DENNIS STATTMAN: And Italy perhaps. There are other countries that are not in as bad of shape as Greece, but where there are debt problems that havenât been resolved yet.
CONSUELO MACK: So do you think that the debt problems will be resolved in a traditional sense the way that, as a matter of fact, that the E.U. has attempted to resolve them now? Or do you see, is this kind of the tip of the iceberg in sovereign debt problems where you have any number of countries, the U.S. included, that are highly indebted at levels which really cannot be sustained without some major changes?
DENNIS STATTMAN: In my opinion, the significance of the Greek debt crisis is not Greece itself, which is a relatively small country of only about 10 million people, and whose problems theoretically could be solved by the European Union, since Greece is such small portion of the European Union. On the other hand, what is really significant about Greece is that it serves as an advertisement for problems in bigger countries, whether they are the ones that immediately present themselves- Portugal, Spain, Ireland, Italy, for example, or some bigger countries such as the United States, which has big deficits, rapidly growing debt and demographic issues that we havenât come to grips with in terms of how weâre going to finance future spending.
CONSUELO MACK: Where should we look for retirement income?
DENNIS STATTMAN: Thereâs really no simple answer to that. Retirees are going to have to be very careful because interest rates are low today. And thereâs no assurance that theyâre going to remain low for the rest of a retireeâs lifetime. And a fixed-income asset that is connected to a rising interest rate has a falling principle value. Thatâs the way it works. And we had a tremendous bull market in bonds from the early 1980s until ultimately so far the end of 2008. Thereâs no reason that we canât have a continuation of the bear market in bonds thatâs been going on since really the start of 2009. And weâre starting from low interest rates and if rates go up, thereâs room for them to go up a good deal.
I donât anticipate that in the short term, but there is an awful lot of government debt to finance in the intermediate to longer term. So I think retirees need to be careful. They need to be looking not only at bonds. They should be looking at some high dividend stocks where there is a set of underlying assets and a management that is trying to grow earnings and grow dividends. So, for example, in the energy sector, integrated oil companies offer good dividend yields today.
CONSUELO MACK: Any names that you want to share?
DENNIS STATTMAN: Well, you could look at a variety of the big ones: Chevron, Exxon, Conoco Philips just to name a few of them, but there are quite a number of them that investors could choose from. There are other high-quality stocks in the health care area that offer good dividends. Bristol Myers is one. Merck would be another. Johnson & Johnson would be one.
CONSUELO MACK: Right, one of your favorites for a long time.
DENNIS STATTMAN: Yes. Then in the telecommunications area, Verizon or AT&T offer quite good dividend yields. So I think retirees should be looking to at least some of those sorts of stocks as an alternative to bonds at this point.
CONSUELO MACK: Goldman Sachs, how big of an issue? Is it a game changer for the industry, do you think?
DENNIS STATTMAN: I donât think we really know yet, but it is a potential game changer because ultimately I believe that if the SECâs allegations are proven to be true, and they are allegations as opposed to facts at this point, it will I think create a good deal of pressure for a different business model for the investment banks and probably the biggest commercial banks also.
CONSUELO MACK: So when youâre saying that you think that the business model for the Wall Street big investment banks might change, is the core of that the issue as to whose interests are put first, the clientâs or the firmâs, and what difference that could make?
DENNIS STATTMAN: I think there are really two things. Number one, itâs the wide variety of activities that these firms engage in and whether all of those activities are compatible with each other. And then secondly, to what extent is a firm acting in the interests of its clients and to what extent is it simply taking a trading position that it wants and somehow the clientâs on the other side of that position, that starts to feel like it canât be both in the interest of the firm and the interest of the client. And at BlackRock we have very consciously set a business model so that we never have a relationship with our client where the client is taking the opposite view of the firm. We have a fiduciary relationship as opposed to a counter-party trading relationship.
CONSUELO MACK: Whatâs going to be the bigger problem in the markets over next year and then the next three years, letâs say- inflation or deflation?
DENNIS STATTMAN: Immediately weâre in more of a deflationary situation. We have excess capacity in the labor market. We have excess capacity in the U.S. across a number of industries. And I donât see that going away soon. The policies that our government has been following of large increases in the size of the Federal Reserveâs balance sheet and heavy deficit spending in Washington ultimately are likely to be inflationary, but at the moment with as much excess capacity as we have, weâre not seeing that.
Now, I should hasten to add, there are places in the world where inflation is heating up, and they could be important. For example, in China weâre starting to see some more inflation, and weâre seeing wages galloping ahead in some areas at an annual rate of 15% to 20%.
Now, China has provided something of a price umbrella thatâs helped keep prices for consumer goods in the U.S. down. And the degree to which they have increased inflation eventually can translate to more inflation here. Also commodities have been roaring ahead. In many cases the price of oil has been quite strong, and weâre highly dependent on imported oil. So there are some factors that are starting to push inflation up in some areas of the markets and some geographies, but they havenât translated into immediate inflation here yet.
CONSUELO MACK: One of your mantras that we talked about earlier was going global, but you have a new mantra, as well, which is to focus on certain kinds of returns.
DENNIS STATTMAN: Sure.