>> good evening, good morning at good 2020. this is one of the high points of the year. i do not know if it is the past year or the next year but we will take it for what it is a surveillance special, look year ahead at 2020. we are always trying to find someone with experience, with perspective. they have been right, they have been wrong. abbyould do no better than withh cohen. she is

goldman sachs and has worked with the cfa institute. an extraordinary year to look forward to. thank you for being with us. much to talk about in the next half-hour. i want to talk about your new effort, thinking about immigration and what it means for the fabric of the nation. we must talk about the central bank. we have to talk out the markets. gloom accruesthe great piñata. they love to go after you in good times or bad times. you 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? tom, first of all thank you for having me here for this discussion. the gloom and 2018 him anyway set us up to a good start into money 19 in the markets. one thing i'm concerned about is

how happy ever but he is at year end 2019. 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 mid-single 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. let's call it mid-single 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 blank good on eight teen percent 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? let's add to abby: the panic selling the concept of the structure of the market which is become increasingly related -- increasing the depended on etf's chart index related and market cap index-weighted indices. if it declines of the sort we saw in november and december of 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 now is that almost unprecedented spread in p/e ratios where there are group of

stocks where pes are very high but there also number stocks where pes are on the low side and maybe that is where the best opportunities are for portfolio protection. tom: even on the year have you we have to get out of the way the housekeeping here what 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 reg alert dividends. but we have also -- to raise regular dividends. but we've also seen a percent of cash and future growth in the form of capex and researching about men is not at good levels and that worries me. because it says company's are not really seeing good reinvestment opportunities. tom: you put together a terrific

powerpoint year and 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. lincoln 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 about -- 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 his 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 long-term economic growth. tom: i'm 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 abby josephn that cohen sees? abby: where there is a significant impact of play go 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. , not just inalism terms of trade and economic elation chips, but also in terms of political and military alliances. and 20/20 could be a year will be see these things breaking for their part. that does disturb me -- breaking farther apart. at disturbs me in terms of the long-term consequent is might be. tom: what we have seen an , theview after interview

percolation of international em currencies seems to do a little bit better, on the chart of morgan stanley international index and all, u.s. up, international flat. does that change next year? at thef you take a look forecast for my goldman sachs collie some around the world, will be look to the developed markets, we are not really seeing much differentiation. basically mid or high sigel digit returns from equities -- 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 let's be careful. the emerging market indices are now heavily dominated by china. 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 he wanted to em x china. tom: all of this is driven by revenue. when you go up the income

statement with the low interest rushing 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 by revenue. we seem to be desperate to bite nominal gdp. does that and next year? abby: we also seem desperate to buy earnings growth, per se, and one thing i'm 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 us 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 say ok, we do not

except to recession, we such a modest route improvement in gdp to 2% or better, it pushes us in the direction of some industrials and others have not performed well. andolleague dave acosta makes a strong point about why we want to look at companies that offer growth but growth that reason will 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 left our single-digit 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, was priced in at this pes 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 pe of 18 times earnings, is the assumption that there will not be a recession, that profit growth will continue come and so on. 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 and i'm going to squeeze the minute with our discussion on the fed. i'm 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 bluebird surveillance. ♪

tom: we welcome you to bloomberg surveillance. with abby joseph cohen of goldman sachs and i mention her work with the cfa institute over the years. is devolved into fed policy p are we done with the datsun and 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 flat it in 2020. here's the thing to look at, tom, and that is the way we have seen this decompression of p/e ratios the equity markets, we have seen a compression of yields in the bond market. we see the compression in terms of the term premium, that is the duration of the bonds, where young's art 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. and i find it this disturbing. tom: it is very different, isn't 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. said official, the new government 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 jan to something we are making up as we go? abby: this is an asked ordinary. an 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 fears is we are fighting deflation. let's 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 because is the single most used policy tool in many nations. in europe, for example, there is 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 i do not want might negative yield on my own countries 10 year. you by the u.s. treasury. out front ofetting my calendar in january and davos of the meetings of the world economic forum, my theme is going to be negative interest rates. i don't want to get you in trouble with ullman sex but is it an experian that is 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 expense and that and say that in a financial crisis, the idea was for sure. of time, to have negative interest rates. what we are seeing, though, in terms of the implications in the real economy, not so pleasant. nationsexample, in 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 yield and yet aren't yields are lower than the 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 professor goodfriend's work and people like you are in the if there a world of economics talking with chairman powell and the rest of us are out there is negative interest rates. it doesn't work. is chairman powell aware that into 2020, there is a must 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 than that they know how to use as a policy labor. they are in a very awkward position now. a policyolicy -- as levefr. tom: this goes back to come located mathematics, i don't know if it is differential equations, but abby joseph cohen can do the math. do we escape with smooth controllable stable curves and functions or do you look at 2020 or 2025 as jumps and discontinuous moments? abby: i'm going to change the question 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 come in many countries, population growth is extremely slow, if not stagnant what gives us long-term economic growth? it is publishing 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. 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 you mentioned it is the idea

of the people of united states of america. and she has been looking into that. -- thatp, the airhead year i had. this is bloomberg surveillance.

tom: we welcome all of you again. the year ahead. bloomberg surveillance. we love doing this every year. our team loves putting 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, data graphic 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 and a higher death rate. and 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 nation's 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. my life at bloomberg i've seen many policies succeed and others go down in flames upon vote in washington. how to get some thing voted on the benefits all? abby: looking at the economic dimension we have identified some things 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 job some americans -- taking jobs from americans? abby: they are not. we have had conversations with the american academy for the advancement of sciences and they have said we have an inadequate pipeline so we are not training our kids at a young enough age k-12 to be interested and strong enough in math and science. by the time they get to college, they are already behind and will be take a look at trap get -- graduate school, we see 60% of the students in masters and phd programs in the applied sciences and engineering are immigrants. here's 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. there's 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 feeling that native pipeline. we need to be improving education. but in the meantime, we are hurting ourselves. tom: let's take a famous goldman-s to s ask abby joseph cohen scatter. chart and it has all those dots linking lower quintile, lower quartile, low-wage jobs and it folds right into consumption and then full to write into nominal gdp. that linkage is still there, isn't it? abby: that linkage is there an recent data from the commerce department show something interesting. the fastest-growing job category's in the united states tend to be those which are filled by immigrants. they fall into two categories. there the high skilled jobs, thick of it as i.t., engineering

and so on. . advance 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 hassles 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 us. the what is -- tom: what is compare and contrast europe? i think of the mckinsey study there could be a golden study as well. what is our best -- a goldman sachs study as well. what are compare and contrast with say, europe we look at fears? other nations are looking at things in a different

way. 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 restrictions.at what we have seen that distinction is our history from ourselves has been the attitude we are taking toward refugees. the united states previously had was been one of the most welcoming nations toward refugees. and 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 all of you 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. ♪

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into 2020.ling commodities hit their highest level in more than a year as oil, copper, soybeans, and wheat close out the year on a high note. we revisit one of the most notable interviews of 2019, our sit-down in houston with bp cfo brian gilvary. and the chemical industry's biggest ever ipo. we talk to one company executive looking to make sustainability profitable. ♪