BlackRock 2023 Outlook [pdf] | Hacker News Reader

BlackRock 2023 Outlook [pdf]

blackrock.com

66 pointsbaal80spam52 comments

There's old saying in finance: "Never trust an analyst".

If the analysis is so great, it won't be distributed on the internet for free. These financial management firms are always "talking their book", that is they cherry pick their data to support their portfolio.

Black Rock has seriously underperformed compared to XLF ( ETF for finance) year to date.

Perhaps they are just looking for excuses.

Except there are hundreds of billions of dumb money that are managed by very small amount of people, it’s not economically reasonable for them to do their own primary research. They mostly invest into other funds (ie. Some may be BlackRock funds.).

It’s widely accepted that sell side search (like this) reflect on average the market view. As a result, most of these insights on average are likely priced in. You won’t “create alpha” from following them. However, most dumb money just want to track the market, thus it’s perfectly fine for them to follow sell-side research in aggregate.

Also, on your comment comparing BlackRock YTD performance to XLF, that’s not a valuable comparison. XLF composed mostly of banks, which are highly levered (by definition of fractional reserve banking). BlackRock is not a bank, it does not have the same leverage as JP Morgan.

ie. Chase has $3.7T in assets, $3.5T in liabilities (mostly deposits), and $400B in market cap (shareholders equity).

Liabilities to equity is ~8.75.

BlackRock has 115B in assets, 77B in liabilities, ~100B in market cap (shareholders equity).

Liabilities to equity is 0.77.

Leverage is risky, higher risk firms demand higher returns, this is the very foundation of capital asset pricing.

Berkshire had a (especially relative to the market) very good year and it’s the highest weighted constituent in XLF. Also a lot of the active fund companies had this same sort of trend where they went about 2x in market cap in a 12-16 month period in 2020-2021 and then gave about half the growth back (or more) in 2022.

> Central banks are deliberately causing recession by overtightening policy to tame inflation, in our view.

I didn't read the whole report, but a cursory glance revealed the above quote in the lede. Which seems interesting to me, that one of the largest (maybe the largest?) investment management firms in the world has a different take on inflation taming than central banks. Maybe it's only natural; they see a willed recession on the horizon which will obviously hurt their bottom line.

Maybe they don't even have an alternative strategy, but I'm personally wondering if hiking interest rates on top of soaring energy prices is really the best we can come up with. Is it?

It’s a matter of different incentives.

The Fed is trying to reduce prices in asset markets.

Asset prices growing faster than our ability to make things is a sure-fire cause of inflation (more stock-based billionaires chasing the same amount of houses makes all house prices go up, as an extreme example).

Blackrock just wants to have as many assets under management as possible (that’s how they make money), and one easy way to goose that number is to have your existing assets go up in price (and vice versa for falling prices).

So yeah, Blackrock is rightly mad at the Fed and will probably say a lot of mean things about them.

Doesn’t mean the Fed isn’t doing the right thing though.

It's not billionaires pushing up house prices but the middle class .. like me

I'm in the top 1% of UK salaried income and a family home is not affordable in an area I'm willing to commute from.

To buy a family home I'd be paying almost as much as a whole year of the UK annual after-tax s just in stamp duty (transaction tax).

Things have gotten out of hand.

Top 1% of income isn't middle class.

Lot of folks in the top 1% who have a lot of equities investments - those get inflated, makes it easier to borrow more, pours gas on bidding wars.

High income has nothing to do with class or wealth.

It certainly has something to do with class and wealth. I am very comfortable saying that someone in the top 1% of income is in the upper class, regardless of the fact that the top 0.1% or top 0.01% of income may have vastly more assets.

Exhibit A: Elon musk. The fool has neither wealth nor class.

Arguably, if you have to go to work for money and need loans to buy shelter, you’re not upper class.

