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Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. Joining us today is our CEO and Chairman Larry Fink. For more than a decade, Larry has written an annual letter, not only to focus on critical long-term issues, but also to start a conversation about finding solutions.

This year, Larry is considering the challenge of retirement, why it has become an increasingly difficult proposition for too many, and what opportunities exist and will be developed to help people achieve their financial freedom. Larry, welcome to The Bid. Larry, thank you so much for joining us on The Bid.

Larry Fink: It's wonderful to be here and be a participant in The Bid.

Oscar Pulido: So, Larry, it's, it's that time of year again. It's the time of year where you release your annual chairman's letter, and this is a letter that you write to raise attention to the issues that you think. Deserve more attention over the longer term. The letter goes to investors, to company leaders, to governments, really to a wide array of stakeholders.

And the letter this year focuses on retirement and specifically rethinking retirement. So curious to hear your views over the last few years. How has the retirement landscape changed and why is this an important issue right now?

Larry Fink: Well, let me just comment on the context of letters. they're getting much harder to write. but over the course of 2023. The conversations I was having worldwide was an elevation of conversation related to retirement. And how, not just in the US but other countries have to think about retirement and a whole different way. It has been evolving, and the raw reality is as we moved more and more to a defined contribution framework, we did not elevate financial literacy at the same time. A defined contribution puts a responsibility on the individual. A defined benefit plan puts the responsibility on a corporation of government.

And so, as we have evolved the retirement system, I think the inadequacies of financial literacy now is really having a demonstrable impact, on how people live. And part of my letter, I talked about hope and fear as we see in so many of the developed economies, the aging of populations which I've mentioned, people are getting closer or nearer to retirement. In so many instances, they just don't have the adequacy of savings to live in retirement in dignity, specifically in the United States. Social Security, which is a foundation of retirement, but it is only one part of having a retirement where you could live in dignity. In actuality, if all you are is dependent on your social security, by definition, if that's the only source of your income, you're living in poverty, if you had no other savings.

And so, when we designed our system, we had these three pillars, four pillars, to really try to ensure that there's adequacy when we are focusing on retirement and adequacy, that we could live in retirement with dignity. That is being lost by many people. And in fact, in the United States, as my letter suggested, we're talking about a substantial level of the US and my letter doesn't have good answers for those people it's a very large, policy issue that we have to address as a country. And I try to stay away from policy issues in the country and in every country. The letter was suggesting conversations, and I think that's the most important thing.

In building BlackRock over these years and throughout my entire career, I remain to be an incredible optimist I'm actually more optimistic about the future than ever before, despite all the pessimism we're seeing and more importantly as we read our news sources, the preponderance of information that we're reading today is just full of awful negative things. A lot of people get frightened about reading how terrible things are. actually, I get a little more optimistic about it. Because they're in front of us, and generally we solve problems. We build a better future by addressing our problems. When we address them, we fix them, we improve from them. Sometimes it takes way longer than we ever wanted it to be, but let's be clear, we do improve.

If you look over the course of my career, how the US has improved and other countries have improved, being an optimist, especially in financial markets, have proved to be a good outcome. Being a pessimist out of any one periodic time you may have good success, but over the long run.

I believe in capitalism, that in the long run it's the best, economic model in the world. But what disturbed me as I wrote this letter, we never talk about retirement. It is not a conversation we're having, and that is why it's becoming a bigger and bigger problem. If individuals had better information on how to navigate it over their 30- or 40-year journey of work, they then can build the adequacy.

And then importantly, in my letter and we talked about Life Path Paycheck and to me that is the biggest transformation for defined contribution plans where we transformed what typically is in a defined contribution plan when you retire you get a lump sum, most people have no idea what to do with that. And importantly, people really are concerned about, what is my monthly paycheck?

By the annuitizing of the backend, you are receiving a monthly payment. And that's why we call it Life Path Paycheck. And so that gives you a lot more understanding of, okay, here's my cashflow, here's what I can afford, also we have created, a digital experience in which we could show you if you add $10 more a month to your retirement, what can that do to the ultimate outcome? In addition, we could show you should you retire at 60 or 62 or 65 or 67 or 70, what that other outcome will be, how much money would you have on a monthly basis? So, all of it in my mind, helps the journey of accumulation for retirement.

