tom: good evening, good morning and 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, a look year ahead at 2020. we are always trying to find someone with experience, with perspective. they have been right, they have been wrong. we could do no better than abby joseph cohen. senior investment strategist at goldman sachs and has worked with the cfa institute.

again an extraordinary year to , look forward to. thank you so much for being with us. there is 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. you have been the gloom crew's great pinata. 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? abby: well, tom, first of all thank you for having me here for this discussion. the gloom at year-end 2018 in many ways set us up to a good start to 2019 in markets. one thing that concerned about

is how happy everybody 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. but 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 blink

down 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: let's add to the panic selling the whole concept of the structure of the market which is become increasing the depended on etf's and other things that are index related and market cap index-weighted indices. if there are declines of the sort we saw in november and december of that in fact takes 2018, 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 that almost unprecedented spread in p/e ratios where there are group of

stocks where p/e's are very high but there also number stocks where p/e's 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 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 some 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 we have also seen the percentage of cash and future growth in the form of capex and researching is not at good levels and that worries me. it says companies 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 which is business investment. link in the current news item, the trade war, with the dearth of business investment in the future out a 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. 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 long-term economic growth. tom: i'm going to predict in 2020 there will be a new study

of what globalization means. from 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: where there is a very significant impact from political forces in many countries. we see pushback not just in the united states but in 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. and 20/20 could be a year where we see these things breaking further part. that does disturb me in terms of the long-term consequent is might be. tom: what we have seen an interview after interview, the percolation of international em

currencies seem to do a little bit better. the chart of morgan stanley international index and all, u.s. up, international flat. does that change next year? abby: if we take a look at the forecast of my goldman sachs colleagues 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 depends upon where the year ends. but it is really tied to profit gains. where we see more valuation opportunity is in the emerging markets. but let's be very 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 you want it to em x 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 -- for doing well and revenue 2019 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 of the things 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 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, we expect a modest improvement in gdp it , pushes us in the direction of some industrials and others have notthers that have 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 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, what was priced in at

this p/e's 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 and i'm going to squeeze them in 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 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. abby, the market has devolved into fed policy. are we done with the dots 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 flatish in 2020. here's the thing to look at, tom, and that is the way we have seen this decompression of p/e ratios in the equity market. 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 longs are not yielding much more than short. we see this compression 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. is just fine because of 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, and frankly 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 inflation. and we continued to fight inflation for many years. now the fear 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's 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 you do not want my negative yield on my own

country's 10-year. tom: you're 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 don't want to get you in trouble here at goldman sachs, but is it an experiment that has worn out its welcome? was it an experiment that was wrong or is there value to this original central bank policy? abby: i can explain it is a monetary economist with some experience in that and say ok, , in a financial crisis, the od ofwas for a short peri time to have negative interest rates. what we are seeing, though, in terms of the implications in the real economy, not so pleasant. so, fx, 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. we do see the impact in the united states. our fed has pushed back againstd

yet our 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 precisely this work is people like you are the ethereal 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 ended 2020, there is 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 right now in terms of having very limited policy tools. tom: this goes back to some of you work in academics with some high-level mathematics, i don't 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 interest functions and such, or do you look at 2020 or as jumps in 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 in many countries, population growth is extremely slow, if not stagnant what gives us long-term economic growth? it is population growth. if population is not growing in japan and not growing in china very importantly, and extreme we sluggish population growth in europe maybe we can understand , better why those economies have slowed, why there are signs of deflation elsewhere. the united states has been fortunate. we have had one of the fastest rates of population growth and we have to point out clearly that about 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. she has been looking into that. coming up, the year ahead,

abby joseph cohen on immigration. this is bloomberg surveillance. ♪

tom: we welcome all of you again. the 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 walks into the door i know there is new research. and you go to where henry kissinger is, that is the fabric of a 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 that 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. and 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 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. in my life at bloomberg i've 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 important for the united states. for example, when 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 say the problem is we have an inadequate pipeline. we are not training our kids at a young enough age k-12 to be interested and strong in math and science. by the time they get to college, they are already behind and 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. 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 filling that native pipeline. we need to be improving education. but in the meantime, we are hurting ourselves. tom: let's take a famous 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 folds right into nominal gdp. that linkage is still there, isn't it? abby: that linkage is there an -- and recent data from the commerce department show something interesting. the fastest-growing 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 the mckinsey study there could be a goldman sachs study as well. what is the compare and contrast . abby: 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 when we see the periods of restriction. 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. and now not so much. tom: abby joseph cohen of goldman sachs, love doing this. it is the year ahead. 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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