telecom and staples and utilities, but you're not too big on those sorts of defensive stocks either these days.
Kate Moore: Yeah, I think there's a tendency, particularly for large segment of the retail base that you know our at or close to retirement to really sort of look for income strategies within equities. And so, you might just look overall at dividend yield and say well I’ll buy some of these sectors or industries with high dividend yield. But it should be no secret to anyone that some of those sectors with high dividend yield, actually are structurally impaired, have very little ability to grow. I mean, the sweet spot is finding a company that's growing, maybe not at the pace as a pure growth company, but, you know, is also offering some shareholder cash return in the form of dividends. Anyway, I mean, you know, it can be it can be a little bit of a challenge, and I think that's actually where picking individual securities and like sort of more active management in your income strategies and equities makes a lot more sense.
Um, but your point around overall asset allocation for the retail investor is interesting. So little anecdote is that my mom is in her mid-70s, and I work with her financial advisor team, which they may hate to be fair, given the fact that I like so, in the mix on some of these numbers, but we have her about 80% in equities as well. In high-quality equities. More kind of on the blue-chip side, but you know her goal is to continue to give away money and to, you know, fund charities and causes that she feels really passionate about. For her to meet those goals she can't be sitting in a big chunk of sort of Treasuries, or in fixed income, that's going to offer her no total return. So it's, it's a dilemma and we've all had to sort of shift our mindset and this monetary policy environment. By the way, our core view across BlackRock is that you know, monetary policy will continue to be very accommodative. The Fed has been crystal clear about allowing inflation to overshoot the 2% target for a period. And, you know, even if we would have that pop as we restarted the economy. Let's assume and expect that there's no meaningful shift in monetary policy in the US or elsewhere.
Willy Walker: So, one of your, you know, in your bio at BlackRock, part of your responsibility is to identify and exploit structural change. So just looping back for two seconds on Tesla and Bitcoin, weren’t Tesla and Bitcoin structural changes to the extent that the valuation that one might put on Tesla is a complete change in the structure valuation, but you've kind of… Like Jim Cramer was on CNBC this morning, basically saying he had a discussion with an 18 year old last night about Tesla, and he couldn't come up with a reason for why the 18 year old shouldn't invest in Tesla, other than the fact that is trading at 1,320 times earnings and I'm sort of like that's the reason, and he said, but the 18 year old looked at me and said, you don't know anything, old man, your old school. So, is there a structural change to valuations, given what Tesla and other companies are doing? And then on the Bitcoin side just is Bitcoin a structural change to currency and or is it really just another investment?
Kate Moore: Oh man, so much to unpack here Willy. Okay so when it comes to a company like Tesla, it's captured a lot of the hearts and minds of individual investors and certainly has been a great investment for institutional investors as well, but it's not about Tesla. It is about the disrupter. I mean, I think that's where we're seeing the multiples expand the most. If you are a company that is disrupting, either from within the industry or outside the industry, you've seen the greatest multiple expansion over the course of 2020. You know the companies that started off with premium valuations before the pandemic actually saw their valuations expand over the course of this year and it's because they have the business models and they're accessing markets that have the largest potential growth and they're disrupting, you know, and so you know, Tesla is an example of that. I would suggest that you know EV’s in general, and battery technology, is one of the most exciting places to invest. One of the ways I'm invested right now in my fund is not specifically around the OEMs, or the traditional cars, but actually the entire battery supply chain and including the semiconductors that go into EV’s and also the raw materials. I think that's an interesting way to play it. If we look at these companies that are disrupting, and I think you can kind of broaden out your investment from there. It's not just the company itself, but what it represents to an overall industry and where the opportunity is. When it comes to Bitcoin though, I think that's a fair question. Look, I'm not an expert on Bitcoin, I will never purport to be, but, um, it is a disrupter in terms of, you know, overall assets. And is it an alternative to currency? Is it a hedge against other assets? Maybe a little bit of both. It can be really difficult for an outsider like myself to actually say, you know, exactly why the algorithm is pricing something in one way or another. But I do recognize that we're going to have to look at that technology, the blockchain technology, what that means. The use of digital currencies around the world. How we think about integrating digital currencies in general into our portfolios. You know we are at like an incredibly exciting period for investing where there's so much change and there's so much disruption. And we need to be really focus on the future instead of sort of thinking about mean reversion or going back to our old playbooks that we might have used for multiple decades. So, I would just ask everyone to be sort of creative in how they think about the future, not overly fixated on valuations, but thinking about what those business models really could do. Or what those assets could really do diversification in your portfolio.
