Introduction:
Judy Olian, Dean of UCLA Anderson, introduces Larry Fink and Bill Gross, two distinguished alumni and giants of the financial industry. Both Larry Fink and Bill Gross have experienced increased influence in U.S. and global markets, recognized by Forbes’ annual list of the world’s most powerful people.

Combined Asset Management:
BlackRock and PIMCO, the companies led by Larry Fink and Bill Gross, respectively, manage a staggering 5.8 trillion dollars in assets. This amount is equivalent to Japan’s 2013 GDP, which is the third largest economy in the world.

Economic Comparisons:
5.8 trillion dollars is more than the combined assets of Freddie Mac and Fannie Mae. It can repay about a third of the U.S. debt. It is equivalent to 13 times the market cap of Apple, the most valuable company in the world.

Global Impact:
Larry Fink and Bill Gross are influential asset managers whose opinions are closely followed by the market and government leaders. They exemplify Anderson’s “think in the next” culture, setting new directions in business and having a global impact.

Anderson’s Exemplars:
Larry Fink and Bill Gross serve as exemplars of Anderson’s culture, demonstrating the impact of the school’s education and values.

Bill Gross:
Bill Gross, founder and co-chief investment officer of PIMCO, manages the world’s largest mutual fund, the Total Return Fund. He is known for his bold entrepreneurship and nonconformist thinking, which has led to his success in the investment industry. Gross applies his blackjack skills to his investment strategies, mitigating risk and calculating odds. He generously supports Anderson students through philanthropy and has served as a commencement speaker.

Larry Fink:
Larry Fink, founder, chairman, and CEO of BlackRock, leads the world’s largest asset management firm. He is recognized as one of the top CEOs globally, receiving numerous accolades over the years. Fink is a strong supporter of UCLA Anderson, donating generously and being involved in various initiatives. He chairs the Fink Center Board and engages with students and alumni through Q&A sessions and events.

Common Success Factors:
Both Gross and Fink are icons in their industry, known for their boldness, nonconformity, and entrepreneurial spirit. They attribute their success to the unique culture and remarkable finance faculty at UCLA Anderson. Anderson aims to nurture graduates who drive business innovation, influence global change, and positively impact society. Gross and Fink serve as role models for Anderson students and alumni, demonstrating the impact of the school’s education and values.

The Narrative of Uncertainty:
Larry Fink expressed concern about the negative narrative surrounding the United States, which creates uncertainty and has a profound impact on consumption and CEO behavior. This uncertainty leads to economic weakness and is reflected in the disappointing job data.

The Debt Situation and its Consequences:
Bill Gross highlighted the increasing debt to GDP ratio in the United States and the world, which is comparable to the leverage seen in the 1930s. The total obligations of the United States, considering future liabilities, are estimated to be around $60-$65 trillion, significantly higher than the reported $15 trillion. This high leverage creates a challenging situation, leading to a perpetual battle for the rest of our careers, according to Gross.

The Generational and Global Divide:
Gross also mentioned the generational divide between the older and younger generations, as well as the country versus country divide, in terms of currency regimes and economic competitiveness. This division leads to a constant battle over who will pay the tab and who will take the haircut.

Potential Negative Impact on GDP:
Gross expressed concern that the current situation of uncertainty and high leverage could lead to many years of negative GDP growth, making it difficult to build companies and plan for the future. This situation is exacerbated by the structural differences between young and old and country versus country.

Larry Fink’s Perspective:
Fink acknowledged the potential for a negative outcome, but he emphasized the unique attributes of the United States that allow it to overcome these challenges. He mentioned that global leaders are discussing the resilience of the United States and its ability to navigate through difficult times.

Energy Renaissance in the United States:
Manufacturers are relocating back to the United States due to the low natural gas prices, which are significantly lower than in Europe, Japan, and South America. This energy advantage is expected to drive economic growth and job creation in the United States.

Automation and Wage Compression:
Automation is reducing the cost of human labor, leading to job creation challenges worldwide. This trend is exacerbated by the compression of wages over the past 20 years, making emerging economies less competitive.

Energy Costs as a Transformational Factor:
Energy costs are becoming a key differentiator in manufacturing. The United States, Mexico, and Canada have a unique advantage in energy costs, which will allow them to attract manufacturers and rebuild their economies.

