♪ >> good evening, good morning, and good 2020. this is always one of the high points of the year. we will take it for what it is -- a surveillance special, a look a year ahead to 2020. we are always looking for someone with experience, perspective, they have been right, they have been wrong. we can do no better than this most interesting 2019 then abby joseph cohen went. she is a senior strategist at goldman sachs. that barely describes her

contribution to the u.s.. an extraordinary year to look forward to. abby, thank you for being with us. there is a lot to talk about in the next half-hour. i want to talk about immigration and the central bank. we have to talk about the markets. you have been the gloom cruz great pin yada. they love to go after abby -- great pinata.'s they love to go after abby joseph cohen. when does it end? all forank you first of having me here for this discussion. gloom at year end 2018 in many ways set us up for a great start to 2019 in the markets. one of the things i am concerned about is just how happy everyone

is at year end 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 the mid single digits, maybe a little higher. it is priced into the market. when i am worried about is when valuation is already there the risks cutting fact be to the downside rather than the upside theould in fact be to downside rather than the upside. let's college mid single digits along with growth in 2020. there are a number of things on the horizon that could put just 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 impossible to go down 10%. maybe for a blank -- blink we go down 18%.

if we get tonow is enough down, there will be panic selling, which will bring us down even further. do you buy that idea? abby: let's add it to panic selling the concept of the structure of the market, which has been increasingly dependent on etf's which are index related, especially market cap-weighted indices. if there is a decline of the sort that 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, those stocks that have performed the best. in 2020, investors need to be thinking about the stocks that did not have the great price momentum thus far but offer great value. what we are seeing in the equity market right now is an almost unprecedented spread in issues where there are a group of high, where pe is very

but there are a number of stocks where pe is on the low side. maybe that is where the best opportunities are for portfolio protection. tom: a little housekeeping here -- share buyback, does it continue? abby: share buybacks have been such an important part of the story for several years. there are some signs that it could be slowing. one of the things that has always troubled me about share buybacks is that companies are using their cash to do this and for special dividends and to raise regular dividends. we have seen the percentage of cash being used for future growth in the firm of capex and research and development is not at particularly good were levels -- levels. it means that companies are not seeing good reads. tom: you put together a

powerpoint at years end for some of your clients and it is about the uncertainty out there, it is about the -- link in the current news item, the trade war, with the dearth of business investment and the future in terms of earning equities? abby: it is no secret that capex was disappointing in 2019. in fact it was negative and we think this will continue in 2020, especially for structures. when we talk to companies about why that is, many of them do pointed to the uncertainty of the trade rattles. we see this not only in the united states, -- trade adelson. we see this not only in the united states, but it is even battles.atic -- trade we see this not only in the united states, but it is even more to erratic and other

countries. abby: in 2020 -- tom: i predict in 2020 there will be a study of what globalization means. the new.s., what is globalization that abby joseph cohen sees? isy: the new globalization one where there is very significant impact from forces. we are seeing not only a pushback in the united states, but other nations, and i worry about it. since the end of the second world war we have had this. of multilateralism, not in terms of -- in terms of political and military alliance. we20 could be a year where see these things breaking further apart and this does disturb me in terms of what -- tom: i want to go to a more granular call. what we have seen call after

call is the percolation of currencies. the chart of morgan stanley international index and all, the u.s. is up, international flat. it that change next year? abby: if we take a look at the forecast from my goldman sachs colleagues around the world, when we look at the develop -- we see mid, may be high single digits equities. it depends on where this year ends. it is really tied to profit gains, where we see more valuation opportunity is in fact in the emerging markets. let's be very careful -- emerging market indices are now heavily dominated by china. very often when -- what individual investors say, make a careful decision on whether you want that exposure to china or whether you want it to e and ask china. -- enx china. tom: we mentioned stocks for