Willy Walker: So, when you talk about disruptors, I mean, if we wind the clock back for the last 20 years BlackRock has clearly been a disrupter in the asset management business. As you look forward and think about BlackRock’s competitive landscape. Who are the competitors out there from BlackRock from a disrupter standpoint? Is it, is it a Nuveen, is it a JP Morgan, or is it a Charles Schwab?
Kate Moore: It's a little bit of everything. So, let me say, you know, BlackRock manages close to $8 trillion of assets, and we are not just an asset manager. We're also a technology company, you know, we have a technology platform that we sell to others and that our clients use extensively. And so I would suggest that you know some of our competitors are traditional asset managers. Some of our competitors are technology platforms. And with any industry, you know, you shouldn't get to sort of complacent about your peer group. You have to think where could there be potentially new entrance coming in and pushing on your business model. And we spend a lot of time from a corporate strategy perspective thinking through that as well. It's not just the people that we've been, you know, competing against on the fund side for a number of decades. It is not just the folks that are also offering index, and ETF products. It's not just alternative asset managers. But it's also technology companies, and it may be new companies and upstarts that have the ability to sort of gain market share from younger investors. So, we are really like making investments and acquisitions and thinking about our competitive landscape outside of just finance and asset management.
Willy Walker: So, do you think I mean if, if, you get inside of Larry Fink’s head for a second. And sit there and say, and I know you spend a lot of time with Larry, so I mean what's keeping him up the night. Is it a square? Or is it a JPMorgan Chase?
Kate Moore: I would suggest that you know he doesn't confine his concerns, or you know bucket his potential threats, into you know, just like as I said, a traditional asset managers or you know, finance and sort of Fintech upstarts. Larry’s brain is gigantic, by the way, and so to get in there I might wander around for a couple years. But he thinks about all that. But Larry also thinks about sort of the biggest disruptions in the overall economy that, you know, so the geopolitical environment. Where the biggest growth opportunities for us, in terms of accessing new customers and providing new products, both on the technology side as well as a traditional investment side. So you know, I would just say that the world is large, even for a behemoth like BlackRock and we are going to continue to be really creative about the solutions that we provide. I would also note that you know of the close to $8 trillion that are you know under management that is, we are a fiduciary, that's not our money, and we have to really be focused on you know, the majority of our clients are like pension funds and retirement accounts that really need us to be sort of thinking creatively about how to achieve returns for them in the long term.
Willy Walker: How much of that $8 trillion Kate is actively managed versus in passive funds?
Kate Moore: About $2.2 trillion is active and you know passive makes up sort of the balance of that. And so, you know, it's one thing… we talk a lot about active versus passive as an industry, but you know BlackRock having both alpha generating strategies as well as kind of more index strategies thinks about these two things together. I mean, they need to be married in everyone's portfolio. There is room and need for both sets of instruments. In my portfolio and the portfolio I manage, in my family's portfolios, and these two things are kind of inextricably linked. You need to think about your basic exposure in terms of overall index and then how you layer in alpha generating opportunities the more you take that risk.
Willy Walker: And you mentioned previously, technology, when you started talking about BlackRock and clearly Aladdin is your technology platform you all use, and I think 55,000 investment professionals across the world use Aladdin as well. Is that, is that more of an information source to the extent that that sort of trying to replicate what Bloomberg provides you with or is that more of kind of a portfolio allocation management software that might be replicated. I don't know that space very well, but Oracle may have a solution or somebody else. What's the, what's the, if you will, the special sauce inside of Aladdin as it relates to why people find it to be so valuable?
Kate Moore: Well look I don't want my Aladdin colleagues who are in a better place to sort of talk about all the nitty gritty, but you'd have to remember that BlackRock was built on a culture of risk management. So, a lot of what, you know, Aladdin does, is effective risk management. It's an unbelievable portfolio analysis tool. It helps with the overall trading and execution, it's kind of, it's not an alternative to Bloomberg, it's something else entirely for investors, specifically for investors, and for portfolio solutions, and its continuing to grow. This is one of those exciting and dynamic parts of BlackRock at this moment. It’s everything we're doing across the entire Aladdin product group. You know, I use Aladdin all the time in terms of portfolio analytics and sort of risk management, even when I'm doing like ESG screens on potential investments and I think about you know, you know, overall portfolio construction, But our clients use it in a multitude of different ways. And as an investments platform, and as a risk management tool, you know, it is a place where the firm is continuing to put a lot of resources and we expect a lot of growth.
