tom: the new year brings radical change to washington. nothing will change for janet yellen. the chair, they are accommodative, and the fed must right size amid trump reflation and go to cash. here's the truth. i went to cash, and i have seller's remorse. for this entire hour, abby ,oseph cohen from goldman sachs

we look through the prism and synthesis of economics, finance, investment, and international relations. a really with the perspective of decades that abby joseph cohen has brought to all of investment. was a good evening, good morning, good afternoon to you, wherever you are, worldwide. it is a "bloomberg surveillance," year-end special. i'm tom keene from the world headquarters in new york. right into it with abby joseph cohen, senior investment strategist at goldman sachs. it merely describes her commitment to the education of those within the investment community. at the cfa institute, her work for years with goldman sachs. what is the difference tween what you do and what david kosten does everyday goldman sachs? abby: first of all, i'm delighted to be here with you. for year-end retrospective and a look ahead into the new year.

i spent most of my time thinking about the intermediate to long-term outlook. david in many of my other colleagues at goldman sachs really focus in short term. we are trying to be held to our clients do need that regular, hourly, daily updates. i tried to step away and work with the longer-term horizon clients, including individuals, endowments, sovereign wealth funds, and others. tom: many people watching the 2015 -- into 2017 are huge abby joseph cohen fans. they say she is always bullish. you and i know that is not true. for starters, you look really into this year. brilliant into a seven or eight year market. can you be brilliance and be the bull for nexterma

year? abby: there are so many unknowns. 2016 turned out to be a good year for the economy. and that was the basis for being optimistic about the equity market in 2016. economy growing, profits increasing, labor markets stabilizing, we just beginning to rise, that's a great combination for the equity market. in 2017, base will be good. as we will be entering the year with an economy that is performing well. the real question surrounds policy, new administration, and quite frankly, there are so many unknowns that we will be adjusting views as the euro goes on, based upon changes in policy. tom: in historic perspective, the bull market we lived since early 2009. abby: we've actually had to bull bull market, one

that began in earnest in the springtime of 2009. after the financial crisis was calming down, we began to see a very significant rise in equity prices, by most accounts tripling of those prices, but we have also had a multi-decade bull market in bonds. i think that bull market in bonds is now over. and so much of what investors into think about, businesspeople and so on is what are the implications of having hit the bottom of inflation, having hit the bottom of interest rates, and how do we adjust for that? tom: this is critical. i think of the idea that i say please bonds -- equities bonds and commodities. there's a relationship between bonds that was broken. sync? in think -- in abby: not yet.

when we apply valuation models to fixed income, what we find is that despite the rising yields since the election, those yields are probably still too low. for example, on a fair value basis, we would expect the 10 17r bond yield -- which was for the election, we expect that to march from roughly 2.4 in december to perhaps 2.7 in the coming months. we have a ways to go for we get back to fair value on fixed income. let me point out, when we do the equities valuation work on that we are not using the unsustainably low interest rates, we're using yields that we expect will occur. abby: this is a critical -- tom: this is a critical point. you plug in what you think rates are going to do, and you don't use the clearly present distortion that we are in now. abby: if you believe that yields are going higher and that the mathematics tell you the higher the yield, the more problem it is for equity valuation, we are

trying to make exercise a little more difficult, and even when we do, the conclusion is that equities have value. tom: you and i have witnessed any number of bond bear markets. remember when your grandfather showed you boise cascade bonds? those days are gone. now everyone says yield, yield, yield, yields go up, price goes down, and all of a sudden, its price, price, price on bonds. are we anywhere near a bond bear market where people see significant price and version? abby: i believe that has already begun. we see that in treasuries and high-quality bonds where we have seen more price decline then we have seen in say corporate bonds, because corporate bonds have a margin built in. up, abby joseph cohen on chair yellen, the federal reserve reserve system,

andbanks around the world the tumultuous year-end that europe has seen as well. stay with us as we look ahead. this is "bloomberg surveillance." ♪

>> it is critically important that a central bank have the on how to make judgments best to pursue those goals while being accountable for expanding his decisions and transparence in its decision-making. tom: maybe not the statement of 2016, but there is chair yellen of what will be the statement of

