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Dr. Jean Boivin, Head of BlackRock


MODERATOR:  Good afternoon, everyone.  It is a pleasure to see you in person in the Foreign Press Center.  It’s a pleasure to introduce our briefer today, Jean Boivin, the head of the Blackrock Investment Institute.  Today’s briefing kicks off our annual Wall Street Series.  Mr. Boivin will provide his outlook for markets and the economy in 2023 and discuss key themes he is watching in the year ahead and what it means from an asset allocation perspective.   

This briefing is on the record and the transcript of his opening remarks will be provided.  The question-and-answer session will not be transcribed today.   

As a reminder, non-U.S. Government guests invited to brief at the Foreign Press Centers offer their views in a personal or organizational capacity, and do not necessarily represent the official policy views of the U.S. Government.   

Following his opening remarks, there’ll be a time for Q&A and I will moderate.  If you can raise your hand if you have a question during the Q&A session, we will come around and offer you a microphone.   

And with that, it’s a pleasure to introduce our briefer today.  Over to you, sir.   

MR BOIVIN:  Great, thank you so – thank you so much.  It’s a pleasure to be here.  Is that glass of water intended for me?   


MR BOIVIN:  Just to check.  Very good, thank you.  A pleasure to be here in person.  I had the chance to – I think to do an event like this two years ago virtually, but it’s – I’m glad we are physically here now.   

So I’m going to spend a few minutes just to lay out the global outlook, and how we kind of see the frame for, I mean, this year.  But I think there’s a story that is happening that is a bit more fundamental and structural in nature, which I think is – goes beyond just this year.  So we think we have entered somewhat of a new regime since 2020, and the old playbook of the last 20, 40 years might not apply when it comes to investment and asset allocation in that context.  So that’s kind of a overarching theme that – or (inaudible) conclusion.  

But when we think about 2023 and how – what to pay attention to, there were three themes that were at the heart of our outlook for 2023.  The first one was what we call sizing the damage, which I’ll say a few words about this – quite a bit of few words.  But this is really about trying to gauge how much damage will be needed to bring inflation down globally, and that is to us one of the most crucial questions that will determine opportunities across risk assets, but in particular, like, when you think about equities versus bonds.  So sizing the damage was the first – the first key themes – key theme.  

The second, more from an asset allocation perspective, is that we believe that we need to rethink the role of bonds, government bonds in particular but bonds more generally, in portfolios.  And there are going to be two angles to that, which I’ll come back to.   

And then finally, the last theme was that, despite the fact that 2023 will be a year about inflation coming down – and it has come down and a lot of excitement has been happening on the back of this inflation coming down – the – our third theme was that of living with inflation.  So we’ll see a big drop in inflation, we think.  That’s going to be – that has been, like, really notable already.  But it’s not a given that inflation will go easily back to 2 percent or to the inflation target of central bank.  Our view is, in fact, it’s going to settle for the next few years maybe somewhat higher than that, despite all of the intent to bring it to 2.  And a third theme is – this is something we need to prepare for and has implications for asset allocation. 

So these are the three themes.  And if I spend just a minute, I mean, underneath that there is a – there is this kind of a more fundamental change in regime that we think is happening.  We have been saying, I mean, for a few – around a year now that – or about a year now that starting with the 2020 – 2020 and the pandemic, and a bunch of other factors and forces that happened to be turning at the same time, in our view, more or less coincidently.  We see a clear demarcation, a clear break with the period that certainly characterized the 20 years prior and maybe even all the way back to the ‘80s.  And that period has been labeled by many as the “Great Moderation,” this period where we had been able, in developed economies but I think globally, to reduce the volatility of both inflation and activity and growth in a very material way since the early ‘80s.  The Great Moderation had been dated to start, like, in 1984 or thereabouts, and had been, like, for many years a debate, which in my previous career an academic I took part of – around the turn of the century, and it was around what is the reason for that Great Moderation?  What was the cause of this Great Moderation?   

And the main – I think the main consensus around what allowed us to achieve this feat of very low volatility, both in terms of growth and inflation.  The consensus view was for a long time that it was due to good policy, the fact that maybe in the aftermath of Volcker, Paul Volcker in the U.S. and other central banks embarking into a regime of inflation targeting, we had to figure out how to conduct monetary policy in a better way with clear anchor on inflation, and that had allowed economies to be more stable.  And even the GFC, the Global Financial Crisis of 2008, was seen as – despite the size of the shock and environment that remained in the end pretty stable, and where inflation was never an issue.   

