Institute. An extraordinary year to look forward to. Abby, thank you for being with us. Much to talk about in the next halfhour. I want to talk about your new effort, thinking about immigration, what it means for the fabric of the nation. We must talk about the central bank. We have to talk out the markets. You have been the gloom crews great pinata. They love to go after you in good times or bad times. We cannot possibly go up and once again confounded not only off the gloom of last december but confounded over one year, two years, five years, 10 years to good and substantial equity returns. When does it end . Abby well, tom, first of all thank you for having me here for this discussion. The gloom at yearend 2018 in many ways set us up for a good start into 2019 in the markets. I think what is priced into the market now, is an economic scenario that seems to be the most likely. No recession, the economy perking up a little bit, corporate profits in midsingle digit, maybe a little higher growth. It is priced into the market. What i worry about is when valuation is already there, the risks could be to the downside rather than the upside. The base case is for mild returns, not just in the United States but several other equity markets. Lets call it midsingle digit along with expected Profit Growth in 2020. But there are number things on the horizon that could push us askance, and with valuation where it is, there is no margin for error. Tom i want to talk about the idea of a correction. It seems it is impossible to go down 10 and maybe for a blink we go down 18 but we have forgotten what it is to go down. A huge theory of the gloom crew is if we get to enough down there will be panic selling that would take us down further. Do you buy that idea . Abby lets add to the panic selling the concept of the structure of the market which is become increasing the depended on etfs chart index related and market cap indexweighted indices. If there are declines of the sort we saw in november and december 2018, that in fact takes on a life of its own because the stocks that are most heavily sold are the most liquid stocks and the stocks that have performed the best. And i think in 2020, investors need to be thinking about the stocks that did not have the good price momentum thus far, but offer good value. What we are seeing in the equity market right now is an almost unprecedented spread in p e ratios, where there are group of stocks where p es are very high but there also number stocks where p es are on the low side and maybe that is where the best opportunities are for portfolio protection. Tom even on that year ahead view we have to get out of the way the housekeeping here what where p es are on the low side we are doing. That is dividend growth, Share Buyback, does it continue, the use of cash story, does it continue . Abby Share Buyback has been such an important part of the story for the last several years and there are signs that it could be slowing. One of the things that has troubled me about Share Buybacks is that companies are using their cash to do this, and for special dividends and to raise regular dividends, but weve also seen a percent of cash and for future growth in the form of capex and researching is not at good levels and that worries me. Because it says companys are not really seeing good reinvestment opportunities. Tom you put together a terrific powerpoint at the end of the year for some of your clients and part of that is the uncertainty that is out there, about the lack of spending. Let us go to what Goldman Sachs looks at, Business Investment. Link in the current news item, the trade war, with the dearth of Business Investment in the future out one year in terms of owning equities . Abby it is no secret that capex, business fixed investment was disappointing in 2019. In fact it was negative, and we think this will continue in 2020, especially for structures. When we talk with companies about why that is, many of them do point to the uncertainty of the trade battles. We see this not just in the United States, by the way, but trade policy uncertainty is more dramatic in some other countries as well. And what we basically see is companies are not sure about where they should be investing for their supply chains. So they are just sitting on their hands now. That is not good for longterm Economic Growth. Tom im going to predict in 2020 there will be a new study of what globalization means. For multinationals and the kind of Big Companies we are comfortable buying now, in the u. S. , what is the new globalization that Abby Joseph Cohen sees . Abby well, the new globalization is one where there is a Significant Impact from Political Forces from many countries. We see pushback not just in the United States but in many nations. I worry about it. We have had since the end of the second world war, this period of multilateralism, not just in terms of trade and economics, but also in terms of political and military alliances. And 2020 could be a year will be we see these things breaking apart. That does disturb me in terms of the longterm consequent is consequences. Tom what we have seen an interview after interview, the percolation of international em currencies seems to do a little bit better, on the chart of Morgan StanleyInternational Index and all, u. S. Up, international flat. Does that change next year . Abby if you take a look at the forecast around the world, when we look to the developed markets, we are not really seeing much differentiation. Basically mid or high single digit returns from equities. But it is really tied to profit gains. Where we see more valuation opportunity is in the emerging markets. But lets be careful. The emerging Market Indices are now heavily dominated by china. Where we see more valuation so very often when individual investors say, i want em exposure, make a careful decision about whether you want that exposure to china or whether you want it to em ex china. Tom all of this is driven by revenue. When you go up the income statement with the low interest regime we have now, stocks and 2019 doing well and revenue growers and a general state, apple is an exception to that rule, we seem to be desperate to buy revenue. We seem to be desperate to buy nominal gdp. Does that end next year . Abby we also seem desperate to buy Earnings Growth, per se, and one thing im glad you point out the difference between is a good deal of the Earnings Growth for some companies has come about because of the reduction in the Corporate Tax rate. That is not what we want to pay a lot for. We do want to pay for revenue. We take a look at some of the categories that have not performed well. We