It informs the participants in a whole new way. It provides more certainty, and through more certainty, it creates more hope and less fear. And I believe this is going to be the key characteristic of retirement.

So, all of this is about education informing with a real purpose of providing more hope for more people in the world so they could have more dignity in their life. and with more dignity, you know, what happens? People actually consume more, it's good for the economy.

Oscar Pulido: And Larry, as you said, you're trying to start a conversation on retirement and you're certainly doing that. And part of the reason you, I think, feel some urgency is you mentioned aging populations, which we've actually spent some time with colleagues from the BlackRock Investment Institute talking about this exact topic. There's a fear that on the part of companies and governments, that as the population ages, particularly in the developed world, it drags on economic growth, it drags on productivity. In your letter though, you've used the word hope. You say that you have more hope for the future, and that, in particular, the capital markets have a role to play in helping investors save for retirement. So maybe you can talk a little bit more about that as well.

Larry Fink: The US has been blessed by the ingenuity in the financial markets to create the most substantial, capital markets of any place in the world.

And one of the foundations of what the capital markets have done to the majority of people in the United States was if you are in need of a home mortgage, that home mortgage is not sitting at that bank or that institution that it was originated. It is packaged into a mortgage-backed security, and it's part of the capital markets.

The reality was the capital markets drove down the cost of mortgage finance, and that is the beauty of the capital markets. That we have a country that has a strong banking system and a country that has strong capital markets generally are the most robust economically. And the United States has the most robust capital markets. If you think about the markets in 2008 and 2009, during the great financial recession, there was a lot of fear. If you look at the rebound in the United States post 2009, was far faster here than any region in the world.

In the United States we had the capital markets and so as the banks were told that they have to raise their capital standards as other banks were trying to rehabilitate their balance sheets out to the financial crisis, more and more economic activity, flowed to the capital markets. And that is the main reason why we rebounded as a country faster than Europe, faster than anywhere else in the world. And it actually took Europe five to seven years longer than the U.S. to rebound because they have a much weaker capital market.

In addition, getting back to my conversations about retirement worldwide. Most policy makers are looking at the United States capital markets with true envy. They're witnessing that U.S. Corporations generally traded at two to four, multiple point higher than in Europe and other places, and much of it has to do with the retirement system here in the United States. And the U.S. investors are willing to put more of their savings into equities. They have more hope. As I said in my letter, if you're fearful of the future, why on earth would you put anything in a long-dated asset? You'd keep it all in the bank.

So, one of the big observations is the US economy has historically just been more hopeful than most places in the world and so in my conversation with many of the governments, they're now saying, how can we develop our own capital markets link to a retirement system because they want to build out their corporate champions, they want to build out their economy. They see the magnificence of our mortgage securities market and how that brought down the cost of home ownership in terms of mortgage rates, all of this. And so, the conversations we're having related to the development of the capital markets, with the retirement is totally linked.

Now, if I may, let me go back to this whole concept of aging and technology. And I've had conversation with the heads of state on this issue, especially the heads of state of declining populations. It is imperative that these countries embrace AI, robotics, and new sensor technologies. This is the only way these economies going to be able to grow and be more productive is to be advancing AI and technology even more rapidly. So, if the estimates of how powerful AI can be we can build and increase productivity in these countries with a smaller population. And if you can build productivity through technology, actually the wealth of the declining population grows up.

And so, to me, we need to be embracing technology more than ever before. And to me, this is going to be a very interesting dilemma and paradigm; how each country is going to be navigating the expansion of technology in their own society, and how does that play out with a growing population versus a declining population. So conventional wisdom has always been declining population is bad. I could make a statement if you are a big believer in the advancements in technology, a declining population actually makes the advancements of technology within the society easier to do. And the advancements of technology can most certainly elevate productivity, and when you elevate productivity will elevate wages. That is one of my futuristic views. but it's all interconnected.

Oscar Pulido: Well, and I'm glad you raise AI technology because actually in the letter. You know, the other big topic that you discuss is the urgent need and focus around infrastructure. So, you know, you mentioned AI. I think about topics that we've covered on the podcast, like cryptocurrency, there's a whole host of new technologies, Larry, that are changing the way we live and work, but they also change the physical world in terms of how we consume energy, in terms of how we think about transportation.

