Others. An extraordinary year to look forward to. Thank you so much for being with us. Much to talk about in the next halfhour. I want to talk about your new effort, thinking about immigration and what it means. We must talk about the central bank. Weve got to talk about the markets. You have been the gloom cruise great pinata. Good times, bad times. We cannot possibly go up. Confounded off the gloom of last december, but confounded over one year, five years, 10 years to good and substantial equity returns. When does it end . Abby tom, thank you first of all for having me here for this discussion. Gloom at yearend 2019 in many ways set us up for a good start to 2019 in the markets. One of the things i am concerned about is just how happy everybody is as yearend 2019. I think what is priced into the market right now is an economic scenario that seems to be the most likely. No recession. The economy perking up a little bit. Corporate profits in single digits, maybe higher growth. It is priced into the market. What i am worried about is when valuation is already there, the risks could in fact 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 Profit Growth in 2020. There are a number of things on the horizon that could push us. 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 . Ies is if we get to enough down, there will be panic selling that takes us down further. Do you buy that idea . Abby lets add to the panic selling, the whole concept of the structure of the market which has become increasingly dependent on etfs and other things which are index related, especially market cap waited indices. Declinesare n of the sort we saw in november and december 2018, that 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. I think in 2020, investors need to be thinking about the stocks that did not have good price momentum thus far, but offer a good value. What we are seeing in the equity market right now is all this unprecedented spread in p. E. Ratios. There is a group of stocks with p. E. s very high but there are number of stocks on the low side, and maybe that is where the best opportunities are for portfolio protection. Tom weve got to get out of the housekeeping and that is dividend growth, share buyback. Does it continue . Abby share buybacks have been an important part of the story for the last several years. There are some signs it could be slowing. One of the things that always troubles me about share buybacks is that companies are using and toash to do this raise regular dividends, but we have also seen the percentage of cash being used for future growth in the form of capx and research and development is actually not at a good level. That worries me because it says companies not really seeing good reinvestment opportunities. Tom you put together a terrific powerpoint for some of your clients. Part of that is about the uncertainty that is out there. The lack of spending. Lets go to the Goldman Sachs looks at. Business investment. Linkedin, the trade war with a dearth of investment, and the future in terms of owning equities. Abby it is no secret that c apx was disappointing in 2019. It was negative and we think it will continue in 2020. When we talk to companies about why that is, many of them point to the uncertainty of the trade battle. 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. What we basically see his companies are not sure about where they should be investing for their supply chains. So, they are sitting on their hands right now. That is not good for longterm Economic Growth. Tom i am going to predict in 2020, there will be a new study of what globalization means. For multinationals and the Big Companies we are comfortable buying right now in the u. S. , what is the new globalization that Abby Joseph Cohen sees . Abby it is one where there is a very Significant Impact from Political Forces in many countries. Were seeing pushback not just in the United States, but many other nations. I worry about it because we have had since the end of the Second World War this period of multilateralism. Not just in terms of trade and economic relationships, but also in terms of political and military alliances. In 2020, i think could be a year where we see these things breaking further apart. That disturbs me in terms of the longterm consequences. Tom i wanted go to the more granular view on the call for internationals. Interview after interview of bloomberg surveillance, the percolation of international e. M. Currency seem to do better. On the chart of international investment, u. S. Up, international flat. Does that change next year . Abby if we take a look at the forecast from my Goldman Sachs colleagues, when we look at the developed markets, we are not seeing much differentiation. Nglecally, mid, highsi digit returns for equities. Depending on where the year ends. It is tied to profit gains. Where we see more valuation opportunity is in the emerging markets. But, lets be very careful. Emergingmarket indices are now heavily dominated by china. Very often when individual investors say i want e. M. Exposure, make a careful decision about whether you want that exposure to china or whether you wanted to e. M. Exchina. Tom all of this is driven by revenue. You go up the income statement with the regime weve got now 19 doing well. 92 doin we seem to be desperate to by revenue. We seem to be desperate to buy nominal gdps. Is that in next year . Abby we seem to be desperate to buy Earnings Growth, per se. One of the things i am glad you point out the difference between is that a good deal of the Earnings Growth for some companies has really come about because of the reduction of the Corporate Tax rate. Not what we want to pay a lot for. We want to pay for revenue. We take a look at some of the categories that have not performed well. We all know that Technology Stocks have done an 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 and other countries. When we take a look Going Forward and we say, ok, we dont expect a recession. We expect modest improvement in gdp to 2 or better, it basically pushes us in the direction of some industrials and others that have not performed well. 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 about equity, we will talk fed in the moment, i want to focus and we into the idea of equity outperformance and the gloom that is pervaded. It has been a single digit world. 