2019 doing well. exception to that rule. we seem to be desperate to buy revenue. we seem desperate to buy nominal gdp. toy: we also seem desperate buy earnings growth. 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 in 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. will know that technology stocks have been outstanding doc performers in the u.s. markets. one of the reasons the u.s. has outperformed other markets is because we are more tech heavy. when we take a look at going forward and we say we do not

expect a recession, we expect a modest improvement in gdp to 2%, it pushes us in the direction of some industrials, some others that have not performed well. my colleague makes a very strong point about why you want to look ,t companies that offer growth but growth that a reasonable price. tom: as we close out this discussion of equity, i want to to this ideall in of equity out performance and the gloom that has pervaded it. it has been a single digit world, but it's not. it seems like we were too cautious over the last 10 years. should we maintain that caution, or can we lift our single digit expectations? i find myself to be more cautious -- to be more cautious then i was. during the great recession, what was priced in at the pe was

basically the assumption that the prophet recession would last another three to five years. profit recession would last another three to five years. there is no margin of error. that is what i am most looking at -- could there be surprises? will those surprises be positive or negative? as i look at things now, i think we have a chance of more negative chances than positive. i will come back with abby joseph cohen of goldman sachs. we will have a very special section right here on her current research. please stay with us. ♪

tom: we welcome you to bloomberg surveillance. a year ahead and we are thrilled to bring you abby joseph cohen, senior strategist at goldman sachs. there are so much more to the financial system in the u.s.. abby, the markets devolved into fed policy. are we done with the dots? can we bury them in 2020? abby: i do not think we will be paying as much attention to the dots because we think the trend in interest rates is a flat in 2020. here is the thing to look at -- it is just the way that we have seen this decompression of p/e ratios in the equity markets. we have seen a compression of yields in the bond market and we see compression in terms of the -- that is the duration of the bonds. lungs are not yielding more than shorts. are not yielding more

than shorts. i find this disturbing. very different to say the least. abby: keep in mind that those --ple who argue that the big equity valuation is fine are basing those note -- numbers on interest rates that are at historically low levels. if interest rates were to move up, there would in fact be an impact on equity valuation. tom: this is not in the textbooks. chairman powell and the new governor of the bank of england and others have to deal with a material world that is not in the textbooks that we studied. how unusual is this and do we go back to what we knew or do we go beyond something -- to something that we are making up as we go? abby: this is an extraordinary. in economic history.

in the fed we were fighting inflation. now the fear is that we are fighting deflation. let's be clear, in the united states there is not deflation. wages are rising. inflationtantly good is moving up as well. where has there been deflation? there has been deflation in places like japan. 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, there has not been much use of a fiscal policy for stimulus reasons. that has to do with the compact that puts the eu together. 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 to buy negative yields on my own country's 10 year. tom: you're getting out in front of my calendar. my theme is going to be negative interest rates. i do not want to get you in trouble here, but isn't it an experiment that has worn out its welcome? or is there value to this original central bank policy? aby: i can explain it as monetary economist with some experience in that and say ok, in a financial crisis, the idea was for a short. of time to have negative interest rates. what we are seeing thou in terms of the implications in the -- though in terms of the implications is -- people are not spending money, in fact to they are saving more than they did before. there is the opposite impact.

it is not stimulative. we of course to see the impact in the united states. our fed has pushed back against the idea of negative yields and get our yields are much lower than they would be because of what is happening in other countries. goodfriend, his criticism of professor goodfriend's work is that people of you are in the ethereal of economics, talking to chairman powell and the rest of us are out here with negative interest rates. it does not work. his chairman powell aware that in 2020, there is almost a social need to normalize rates back to be -- the incentives that we knew? abby: i have great confidence in chairman powell and did team that he has -- the team that he has. i think they see the pragmatic aspects of what is happening right now and i think they would like nothing more than to be and