all know Technology Stocks have been outstanding stock performers in the u. S. Markets. One of the reasons the u. S. Has outperformed other markets is because we are more tech heavy than the indices in other countries. When we take a look Going Forward and say ok, we do not expect a recession, it pushes us in the direction of some industrials and others that have not performed well. My colleague dave acosta makes a strong point about why we want to look at companies that offer growth but growth at reasonable price. Tom as we close out this discussion of equity and we will talk fed in a moment, folks, i really want to focus in and drill into the idea of this equity outperformance and the gloom that has pervaded. It has been a single digit world but it is not. Spx a long time 9 return. It seems we were too cautious over the last 10 years. Should we maintain that caution or can we begin to lift our singledigit expectations . Abby i find myself to be more cautious than i was. It is strictly driven by valuation. In the worst part of the great recession, what was priced in at those p es of eight times earnings, was basically the assumption that the prophet recession would last another three to five years. What is priced in now at a p e of 18 times earnings, is the assumption that there will not be a recession, that Profit Growth will continue. There is no margin for error. That is what i am most looking at. Could there be surprises . Will the surprises be negative or positive . As i take a look at things now, i believe we have a chance of more negative surprises than positive, including things that happen outside the United States. Tom i have about eight more questions on the markets. Im going to squeeze them in with our discussion on the fed. Im going to come back with Abby Joseph Cohen of Goldman Sachs in a really special section on her current research. Please stay with us for this year ahead view for bloomberg surveillance. Tom we welcome you to bloomberg surveillance. We are thrilled to bring you Abby Joseph Cohen of Goldman Sachs, and i mentioned her work with the Cfa Institute over the years. The market has devolved into fed policy. Are we done with the dots . Can we bury the dots . Abby i think we will not be paying as much attention to the dots because we think that trend in Interest Rate is flatish in 2020. Heres the thing to look at, and that is the way we have seen this decompression of p e ratios in the equity markets, we have seen a compression of yields in the bond market. We have seen the compression in terms of the term premium, that is the duration of the bonds, where longs are not yielding much more than short. We also see this in terms of quality where lower quality bonds are not yielding much more than Higher Quality bonds. I find this disturbing. Tom it is very different, isnt it, to say the least . Abby it is very different. And keep in mind, those people who argue that equity valuation is fine because of discounted cash flow, are basing those numbers on Interest Rates that are at historically low levels. If Interest Rates were to start to move up, there in fact would be an impact on equity valuation. Tom this is not in the textbooks. Chairman powell, fed official, the new governor of the bank of england and others have to deal with a Material World that is not in the textbooks we studied. How unusual is this world and we go back to what we knew or do we go to something we are making up as we go . Abby this is an extraordinary period in economic history. When i was a junior economist at the fed, we were fighting inflation. We continued to fight inflation for many years. Now the fear is we are fighting deflation. Lets be clear, in the United States, there is not deflation. Wages are rising, most importantly, goods inflation is moving up as well. Where has there been deflation . There has been deflation in places like japan, but it is not really that common. So why are Interest Rates as low as they are . In many cases it is because it is the single most used policy tool in many nations. In europe, for example, there is has not been much use of fiscal policy for stimulus reasons that have to do with the compact that put the eu together. So we have a situation in the United States where our Interest Rates are being held down in part because Interest Rates are negative in other countries. If you are an investor based in any number of developed economies, you say you do not want my negative yield on my own countrys 10 year. Youre buying u. S. Treasuries. Tom youre getting out front of my calendar in january and davos of the meetings of the World Economic forum, my theme is going to be negative Interest Rates. I dont want to get you in trouble here, is it an experiment that has worn out its welcome . Is it wrong or is there value to this original Central Bank Policy . Abby i can explain it is a monetary economist with some experience and say, ok, in a financial crisis, the idea was for a short amount of time to have negative Interest Rates. What we are seeing, though, in terms of the implications in the real economy, not so pleasant. So, for example, in nations where those yields are negative, people are not spending money. In fact, they are saving more than they did before. So there is the opposite impact. It is not stimulative. And we do see the impact in the United States. Our fed has pushed back against the idea of negative yields, and yet our yields are lower than they otherwise would be because of what is happening in other countries. Tom one of our losses in economics this year is Marvin Goodfriend of Carnegie Mellon with his important jackson hole paper and precisely this work is people like you are in the if in the world of economics talking with chairman powell and the rest of us are out there is negative Interest Rates. It doesnt work. Is chairman powell aware that into 2020, there is a must a almost a social need to normalize rates, back to the incentives that we knew . Abby i have great confidence in chairman powell and also the team he has. Not just members of the board, but also the staff members. And i think they see the pragmatic aspects of what is happening now. I think they would like nothing more than to be in an environment where we have real Interest Rates return to positive levels, because it is something that they know how to use as a policy lever. They are in a very awkward position now. Tom this goes back to some of your work with some highlevel mathematics, i dont know if it is differential equations, but Abby Joseph Cohen can do the math. Do we escape out of this Central Bank Experiment with smooth controllable stable curves and functions or do you look at 2020 