2017 and 2018. we welcome back to "bloomberg surveillance." cohen, is abby joseph senior investment riser to goldman sachs. that was the perfect moment to capture of janet yellen in 2016. i want to jump ahead to maybe to the end of her term, to a new fed chairman in this massive battle to calm overrules and discretion. , alanrd university greenspan on the other side talking about strategy. where you on that? abby: the word i think that is most critical is fed independence. to look ahead to 2017, 1 of the big political footballs may prove to be

sacrosanct in this country. when we talk of the taylor rule, i think that's a good starting point. the fed uses mathematical models to try to term and where they want to be, where they think it is rates will be, but the taylor rule by itself is just one tool, in my view, in the larger tool bag. tom: are the checks and balances within the washington system to give us the miracle of 1951. you served with a very independent fed 25 years on. that, everyonee agrees with you, are the checks and balances to push back the mood of so much support of the president? abby: i think it's important that it not be just the president, but also the congress that acknowledges that the fed should be independent. when the federal reserve chair comes and gives testimony before congress, it's important that that be an open dialogue, rather

than the chair being berated for things that may or may not come under fed control. piercingasked questions of the economic club of new york this year, and as always, there was a motion of vice-chairman fisher corning that phase ultra accommodative. we from neutral or even how distant are we from a restrictive fed? abby: i think we still have quite a ways to go before we have restrictive monary policies trade keep in mind that the united states in our view will be ving forward with policy rate increases, but we have seen is the intermediate control by they get market participants have already moved higher in the yield curve has steepened. if medication that investors are looking not just -- it is an

indication that investors are not just looking at demand for these funds, but in terms of the inflation outlook and so on. when we talk about ultra accommodative, the story isn't really the fed. is really the european central bank, the boj, and others that continue to follow negative interest rates. tom: as you know it well, the idea in working with the cfa institute, there's nothing like the manufacture of a chart to intuitively understand those timeseries. there is something about a pencil or a bloomberg terminal -- my 2017 shameless plug for the bloomberg terminal. you put the chart together and it works. of me, it was balance sheet the fed to gdp. japan is out of control with the expansion of their balance sheet. tell me about the pressures on mr. drawdy next -- mario draghi next year to right size is ecb?

abby: he has a problem in terms of what we see with other central banks as well, which is fiscal policy has been asleep, and he been largely inactive for most of the period since the financial crisis. we have seen more stimulus in the united states, 2009, 2010, then was the case other work, especially in europe where they had constraints that were very considerable in terms of deficit relative to gdp. mario draghiabout and other central banks, let's not do it in a vacuum. let's recognize that we have asked central banks around the world to do way too much. and that is because fiscal policy largely has been absent. going to be ecb is looking not just a interest-rate policy, but also in terms of their approach to qe, quantitative ease. what mario draghi said recently he doesn't plan to taper

anytime soon. when you to keep in mind this is not a long-term opportunity. tom: this goes back to your work at the cfa institute. in conversations with deutsche bank and his work with all of the other research that pulls in research that pulls in history. what is the details of the european financial experience in the next year? what is your measurement of how 2019? gets 2018 or abby: we have to recognize that europe is facing notable structural impediments to growth. if we take a look at the potential growth rate of most european economies and take the average, it just about 1%. it is that euros chlorosis? abby: it is. you have an extremely low growth rate.

we see productivity gains have been anemic. ,hen we take a look at europe they really are struggling very hard against their structural problems. monetary policy does not address structural issues. does, regulatory policy, trade policies, not monetary policy. tom: if we get the rate rise you were talking about, the reflation that is assumed quickly here, rates rise in japan. that has been the multi-decade fear. where's the tipping point for japan if rates rise? abby: the tipping for for japan has shifted. it's because they have been trying desperately to get inflation up. when you talk about rates, we often talk about nominal interest rates and we don't adjust for inflation. one of the big problems in japan has been ongoing deflation. as prices begin to move somewhat higher in japan, they can tolerate higher interest rates.

we think that in japan, we are seeing benefits not just for monetary policy, but from what is referred to as autonomic's. we are seeing structural reform in japan, and these are progrowth reforms. tom: we will come back on this, it fits perfectly to a conversation on a president trump and the reflation of our markets. stay with us. ♪

>> if you look at

diversification, we have now documented evidence of the fact that when women participate in the economy and the labor market as much as men do, you have a more diversified economy. women to theng labor market and giving them access to finance, you reduce the inequality. tom: good morning, everyone. madame lagarde, we'll get to that in a moment. this is the "bloomberg surveillance," special. i am tom keene. christine lagarde is speaking --h john nichols with nichols weight. it's a wonderful moment, christine lagarde with her new tenure at the international monetary fund, really aggressive, women within finance and investment, and frankly within that world economy. tos a good comment to speak abby joseph cohen. i think of your tenure at the fed years ago, what was your first day like?

