Lower rates not effective way to stimulate growth: Stephen A Schwarzman Cofounder, Blackstone Group
"We scour the world to pick growth spots or where we see unusual opportunities in a slow growth environment, emerging to buy assets when other people are losing faith in their future."
Q-We just saw the Fed cut rates. Does this near zero or negative interest rates signal that global growth will take a long time to revive?
Its already incredibly low. Lower and lower rates do not necessarily result in sustained economic growth. It is not an effective way to stimulate economies or growth. It hurts savers, retired people. It also hurts financial institutions since they lose the yield curves and their spreads get impacted and they can’t grow their capital at the rate at which they would like to. Their capacity to give enough loans to individuals or corporates goes down significantly. So, this trend is not good for the US or for anyone and it is astonishing that the world has moved and is moving that way.
Q-But if that is the new reality, what would that mean for organisations such as Blackstone? How do you pick companies, markets, themes in such an environment?
We scour the world to pick growth spots or where we see unusual opportunities in a slow growth environment emerging to buy assets when other people are losing faith in their future. We buy individual assets that tend to be large, try to turn them around and grow much faster than the regular economy. If we grow at a faster rate, it will have a higher PE than when we bought it, more earnings than when we bought it and when we put leverage on, we normally can make returns for our investors that are double the stock markets - that’s our model.
You can do that in many markets. It's harder if you are going into a recession but even if there is economic growth, albeit at a slower pace, you are fine and create very good outcome. We are looking at the US. Our economy has slowed but is still growing. In Europe even if growth is slow, there is limited access to credit. So, we can give loans to companies for very good returns. We can buy real estate assets there. Asia has been among the best performing economies in the world and we keep looking at opportunities there, including India which has been our favourite in the region. China is a difficult place because of their internal dynamics, trade wars and policies.
Q-Have your views on India changed since last December? We are witnessing slowdown across sectors.
The Indian economy even though is going softer now is growing much faster than several economies around the world. It has issues that it is dealing with now. We can still do exceedingly well in real estate even after being among the largest foreign investor. In fact, everything that we have touched in the sector has turned out extremely successful including the new REIT. We have been buying companies, taking larger bets of control (buyouts) or near control. Our Indian portfolio companies have been our best performing companies in the world since we can take our global best practices and ramp them up. We can see a slowdown in the Indian economy, but relative to the rest of the world India’s prospects remain strong even if they are not as strong as they were.
Q-But since we are going through a slower pace of economic growth, are you considering a change or a tweak in your investment strategy or some sectoral recalibration?
Our strategy won’t change even if India slowed a bit. We keep looking for real estate opportunity, technology opportunities. Our confidence in India is long term. It has the ability to grow, it’s one of the largest populations in the world. It has got highly educated people. If economy gets slower, prices will get lower to buy assets -- so, we keep looking. Also, we have different divisions within the firm. For example, slowdown gives opportunities for our credit teams to source deals more aggressively.
Q-In the first half of this year, we were seeing record corporate earnings, record fund raises. Blackstone alone raised $43 billion in 6 months. But we are ending the year on a totally different backdrop when the mood is sombre and perhaps recession is a reality. What led to this, so fast and so sudden?
All experts were predicting a recession at the end 2018. Markets really went down a lot in the fourth quarter on the back of such expectations. That turned out to be 100% wrong; the economy recovered and did very well. At that time when we last met, I thought it was ridiculous to expect a recession as none of our companies were feeling that. That was a media created recession that never happened. The stock markets recovered all those loses. In the first half of the year in the US, you had that recovered and the impact of the tax cuts. But what’s happening in the second half, I think is the direct and indirect consequences of the trade war between China and the United States.
Q-You would say that’s the single biggest factor?
The two countries, depending on what set of numbers you take, is 35-40% of the world’s economy. If 40% of the world’s economy suppresses trade between themselves, it would be inevitable that trade on a more global basis would get hurt. Trade comes from manufacturing and so that too gets impacted due to the impasse. China is slowing, the US too is slowing in manufacturing and you will of course end up having a slower world. It’s hardly surprising.
It was expected that there would be an agreement last May but Beijing withdrew from those discussions -- that was a shock. It’s always some geo-political event that impacts people from all over the world. It’s not just about an economic cycle per say. There could be some elements of it but all of a sudden if 40% of the global economy is facing a standoff and talks of a no-deal, then there is something bigger at play. The decoupling of these two giant countries is a different economic paradigm all together.