For the last – the years that followed the global financial crisis, we have come to believe that inflation was actually dead, was actually a problem to bring back up – the target – and very difficult to envision a world where we’d have to worry again about inflation.  That was only – it became more and more entrenched over time.   

So we think with the 2020 – a combination of factors have been happening, which are leading to – for us, to a different look at the past 40 years of the Great Moderation.  And that different look is that maybe good policies has been part of the reason for why we managed to stabilize the global economy.  I think it has been playing a big role, but that’s not the only thing that has happened there.  It was a period characterized by a very steady growth in production capacity across the world, very stable growth year after year driven by globalization, integration, exploiting efficiencies of global supply chain, deploying production across the world, and that allowed to increase production year after year at a pretty steady pace.  And fluctuation in this environment during a period were mostly driven – were essentially driven by fluctuations in the demand side of the economy, fluctuation in spending by consumers and companies and investment, and those being subject to a period of exuberance, sometimes periods of – where sentiment was souring.  But that’s where the fluctuations were coming from, demand around a pretty steady increase in production capacity.   

In an environment like this, policy played – good policy played a role for sure, but it’s actually a lot easier to conduct good policy in an environment that is dominated by these type of shocks.  And so we’ve seen, as a result, people have been coining that “the Divine Coincidence,” the fact that you can stabilize both inflation and growth at the same time by conducting policy or using the interest rate as the only tool.  And then when you face big shocks like you faced in 2008, then whatever it takes is the right approach.  You do whatever it takes and you don’t necessarily have to worry about overdoing it in terms of inflation because what you’re doing to support the economy is also helping bring inflation back up to 2 percent.   

So long story, sorry, but I think it’s important context for where we are now, and we think it’s more fundamentally changed.  Three big forces, I think, are very different now.  Pandemic itself has been a big supply shock.  And when I say it’s been a big supply shock, of course, like, we’ve locked down – shut down economies across the world.  That’s shutting demand and supply at the same time.  But the supply aspect, the supply limitation of the story is really that we were – we saw that it was a lot easier to restart demand than it is to restart production.  And that created this massive mismatch initially that created a burst of inflation.   

The second big trend is that globalization is not this like steady one way direction now.  It’s – we use the word rewiring of globalization, but I think the key thing is that two key aspect of it is that this is not simply anymore a story about efficiency, but it’s a story about finding resilience in productions – in global productions supply chain, resilience in the ability to shift production if needed because of pandemic, and geopolitics being – playing a role in that as well in terms of now the consideration that goes beyond just the efficiency driver.   

This means that – I mean if you’re building efficiency – sorry, resilience to international supply chain, this is mean that if its not only about efficiency, it means higher costs of production.  So this is another way of saying that supply production is a constraint as opposed to a tailwind like we’ve seen over the last (inaudible). 

And the last piece of the – this different world is that we are seeing also an energy transition that will take a direction, but – the simple point of it is that if it was cheaper to transition, probably a transition would happen much more naturally than it actually is happening.  So I think at least for sort of time being, transitioning will mean an energy mix that is going to be higher costs and that’s also an higher cost of production.   

So these three kind of (inaudible) phenomenon are – means that like this big struggle the last four years has been shifting, and we have on top of all this demographics.  And it is interesting, coincidentally, that the pandemic has arrived more or less at the time where the Baby Boomers were accelerating their shift towards retirement might have been accelerated itself by the pandemic.  And the fact is, however, that we’ve seen big democratic – demographic shift in the U.S. certainly, but elsewhere, that is also meaning fewer people working – another production – strain to production.  And that is very real when you look at labor force participation in the U.S. that has not recovered back to the pre-pandemic level, and we don’t expect it to recover.   

So that is leading me to the price of the damage.  So in an environment where inflation is being driven more – mostly by these kinds of limitations on the supply side, if you try to control inflation for central banks, that’s going to be much more challenging and difficult.  You don’t have this divine coincidence anymore where your – you’re going to deal with the inflation problem at the same time you deal with the growth problem.  Right now, what is abnormal is not the fact that demand is excessive or spending is excessive globally.  I mean, we’re basically back to the trend we would have been pre-pandemic.  So there’s not exuberance in the spending behavior across the world in our view.  What is very abnormal is that we cannot sustain for the production side this level of demand that would have otherwise been completely normal before.  So we have this production bottleneck and strains in labor supply being a bit part of it that are preventing us from being able to produce what would have been before a normal level of production without creating inflation.  

So if we don’t have – if we don’t want this inflation, it’s going to come at a greater cost, and it means we need to bring back activity down down, contract it down to a level that is more in line with the new lower level of production capacity that we currently have globally.   