Willy Walker: On that, as you look at just as one example of technology and if you will, old school markets versus new school markets, the Morgan Stanley acquisition of E-Trade struck me as, as somewhat of a masterful move by Gorman in the sense that the, if you will, white shoe investment banking operation that Morgan Stanley has is unlikely to be disintermediated by technology. Bankers go and meet with CEOs like me, talk about M&A strategy. CFO’s will talk about a dead issuance what have you, and that market needs to be banked, if you will. And yet the E-Trade market of the entry level investor is something that technology can really play a much bigger part than the individual money manager, and therefore, they get the ability to not completely disrupt their white shoe investment bank, and yet at the same time enter a high growth, higher technology market by buying E-Trade. Do you see it similarly, and do you think that will see similar type moves by major corporations to try, and if you will, get a technological edge without completely disrupting their core business?
Kate Moore: Yeah Willy, I think about that acquisition, not just in terms of more vertical degradation and expanding across product and pardon me, of a client segments. But it's also about data, right. A lot of acquisitions that we're seeing today, about access to data, access to flow in the case of our industry, and who owns the data, and who has access to that, you know, is a winner. Um, and increasingly these sorts of smaller platforms that are capturing interesting consumer or customer segments. Who are getting access to this information are incredibly attractive acquisition targets. So, you know, I don't cover Morgan Stanley specifically, I would leave that to my financial analysts, but as I think about this, it's not just about customer acquisition and, you know, extending their reach, particularly in wealth management to, you know, another segment of retail, but also access to the data, and that's, you know, those who have the data will be the winners, not just in 2021 but over the next couple years. So, there are advantages that BlackRock has as well. Being as large as we are, and operating so many different markets and asset classes and our technology platform, we have just outstanding data.
Willy Walker: Well, that was actually where I was going to go, which is that with being the largest asset manager in the world with $8 trillion of AUM, you all see where markets are going before anybody else does.
Kate Moore: We have incredible flow of information. I mean, look, we are big players. We're not the only players and certainly we pay very close attention to what retail is doing. I mean just today, this morning we're having a great debate around the overall call activity. Short dated calls, levered calls, being used by the retail community. Small lots relative to what institutional investors would be doing. You know, in sentiment and positioning are huge part of our process. Certainly we're a big player, but it's important for us to know what other institutional investors are doing. What is retail doing. What is the segment that you know we call fast money, hedge funds doing in terms of the market? How does that help us, you know, enter and exit the market?
One of the things that's best about BlackRock and I think our overall investment platform is the flow of information internal though. Not simply what we're trading, but we have so many bright minds, and so many different asset classes, so many forums for us to communicate. It really gives us an informational advantage or at least a debating advantage. It goes back to the inflation bit where we have a number of different views internally on inflation. And it's a robust an ongoing discussion, but whether or not companies will be able to control costs and whether or not they'll be able to pass things on to consumers. It's a lot of fun actually, Willy.
Willy Walker: So, I want to get your view on international and domestic for a moment, and then I want to dive into a couple other things, before we run out of time. And I know I'm gonna run out of time with you before I want the clock to be up.
As it relates to international. One of the comments that I saw you make previously was that you didn't really love Europe or Asia because there are more value plays there and that the US economy and opportunities to invest in this economy are much more tech and growth driven. Are you still overweight US equities and sort of underweight Europe and Japan or have you changed your view on that, given the overall investing environment?
Kate Moore: Yeah, so it's a long-held belief of mine that given the structure of both the European and Japanese markets, you're better off being a stock picker. You know market composition matters. And when you look at what percentage of the market cap in Europe or Japan is technology, or fast-growing communications, or innovative consumer companies. It's much less than you get in the US. So if you're just buying overall index exposure, you're getting more of a higher octane, high free cash generating companies when you buy US. That said, there are great companies in Europe and Japan, and we do own them in the portfolio and in some cases have been increasing our allocations. But you know, I, for one, am not someone who's putting a lot of money into European banks, which are still a huge portion of that overall index. I would also note that Europe and Japan have more challenging demographics and that sort of macro consideration has to come into play. And a different sort of political environment in each of those as well. So, you have to sort of marry what you can get in the overall market with what's happening in terms of the macro and the big picture.
