This is Master's in Business with Barry Ridholds on Bloomberg Radio this week on the podcast strap yourself in for another fantastic conversation. What can I say about Mark Weedman, who has pretty much done everything at Blackrock. He started there setting up the Financial Markets Advisory Group, working with all sorts of giant institutions, before he ended up running the I Shares Group, which is responsible for the ETF and index business, which is just huge. It's a third
of the ten trillion dollars that Blackrock manages. He was there from twenty eleven, running it to twenty nineteen, an explosive period of growth, and now he basically does everything as head of Global Client Business, where he works with black Rock's largest institutional clients, pretty much helping them map out strategy using Blackrock not just its products, but its
tools and strategies. I found this to be an absolutely fascinating conversation, and I think you will also full disclosure My Farm Results Wealth Management not only owns ETFs and mutual funds from Blackrock, but last year we purchased a division of the company called Future Advisor with no further ado Blackrocks.
Mark Redman, Gary it's a great pleasure. And you didn't mention that we also grew up in the same basic hood we did.
I we'll talk. We'll get to that a little later. Let's talk about schools, because we went to different schools. You got a law degree from Yale. I got a law degree from a different school after a bachelor's degree in social studies. How does social studies and law lead you to a career in finance?
So I think the great thing about how American education college education is set up is it's less about what you learn. It's more that you learn how to learn. So when I think about actually what shaped how my mind at least works, it was two things. It was one social studies, which is a department. I went to the undergrad that focuses on books, great books in the social sciences, and you learn how to read and write
about a text. So I really studied, for example, Max Weber and Meil Durkhim, these are great sociologists, John Stuart Mill understanding their text, their concepts, and being able to write short, concise papers. Went to law school. But I'll tell you, Barry, the thing that actually I learned the most from was not law school. It was clerking for
a judge. After law school, I worked for a judge in Chicago on the Federal Appellate Court there or the Seventh Circuit, and that's where I learned really how to write. Watch it because now you're writing for a proper audience, which is like the litigants, but also actually all the other judges who are trying to figure out what does this case mean? Figuring out how to be clear and concise?
Really interesting. I had a similar experience. The thing that I took away from law school is how to think logically and clearly and then express it in the written word, which is always a challenge.
I'd actually argue that that ability to to write, not to speak, but to write clearly and concisely, is almost the foundation of civilization. It is how we move forward is actually putting things in categories. Being precise and memos that boring topic are actually how you build civilization.
Really interesting. You join the firm, You joined black Rock in two thousand and four where you set up the Financial Markets Advisory Group. Tell us a little bit about what led to that. Obviously a huge success for Blackrock, how did your prior employment lead to this new division? Within Blackrock Barry.
Frankly, it didn't. I got hired to do a job I didn't want and I wasn't qualified for. Okay, but I a mentor of mine, a guy named Peter Fisher, who later ran fixed income for Blackrock, had been my boss at the US Treasury, and he went to Blackrock and said, why don't you just come and meet some people. I came over and it was the best management team. I met Larry Fink, I met Rob Capedo, our president, I met Sue Wagner, who's on our board, and these people. I walked out and I said, you know, this is
the best team I've met. I'm in.
Doesn't matter what I'm going to do. I just want to work with these people.
Just want to work with these people. I figure I'll learn because you really can't predict how the future is going to go. You really don't know. But if you work with great people, that temps to work out. So what we started doing was building something which is basically advising financial institutions on balance sheet problems that were of
a capital markets nature. So what does that mean? It means, for example, that imagine you were a global bank that had a huge toxic mortgage book during the financial crisis, or perhaps you were the New York Fed which got sattled with books like that from AIG and from bear Stearns. We helped work all that out. That's the kind of work that was a few years later, but that's conceptually what we were doing, which is helping our clients figure out how to manage complicated capital markets exposures.
And when you say clients, this is government, sovereign wealth funds, central banks, financial institutions.
This is the biggest of the big Yeah, we worked for and this is years ago, but we worked for and the business still continues at black Rock. When you work for anybody who has a big, massive exposure. We were particularly good at mortgages and structured finance. That turned out to be pretty handy in two thousand and seven into two thousand and eight, and basically, you know, when we started it, my question was what in the world do we have to offer to these institutions And it
was pretty simple. One clear thinking, and two we had a risk management platform called Aladdin. That's the foundation of how we manage money at plock Rock, and we were able to actually run other people's assets through it and actually get some order out of chaos.
So, since you mentioned the financial crisis, not long afterwards, after Freddie Mack and Fannie May did the face plan, Blackrock helped or is it you that helped the creation of Pennymac in two thousand and eight, which today is the number two mortgage bank in the US.
It is so, this is a company, it's based out of California that we started. We did it as a joint venture with another firm, a guy who became a close friend of mine. It started off with a whiteboard exercise. The financial crisis had swept aside all the incumbent mortgage players, including Fanny and Freddy, and we thought, what is going to come like the little little mammals after the dinosaurs have been swept away, what will evolve afterwards? And we
did a whiteboard exercise around a mortgage insure. We thought about a credit rating agency dot dot and we concluded actually where the money would be made, where clients could be served, was actually in buying distress mortgages. And that was the origin of what now is Pennymac.