Death of Long-Termism:
Short-termism is prevalent in business and government, leading to decisions that prioritize immediate gains over long-term sustainability. Stock buybacks, driven by short-term shareholder interests, are an example of this short-term thinking.

Accounting Misalignment and Short-Termism:
Accounting regulations have contributed to short-termism by misaligning the timing of asset and liability valuations. This mismatch has made it difficult for institutions, such as insurance companies, to invest long-term.

Central Banks’ Role in Yield Compression:
Artificially low interest rates set by central banks have suppressed returns on investments. This has discouraged companies from investing in real plant, equipment, and technology, leading to a lack of infrastructure investment.

Infrastructure as a Solution:
Countries worldwide are grappling with the challenge of creating jobs through infrastructure investments. Attracting long-term and safe investments in infrastructure is a critical issue that needs to be addressed.

Investment Considerations:
In the current environment, Bill Gross recommends investing in the United States, but with caution and a focus on short-term investments due to artificially compressed yields. Investing in the real economy is less attractive due to the low returns relative to the risk.

Foreclosure on Financial Instruments:
Cities and counties can take a particular home to build a freeway or a school, but the principle discussed here is to foreclose on financial instruments. This means to take a mortgage on that home or building and clip or default on the principle of the paper rather than the property itself.

Regulation:
There’s a debate over how much and how far to go, but regulation is necessary to prevent investment banks and banks from putting depositors’ savings at risk. The re-regulation should not go so far as to impede the spirit of lending and capitalism. The debate includes whether to bring back Glass-Steagall, which separated investment banks and banks.

Pain and Wage Compression:
Since June 2009, 3.6 million of the 4 million new jobs have gone to men and women over 55, leaving 600,000 fewer jobs for those under 55. Wage compression has been an issue, and many people have lost their homes.

Eminent Domain:
California has a history of using eminent domain for projects like the Chavez Ravine Dodgers Stadium. The Richmond case involves using eminent domain to foreclose on mortgages, which is questionable and breaks down contract law. The suit will go to court to determine who is right.

Fiduciary Duty:
BlackRock and PIMCO are representing other firms and governmental agencies in this suit, not just themselves. They are acting as fiduciaries on behalf of their clients, not for their own money. Not standing up for their clients’ rights would be a breach of fiduciary duty.

Main Street Versus Wall Street:
Capital formation is the idea of Wall Street, and without it, there’s no long-term growth or employment. Technology displaces workers and creates vast income disparities. The disparity between Main Street and Wall Street is serious because Main Street needs a fair share of GDP and wages. Corporate profits have increased while wages have decreased, leading to an imbalanced economy.

CEO Compensation and Wealth Disparity:
CEO compensation has become a controversial topic, with some arguing that it is excessive compared to the pay of average workers. The disparity between CEO pay and employee pay has led to frustration and resentment among the general public. In Europe, there is a movement to set limits on CEO compensation to address this issue.

Potential Solutions to Address CEO Pay Disparity:
The media can play a role in addressing CEO pay disparity by asking questions and bringing attention to the issue. Politicians can also address the issue through taxation, benefits, or other measures to make CEO pay more fair and equitable. The SEC has proposed a rule that would require companies to disclose the ratio of CEO pay to employee pay, which could help to shed light on the issue.

The Role of Small Businesses in Job Creation:
There is a common misconception that small businesses create most of the jobs in the United States, while large companies do not. In reality, large companies actually create more jobs than small businesses, although small businesses are often involved in construction and other industries that have been hit hard by the recent economic downturn.

Rebuilding Infrastructure:
Investment in infrastructure is essential to create jobs and boost the economy. Collaboration between politicians and long-term investors is needed to fund infrastructure projects.

Education as a Long-Term Solution:
Education, especially higher education, is key to reducing unemployment and improving job prospects. The gap between college and high school graduate unemployment rates highlights the importance of high school education. Efforts should focus on increasing high school graduation rates and providing job training programs for those without a college degree.

Addressing the Demographic Shift:
The aging population in developed countries raises concerns about the sustainability of capitalism. Consumption patterns change as people age, potentially impacting economic growth. Political parties may face challenges due to the demographic shift, leading to a potential divide between the old and young.

Mexico as an Investment Destination:
Both Larry Fink and Bill Gross favor Mexico as an investment destination due to its strong growth potential and ongoing economic revolution.

Conclusion:
Investing in infrastructure, education, and addressing the demographic shift are crucial for long-term economic stability and growth. Mexico is seen as an attractive investment destination due to its favorable economic conditions.