When it comes to overall regional allocation, though, you know, another area of the world that has the market composition that I am inspiring, excited about, is emerging Asia. Not just China, but also Korea and Taiwan. We know that technology and consumer and healthcare platforms there are growing. There significantly larger portions of the overall market than they had been historically. So, we see a tremendous amount of opportunity to allocate to high quality companies in those spaces in emerging Asia, and that's a big part of our portfolio at this point.
Willy Walker: And then how do you suggest people play China. I mean, it seems as if after the you know the trade war that's gone up, and up, and the, sort of, if you will, the rhetoric has gone up and up, China seems to be doing really well, all things considered. And should people be thinking about playing China as far as going and investing in US companies that have footholds into China and use that as the way to get trying to exposure? Should they buy at ADRs or should they go directly and by Chinese corporations?
Kate Moore: Yeah, Willy, there was a time where I ran a whole strategy called DM for EM, which was looking at the you know multinationals in the US and Europe with the highest gearing towards Chinese and emerging market growth. And, you know, that was a strategy that performed really well. You got these diversified geographic companies with really strong business models who were getting their incremental earnings growth from China. Increasingly, though, you know, we've seen extremely strong business models in China itself. And I have to say, my strategy has evolved where as I'm looking to buy mostly domestically oriented companies and brands.
You know, we keep on talking about the decoupling of the US and China, you know, some of that driven politically, some of it on trades, some around information security. All of that's fair but China also has its own set of protocols and systems and a different way that consumers interact with products and businesses. And you know their companies are built around that different experience. I think it's incredibly important to own, you know, A-shares and Chinese companies that are geared to the second largest economy and to an incredibly dynamic consumer base. And so that's what we're doing right now is, you know, adding exposures directly on shore. It's also worth noting, I mentioned portfolio construction before, that, you know, A-shares in Chinese markets actually have a quite low correlation to other developed market equity indices. This is also true in terms of the Chinese bond market relative to the rest of the world. So, there's a diversification element there as well as sort of capturing some of the higher octane growth that you can get from different business models that are onshore.
Willy Walker: Do you think that US-China trade policy changes dramatically under a Biden administration versus a Trump administration?
Kate Moore: In the near term, no. Because everything I understand and, you know, speaking to friends who are intimately involved in the Biden administration is that the project, of course, in the first hundred days, maybe even the first 200 days, is to get the economy back on track and the pandemic under control. And so radical changes in terms of trade seem very unlikely. You know, while some things may get overturned or renegotiated or the US may engage with China in a different way than it had under the Trump administration, I feel like that is a sort of a second priority after the pandemic and the domestic economy.
What I would also note is there's a strategic logic to keeping some of the trade agreement in place. Some of the tariffs in place in the near term. As a Biden administration ramps up and decides, you know what parts of that they want to renegotiate, where they can use leverage, what's necessary to change. You just want to come in and blow up the whole thing when you have a million other problems on day one. So, I think they're going to be very strategic. We are going to continue to engage with China. I don't expect Democrats to be particularly weak in terms of the US-China information and data considerations. That said, will it happen on January 21st, I think there are other things to deal with first.
Willy Walker: So I know you start your days extremely early and you have an extremely broad mandate at BlackRock as it relates to, you got to look at, we just talked about China, you talked about Asian emerging markets, we've talked about Tesla, you've got so much that you have to take into account as you set the course for Thematic Strategies at BlackRock. What are the, what are the three data sources either newspaper, journals, industry publications, television, what have you, that you reliably go back to, to inform Kate Moore's view of the world we live in, and where you need to be focused as it relates to your job at BlackRock.
Kate Moore: So, it can be overwhelming to try and take in all this news and actually one of my big projects is actually to cut out some of the noise. It was a project before the pandemic and it's certainly been one that I've been working on over the last nine months.
In terms of the news sources, you know, I tend to read a whole bunch of news aggregators, you know so I can get a good sense. I try and read things that when I read a headline, I have a visceral reaction to, like, oh, I don't agree with that. That means I probably should read that article or that analyst report. You know, because I need to challenge my own thinking if I want to be, you know, correct or sort of clear headed. So yeah, I read a bunch of news aggregators.