And it's become pretty.
Large to the number two independent mortgage company. After quickened Loans and they focused on basically rebuilding efficient access to credit. After the financial crisis when most of the big banks retreated, most of the big banks just left the market.
So we'll talk a little bit about I Shares, which you ran for quite a while. But later in the decade twenty nineteen to twenty twenty two, you were head of International in corporate strategy. Sounds like a pretty big title. What is the head of national and corporate strategy do well?
Effectively, it was minister without portfolio. My job really, I had other formal duties, but the real job was handling, managing, organizing the things that had no owner at the firm, as we.
Did utility outfielders at it, that.
Utility outfielder somewhere, you know, things that were not properly organized and marshaled. Somebody needs to step up in an organization and put it together. And that means, for example, a great example, we launched a joint venture with a singapore Ian entity called Tomasik, which is effectively like a sovereign wealth fund. It's actually not, but it's what they do, and what we did with them is build a joint
venture to have our first growth equity strategy. There was no natural place for that to sit anywhere in black Rock. It's called Decarbonization Partners. We raised one point four billion in the midst of gale force wins against growth equity over the last couple of years. That all started because I had the free time to be allocated to that minister without portfolio. Organizations need them.
That's interesting. I use that phrase for something else. It's the talking head you see on TV that don't manage money but hold well.
Well, there's a bit of that too, Barry's you wonder when you were sitting in a seat like that, Am I just talking? Am I doing.
Anything that's really interesting? And then, at this point in your career you have twenty years of experience in finance, you start teaching finance at various schools, at Princeton, at Stanford, at Yale, and at Beijing. How did you get interested in becoming a professor of finance?
Well, Barry, what I actually really love doing is teaching and growing people. And so I've always either hit the lottery or simply got sacked. I think teaching would play an important part in my future. What I love about teaching is about something that I know about. I've typically taught about either something around exchange traded funds and the capital markets, or around the financial crisis. People are interested
in that. It is basically is, how do you get across the core understanding of something very complicated, but make it simple, not simplistic. And if you can do that, people walk out understanding that a financial crisis is nothing other than an overdone bank run. If you really get down to it, it all comes down to people borrowing too much money with too short maturity. And if you understand that, then other crises, other panics, all make more sense. That's why I like teaching. I think it's fun.
And Beijing, were you doing this remote or were you in China?
So I lived in Beijing in nineteen ninety nine. I taught two courses, one on American business law, nothing extraordinary there. But I taught another class on the rule of law. And I have to say, twenty five years later, it is unbelievable that I taught a class at what was formerly a Communist Party training school in the rule of law. It is literally impossible to imagine that this would happen today. Back then, really, nobody bothered me as long as I
didn't fement dissent. I wasn't. I just was doing academic teaching of what does the rule of law mean, what does an independent judiciary mean? The roots, for example, even in Chinese traditions. And I did this at a time when China was opening up. We in the West had the view that if we just trade enough with them, they'll liberalize and become at least a kind of quasi democratic society. Didn't quite work out that way.
You never know when a strong man is going to take over a country, even one that is moving towards Western ideals. So tell us a little bit about the work you do. Focusing Capital on the Long Term or FCLT.
So this is a group that brings together a set of asset owners, meaning like pension plans, some asset managers, and actually some companies. And the question is how do we in the public markets and in the private markets, how do we get investors the whole ecosystem focused on the companies focused on making money over the long term. Our financial markets, with daily marked to markets, do encourage a lot of very short term thinking. Companies are very
focused on the next quarter's earnings. How do you get companies investors, asset managers to think years and years into the future, and how do you set up incentives to achieve that. That's what the group does.
It seems like there are thousands of C level executives and millions of people running businesses. So the question is, you know who's your audience. If you're a tailor swift, your audience is global. If you're running a mid size publicly traded company, well, your audience is much more narrow.
Well, there's a couple different angles can go in this start. If you're basically saying like, there's lots and lots of people in commerce who are making money at the upper echelon, including with stock options, as value creation happens within the stock market, So I think that's true. I think we just have to step back and like, how much do we think that the most success for people in a society should be able to take home. It's an open question.
And there's a lot of moving parts to that. It's long dated stock options versus some shorter term stock options, it's broad tax policy. There's a million moving pieces there, and I think generally it's a much longer conversation that you and I want to have today. But I don't believe we disagree. I think we both think this is a really complicated issue.
Is complicated. I think stock options are part of it. I think having restricted stock units that basically tie you to the actual stock price, even so it's always in the money, is important. And I think we also have to remember that anything that ties people to long term value creation is ultimately in the interest of the shareholders. It's probably also in the interest of the employees and
in the communities they operate. The danger is when you have short dated trickery from compensation structures that aren't long dated. That's a place where I think, actually, as an investor, need to be careful.
Yeah. Absolutely. Let's talk a little bit about I shares, which I have argued could be the stealthiest and greatest corporate acquisition of all time, certainly relative to the cost. So tell us a little bit about the division I shares and index investments that you were running from twenty eleven to twenty nineteen when it's growth exploded.