or 2025 as jumps and discontinuous moments . Abby im going to change the question a little bit and say what are the other issues that are leading to these very low Interest Rates because we tend to focus only on policy tools. One of the things many people forget about is we have been in an environment in which this move toward globalization has, in fact, it kept inflation lower. We are also in an environment where in many countries, population growth is extremely slow, if not stagnant. What gives us longterm Economic Growth . It is population growth. If population is not growing in japan and china, importantly, and sluggish in europe, maybe we can understand better why those economies have slowed, why there are signs of deflation elsewhere. The United States has had among the fastest rates of population growth, and we have to point out clearly that half of that of the last decade has come from immigration. Tom this is so important. Abby joseph cohen with us to drive into 2020. It is an election year. Part of that will be the fabric of the nation. As abby mentioned it is the idea of the people of United States of america. She has been looking into that. Coming up, the year ahead. This is bloomberg surveillance. Tom we welcome all of you again. A year ahead bloomberg surveillance, we love doing this every year. Our team tries to put together a good conversation and that is easy with Abby Joseph Cohen because every time she walked to the door i know there is new research. And you go to where Henry Kissinger is, that is the fabric of the nation, immigration, migration, and the demographic trends. What did you learn when you studied it . Abby clearly ours has always been a nation of immigration. And there has been so much noise in the discussion over the last few years, we need to really look at the data, which is what we have done. One of the key observations we have made is this. Over the last 10 years, because the native population is getting older, there is a lower birth rate and a higher death rate. About 50 of the growth in our labor force and population is now coming from immigration. And that is something that really is the lifeblood for any nations Economic Growth. The nations now in the world that are struggling are often those with extremely low birth rates and, in some cases, stagnant population growth. Tom there has to be a policy. In my life at bloomberg ive seen many policies succeed and others go down in flames upon vote in washington. How do we get something voted on that benefits all . Abby looking at the economic dimension, we have identified some things that are really important for the United States. For example, we take a look at those people have doctorates in things like engineering and computer science, who are working in u. S. Industry, something on the order of 40 or 50 of them are immigrants. Tom are they taking jobs from americans . Abby they are not. We have had conversations with the American Academy for the advancement of science, and they have said we have an inadequate pipeline. We are not training our kids at a young enough age, k12, to be interested and Strong Enough in math and science. By the time they get to college, they are already behind and will when we take a look at graduate school, we see 60 of the students in masters and phd programs in the applied sciences and engineering are immigrants. Heres my concern. While there has been all this discussion about unauthorized immigration, and clearly we understand there are issues associated with it, we are also now seeing a decline in authorized immigration. So, for example, since 2015, there has been a notable decline in the number of foreign students coming into the United States. Theres been a 20 decline in the visas we issue for people coming in for specialized employment. And so i worry that we are harming ourselves. We need to be filling that native pipeline. We need to be improving education, but in the meantime, we are hurting ourselves. Tom lets take a famous Abby Joseph Cohen scatter dot chart, and it has all those dots linking lower quintile, lower quartile, lowwage jobs and it folds right into consumption and folds right into nominal gdp. That linkage is still there, isnt it . Abby that linkage is there. Recent data from the Commerce Department show something interesting. The fastestgrowing job categories in the United States tend to be those which are filled by immigrants. They fall into two categories. There are the high skilled jobs, think of it as i. T. , engineering and so on, advanced health care. And then at the other end are things like accommodation and retail trade and food. And these two sets of categories both tend to be overrepresented if you will by immigrants. And the household formation we see from immigrants represents about 43 of the total over the last 10 years. When households are formed, they buy homes and furnish those homes and pay property taxes and so on. So there really is an important ecosystem associated with this. Tom what is the compare and contrast to europe . I think of a mckinsey study. There could be a Goldman Sachs study as well. What is the compare and contrast with, say, europe . Abby other nations are looking at things in a different way. The United States is different. Other than the native americans, we are all immigrants, some forced through slavery, but we are all immigrants. So we have had over the last 200 years cycles in terms of immigration policy. Sometimes extremely welcoming and sometimes perhaps, when there is perceived economic duress or some political advantage to be taken, that is when we see the restrictions. What we have seen now that distinguishes our history from ourselves has been the attitude we are taking toward refugees. The United States previously had always been one of the most welcoming nations toward refugees. Now not so much. Tom Abby Joseph Cohen of Goldman Sachs, love doing this. It is the year ahead. And we have done this with Abby Joseph Cohen of Goldman Sachs. We hope for all of you it is a wonderful 2020. I cannot promise you that equity returns of last year but perhaps you get half as much this year. This is bloomberg surveillance. Lisa im lisa abramowicz. Welcome to bloomberg money undercover, a show that provides valuable insights into alternative investments. We take you inside the world of private debt, equity, and real estate. Lets get to the burning issues in private markets. Public markets keep shrinking, pushing funds to focus more on private lending. Settling down in the Luxury Property market. Global cities looking for a brighter 2020. Getting richer, bill gates and other global billionaires adding more than a trillion dollars