Opportunities in Mexico’s Energy Sector:
President Pena Nieto proposed constitutional changes to liberalize Mexico’s energy sector. Pemex, Mexico’s state-owned oil company, is poised to benefit from increased investment opportunities. Mexico’s proximity to the Cantarell field, which is currently being drained, presents a growth opportunity.

Mexico’s Economic Advantages:
Mexico’s debt is significantly lower than that of the United States. Mexico’s lower wages make it competitive on a global scale. The undervalued Mexican peso, as indicated by the Big Mac Index, further enhances its competitiveness.

Challenges in Latin America:
Latin American countries have struggled to utilize their recent wealth for infrastructure development beyond sports stadiums. Leverage and the inability to invest in productive assets have hindered economic growth.

Investing in US Companies:
Given the persistency of low interest rates, investing in US companies that can benefit from the energy boom is recommended. Dow Chemical and other companies with the ability to take advantage of low-cost energy are well-positioned for the future.

Low-Interest Rate Environment:
Both Larry Fink and Bill Gross believe that interest rates will remain low for an extended period. This environment favors equity investing in the United States, Canada, and Mexico.

Interest Rates and Economic Growth:
The key to raising interest rates is the ability of the economy to grow at a healthy rate. If a policy rate of 25 basis points can stimulate a nominal GDP growth rate of 6% to 7% in the United States, higher interest rates may be feasible.

Economic Stability and Inflation:
Bill Gross highlights that ultra-low policy rates can hinder economic growth, potentially leading to a 3% nominal GDP rate instead of the Fed’s target of 5%. Larry Fink expresses concern that the Federal Reserve’s bond purchases may lead to asset speculation and inflation if they continue without tapering.

Financial Stability vs. Inflation:
Gross emphasizes that central banks provide financial stability but can also create inflation. He cites the quantitative easing (QE) of 2008-2009 as a necessary measure for stabilizing the economy but cautions against its long-term implications for inflation.

Blackjack and Risk Management:
Gross draws lessons from blackjack, particularly the Kelly system, which emphasizes risk management and avoiding significant losses. He applies this principle to investing, stressing the importance of not risking too much capital, even with favorable odds.

Post-Recession Financial Market Safety:
Larry Fink asserts that financial markets are safer now due to stricter regulations on banks’ leverage and tangible equity requirements. However, he warns that the shift of business to capital markets and exchanges poses new risks if not properly regulated.

Bank Safety and Glass-Steagall:
Brian Sullivan highlights the lessons learned from the subprime crisis, emphasizing that banks should focus on traditional lending rather than excessive leverage. Bill Gross acknowledges that banks are safer with increased capital but points out the ongoing global financial system’s leverage.

Conclusion:
Overall, these experts provide valuable insights into the challenges of maintaining economic stability, addressing inflation, and managing risk in the financial system. They emphasize the importance of regulatory measures, risk management, and striking a balance between financial stability and the potential consequences of ultra-low policy rates.

Systemic Risks and Hyman Minsky’s Theory:
Bill Gross emphasizes the significance of Hyman Minsky’s theory, which explores how stability in human nature can lead to instability and risk-taking.

Financial System Improvements:
Gross acknowledges that banks are safer after the 2007 crisis, but questions if the system has truly learned from past mistakes. He highlights the need to address total leverage and ensure it’s at a reasonable level to prevent future deleveraging events.

Potential Triggers for Market Instability:
Gross warns of the potential for accidents or events that could spark instability in the global marketplace, such as in China, New Orleans, or Washington, D.C.

Addressing Systemic Risks:
Gross proposes the need to not only recapitalize banks but also to ensure that total leverage in terms of debt is at a reasonable level to prevent excessive risk-taking.

Appreciation for the Discussion and Participants:
Brian Sullivan thanks the guests, Larry and Bill, for their insightful and candid discussion, acknowledging the twists and turns and the balance of bullish and scary insights. Judy Olian expresses gratitude to Brian for moderating the discussion and to Larry and Bill for sharing their wisdom, candor, and maturity in addressing market issues. Olian mentions UCLA’s ranking as number 12 in the world and number eight in reputation, crediting Gene Block’s leadership and the contributions of alumni.

Availability of the Discussion:
Olian informs the audience that the discussion will be available on CNBC.com and the Anderson website for those who missed it or want to revisit it.