So solving the inflation problem comes with a bigger trade-off.  It’s either we live with some, like, more inflation than we’ve been used to, or if we want to bring inflation back to 2 percent target as we have been used to before, it would require accepting contraction of activity and more damage as a result.   

That’s pricing the damage.  We haven’t seen the damage yet clearly in the U.S. and elsewhere.  We’re seeing, like, quite a bit of resilience.  I mean, people like to talk about resilience of the U.S. economy and elsewhere, and that has led in generally to quite a bit of hope that we could maybe have a soft landing where we can see inflation coming down eventually to 2.  We saw some signs of inflation starting to roll over, and at the same time without any meaningful economic pain.  We still don’t believe that this is realistic or in the cards at this stage.   

So – and the way we see it, in fact, is that inflation will not come down on its own to 2 percent.  In order to come down, we’ll need to slow down the economy and have it – contract it.  The more it’s resilient in the near term, the more we’ll have to do to contract it to bring inflation down.  And so that brings a different lens on how to look – we look at the incoming macro data.  Typically you see good employment numbers, you see good growth numbers, you say that’s good for markets and the economy is doing well.  In this environment, that means it needs to be looked at through the lens of inflation, and good macroeconomic news means more inflation, means more from central banks to do and is just delaying the kind of damage that will need to come.  

So that’s the way we look at the world this year.  So that leads us to a couple of implications.  When we’re thinking about central banks, we think the lens – we take it – there are big two phases for central banks on how they’re going to approach this.  The first one will be playing Volcker, if we can put it this way, or whatever it takes to bring inflation down.  That’s the kind of regime phase that we’ve been since last year, where the message from central banks more – generally speaking has been all about bringing inflation to 2 percent.  I think we’re still in that regime, and it’s just really about – I think from the central banking community it’s really about, like, the cost of losing control of inflation is way higher than creating a recession, and while they would like to avoid a recession and they speak as if they hope it’s going to happen, they’re going to be more comfortable with having a recession than being held responsible for having – creating a big inflation problem.  

So – and I think, like, there’s an historical precedent to point to and to say, like, the big benefit that Volcker did to the – to the U.S. at a time that created the basis for prosperity for decades after.  This is a very strong kind of message and I think is the first part where they start. 

I was also been calling that the politics of inflation, because inflation is in everybody’s mind and that, as a result, means that appearing to respond to this concern that everybody shares is also a pretty powerful force that leads them to be into this “whatever it takes” kind of a phase.   

At the same time, we don’t think it’s going to be sustainable to be on “whatever it takes” forever through this until inflation is back to 2, because the damage will become apparent to our mind.  There’s a couple of key damages.  I mean, we were seeing the most rapid rate high campaign since the 1980s.  Real rates – right, real rates – once you adjust for inflation and you look, like, in the real term, the real rates we’re facing, we’re back to levels we haven’t seen since the ‘80s, even now already.  So that’s going to create some significant headwind at some point.  There’s quite a bit of debt out there.  I mean, at some point the debt servicing will be a real phenomenon.  We’ve seen the real estate market clearly responding very strongly to what we’ve seen as the rate hike.   

And the lag effect of these rate hikes are just barely starting to be felt.  We shouldn’t have expected to see much impact until now.  Now it’s going to start to be a time at which we’re going to see that.  And that’s combined with the consumer in the U.S. that was benefiting from a big cushion from the savings that have been accumulated during the pandemic, but has been eroding those pretty quickly.  And at that pace, this is something that will be basically back to – or the (inaudible) will have disappeared at some point during the course of this year, at the time where we’ll see peak impact of the past tightening of monetary policy.   

So that means that I think we’re going get to a phase where it’s going to be a bit more nuanced.  It won’t be whatever it takes on inflation anymore.  I think – we think Chairman Powell in the recent press conference started to stumble a little bit into phase two, where we saw scripted messaging, the prepared messaging that was all about whatever it takes.  This was really phase-one language.  But then in the unscripted response to answers or to questions, then we saw a bit of a daylight appearing, which a lot of market participants have taken note of.   

So I think we saw a glimpse of what the more nuanced phase will eventually look like.  But that was, of course, before we got news that inflation has actually not fallen as much as we thought in the last three months.  The last print showed that it was actually more persistent going forward than was expected by most market participants.  And moreover, we’ve learned that the labor market has been (inaudible) in more than half of a century in the U.S., and we see that in other countries as well.  So that reinforces our view that inflation will not fall on its own.  We’re going to see central banks going farther in terms of hiking.  The damage will become more apparent at some point.  We then get to a more nuanced story, but we’re not quite there yet.   