O god, I never realized loans are a kind of charity. Reading myself write it it sounds sarcastic but nearly everyone is so damn poor they need someone to support them just to have a roof over their heads. Shelter is exactly the word in how temporarily it all is. You show documents to demonstrate how likely it is you will be able to pay for it some time in the future. Odds that will happen are not good at all. We also get food subsidies or we wouldn't be able to eat properly. Oh, and we also do all of the work on this planet. We do it to demonstrate how well behaved and civilized we are. Very obedient subjects.

I still think it's useful to separate out the working middle/upper class from the true "aristocracy" (for lack of a better word). A professional in the middle class can save up and buy property until they can live off passive income to become upper class but that's a different class from the people who can fund their life styles through financial arbitrage by the sheer size of their wealth.

I don’t believe you’re middle class mate. Though I realize that the British definition is more grounded in upbringing and family history than the American usage.

In my definition salaried people are middle class, high salary is upper middle. Not having to work to maintain their lifestyle is the start of the upper classes.

Does that make a retiree upper class? Plenty of those I consider middle/upper middle class reach the ability to live off interest by age 60

I imagine in this system a retiree is the class they achieved professionally in employment.

Generally upper middle class is where family background begins to be a major factor. It generally means coming from a traditionally well off and educated family, with prestigious roles at the pinnacle of a hierarchy (prominent politician, judge, dean of a university, general, etc), public school education, and perhaps ancestral connections to nobility.

It's more that in my view not having to work is necessary but possibly not sufficient for being a member of the upper class. I think by that point it depends on which social circles you run with.

Upper middle class may be more accurate.

The British term "middle-class" is weird, because "upper-class" pretty much refers to nobility. Unless your ancestors have a nice pride of place in the Domesday-book, you are unlikely to ever consider yourself or be considered "upper"...

if a person with access to much more credit than you, and has more cash than you, is competing with you to get a house when there are not many houses, how can you be the cause of the increase in price?

secondly, if the entire house market is so over-priced that only people that have a house to sell, and new cash, and substantial access to credit are the ones getting any house at all, how is the cause of the price rise the buyer?

thirdly, if the total capital in the system has been multiplied by QE and network effects on assets, such that you the middle-class buyer are not able to afford even a bid, how is that the result of the middle-class house buyer?

>as an extreme example

Blackrock is, of course, free to start making things, or to increase their assets by buying from people who are.

Ppppphhh meaningfully contribute instead of just leeching out passing value like some kind of parasite??? What a crazy idea.

Can’t do A in a suit, and can’t do B when outflows are your problem and nobody will loan you their money for free to buy more stuff.

I don't think that they have a different take than the central banks, but the central banks don't advertise openly how interest rate hikes "tame inflation".

In the end, you cannot have any durable inflation without wage increases - supply shocks can cause temporary inflation, but long-term you need a cycle of wage increases that lead to price hikes to perpetuate inflation.

The way that tightening policy tames inflation is by choking off enough of the economy to ensure that demand for labor is reduced to the point where labor no longer has bargaining power to obtain wage increases.

This is clear to anyone that follows economics, but it's sufficiently inflammatory that it's not expressed in plain language. You tame inflation by tanking the economy just enough so that employees lose their bargaining power, and hopefully not more - but you can't achieve that without creating a certain level of unemployment, otherwise employees keep their bargaining power.

This is pretty much the same view central banks have, just stated from a different perspective. Inflation happens when demand outpaces supply, so to curb it you either increase supply or reduce demand. Central banks control monetary policy which really only affects demand, so when they want to lower inflation they cause less goods to be demanded by increasing unemployment.

BlackRock is an investment management firm that sells index funds. They want a bullish market but with just enough uncertainty and doubt that investors pick their index funds instead of hand picking stocks.

Governments and central banks have other incentives than BlackRock. For governments temporary recession is better than a state of long-term high inflation.

Just something to think about: Fed Funds rate follows the 2-year treasury with a lag.

What BlackRock calls "deliberately causing recession", I would call "following the signal from the bond market"

Chart: https://stockcharts.com/h-sc/ui?s=%24UST2Y&p=W&b=1&g=0&id=p4...