abby: it was actually wonderful. ofas hired by the director research, who, during the recruitment process, specifically said to me i have three daughters. tom: that's a start. abby: i want to make sure women at drexel have every opportunity to succeed. it with madame lagarde and abby joseph cohen. the analysis of it is women not so much work harder, but work smarter towards that marginal effort to gain on wall street. are the women outdoing the men? -- toi have to do disagree with you. i think women work harder. they are also better prepared and we basically find women are succeeding most in categories measured.eeply

whether it's investment research portfolio management, where there are numbers that can measure performance, we see that women are doing quite well. one of the concerns we have had has been that we lost a whole cadre of people, if i can use that expression, post financial crisis. many of the young people, male and female, who came to wall precedingthe period lost their jobs are decided to leave the industry. so we are missing some of those people who should now be moving into important middle-management positions. -- full do you respond disclosure, you worked with cornell afterwards -- how you responded to the lecture you give to parents who picked up stem,itgeist of 2017 -- stem, stem, stem, stem. my experience is that doesn't work. but you have to have the broader experience.

what do you say? abby: i would be saying the same thing that you are. stem should not be viewed first of all, as an independent area. this economy will move forward when stem get incorporated into the things that we do. for example, about one third of the workforce goldman sachs are people who are technologists. i believe that in almost any field right now, people who have the background in math, who understand what computers can do, and so on, really have an advantage, but that's not all. one of the things i really do worry about is the way we have devalued liberal arts. think of liberal arts as literature, history, learning to think in different ways. we need the helical skill of analytical skill of stem, but we also knew the more qualitative approach. tom: when you have done within your work for decades -- i tried

to do that on "bloomberg surveillance," is to pull history into our finance analysis. nobody does that. it's important to understand the nuances and distinctions of 1907 versus 1929 versus 1937. i see it coming back. i'm optimistic about a new history. you are correct. but let's be careful how we describe this. with the power of the data systems that we have, including the bloomberg terminals on our our people,f experienced and younger people, can say look what happened in 1942. but what is often missing is the understanding of why it happened. and sometimes, the data alone don't tell the full story. do your point, it's the understanding of political economy, not just quantitative economics that i think will make a big difference. tom: one of the lessons that i learned is when you see people

advance, i have always followed people's careers. -- ruth -- roof porter quarter goes for morgan stanley to google and transform google. she went across industries and had a profound effect. abby: she was also involved in the committee. we are also engaged in the economic club of new york, an important forum for conversation about economics. conversation about the economy and business in history, and looking forward. ruth served as vice chair of that organization. to go now, we could have spent the entire hour with abby joseph cohen speaking about t of 2016.-- tumul

that shocking night -- not shocking for mr. trump -- the shock as we move towards president trump. as we continue our conversation with abby joseph cohen. ts is "bloomberg surveillance." ♪

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joseph cohen, goldman sachs senior investment strategist. we could go for five hours on the impact of this election. but where -- what were your thoughts on election night? abby: i was surprised by the result. clearly this big gap between the popular vote, which mrs. clinton won versus electoral college, which helped confuse the polling that was done before the election. after the election, we obviously have to do our analysis about what is the impact one to be? --what the impact is going to be? much of the rise in a stock prices early on was selling treasuries and securities, likely to see if the -- likely to see it come that was elected or not, the rise in inflation

and interest rates. financial services, health care, let's call it some of the energy producers, because there are other companies as well. what we are seeing towards year end 2016 is more interesting. it is a rotation towards those companies that benefit from ongoing economic growth. growmy continues to cyclical stocks do well, commodity stocks do well, and all of this is internally consistent within the market. tom: there are gateways to go in as the look ahead to 2017, the question for all of our viewers and listeners of all walks of life is to be shift the gainesution of games --

within american society? i know you are optimistic that we will move forward, but we will move forward for 25% of america, or can we begin to shift the inequality? daysde mentioned a few ago, can we shift? abby: that is a great way to talk about it if you are an economist. if you are not an economist, i would encourage people to read two books, both of which are 400 year histories. one has to do with the frustrating lack of social and economic mobility for people mainly in the rural areas of the united states. i don't mean to offend anybody. it is not my title. tom: but you grew up in rural new york? abby: i did grow up in ruralew

york. that book is called "white trash." there is a second book called "city of dreams." it has a subtitle of a 400 year history, but this is the 400 your epic history of immigrants in new york. the contrast between the two because phenomenal groups of people, both urban and rural, are fighting dissemination. they, with less education -- they come with less education and less economic opportunity. you see in the cities of united states, people have done better because job creation is better. to try to answer the question of what happens next? let's talk aut it structurally and cyclically. cyclically, we are much better now than we were two years ago, four years ago. job creation is there, wages are rising. structurally, we have not really done the job.