So, coming back to this topic of capital markets, which is sort of a common thread throughout the letter. What is the role that you think capital markets are going to play in funding the infrastructure needs of the future?

Larry Fink: In my letter, I talk about deficits and the debt, GDP with some other countries. And I don't believe fiscal stimulus is going to be as broadly used as they have been for the last 23 years. In fact, I would argue the fiscal stimulus is these deficits that are being accumulated by this country and other countries. But more importantly, the U.S. are at unsustainable levels.

Getting back to growth, the only way we could get out of these deficits is growth. How are we going to grow? We need to be focusing on more public, private type of deals, pipeline, the financing of any new technology, digitization, power grids. it's going to be financed through the private sector, through the capital markets. If you understand the cost it's going to take to digitize an economy to decarbonize at the same time, making sure that you have adequacy of power at any given moment. I talked about energy pragmatism, so you have to have both hydrocarbons and more sustainable, energy sources.

But I do believe the role of infrastructure. Because the enormity of costs in doing this We're just going to be hitting the J curve where this is going to be very much accelerated, and this is one of the reasons why I'm so bullish. The amount of capital that's going to be necessary to build this out, it's going to continue to stimulate the economy.

One thing we've learned most recently that with all the AI's potential, at the present technological level, it is really costly. The algorithms to do AI require so much power. These new data centers are going to be responsible for ab absorbing as much power as a small city, and we're already witnessing energy shortages, power shortages. If we are going to reach the full potential of ai, that means we're going to have to develop better power grids, we're going to have to have much better sources of power, and all of that is just very expensive. The role of the private sector through the capital markets can play an enormous role in this. It doesn't have to fall on the backs of state and local government financing or federal government financing.

And so, we are seeing tremendous opportunity. Even this past week, the conversations I'm having on the intersection of power in AI, the reason why we're having all these conversations, everybody who is thinking about this dilemma, 'We need capital to do this. We need hundreds of billions of capital to pull this off.' And now if you overlay the whole idea of decarbonization, we need to develop new technology to bring down the green premium or we'll never decarbonize.

And so, the amount of capital that's necessary is enormous, both here in the developed world and in the developing world. This is probably one of the more exciting parts of the overall global capital markets, how we are going to move society forward both in a way of having adequacy and power and developing relatively cheap power from non-carbon-based sources. The fundamental problem of non-carbon-based sources like wind and solar, it's intermittent. We can't afford just to have intermittent supply. So, the need for Consistency and power, dispatchable energy, having energy flowing all the time, and the amount of capital that's going to be needed to do all this here in the United States, but everywhere else in the world is going to power the global economy is going to be the next horizon. And all of this is just so exciting.

Oscar Pulido: Larry, you've used the word hope a lot in your comments, and you've talked about how, despite all the headlines that can at times seem scary, you're optimistic. So, what is the message that you want to send to the younger. Generations maybe, who are just starting to invest and thinking about the future and also, to the pre-retirees who are maybe just at the front end of starting their retirement?

Larry Fink: Focusing on the long term, not the moment, think about your objectives and your game plan to me is critical. We built BlackRock in the idea of focusing on the long term, focusing on big macro trends over tens of years. Being in the market all the time is really important. there are a lot of people who were good at market timing, okay? Then you could go in and out of the market. But the majority of people have no ability to market time. And this is why we constantly try to remind people your liability is 30 to 40 years. You need to be thoughtful about that. It's not about the ins and outs of the markets, and I know the financial press talks about the markets today, what's hot, what's not? It's all garbage. It doesn't matter. What matters is being consistently in the market, consistently investing for the long term is going to have a far better outcome.

Oscar Pulido: Larry, it's always good to hear what's on your mind. I have to say, I was actually struck by the very beginning of your letter where you tell a personal story about your parents and how they meticulously saved and invested for retirement. So, I know these are important issues, and in particular helping others, save and invest for retirement the way your parents did. Thanks for starting the conversation, and thanks for doing it here on The Bid.

Larry Fink: Thanks for having me, it's great to here.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, check out the episode. Larry Fink on the Power of Capitalism.

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