9 return. It seems like 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 and it is strictly driven by valuation. The worst part of the great recession, what was price then at those p. E. s of eight times earnings was the assumption the prophet recession would last another three to five years. What is priced in now at p. E. Of 18 times earnings is the assumption there will not be recession, that Profit Growth will continue, so on. There is no margin for error. That is what i am most looking at. Could there be surprises . Will the surprises be positive or negative . I believe that we have a chance of more negative surprises than positive, including things that happen outside the United States. Tom ive got more questions on the markets. I will squeeze in them on the discussion on the fed. Abby joseph cohen went of Goldman Sachs. A really special section on her current research. Stay with us. This year ahead view for bloomberg surveillance. Tom we welcome you to bloomberg surveillance a year ahead. We are thrilled to bring you Abby Joseph Cohen and, Senior Investment strategist at Goldman Sachs. So much more with the American Financial system. She worked with the Cfa Institute over the years. The market devolves into market policy. Are we done with the dots . Can we bury the dots in 2020 . Abby i dont think we will be paying as much attention to the dots because we think the trend in Interest Rates is basically tish in 2020. Justice say we have seen the decompression of ratios in the equity market, we have seen the compression of yields in the bond market. We see the compression and terms of the term premium, the duration of the bonds where longs are not yielding much more than shorts. We see this compression in terms of quality. We arlower quality bonds are not yielding much more than Higher Quality bonds. I find this disturbing. Tom it is very different to say the least. Abby it is very different. Keep in mind, those people who argue equity valuations is just fine because of discounted cash flows and so on are basing those numbers on Interest Rates that are at historically low levels. If Interest Rates were to start to move up, there would be an impact on equity valuation. Tom this is not in the textbooks. The new powell said, bank of england and others have to deal with the Material World that is not in the textbooks that we studied. How unusual is this world and do we go back to what we do we go beyond to something that we make it 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 and we continued to fight inflation for many years. Now, the fear is that we are fighting deflation. Lets be clear. In the United States, there is not deflation, right . Wages are rising. Most important, 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. 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, not 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 out in part because Interest Rates are negative in other countries. If you are an investor based in any number of developed economies, you say i dont want my negative yield on my own countrys 10 year. Abby you are getting out in front of my calendar. Tom in january in davos at the World Economic forum, negative Interest Rates. I dont want to get you in trouble with Goldman Sachs, but is it an extreme at that worn out its welcome or is there value to this original Central Bank Policy . Abby i can explain it as a monetary economist with cemex variance and say, ok, in a financial crisis, the idea was for a short period of time to have negative Interest Rates. What we are seeing in terms of the implications from the real economy, not so pleasant. So, for example, in nations where the yields are negative, people are not spending money. In fact, they are saving more than they did before. There is the opposite impact. It is not stimulative. We see the impact in the United States. Our fed has pushed back against the idea of negative yields, yet our yields are much lower than they would be because it is happening in other countries. Tom one of the great losses in economics was margaret goodwin. Precisely this criticism of the professors work is that people like you are in the at the real of economics talking to chairman powell and the rest of us are out there with the negative Interest Rates. It does not were created is chairman powell aware of that into 2020 . There is almost a social need to normalize rates back to the incentives we knew . Abby i have great confidence in chairman powell and also with the teams he has. Not just the members of the board, but also his staff members. I think they see the pragmatic aspect of whats happening right 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 they know how to use as a policy lever. They are in an awkward position right now in terms of having very limited policy tools. Tom this goes back to your work in academics, some highlevel mathematics. I dont know differential equations but Abby Joseph Cohen can do the math. Do we escape out of this centralbank experiment with smooth, controllable curves and drift functions, or do you look of it in 2020 or 2025 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. I think one of the things that many people forget about is that we have been in an environment in which this move towards globalization has in fact kept inflation lower. We are also in an environment where in many countries, population growth is extremely slow, if not stagnant. What actually gives us longterm Economic Growth is population growth. If population is not growing in japan and it is not growing in china, very importantly, and extremely sluggish population growth in europe, maybe we can understand better why those economies have slowed, why there are some signs of deflation elsewhere. The United States has been fortunate. We have had among the fastest rates of population growth and we have to point out very clearly that about half of that over 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. The idea of the people of the United States of america. She has been looking into that, coming up on this year ahead. Abby joseph cohen on immigration. 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 then that is easy with Abby Joseph Cohen because every time she walks in the door, i know there is new research. You go to where Henry Kissinger is, which is the fabric of a nation and about immigration, migration, the demographic trends. What did you learn in your study . Abby clearly, ours has been a nation of immigration. There has been so much noise in the discussion over the last few years that we need to 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, theres a lower birth rate, a higher death rate. In fact, about 50 of the growth in our labor force and our population is now coming from immigration. Thats something that really is the lifeblood for any nations Economic Growth. The nations right 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. Have life and bloomberg, i seen many policies succeed and go down on flames on 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, when we take a look at those people who 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 who says the problem is that we have an inadequate pipeline. We are not training our kids at k12,ng enough age, to be interested in strong in math and science read the time they get to college, they are already behind. We take a look at graduate schools, what we see is that 60 of students in masters and phd programs in the applied sciences and engineering are immigrants. While there has been this discussion about unauthorized immigration clearly, we understand the issues associated with it we are seeing a decline in authorized immigration. For example, since 2015, there has been a notable decline in the number of foreign students coming into the United States. There has been a 20 decline in the visas that we have issued for people coming in for specialized employment. So, i worry we are harming ourselves. We need to be filling that native pipeline. We need to be improving