Blackstone boss Jon Gray is bracing for the ‘third economic wave’

The head of the $1.5 trillion asset manager believes most countries will be able to trade through the slowdown.

The way Jon Gray sees it, the world is now entering a new economic wave of a grinding slowdown.

Even as interest rates surge, most countries will be able to avoid the deep economic shock seen through previous downturns, the boss of the $US1 trillion ($1.5 trillion) Blackstone empire says.

Despite credit being “sucked out of the room” like oxygen and inflation still high there is enough momentum for the global economy to avoid falling off a cliff, Gray says.

But the Blackstone president says even when the inevitable slowdown comes markets need to shake off the notion that central banks will come to the rescue by cutting rates again to cushion the fall.

Gray was speaking ahead of his appearance at Australia’s Economic Outlook conference hosted jointly by Sky News and The Australian on Friday.

Blackstone ranks as the world’s biggest private equity firm, and this includes sitting on top of the largest portfolio of commercial property in the world and hundreds of billions in investments across infrastructure, healthcare and renewable energy.

Last year the New York-headquartered giant became the new owner of Crown Resorts, picking up the badly bruised casino operator for $8.9bn in a move that involved a delicate round of negotiations with cornerstone shareholder James Packer.

Crown Tower at Barangaroo. Picture: ChrisPavlich

“If you think about it as investors and economies there are three waves to this cycle,” Gray says. “First there was the inflation wave that hit companies and their cost structure and hit investors.

“Then there was the interest rate wave, where central banks raise the cost of capital, and this has impacted businesses and consumers.

“And now the third wave is coming, which is a slowdown. And so one follows another, and we’re working our way through it.”

Gray started out with Blackstone in New York in 1992 in the asset manager’s property team. Back then they shared an office floor with BlackRock, the little known investment firm that had just been launched by former bond trader Larry Fink. Indeed BlackRock at the time was part-owned by Blackstone.

Gray recalls he came out on top of the office-run American football tipping competition run jointly between the two companies. And this probably helped him to get noticed on the way to the top.

Gray says Blackstone founder Steve Schwarzman and then Larry Fink both created “something extraordinary” from the long-time Blackstone Manhattan headquarters at 345 Park Avenue. The two firms are no longer tied, but BlackRock has since grown to oversee $US9 trillion in investment funds.

By some coincidence Fink and Gray briefly crossed paths this week in Australia when they were here for separate visits. They shared a customs line at Sydney Airport after arriving from the other side of the world. “Boy, we were both looking fresh,” Gray quips.

Where Gray diverges from Fink is over the outlook for inflation. Gray strongly believes it has passed its peak in the US, while Fink this week argued there is more inflation to come.

BlackRock chairman and CEO Larry Fink. Picture: John Feder

Gray says even in the face of a tight labour market, wages growth is slowing, while input and shipping costs are easing.

What is important however is while two of the most influential people on Wall Street have different views on the inflation monster, both are fundamentally optimistic that the US economy can avoid a deep or entrenched recession.

“I’m cautious about the next 12 months as the weight of this tighter policy impacts growth. But I’m not in the extremely bearish camp of those who think this is going to be some sort of very sharp downturn like 2008-09,” he says. “I don’t think we have the kind of imbalances we had back then.”

While a recession in the US is still likely, it will come on slowly and be shallow, he says.

“There’s still enough momentum we’re seeing in the economy, particularly in services and travel. And unemployment still remains fairly low. For most countries it’s grinding slower, as opposed to coming really quickly.”

And where Gray also breaks ranks with most of the betting in the market is on the forward path for interest rates. In the US and most countries they are likely to stay higher for longer.

“The Fed is likely to keep policy tight. You will see that even as they see some signs of inflation coming down, because they really don’t want to be similar to what happened in the 1970s in the US, which is that they prematurely started lowering rates as the economy slowed, and then inflation took hold again.”

This course later prompted a new Federal Reserve led by Paul Volker to hike the cash rate aggressively to a peak of 20 per cent by the early 1980s.

“Our expectation is and – has been different than the market – is that we agree that the Fed is close to its terminal rate and a pause. But I think the expectation of a pivot (to a cut) is premature. The Fed will hold rates to the higher level, and that will weigh on the economy.”

The rest of the world too is still in its rate hike cycle. Canada issued a surprise interest rate hike on Wednesday night to 4.75 per cent and the Reserve Bank of Australia this week also surprised as it moved to 4.1 per cent. Gray believes all markets are getting closer to their terminal, or peak rates. But it will also be a function of what the US Fed does and then the inflation dynamics in each country.

The Cosmopolitan of Las Vegas, which Blackstone sold for $US5.7bn two years ago. Picture: Bloomberg

With commercial real estate vulnerable while interest rates are high, Gray says Blackstone has been pivoting away from US office towers for years even before the Covid pandemic hit. Now it represents just 2 per cent of its giant real estate portfolio.

“We didn’t think the rents were keeping up with the capital costs in the business. And so it’s become less and less relevant to us.” Where Gray has been doubling down has been logistics and warehouses and more recently data centres where vacancies are low and rents are growing.

“The outlook for commercial real estate is more nuanced than you will read, it remains quite challenged in the traditional office market. Certain cities are different, Asia is generally healthier than Europe, Europe generally is healthier than the United States, newer buildings are better than older. But in general, office markets are under a lot of pressure. Other categories of real estate are performing much better. And for us, I think that’ll create significant opportunities.”

The $9bn Crown Resorts play feeds into this with Blackstone bullish on the longer term drivers of tourism and hotels. Gray has big plans for the casino which is on a short leash from regulators and still paying hundreds of millions in fines.

With Crown, Gray intends to use the invest and build playbook that worked for Blackstone’s stunning turnaround of The Cosmopolitan in Las Vegas sold two years ago for $US5.7bn.

He wants Crown to be a “best in class” entertainment company operating at the highest standard possible.

In total Blackstone has $US332bn deployed across real estate, $US287bn in private equity, with another $US372bn across debt financing and hedge funds.

In addition, Gray’s Blackstone is sitting on $US195bn of so-called “dry powder” to invest with plenty of opportunities ahead in private credit as banks start to pull back on lending. There’s also a bigger role for Blackstone to play in housing where the structural drivers that keep demands for apartments are likely to underpin billions in build-to-rent investment for years to come. But Gray also points to Blackstone’s thematic areas: logistics, rental housing, travel, life sciences and digitalisation.

“The reality is, as an investor, it’s a much better time now after prices and multiples have reset. Yet, people tend to be more nervous and they wait for an all clear sign.

“And for us and for our investors what we want to do is take advantage of moments like this”.

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