Q-For someone who has deep associations in both Washington and Beijing, how do you see these trade issues pan out over the next 6 months to a year?
A Chinese vice minister level delegation has arrived in the US last night (last Thursday). They will be meeting their counterparts here in preparation of vice Premier level meetings in October. From what I know, China realises that it will be beneficial that if there is a mutual agreement on at least a few of the issues that are on the table. There are no miracle cures once the global economy starts slowing but if we start to re-engage on a more serious basis after just warring over both countries delinking, then it that has the potential, if successful, to change the way people might feel. It’s imperative that the two countries find some common ground.
Q-You have said in the past that China's economic miracle has come at the expense of the West and the US. Is it realistic to even think that Beijing would give all that up now?
No one expects China to give it all up since they won't. This is a rebalancing that needs to be done over a period of time. China has seen the fastest growth in world history. But at the same token, the developed world has really suffered and they have been witnessing economic unrest - the Chinese recognise that. So, change will happen. Not necessarily at the pace the West might want, but will happen through a series of agreements.
Q-In that interim as global chains get affected due to the trade issues, to what extent can India benefit or capitalise? Some would argue that other Asian 'miracle' economies such as Indonesia, Vietnam, Thailand are actually reaping the benefits from these new opportunities much better.
I don't know enough about that to offer an intelligent comment other than agreeing with you. Those are the names we hear as well. These are lost cost (OR LOW-COST?) locations. They are physically closer.
Q-In your book you mention one interaction with Angela Merkel where she called PE industry locusts. In India, the PE industry is once again under scrutiny after the suicide note of an entrepreneur became public. Is it time for a serious soul searching?
I think the answer is 'absolutely.' Who would want to be a barbarians? Not me. And if that's the perception, it is very unfortunate. It's actually against our economic models. But transparency is essential.
Q-Why did you decide to write this book?
Six to seven years ago, when I was marketing Blackstone's products across the world, I met a CEO of a large fund house and he asked me, 'I am new here. What do you think I should do? How can I run my institution better? How do you (in Blackstone) get such great returns over so many years? What should we do differently?' That meeting was supposed to be a 10 minute one but we sat down for more than two and half hours. In between I tried to sell Blackstone products, but he said, 'Please. Don't spend your time on products. Because we buy them anyhow. I don't want to spend my time on that. I want you to continue talking about how we can get better.' Everybody outside was waiting and got surprised. That was interesting. I travelled across the world and so many such CEOs wanted to know about how things can be done better. How to manage people? how to take great decisions, how to hire people, how to run an organization better. All the things that we do at Blackstone over 34 years and to me it was easy. So my job sort of changed. And I got slightly bored talking about the same things to all these people. So I wrote it down in a book.
Q-You started the book saying that leaders are made and not born. Many would argue quite the opposite that these days its all about access and access comes with the surname one is born with.
Ans: No one is born a manager. Managing is a learned skill. Many different kinds of people can be trained as managers. Entrepreneurs think out of the box, people who takes risks – it's very difficult to teach them. You can try, you can take courses. But it's very difficult. The type of people which fall in the 1 or 2 percent that you just mentioned are ones who are born into that. It’s the nature of creation. In the US, 80 percent of the rich came out of the middle class. Because we have a good sized middle class and they use the resources of society and grew bigger. If you ask them they will still say, they are middle class.
Q-There seems to be two Stephen Schwarzman in the book. One is vulnerable almost human and the other a deal making superman. How do they co-exist?
I am like a regular person, who gets uncomfortable with uncomfortable situations. If bad things happen, I also get emotionally affected. But those things are just like anybody else. On the other hand, when I figure out solutions to issues, I have no hesitation in going ahead and implement those whether all the people really agree or disagree. In some cases, you need to listen when you are going into a new area, even if they are from competitors. Most people, won’t like to change. I won’t look at anything, other than values and culture. Everything else can change. And it has a habit of changing. I marshall all the resources that I can use. I have the same feeling with anybody, but to react to certain type of situations. Bad things can happen to nice people. It’s not that only good things happen to me but Once a bad thing happen, it’s a remarkable learning experience.
Q-Do you think its time to recaliberate growth expectations?
It’s a fact that the world economy is sort of slowing. Economies go through cycles and its slowing now. But slowing compared to what? You (India) are growing at 5 percent, which is pretty good compared to everything else in the world. But something that has been growing at 9 percent is now at 5 percent, is terrible. So, the glass is half empty. But remember, whether its full or half empty, there is something to drink.