an environment where we have tol interest rates returned positive levels. it is something they know how to use as a policy lever. there in a very awkward position right now in terms of having very limited policy tools. tom: this goes back to work in academics with some very high-level mathematics. abby joseph ghosn, folks, can do the math. cohen, folks, can do the math. to remove out of this with drift functions and such or do you like jump this at conditions and discontinuous moments? abby: i'm going to change the question a little bit and say what are the other issues that are leading to these very low interest rates? we tend to focus only on policy tools and that -- one of the things 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 in an environment where population growth is extremely slow if not stagnant. what gives us long-term economic growth -- population growth. if the population is not growing in japan and it is not growing in china very importantly, and there is 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. we have to point out very clearly that about half of that over the last decade has come from immigration. with usy joseph cohen to drive into 2020. it is an election year. part of that will be the fabric of the nation. it is the idea of the people of

the united states of america. she will look into that coming up. abby joseph cohen and on immigration. this is bloomberg today. ♪

♪ tom: we welcome you again. a year ahead, bloomberg surveillance we love doing this every year. our team tries to put together a good conversation. at is easy with abby joseph cohen and. every time she walks through the door i know there is new research and you go to where henry kissinger is, which is the fabric of the nation. the demographic trends that are out there. what did you learn in your study? abby: clearly tom ours has always been a nation of immigration. there has been so much noise in the discussion over the last few years that we really 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, there is a later -- lower birth rate, a higher death rate and in fact about 50% of the growth in our labor force in our population is now coming from immigration. that is something that is really the lifeblood for any nation's economic growth. the nation's 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. in my life at bloomberg i have seen many policies succeed, though down in flames upon a 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 important to the united states. for example when we look at those people who have doctorates in things like engineering,

computer science, who are working in the u.s. industry, something on the order of 40% or 50% of them are immigrants. tom: are they taking jobs from americans? abby: no they are not. the american academy for the advancement of science says we have an inadequate pipeline. we are not training our kids at a young enough age to be interested and strong in math and science. by the time they are in college they are already behind. when we look at graduate school, what we see is 60% of the students in masters and phd programs in applied sciences and engineering are in fact immigrants. ofle there has been a lot this discussion about unauthorized immigration and clearly we understand the issues associated with it. inare also seeing a decline authorized immigration. 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 issue for people coming in for specialized employment. 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 goldman sachs scatter chart. i do not have it in front of me. at has all of those dots. quintile,tile, lower it falls right into consumption and right into nominal gdp. that linkage is still there, isn't it? show it is and recent data something interesting. the fastest drawing -- growing job categories tend to be those that are filled by immigrants. there are the high skilled jobs -- think of it as i.t.,

engineering and so on. advanced health care. then at the other hand are things like -- other end are things like accommodation, retail trade, and food. these two sets of categories tend to be overrepresented by immigrants. -- information we get from the household information we get from immigrants represents 40% of the totals. when households are formed they buy houses, they furnish those homes, they pay property taxes and so on. there is an important ecosystem associated with this. tom: what is the compare and contrast with europe here? there has to be a compare and contrast. what is our best practice on immigration when you look at other nations? are dealingnations with things in a somewhat different way. the united states historically is quite different from other

nations because other than the native americans who were here, we are all immigrants, some forced through slavery. we have had over the last 200 years cycles in terms of immigration policy. sometimes extremely welcoming, sometimes perhaps when there is perceived economic duress or some political advantage to be taken, that is when we see periods of restriction. what we have seen that now 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 towards refugees and now not so much. tom: abby joseph cohen of goldman sachs. love doing this. senior investment strategist at goldman sachs. we hope for all of you it is a wonderful 2020. i cannot promise you the equity

returns of last year will get half as much this year. this is bloomberg surveillance. ♪ ♪

taylor: i am taylor riggs in for emily chang, and this is the "best of bloomberg technology," where we bring you all of our top interviews from this week in tech. coming up, the california consumer privacy act. the law is now in effect but not without controversy. we will discuss how companies are interpreting the statute meant to standardize data mining practices. plus, cybersecurity in 2020. what new threats lurk online and will tech try to thwart it?