So if you go back to twenty eleven, what you'd see is a world where the ETF, the exchange traded fund, which is nothing other than an index fund, bundled up as a stock was a small part of many people's portfolios. It was small in or non existent in most wealth portfolios. Most advisors weren't using ETFs. Most institutions weren't using ETFs back then somewhere, but most weren't. And what happened over the coming decade is pretty simple. Two forces drove the
growth of ETFs and the ice business. The first was low cost investing. The basic recognition, as Warren Buffett has said quite publicly, most people are probably going to be better off just buying the S and P five hundred, and the cheapest way to do that is buying an I share, not what he named another product, buying a simple ETF that gives them access to the capital markets
at a low price. The second force, and this is much more inside baseball and technical, but is actually really interesting if you're in the capital markets, is that it allows you to trade risk between a buyer and a seller without an investment bank being in between. So the market that has been revolutionized by the ETF, it's actually not the equity market, because that actually agency trading on exchanges has been here for a long time. The market
that ETF's revolutionized was the bond market. The bond market was always an over the counter market where you went through a dealer always. And what the ETF does by bundling up risk in effectively like a set, is you can sell that set of bonds to somebody else out there in the world who wants that risk, but not
have to go through a bank. And what that means, especially is that in times of stress or as banks get smaller and smaller as they are in their trading books, what that means is you can trade risk efficiently with a transparent price on exchange in a way that fifteen
years ago was literally impossible. So it was those two forces, the securitization of risk in bundles, combined with low cost indexing, that's driven the Ice Shares business to three and a half trillion dollars today, up from about three hundred and fifty billion when we bought it when the firm bought it back in two thousand and nine.
Ten x. That's real. That's really quite amazing. So you're talking about bonds, but in my own practice at my firm, the fascinating thing is the superiority of ETFs to mutual funds, especially in non qualified accounts. Taxable accounts because you get these phantom capital gains from mutual funds that you don't get in ETFs. And we found our best practices are mutual funds are great for four oh one k's or iras or any tax deferred vehicle, but for a taxable portfolio, it's hard not to go all ETFs.
Fair point very that's a thoughtful observation about the tax efficiency of the ETF. So one reason that people that buy ETFs is they're cheaper than a traditional mutual fund. Sometimes there are great mutual funds with great managers, and they may be worth holding on that basis alone. But generally clients have shifted out of active mutual funds and they moved in dtfs because they get better value for money. But you're getting at is that you also avoid paying taxes.
You postponed paying taxes effectively until the moment that you sell. The way it basically works is along the way with the mutual fund, you're paying all the taxes incurred by the underlying PM. Underlying portfolio manager he or she is generating the tax gains or losses, and the gains is what we're worried about. They come through and you pay them that year, as opposed to if you're holding them for fifteen twenty years, you pay the capital gains when
you ultimately sell the fund. The ETF takes those gains and puts it off to the future. And of course there's always the happy story where you die and your basis gets stepped up, so joke, you don't want it.
So arguably you're compounding more in identical ETF versus identical mutual funds.
And in theory if because of the tax bass step up at death, ultimately you may be limiting all those capital gains to boil it down. You don't get those annoying capital gains charges at the end of the year for a fund you didn't buy or sell.
Right, you recontrol, take control over the selling and the timing of.
The timing of the taxes.
So I totally appreciate what you were saying about the bond side, and towards that ends, Blackrock has become one of the biggest bond trading shops on the street, the bond side of black I know most people think of ey shares, think of equities, but you guys are every bit as huge in bonds as you are in stocks, We do.
A tremendous amount in bonds in ETFs. We do it in active strategies, which are still very popular, and we actually manage huge sums of money for institutions. So there'll be huge insurance companies that will come to us and say, you know what, we think it might be more efficient for you just to manage our balance sheet for us the asset side. So we'll take over the entire balance sheet and manage all the bonds, the corporate bonds, the treasuries,
the agencies that sit on those books. All that gets managed at a one big central book, and we get maximum efficiency for our clients as we trade, because there's really no other beast on the street that's bigger, and so therefore you can get the best possible returns for your clients.
So, out of the ten trillion that black Rock is managing, how much of that is fixed income?
I'm going to say it's around two to two and a half trillion. I don't know the number offhand, something around that.
Yeah, that's kind of bullpark what I was thinking, Not not too shabby, two and a half trillion dollars.
It's again, remember most of those portfolios are long term portfolio. Yes, that where clients have basically said build a portfolio. Individuals can come to us to actually say, build me a laddered munibook. Institutions come to us and hey, manage a hedge fund for us. So it's a broad broad range of clients. But fundamentally, bond trading is something where you do get economies of scale by bringing more and more together.
The best bond houses tend to be quite large. Our best competitors are quite large.
So let's stay with that idea because you're anticipating my next question. So you're now the largest asset manager in the world, but there are a lot of big competitors in low cost indexing and ETFs. What does Blackrough do to distinguish itself to differentiate itself from other low cost ETF or index providers.