So put that together in terms of what it means for us in allocation, and maybe I’ll stop – I’ll stop there, given I feel I’ve put already quite a bit on the table.  But what is – what this all means in terms of how we look at investment opportunities in this environment.   

But first, to go back to the theme I laid out at the beginning, so I think we need to rethink the role of bonds in this environment.  The first aspect of this is that we are now seeing yields at levels that we haven’t seen in a generation.  Short-term government fixed-income products can deliver four or five – 4 percent easily, depending on how much risk you want to take.  You can get 5, 6 percent on the – on something that would have been, like, close to zero not that long ago.  So that is making that bond – short-term bonds asset class a lot more attractive, particularly in the context where there’s quite a bit of risk otherwise on other asset class.  So that has been a big theme, I think continues to be – yields are back is kind of the tagline for this.  It’s a pretty real phenomenon.   

The second aspect of rethinking bonds, however, is when it comes to longer-term bonds and their role in portfolio and the role of duration – think of it as a 10-year yield, a 10-year U.S. treasury – they historically would have been seen as a nice place to get refuge, to – or safe flight for safety if you were worried about recession, because typically long-term government bonds would tend to fall, yields would fall, and then they would get some capital appreciation in a world where we see more recession risk.   

That is – that has been the playbook for the last 20 years.  It has worked this way.  If you look at a longer time period, it hasn’t always worked this way.  But it has worked for the last 20 years.  It’s a very well ingrained kind of playbook idea in terms of investment.  But if you look at the last one here, this was a world where we were seeing no inflation problem, and then whenever there was a downturn, central banks were coming to the rescue.  And in a world like this, to mechanically – you have then go from there to yields will fall.  And so that makes sense to own long-term duration bonds in this environment. 

Now, we have to ask ourselves the question:  Is it the way that this is going to play out this time, if we believe our view that the regime is quite different from the last 20 years?  And we think we’re going to see a recession or some significant damage.  But once we see that, central banks will not be in a position to come to the rescue because that damage will be – is their remedy to the inflation problem that they were trying to solve.  The moment they start to walk back from this, then inflation would start to go back up.  So we don’t think we should assume that the central banks will come to the rescue of a downturn or contraction this time around as they would have over the last few cycles.  And moreover, inflation will be on the way down, but will not be a target in this environment just yet.  So that’s going to make it hard to justify easing. 

And then if you look at long-term inflation expectation, they are still very much close to 2 percent.  And I think that’s going to need to be squared with somewhat more inflation.  So all of that means that the role of long-term government bonds in portfolio is more challenge than it used to, and it’s not like something to assume will work the way it has worked in other recession. 

We – so we think big – big opportunities in short-term fixed income, less so in longer duration.  When it gets to equities and risk asset more broadly, given what I just described, I think it should be no surprise that we don’t think – in DM economies equities have been reflecting this hard trade-off that we are – the damage that we think will be needed doesn’t reflect until now the rate path, the rate landscape we’re going to see.  A few weeks ago, markets were expecting that rates would be cut by 75 basis points in this year.  That has been priced out. 

But that was a disconnect that I started to read now that be connected.  But we have – we are just starting to see some adjustment on the equity side as we speak.  But we are underweight DM equities because we think that has more to go.  We think eventually the damage will be reflected at some point over the course of this year, and so we’re ready to turn positive on equities, but not just yet, at this juncture. 

And then this week, we have turned more positive on the EM equity side of things, partly reflecting the fact that, like, it’s all relative – a relative call, right, and DM equities are still challenging our view.  So EM equities benefit for – from a couple of more favorable factors, which is there’s a restart happening in EM economies now, like we’ve had two years ago in DM economies.  China is the one that is restarting more powerfully at this juncture, and we’ve seen that being a powerful driver of risk assets when it happened in DM.  So I think that now, to our mind, is something we expect to see more in the EM landscape as a result of the resurge that just barely started starting in December.  

So that is – has led us to turn more positive on EM equities on a relative basis, but – and on a tactical basis for, like, six to 12-month type of horizon.  If we take a bit of a longer-term view, we are – we think DM equities are appealing if you have a five-year horizon already.  So we think there’s going to be – things will get worse before they get better.  But if you can look through this over a couple of years, I think we’re already at a point where we should expect positive returns on equities.  So to be clear, like, we’re cautious in underweight equities on the six to 12-month basis, but on a longer-term horizon we already see them as the place to be.   

I’m going to stop here, given that I’ve been overexcited once more about this.   

[Note: Please refer to the BII Global Outlook for further information at:] 

U.S. Department of State

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