This is all circular because the treasuries are being priced based on the expectation of the rate changes.

Actually, the relationship with 6-month treasury is even stronger:

https://stockcharts.com/h-sc/ui?s=%24UST6M&p=W&b=1&g=0&id=p1...

BlackRock has been promoting ESG, and Larry Fink has been aggressively defending it publicly. ESG is questionably compatible with being a fiduciary. What really bothers me about Fink is that BlackRock has been buying up every ESG consulting shop, and selling corporations on ESG and implicitly dangling capital injections as a carrot. I sincerely hope this strategy backfires.

here's the direct link https://www.blackrock.com/corporate/literature/whitepaper/bi...

I find it kind of strange that the products many of us have our money in are so static. I use the Schwab robo-advisor. It re-balances to a target allocation. But moving to high inflation regime with a recession on the horizon, with the fed hiking rates, and absolutely nothing changes in my portfolio.

They are doing tactical over- and under-weighting of sectors and asset classes in this report. What can retail investors invest in that does the same thing as the big guys?

Robo advisors don't model interest rates at all. They essentially just estimate volatility of asset classes and do a round of Markowitz Portfolio optimization; they are easy to build (it takes a few days only). There is very little smarts behind them.

They exist because in the past, private banks wealth management would charge customers 2% of assets per year for running the optimizer once a month (which made sense in the 1970s when only banks had computers big enough to do it).

So what is a better alternative for a retail investor to do top level portfolio optimization?

Buy SPY, a few TIPS and you’re all set! Intelligent Investor is a good book here. It goes into a variety of different products and how one should allocate their resources. Highly recommend.

> with a recession on the horizon

said who?…

Presumably they are reducing your risk to ensure your money is safe?

No not all. They rebalance only to get you back to a target allocation. I think that’s true of virtually all robo advisors, and many human advisors too.

In a way, most of them do revert back your risk to what you have set, especially in a normal market (read: equities being much, much faster than bonds and money market funds), but they don't magically make your investments safer to the general risks of the market.

Leaving aside the question of whether it's portfolio appropriate or a good idea, how does an individual reasonably invest in global investment grade credit or inflation protected bonds?

I see TIPS in the US paying at ~1.5% while 5 year T-notes are at 4+%. Assuming that inflation will continue to drop, but remain above the target, wouldn't we expect to see T-bills and T-notes continuing to outperform TIPS?

Surely I am misunderstanding something...

Starting with I bonds is your best bet as an individual. Though there’s a cap on how much you can buy per year.

TIPS yield are real yields (already adjusted for inflation) while T-Notes aren't so they aren't really comparable. In essence you are getting 1.5% on top of inflation.

With 3-12 month CDs now offering much higher interest than my fixed-rate mortgage I'm just happy to dump my extra cash there (after having maxed out on ibonds I guess).

I guess I don't see the need to "beat inflation" when my consumption on things exposed to inflation are mostly fixed. E.g. I still eat the same amount of food each month

On interactive brokers you can modify trading permissions to trade fixed income products. I assume other brokers have similar settings.

Hmmm... in their three theses, they include:

"We stay underweight DM equities " in #1 and "We are strategically overweight DM equities." in #3?

DM Equities = Developed Market Stocks

How do they both underweight and overweight? Is this like having "tea" and "no tea" at the same time to demonstrate superior intelligence?

The language is with respect to investment time horizons for each given risk consideration, i.e. tactically underweight due to the "recession foretold" not being fully priced in yet, but strategically modest overweight based on estimate that "the overall return of stocks will be greater than fixed-income assets over the coming decade" in the face of stickier inflation.

The PDF playbook is structured to make this abundantly clear.

yeah that part is strange. One of those has got to be a typo. Unless they are trying to point out that these are conflicting forces ?

BlackRock, foxes and hen house

These guys are legacy.

Considering these guys are paid to do virtually nothing managing capital and are being blindsided by ESG backlash, you may want to take their report with a shaker of salt.

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