So it's a great question because clients never buy from you because your firm is big. They buy because your product is good. So it's got to be each individual product has to be the best that the client can find. Now, part of that is a brand they trust. So we've reg recently launched the Bitcoin ETF. We've raised about six and a half billion dollars more than anyone else.
So quickly too, in like thirty days. It was amazing.
So why because it's a brand that clients trust. The pricing was also quite attractive. That's another part of what you have to be thinking about always in every product, but especially in the ETF world. And then last, you have to be thinking, how can you help clients build portfolios. Many financial advisors turn to us to help us figure out how to build their overall portfolios for their clients. We'll work with them on asset allocations. We'll give them
what we call model portfolios. It's basically literally a model filled with ETFs, active strategies, RS and sometimes other peoples all in a mix, and it allows them to actually focus on what they do best, which is working with their clients. So that's another aspect of why clients might work with us, which is we help them actually build their own businesses.
I want to talk a little bit about the growth that you've experienced over the past couple of years. A research report out of Morgan Stanley last year predicted in five years Black Rocks AUM would be fifteen trillion dollars. That's a fifty percent gain, pretty heady numbers pretty substantial. How do you get there? Is this by growing market share? Does the overall pie get bigger some combination? How do you fulfill those heady expectations?
You start by recognizing how small we are relative to the universe. You talk about ten trillion dollars. I'd actually think in terms of revenue. Revenue is where you're getting client's attention. Okay, we are our only three percent of global asset management. In almost any other comparable industry like sales and trading and investment banking, for example, the leader there would be fifteen or sixteen percent. We're small. We're small fish in a very, very big ocean. So how
do you get there? You recognize one, you're still small. Two, you've got to figure out the products your clients need in every individual market, and it differs. What clients want to buy in Swetzowan is not going to be the same as what they want to buy in Tokyo. And Third, you figure out how do you bring the strengths of the firm, our knowledge for global brand, global economies of scale all together to serve clients. How do you figure that out and yet make each client feel like she
or he is important? As an individual financial advisor or a pension plan or serving well fund.
So that's the trick. So you sound like the head of global client business, I hope. So, so what's a day in the life of the head of global client business at Blackrock? Like?
So, the passions I have are the things that make me get up in the morning. Pretty simple. I love seeing clients, I love seeing teams, and I love working on problems that are really pretty interesting. So what I mean clients I sit down, for example, with the chief investment officer of a big global insurer. I can sit down with a financial advisor. I might be sitting down with somebody running even actually interesting competitors. A lot of competitors use our products. I learn a lot from talking
to them. I actually think the top job of any executive is actually building great leaders behind him or her, and so actually spending time in meetings, but also individually growing them as leaders, helping them make great decisions. And then the last part is something I'm very interested in, is investing in the transition to the low carbon economy. What I mean by that is for various forces macroeconomic,
microeconomic policy, consumer preferences. We are slowly decarbonizing our economy in the United States, in Europe, in Japan, actually also in China. And what's happening is that day by day, small investment decisions are moving future hydrocarbon expenditures in other words, spending on oil and gas in some future state, moving it today in terms of capital investments. And that's where we come in. Clients need us to actually invest capital
into the transition. Long data cash flows that they can get that will pay for twenty years, thirty years for their pension plans. How do we help them invest in the right products, the right investments so they can get that money and meet their own financial objectives. And this transition to a low carbon economy is one of the biggest trends in the whole investment world. It will consume trillions and trillions of capital doing it thoughtfully consciously. It's
why we just recently bought a company called GIP. It's a big infrastructure firm. It's our biggest acquisition in fifteen years. Because we see this trend of clients investing in infrastructure, especially around this transition to a low carbon economy. That's the place where we want to work with clients. I love that stuff. I love figuring out new products, new teams, new things we can do with clients.
We're going to talk about mega forces in a little while. That comes up in that space. I want to talk about some of the trends that have been changing that have to be a challenge for your clients as well as Blackriduck. How do you help clients navigate market environments like we've seen so twenty twenty two we have inflation, stocks and bonds down double digits. Twenty twenty three we have disinflation and the Nasdaq is up fifty percent, the
SMP is up twenty five percent. That throws a monkey wrench to a lot of people's thoughts about the future.
So we've just gone through the biggest rate shock of our professional careers. If you live and work in finance, the first principle, the most important thing is what's the discount rate? What are the cash flows in the future worth today? That's what interest rates are. As that transformation happened in the last couple of years, where the rate shock and from central banks is inflation served. That has
totally altered client's portfolios. In twenty twenty two, stocks and bonds we're both down about twenty percent globally, huge drop. What that led to is clients going into almost a shock. And actually, for the last couple of years, if you look net global clients, global investors have at least from what we can see in funds, actually invested negative amounts and equities. Now somebody obviously bought some, but broadly the
broad investor has actually reduced his equity position. He's even he's moved some into ETFs, but a lot into cash, a lot into cash, And so where clients have moved is in cash and saying when do I come back in now? Ironically, actually the market was up SMP was up hugely, largely fueled by the AI boom in the last year. So many clients of ours miss that. The question is how do you help them? It's the biggest challenge of their wealth manager like yourself faces. How do
you help clients stay invested when they get afraid. That's one of the biggest questions we have is how do you work with them and figure out when to be in the markets and when not to jump out of the markets because they're a little, little, little nervous.