I think, you know, one of my favorite things to read every week and I've been a subscriber for a long time is 13D’s What I learned This Week, which comes out Thursday afternoons. It's not an advertisement for 13D, but it's great at sort of pinpointing longer-term trends and it's challenged my thinking on a number of assets and a number of different themes. So I love to read that. And then I got to tell you, Willy, I don't watch television. I know sometimes I appear on TV, like once a week, but I generally really love to read, and I love to read things outside of finance and business. In fact, I think it's incredibly valuable to read like science fiction, fantasy, like overall fiction, things that just sort of shake up your brain a little bit after staring at you know what it is four Bloomberg screens all day long. So, that's when your brain really has a chance to sort of like, you know, coalesce around an idea when you're not as focused on it. So, I read alternate opinions, What I learned This Week and fiction.
Willy Walker: So one of the things I've heard you say previously, is that one of the, one of the keys to your investing success has been -- what you've said, is that you need to understand history and behavior. And I'm very interested to hear you say, you know, read fiction to try and let the let the creativity come into the mind. But can you explain how history and behavior influenced your market perspective and decisions at BlackRock?
Kate Moore: Yeah, I spent a huge amount of time thinking about behavior positioning and sentiment. And I think that's a real key, not just to the right entry and exit points to being a longer term sustained investor. When I speak to kids in college, or even in high school, because they're already starting to think about their careers, I tell them, like not to be too narrow in their focus, that the skill of being like a good investor, or even a good thinker strategic thinker, is to have lots of different frames of reference.
I’ll tell you Willy, because you mentioned before I went to University of Virginia as an undergrad and I took this course while I was there called Fantasy and Social Value. It was a graduate level sociology course. People thought it was going to be a gut because you're going to read science fiction and fantasy books and then you know, write papers on it; they thought this was a joke. The truth of the matter is, you had to have an understanding of politics and history, political economy, and sort of, you know, be able to understand the framework in which the author was writing each of these books. That's what this is really about. Read the story. Why is this fiction writer reacting in their way to their current environment? What is the comment they're trying to make around society and culture? And you know that it sounds like a fun class, and it was really fun. It was relatively hard, in some ways, but it really helped to inform. You need to read a lot of different things in order to have a well-rounded view. And you need to understand the perspective of other people.
I think a lot about this. It's not good enough to be like sort of right on your earnings estimates. So your model is perfect and you hit within a penny of what the company earned. You need to also know what the rest of the street thinks that earnings estimates should be. You need to know what consensus thinks. And then more than that, you need to know what consensus thinks consensus thinks. You gotta take it to the third derivative, you need to understand the rest of the players on the board. And, you know, having all of these different sources of learning politics, history, sociology, you know, really helped to understand the investing landscape.
Willy Walker: It is not surprising to me that you were a game theory and political science major at UVA, given that as a perspective on the way that you look at the markets.
Kate Moore: I love game theory Willy.
Willy Walker: Yeah. So I mean, it says a lot about how successful you've been as an investor.
So, on that Kate, you know, you have risen up through the ranks at three really big Wall Street firms, from Morgan Stanley into JP Morgan into BlackRock. That is a world that is increasingly getting both diverse from a gender standpoint and from a racial standpoint, but it's still to a great degree an old boys club or particularly when you arrived there 20 some odd years ago. Talk about how you've been able to progress up the ranks on Wall Street as an investor, as in many instances, the only female in the room.
Kate Moore: Yeah, it felt lonely and I have to say it's one of the reasons why I am so so focused on mentoring and working on diversity, equity inclusion in my current iteration because I just didn't feel like I had a lot of people to look up to, or talk to, when I was growing up in the business. Hopefully as you can tell, in the course of this conversation that I'm super passionate about investing and find it to be the most interesting career, someone could have. I say, if you got bored doing what we do, you are doing something wrong.
But it was lonely sometimes and I didn't always have great mentors. Um, I didn't always feel like I had a strong of a network of some of my male peers. So, I had to work on it. And one of the things that I realized is that if I offered a different perspective or an interesting hook, if you will, it was a lot easier to get invited out to lunches. Or to, you know, be grabbed in a coffee chat after a conference. I had to put something out there to bring people to me. And to create that sort of circle and network. And this is a bit of recommendation I give to analysts and associates and staff today, which is you know, do your work, have something interesting to say, spark a conversation and continue to build on it. By the way, stop building on it if someone doesn't offer something back to you.