we not investing more in education either. k-12, or vocational training. we see that the likelihood of a young man is going to finish college is actually lower today than it would have been 15 years ago. tom: this is a plutocracy? i don't may to pick on mr. trump. in a broader sense over the last decade or two decades, is it a plutocracy, the gilded age that we need to fear? abby: when you look at the employment data and the family income data, people who are well educated, people who live in urban areas by and large have done far better. so the question for us in 2017 is what will the policy direction be? will the policies be favorable toward middle income people, including perhaps increases in the minimum wage? will then include protections

for both worker safety another things? tom: we could go on and off. coming up, we will look for it to this next year and this next decade. stay with us. this is bloomberg. ♪

♪ "brilliant surveillance" in our "brilliant surveillance" special. abby joseph cohen, goldman sachs senior strategist. said, we can do this special, but for one section of this special, i have to go along with abby joseph cohen.

was an industrial book that you took the net income statement down to the bottom menu looked at cap earnings. -- gap earnings. where will we be one year from now or five years from now on how we do security analysis? abby: fabulous question, tom, but i wanto broaden it out. number one, if we had this conversation had decade ago, we would have been talking about an accounting system in the united states that closely. old -- that closely paralleled the -- number two, we are seeing from an investment analysis standpoint that a lot of our work is getting muddled because of the use of cash. 70% of the 2000, cash for companies in the s&p 500 went back into the company for things involving growth,

capital -- tom: how odd, investing in the future? --y: capital spending, r&d it is now 42%. foruch of the cash is going purchase. one of the major policy initiatives that we are hearing about may very well be this important corporate tax reform, and a piece of that could be the the repatriation of profits that companies now have overseas. , andat money comes in there are no restrictions and terms of how that money is used, one of the things i worry about is that a good deal will go for share repurchase, which is great because of the one hand, it narrows the number of shares for which those earnings can be divided. on the other hand, if the money goes into things like shared

purchase alone, or dividend increases, and not into growth, the benefits to the nation will not be there. tom: are you optimistic that the legislative body of mr. trump's administration, the senate, and the house could provide the guidelines so that apple ,omputer, or a mid-cap stock will allocate to invest to create jobs? abby: before the election, there were bipartisan conversations, democrats and republicans, all the technology they need for some form of taxes -- some form of corporate tax reform. democrats and republicans were talking about using that money to fund infrastructure, to fund job creationand in some instances, putting limits on how the cash could be used at the corporate level. in 20 17, when we see the actual language of the legislation, we

will be able to judge better. ballis point, my crystal at this point, my crystal ball is very foggy. tom: d.c. nominal gdp better youth for next year -- do see nominal gdp of better growth for next year? ways in you look for which a number could be wrong, it is probably more likely to be stronger rather than weaker, in part because the economy is ending 2016 on an accelerated note. tom: abby joseph cohen with us. really, really pleased you are with us. we have so many topics we have spoken on through this hour. importantend on things from last year. as we move to the inauguration on to a new 2017, abby joseph cohen, her optimism on america.

american exceptionalism. this is bloomberg. ♪

♪

tom: "brilliant surveillance" our year-end special. we knew this would be a joy with abby joseph cohen. she is with goldman sachs, a senior investment strategist. ok, this is great, we will talk about investments. i want to talk to abby joseph cohen about where this nation is going, and about the world economy as well. abby joseph cohen on american exceptionalism. book last year, we did it in the 20th century, maybe we will do it now. i had a great conversation with professor gordon -- are we were living the glory days from previous times? host not been keeping up with our end of the bargain. the glory days had to do with a dramatic increase for everyone.

there were substantial investments made, not just by corporations, but also by the federal government. during those glory days, 1950's, 1960's, 4.5% of u.s. gdp was in the form of r&d. a good deal of that coming from the federal government. which now down to 2.5%, puts us in the middle of the pack instead of being far out in front. tom: the middle of the pack is not exceptional. abby: not at all because we could be doing much better. tom: is the idea of jumpstarting as to something new, where does it come from? does it come from government policy? does it come from prices? abby: when we have to understand is that crisis in the united states often pushes us in the right direction, not just in terms of the corporate response, but also government response. one of the things that has been

disappointing, i think, has been as a nation, we have not made the investments in the future that we have seen in the past. infrastructure spending, of course, is something that has bipartisan support. to do ithave been during the worst part of the financial crisis when unemployment was higher? that is not a reason not to do it now. what we have the recognizes that some of the discussions about infrastructure are talking about it being privately financed. that is not what long-term, public investing is about. the government, when we go back and look at pictures of analysis, but can -- the government looks at spending on things with there is no profit motive, big projects where there might not be revenue at the end of the day. whether it was eisenhower's highway system. but it was a space program and so on, that is how the night