Let's talk a little bit about the blackrock investment Institute which public wish this wonderful bit of research on the mega forces that are affecting everything, big structural changes that affect investing now and will be felt far off in the future. This creates major opportunities and risks for investors. Let's talk a little bit about this. What led to looking to identify mega forces?
Barry? If you look around anywhere, every newspaper, every bank, they'll give you lots of guidance on stocks up, bonds down. Who knows, maybe this stock op whatever. The question is for a long term investor building a portfolio, where are there underlying economic forces that are shifting where value is created in an economy? Can you keep an eye on that. That doesn't mean you'll make money on it, because you have to actually also think it is already priced in.
But understanding what are those big drivers? And we came up with a few that are driving the world. Clearly, central bank activity is huge, that's not what we mean. What we mean is something that has a ten to twenty year horizon. So we're talking about the aging of
societies all over the world, huge impact on productivity. We're talking about the transition to low carbon economy and the huge capital sums that will be involved as we ultimately move a lot of future expenditure on oil and gas to actually investing in things like heat pumps and batteries.
Today we're talking about dbanking, and we're talking about here banks actually getting smaller, their balance sheets getting smaller due to regulation, especially Basil three, and therefore actually where does that credit go? And we're talking about artificial intelligence, which we do see as a transformative technology that ultimately will give the rise of new industries. So these are the
kind of forces where does capital go to work? And then also geopolitical fragmentation as we see supply chains moving away from high dependence on China to an minimum having an alternative in some cases actually saying let's invest much closer, like in Mexico, to a core market like the United States. These are forces that are actually like transforming our world, but they're day to day. They're not shocks, they're step
by step. So when we talk about megal forces, we're talking about things that are changing our world's day to day. But you might miss it if you just pay attention to today's headlines.
A little bit of Hemingway's suddenly than all at once right, You don't see it happen until hey, what look, how the world's changed.
That refers to bankruptcy. Happily we're talking here about long term capital appreciation.
But yes, it refers to bankruptcy. But it's apple to so many other things. I have so many examples where you don't notice the change and then suddenly you're in a different place.
I think the toughest thing for a reader or a listener to media like this is sorting out what is today's hot topic that tomorrow people won't even be talking about, and where are there underlying seismic shifts that other people haven't paid a lot of attention to.
The late great Laslo Burini used to put out this bound book of newspaper headlines and stories from the previous year, and things that you read in the moment that are so emotional and so important. You look back a few months later, it's ephemeral, empty nonsense. You just it was the emotion that grabbed you, not the line underneath it was. It's one of my favorite publications because it forces you to completely reevaluate how you think about things. It's really amazing.
Sometimes I think of markets like Dory the Fish with a very short term memory. Dorry can't keep much in her head at any one time. Markets are a bit like that. They're very focused on rates right now. Two years ago, no one was talking about rates. Suddenly everyone's talking about rates. That's the nature of markets. I think it's relevant to be thinking about You have to know
what's happening in the flow. But a long term great investor is thinking about the trends that are a little bit below the waterline, that actually fundamentally are where the boat is moving. The current is shifting the entire fleet.
Right. You can't be a dog thinking squirrel, which is often how the markets react. It's like just total squirrel, right, squirrel, it's just solely distracting.
You talked about distractions. I think that much of the investment universe is set up to actually attract, like look at the shiny ball. Look at the shiny ball, because a lot of long term investing is actually not that interesting day to day. It's putting aside a diversified portfolio and holding and not freaking out if you do that over the long haul, especially in US equities, has worked out pretty well.
To say the very least. Let's talk about some of these ten to twenty year mega forces, starting with digital disruption and artificial intelligence. Where on earth is that going?
So artificial intelligence is got to be the single biggest exciting, zesty thing of the day. We've got an active debate inside our firm on this question. On the one hand, artificial intelligence is a generalized technology that can spread throughout the entire economy quite quickly because of the Internet already.
Has I mean, it's been used for so long people and it just didn't see the front end of it.
Well, actually it's already been used from It's been used for many years actually in our own quantitative strategies. So large language models in investing is nothing new, Okay, we and competitors have been doing this for a long time. But how people interact and how we're facilitated by using AI, that is new. We're going to see what the impact is. There's one school of says it's going to completely change the world very quickly, and that's of course why stocks
like in Nvidia have had a huge run. There's another school which says, take the long view that whether it's electricity, the telegraph, the telephone, the airplane, the car, the fax machine, or the Internet. It took decades for these technologies to actually really change the real economy and to actually have a real impact on how people work with each other, how they make things, how they trade. We'll see big debate.
There is a there is a view that actually, while exciting, there is a view that investors are over emphasizing some distant fantasies around AI, when actually the real applications are going to take a long time for companies to figure out. We don't know.
So there's a contingency of people who insists on calling AI a bubble. What would you say to them if you know there they think it's just another shiny object.