Um, but, it had to be a little bit more organic and maybe a little more constructed because I wasn't getting invited out to the state dinners or, you know, despite the fact that I'm a very avid and serious golfer to the golf tournaments. You know, and, and I sort of had to approach the problem a little bit differently. But I will say, the environment does feel like it has changed a lot. And you know the opportunities for people of diverse backgrounds, diverse thought, and people may not look like everyone else in the room have meaningfully increased in my couple of decades on the street and I'm very excited for what that means in terms of innovation and you know potential portfolio returns, actually. The more diverse, we are, the better off it's going to be so.
Willy Walker: This morning in the Wall Street Journal I read a number of op-ed, not op-eds but letters to the editor, about an article that the Wall Street Journal wrote last week pushing back on the NASDAQ for creating board standards. And as you can imagine, plenty of, if you will Libertarians writing in we're basically saying that is not the role of the of the market to do that. You shouldn't be playing there. Clearly, an opinion held by many. BlackRock has been a leader as it relates to really focusing on ESG. And Larry Fink’s annual letter last year really went, if you will, out on the edge as it relates to basically saying we're going to expect companies to be mindful of ESG and that we're going to look for investments in companies that take ESG and put it front and center. How has that, if you will, mandate at BlackRock influenced your analysis from an investment standpoint?
Kate Moore: So I'd say the sustainability mindset was in place, at BlackRock even before Larry wrote the letter. I mean not maybe as much as we are excited about having in the future in all parts of business, but that sustainability mindset has been in place. Um, and I would also note that this is not just us coming top down on sustainability ESG. This is also really building bottoms up. As I mentioned, we are fiduciary. Our clients are asking for this across pension funds, you know, institutional investors. They want considerations around ESG and sustainability built into their portfolio construction. And you know, we are reflecting that and trying to live you know that purpose in our investing life. You know, we know that firms that are not prepared, or are not considering ESG and risks and sustainability, you know, are maybe less attractive investments. Opportunities for the companies that focus on sustainability from an investment perspective, you know, are infinitely greater. There are also these different regulatory regimes, you know, across different countries and BlackRock is a global company and we also need to reflect the needs and desires of, you know, different regulators in terms of the ESG and sustainability. And we've been focusing a ton on tools and reporting both using external vendors as well as building up our own capabilities. It is like front and center of all of our conversations today. If a company doesn't have an appropriate score from a third-party vendor, we need to like dig in deeper understand that, make sure it squares with our own analysis. Is corporate governance really a problem? Or has it been mis-rated? Are they taking, you know, social and environmental considerations into their decisions? What does that mean for their future growth? Are they going to face regulatory and policy [unintelligible] as a result of it? Where can we get the best returns, while also having a sustainable mindset? So as I said, it's not just Larry putting this out there, it's also coming from our client. This is, you know, a major change across the industry and I think one, we should all sort of lean into.
Willy Walker: So final three questions as we run out of time. And I'm so thankful for you, joining me today.
First of all, DOWs right around 30,000, where is it a year from now, 10 years about 95 basis points where is it a year from now, and then the best book you've recently read and why.
Kate Moore: Okay, I think we're going to be up 10 to 12% in aggregate index next year in terms of equities, but there's going to be a huge opportunity in terms of stock picking. Things significantly outperforming that. So you want to be in the fast rivers. This is a perfect example of combination of index and alpha generation in your portfolio construction. In terms of a 10 year. Um, I would expect it, yields to rise a little bit next year. So, I will go between a sort of chicken of one 1 and 1.25%.
Best book I read it goes back to me trying to cut out the noise, Stillness is the Key by Ryan Holiday, was recommended by my coach. It's a great book for investors and thinkers and leaders about how to cut out the noise, how to think about what is important to your process, when you need to sit and think separate from everyone else, and sitting here in Wyoming I've had a better chance of doing that, during the pandemic and I certainly have had on the trading floor.
Willy Walker: Stillness is the key. Kate, thank you so much for joining me today. Fascinating conversation, I'm so thankful for your time and your insights. To everyone on the on the call today thank you for joining us look forward to seeing you next week and have a fantastic week. Thanks again Kate.
Kate Moore: Thanks, Willy, really appreciate it.