dates establishes itself -- that is how the united states establishes itself. tom: talk about the u.s. dollar. that is our exorbitant privilege. it is part of american exceptionalism. where is the dollar as the standard of the american economy? joseph does not buy it. abby: the united states dollar is the world's reserve currency, and will remain the world's reserve currency. but let's keep in mind that china has already stepped up to reserven increasingly currency in asia. a few years back, 40% of all trade in asia was in dollars. china has moved in. let's keep in mind the following -- over the last three years, dollar haseighted

risen about 25% or 30% while the feel-good that it says something about the u.s. being strong, it also is an impediment to economic growth. biggest sector has been growth -- it makes it -- biggest sector has been exports. tom: with this concept of american exceptionalism and what we have witnessed in the campaign, tpp down in flames, and the idea of a new isolationist, zero sum mercantile america. is that a genuine fear, abby joseph cohen? abby: it is a concern for me. history would bear out that those models do not work. intermediate to long-term, they harm not just the country

imposing those policies, but it tends to hurt world trade as well, particularly for such a large economy like that of the united states. tom: do we have a fear of china someone else for that matter takes a vacuum of are not isolationism, but our reticence to move abroad? is there a fear that china takes her place? abby: you are received a the signs thachina is very anxious -- we are seeing the signs that china is becoming very anxious on the world stage economically and politically. we see it most clearly among their specific trade partners in asia, but also in latin america. keep in mind that tpp was designed to help specific rim trade partners in the americas and asia, but did not include china. the idea was to create a trade alliance among nations that did not include china. tom: i want to some up here and au mentioned this about technology company.

wasof the hallmark moments the passing of john glenn. you and i both grew up in space families. here was this icon of a generation truly, and admit they are less innovation -- and it meant fearless innovation. , and theost the risk risk to fear -- and the fear to risk? abby: large expenses by the government going back to the early portion of the 19th century had to do with funding research that may or may not pan out. we don't do that. tom: we don't fail like we used to. fail.we don't like to

it is on the government that can find that kind of thing. governmenting to everywhere, not just the u.s. government. by not providing the basic research, or the capital, and of providing sufficient encouragement for our young , ande to become scientists to really explore the facts and the data out there in the natural world, we put ourselves at an in the list's advantage. i like the book "the curse of cash." the author has been widely criticized for it. he is been critical on how india has imposed this reduction of cash. abby joseph cohen, on our future with cash. every going to be a cash less society? abby: not anytime soon.

we are seeing a reluctance of people to give up their cash. one of the issues is not a theory about going cash less, but it is the reality of cyber of loss, people's worry of their information whether it is financial or other personal information. and i think that while we had seen a reduction in the use of currency and united states, our currency, are large nominations come are used heavily in places like russia. and i look at all of this the mixture of international relations and finance investment in economics, and i have to come back to one of those moments of last year. i was deeply moved standing on the streets, the morning after andy evening of june 24 in and the- the morning evening of june 24 in london over brexit.

when you touch her team at goldman sachs and you do your about what theresa may will do a 2017, what is your view on how the united kingdom will meet -- united kingdom will relate? abby: we do not know what will happen. the british government has not made the decisions on how to move forward under rule 50 and someone. let's talk -- will 50 and so on. what we have seen in the u.k., which is very similar to the pattern here on november 8, a very big difference by region within the country, and also rural versus urban, or in this case brexit, successful urban versus not successful urban. places that voted very heavily to leave the european union tend to be those areas where there has been a big loss of industrial jobs, even though in those regions, the individuals

e big beneficiaries of transfer payments from the e.u. think of a contrast to the united states where many of the counties in the u.s. that are economically depressed, people are looking for a change, they are looking for a different approach, many of these areas were also beneficiaries of notable transfer payment from the federal government. one question is have people vote against their self interest? and in the u.k. and in the u.s. ally, what will the new policies look like? will the new government be able to provide those middle income and lower income a family -- of families were feeling economic pressure? will they be able to relieve the pressure? you when i will do this next year. thanks to abby joseph cohen of goldman sachs, their senior investment strategist.

this has been actually productive as we go into 2017. we thank you for listening worldwide. that is our "brilliant surveillance" year in special. this is bloomberg. ♪

global decade after the crisis, jamie dimon has emerged as one of the most after voices on banking. i set wn with jamie dimon to talk about the motor city's economic recovery. to discuss whether the strategies used here could be replicated elsewhere. and even though he will not be a member of president-elect trump cabinet -- gave a statement on the president up can make real change. >> done properly will have fast growth in america. >> that is all coming up in a