Time's going to tell I don't think it's all nonsense. Importantly, we do see the transformation of the economy through AIS a real long term force. When we saw a huge crypto boom a few years ago, are my view was we're in the midst of a bubble. Want to start growing some tulips. Like the Dutch in the seventeenth century,
this is different. The question is when do the cash flows start moving for data centers, for processing manufacturing, processor manufacturing, when is start getting applied in real businesses and how they change their own operations. The answer is actually data centers are booming everywhere. People are trying to figure out how to use these chips. Whose businesses will rise and fall? Will firms like Bloomberg or Blackrock be disrupted by some
attacker who uses AI as an attack vector. We don't know. We'll see. So there can be a lot of early enthusiasm, maybe even hype, But I wouldn't call it a bubble. To me, a bubble sounds like you're selling tulips. I don't think that's what's going on here. We're seeing a transformation. But we've also saw with the railroads in the eighteen forties, fifties, sixties, seventies that as they started to transform continental economies, all a lot of money was lost as investors got very excited.
So it's a real economic transformation. What are the right investments that's a much trickier question.
In people sort of lose sight of that, whether it's automobiles or internet companies. Even if you know, hey, this is going to change everything, it doesn't mean you know which is the company that's going to be the winner from it.
You don't know which company, and you don't know when to buy. The railroad was obviously a transformational technology, clearly, I don't think anybody really disputed that. The question is how do you make money from it? That's not so obvious. Going back to the dot com boom, the Internet was a transformational technology, but many of the companies that sprouted
back then were complete failures. On the other hand, there was one small company called Amazon that did actually manage to get out of just book selling into something slightly larger.
So sometimes it's just bad timing. Pets dot Com famously blew up pets dot Com, but a few years later Chewy is doing great, and it's it's essentially a variation of the same business model.
The tough part here. You can be really right about the long term trend, but if you get in at the wrong time, too early or too late, you can miss that. That's the tricky part in what we do. It's also what makes it fun.
So let's talk a little bit about geopolitical fragmentation and economic competition. You know, obviously Russia, the EU, China big aspects of the global economy, but what about South America or Africa, which seems to have been left behind in the economic competition and when you talk about fragmentation, what does that mean in terms of global trade and relations.
So for global investors, the big question is how do you build a global portfolio in a world that is fragmenting. Five seven years ago, even as recent as that, you built a global portfolio, and you could be an individual financial advisor, an individual investor, or a giant sovereign wealth fund. You built a global portfolio, sifying, looking for opportunities everywhere, and you didn't think much about political risk. Today a global portfolio has to put political risk at the center
of his or her portfolio. You've got to be thinking, is this market actually too risky for the current price because of geopolitical events, whether it be war, we all live through a pandemic. These are forces that have rent at the globe fabric of global trade and of global investments. So five years ago China, China was the second hottest bell at the ball. First was the United States. Today,
global investors they have no bid for China. Why Mostly domestic issues in China, but also US Chinese trade tensions, technology conflict. These are reasons where global investors are saying, hmm, perhaps I don't want to invest in China. They weren't thinking about political risk five six years ago, seven years ago. Now it's front and center. Not quite as big as as interest rates, but almost there. And so the question is how can you actually invest to make money from this.
We're seeing clients around the world interested in investing in infrastructure and the winner countries who are the winter countries from China's ultimately losing some of its almost monopoly status in manufacturing. We're seeing Mexico, Vietnam, Indonesia, We're seeing India. All of these countries are trying to figure out how they capture it some of that mantle. I think as
US investors looking at mexico's particularly appealing. It's nearby, it is relatively politically stable, and they have privileged access to the US markets and lower cost of production for stuff that would otherwise have been done in China. And we're seeing lots of clients want to invest into Mexico to actually participate, whether in infrastructure or manufacturing. We're seeing companies wanting to move investments there because it's close to the Great American market, but it's not China.
So I'm kind of fascinated by outside non domestic Chinese investors, so US investors' European investors investing in China public stocks over the past twenty thirty years, returns haven't been great. At a certain point, it's going to become attractive, assuming outside investors are not treated as second class citizens with the B shares the way they have been over these years. But at a certain point China is going to become a screaming by We're just noway near that point.
Yet, So by definition, you never know when the bottom is what i'd say is and perhaps this is a by signal. When I talk to global investors, sophisticated investors with major investments in China, they're scaling back, They're not scaling up. When I talk to our own teams in China, the general mood there is pretty dark. Again, It's mostly dark for domestic reasons. Property crisis, the wealth effect of declining property prices on consumption, consumer sentiment is terrible, and
you see increasing concerns for young people getting jobs. These are actual things that dampen people's investment appetite, and they tend to actually go to cash or bank deposits, and so what we're seeing is very little bid for For example, Chinese equities from either inside of China or globally. However, at some point the falling knife hits the floor, and
the question is when do you buy great question. I'd keep an eye as a global investor on that question because at some point China does actually become an attractive buy.
So you were hinting at demographics, Let's talk a little bit about that. We see not just China, but Japan and Europe with flat or negative negative growth rates. The United States growth rate has slowed but is still barely positive. How do you look at aging populations around the world? What does this mean for investors off in the future.
So everywhere that is rich, women want to have fewer kids, even in the United States if you take outgration, barry or actually have a declining population. And in countries that don't have immigration or have much lower levels of immigration, Japan being most extreme, or South Korea or China, you're seeing birth rates plummet. So, for example, in China today the birth rate is approximately one baby per woman and
replacement rate is more like two point two. So we're going to see a future where China in the end of the century will probably have I'm going to guess fewer people than the United States, because the US.
Population contain by the end of this century.
By the end of this century, we may live in a world where there, let's say, six hundred million Chinese. Do I think there will be six hundred million Americans in twenty one hundred, probably, So we're living in a world where these demographics are changing the long term destiny of nations, where having enough kids is actually like a long term question of productivity of staffing. Now, it's not all bad. If you look at GDP per capita, not just GDP, you'd see that actually the Japanese have done
just fine for the last ten or fifteen years. But it does mean that you've got to look to a future where not only will there be fewer kids per adult, but also where robots are going to have to pick up some of the work. That's why I think robotics is being driven by demographic change. Is actually one of the most attractive places for long term investment, because one thing we know is demographics is destiny. If you have fewer babies today, you're going to have fewer workers tomorrow.
This is a huge force we have to look at as relative among nations, there are some countries that still have demographic growth. India is the most prominent among them. Africa I put in a different sub Saharan Africa is in a different category because there's still continued population growth that's well over above replacement rate. The problem is there isn't actually any feasible path for economic growth to match that.
That's a problem for the future. But for investors looking at the companies, the robotics companies that will serve the elderly Japanese of the twenty fifties, my peers I hopefully of that age. Who are those companies? How will they make money? I think that's a really interesting trend. The second healthcare healthcare for all these folks. And then also which societies figure out how to either attract through immigrants or through automation or able to elevate their productivity and
which ones can't. Will actually help distinguish countries that actually have economic growth those versus those as shrink.
So let's talk a little bit about the future of finance. We're in an unusual world. So not only did zero interest rate policy and QE end, but at the same time we've seen the rise of decentralization, all sorts of interesting apps taking place in the world of finance. I could venmo you money without a bank in between. That was unimaginable. I built a car in South America and I was using remitly to send cash to Columbia. That was unthinkable five ten years ago. You couldn't do that.
So you talk about as one of the five mega forces the future of finance. Where do you see this go and how does private credit fit into that?
A couple of big forces, one of which is the relentless growth of the capital markets relative to banks over time. This is largely different by regulation. Basel three an arcane term, but it just means that banks have to hold more capital. One of the things that regulators did after the financial crisis to say, yeah, we're not letting that happen again, and actually I give them big credit. Most big banks
hold lots of capital. A's where despite an energy shock, a war in Europe, and a huge rate shock, the biggest in forty years, actually no major bank failed.
Of that.
We had a few smaller banks that were underregulated in the United States, but the large global banks which caused such a mass speck in two thousand and seven and eight actually came through fine. The problem is the credit that they create is gradually having to move some or else.
It's moving into the capital markets. And one of the winners in that is what I would call private credit simply instead of actually in bond form, we're talking about a pension plan, an insurance company, or an individual investor, a wealthy individual investor who's invested into a so called private credit strategy, which simply means lending money out to some ultimate user, usually a company, and that money ultimately is a replacement for what otherwise probably would have been
a bond. So insurance companies buy a lot of this. And where's why is this happening. It's because these loans are coming off of bank balance sheets and they're coming into this private credit strategies. This is going to be the big driver of the next five years of how the bank shrink and the capital markets grow. Private credit, I think your payments is something big. It's not where we directly participate as a firm, but payments, I think is the place where you have massive revolution. And you
already mentioned the possibility of inter country transfers. That that's a place is massively inefficient. If you think about all of those immigrant workers, legal immigrant workers who are actually remitting funds back to their home countries, many of them
are getting scalped on the way out. Imagine a world where instead of paying seven eight percent to some chain of intermediaries, instead they're actually paying almost nothing directly to transfer the funds back to their parents, their families, whatever. I actually think that the payments efficiency, that's a step forward in human liberation.
So our last question on mega forces is, let's get into the details on the transition to low carbon. How's that going. I know that a lot of the solar panels and wind turbines are made in China. We're not really competing there, but it does seem we're making progress with coal and other things. Tell us about the transition to low carbon, it's.
Pretty simple, Barry. If you look back at the energy system, what we're seeing is is because of the simple efficiency of renewables and batteries, just the simple efficiency not doing God's work, just simply efficiency, lowest cost production. We're seeing that coal plants are coming out of production very rapidly here in the United States, a little bit less quickly
in Europe. We're seeing them being replaced by a mixture of natural gas, which is lower carbon emitting, and batteries with wind and solar, and this combination is actually just simply cheaper than operating a coal plant. That's why coal plants, which are very, very carbon intensive, are disappearing. We're seeing in transport cars that as evs get more and more efficient, that they actually and the costs of batteries drop step
by step. We're seeing, for example, that in China today more than twenty five percent, almost a third of all cars sold last year, we're actually evs.
Wow.
Europe is trending in that same way. US actually charges few lower gas tax and so actually it's slower here, but it's still growing. So what you're seeing are all these steps that are actually moving hydrocarbon intensive activities in other words, things that burn or use oil and gas, and actually shifting things to something that is electrified and lower carbon. So that transformation consumes a lot of capital.
Investors around the world want to participate, but it means building pipelines, it means build deepening the electric grid, putting up battery storage were actually built. The largest battery in the world is in Australia. It's a grid stabilizer outside of Sydney. We're working with clients who want to invest in startup companies, growth equity companies to build something like a heat battery. I don't even know this existed. A heat battery is for industrial processes often use a lot
of heat. Typically, the only way you could do that is burn oil or gas right there to get that kind of intense heat, very hard to do with electricity. A heat battery takes the heat generated through renewables electric electricity coming in converted into heat stored away as a heat sink, and then releases the heat as needed directly into industrial processes. We just invested in a small company
that actually builds these batteries. If somebody can figure out how to do that at scale, perhaps this company, it'll actually transform a whole bunch of industrial processes that today have no alternative to using hydrocarbons. And one of the advantages, especially for non Americans, because America has a lot of
oil and gas. If you're a European or a Japanese, if you can find ways of actually reducing your dependence on imported oil and gas, you increase your national security so these are all coming together as forces that are decarbonizing the economy and investors can actually make a lot of money along the way.
Last decarbonization question. We all always focus on transportation because it's so visible, but what is that fifteen percent of our emissions and private cars are half of that, so really, you know, even if everybody goes ev great at seven percent, what about agriculture that seems to be a really big source of carbon emissions and other problems that have environmental impacts.
Very super astute question. Agriculture is the most underappreciated aspect of where we as a society emit lots and lots of carbon and methane. So the question is how do you decarbonize agriculture massively fragmented by definition fields for pasture or using up land that otherwise would be for trees or other carbon stores. A lot of people encourage eating less beef. Frankly, I find that hard love beef, but
that is one piece. What we're finding is there are ways of capturing the methane emissions from cows, for example, and actually using those methane emissions to actually create energy elsewhere. So we've invested, for example in a company that picks up cow chips. All right, Long Island, we didn't have
cow chips, but that means cow dung. And you actually figure out how do you actually take that cow dung, pick it up basically a nuisance for the farmer, turn it into a biomethane, and then ultimately you can use that methane that otherwise just simply would have admitted you burn it to create electricity, to create heat. That is an example of the ways that we can decarbonize agriculture. But you're absolutely right, agriculture is the trickiest part of the global economy to decarbonize.
So let's jump to our favorite questions we ask all our guests our speed rounds, and we'll get you out of here in a couple of minutes. Starting with what's keeping you entertained these days? What are you watching or listening to, either on Netflix or podcasts or whatever.
So I am listening to Dune, the nineteen sixties novel by Frank Herbert, because it's still one of my favorite books, and Dune Emperor is coming out in just a couple of weeks.
So I didn't know think of you as a sci fi head.
Is that your I confess to a big science fiction and fantasy enthusiasm.
Tell us about your mentors who helped shape your career.
I think my biggest mentors were Peter Fisher, who was my boss at the US Treasury. Sue Wagner is one of the founders of Blackrock, and Larry Fink has actually played a pretty big role in kicking me around and growing me.
Let's talk books. What are some of your favorites. What are you reading right now?
Well, my favorite business book of all time is a book called My Years with General Motors by Alfred Sloan. He's the man who actually really built the modern General Motors and actually really the modern global company. I'd recommend reading that for anybody, anybody interested in business. I am met reading Dune, and I have to say Pride and Prejudice one of my favorites. Reread it during the pandemic. Always great that, mister Darcy.
We're down to our final two questions. What sort of advice would you give a recent college grad who is interested in a career in either investing or finance.
Be curious about the world. Read the Economist, learn about something bigger than the microtechnical thing you're being asked to do long term. That pays off in having a broader mind, because fundamentally, fans is nothing other than thinking about the future and the cash flows in the future.
And our final question, what do you know about the world of investing today you wish you knew thirty or so years ago when you were first getting started.
Investing in public markets involves two separate mental moves. The first is thinking about where ultimate long term value is going to be created and then second thinking about who's going to pay for it tomorrow, and those are very different things. The first is really a private investing question.
The second is what makes great public investors great. And understanding that distinction, I think actually is we talk often in investments as if actually it's just the first one, but the truth is that second one is actually what drives a lot of portfolio returns when you get in and out of security. Understanding that from the beginning, I think that would have been helpful to understand better.
Huh, really really interesting. Thanks Mark for being so generous with your time. We have been speaking with Mark Weedman. He is Black Rocks head of Global Client Business. If you enjoy this conversation, well check out any of the five hundred plus discussions we've had over the past nearly
ten years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast, and be sure and check out my new podcast, At the Money, short ten minute conversations with experts about issues that matter for your money, making it, spending it, and investing it. At the Money. You can find it in your master's and business feed I would be remiss if I did not thank our crack team that helps put these conversations together each week.
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