♪ tom: there is no question of america and the world changed in 2016. the new year brings president trump and 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. ok, here is the truth, folks. i went to cash, and i and many others have seller's remorse. for this entire hour, abby joseph cohen from goldman sachs, we look through the prism and

synthesis of economics, finance, investment, and international relations. really with the perspective of decades that abby joseph cohen has brought to all of investment. we say 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. let's get right into it with abby joseph cohen, senior investment strategist at goldman sachs. but that barely 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 -- between what you do and what david kosten does everyday at goldman sachs. abby: first of all, i'm delighted to be here with you. tom: for the whole hour. that is great. abby: for year-end retrospective and a look ahead into the new year. i spend most of my time thinking

about the intermediate to long-term outlook. david and many of my other colleagues at goldman sachs really focus in short term. we are trying to be held to our -- helpful to our clients do need that regular, hourly, daily updates. i try to step away and work with our longer-term horizon clients, including individuals, endowments, sovereign wealth funds, and others. tom: many people watching the show into 2017 are huge abby joseph cohen fans. they say she is always bullish. you and i know that is not true. abull you lookperm , really brilliant into this year. you look brilliant into a seven or eight year market. can you be brilliant and be a permabull for next 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, wages beginning to rise, that's a great combination for the equity market. in 2017, the base ll be go because we will be entering the year with an economy that is performing well. the real question surrounds policy, a new administration, and quite frankly, there are so many unknowns that we will be adjusting views as the year goes on based upon changes in policy. tom: in historic perspective, the bull market we lived since early 2009. abby: we have actually had two bull markets. one was the equity bull market that began in earnest inhe

springtime of 2009. after the financial crisis was calming down, we began to see a very significant rise in equity prices, by most accounts a 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 need to think about, business people 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. this is where you can really add value, the idea that i say equities, bonds, currencies, and commodities. there is that relationship between equities and bonds, and there was a suggestion that it was broken in the great distortion. are we in sync yet? abby: not yet. when we apply valuation models to fixed income, what weind 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 year bond yield, which was 1.7 before the election, we expect that to march from roughly 2.4 in december, perhaps 2.7 in the coming months. so we have a ways to go for we -- before we get back to fair value on fixed income. let me point out, when we do the equity valuation work, we are not using the the unsustainably low interest rates. we are using yields that we expect will occur. 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 of a problem that is for 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 the old days, you had the standard & poor's bluebook and your grandfather showed you boise cascade bonds? those days are gone. what is unchanged is 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 erosion? 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 had a margin built-in, if you will. tom: coming up, abby joseph cohen on chair yellen, the federal reserve reserve system, and we will look at the central banks around the world, with a particular focus on the tumultuous year-end that europe has seen as well. stay with us as we look ahead.

this is "bloomberg surveillance."

♪ ms. yellen: it is critically important that a central bank have the ability to make judgments on how best to pursue those goals while being accountable for expanding his -- explaining its decisions and transparence in its decision-making. tom: maybe not the statement of 2016, but there is chair yellen way out in front of what will be the statement of 2017 and 2018. we welcome you back, our "bloomberg surveillance" year-in

special. i'm tom keene from new york. with me is abby joseph cohen, senior investment riser to -- advisor 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 come over rules and discretion. stanford university, alan greenspan on the other side about discretion. where are you on discretion for any given central bank? abby: the word i think that is most critical is fed independence. i think that to look ahead to 2017, one of the big political footballs may prove to be the independence of the fed, which i think must be sacrosanct in this country. when we talk of the taylor rule, i think that's a good starting point.

the fed obviously uses many different mathematical models to try to determine where they want to be, where they think interest 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 william mcchesney's miracle of 1951. you served with a very independent fed 25 years on. we want to drive that, everyone agrees with you, are the checks and balances to push back the -- balances their 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. tom: you asked piercing questions at the economic club of new york this year, and as always, is there -- there was the emotion of vice chairman fisher pointing that phrase "ultra accommodative." how distant are 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 monetary policy. keep in mind that the united states in our view will be moving forward with policy rate increases, but we have seen is the intermediate bond yields that get controlled by market participants have already moved higher in the yield curve has -- and the yield curve has steepened. 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. it 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 and the day-to-day grind at goldman sachs, 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. for me, it was balance sheet of a given fed to gdp. japan is out of control with the expansion of their balance sheet. but the real surprise is europe and the ecb. tell me about the pressures on mr. draghi next year to right size his ecb? abby: mr. mario draghi 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 -- has been largely inactive for most of the period since the financial crisis. we have seen more stimulus in the united states, 2009, 2010, than was the case elsewhere, especially in europe, where they had to the constraints that were very considerable in terms of deficit relative to gdp. so when we talk about mr. draghi 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. in 2017, the ecb is going to be looking not just a interest-rate -- act interest-rate policy, but also in terms of their approach to qe, quantitative ease. and what mr. draghi said recently is that he doesn't plan to taper anytime soon. but what we have to keep in mind

is that this is not a long-term opportunity. >> the arch question here, and this goes back to your work with the cfa, 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 fragility of the european financial experiment into next year? what is your measurement of how europe gets to 2018 or 2019? 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, take the average, it just about 1%. tom: is that euro sclerosis? abby: it is. it has been in place for several decades. we see an extremely low birth rate. if you don't have economic

growth. when you take a look at europe they really are struggling very , hard against their structural problems. monetary policy does not address structural issues. fiscal policy does, regulatory policy, trade policies, not monetary policy. tom: i want to make sure we get this in for the year-end show, 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 point for japan has shifted. it is 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 from monetary policy, but what has been referred to as abenomics. for the last year or so 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.

♪ ms. lagarde: 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. and by bringing women to the labor market, giving them access to finance, you redu the inequality. tom: good morning, everyone. madame lagarde, an extraordinary conversation. we will get to that in a moment. this is the "bloomberg surveillance," special. i am tom keene. from our world headquarters in new york. lagarde speaking with our reporter. it's a wonderful moment, christine lagarde with her new tenure at the international monetary fund, really undresses -- addresses women within finance and investment, and frankly within our world economy. it's a good comment to speak to abby joseph cohen. i go back, i think about your tenure at the fed years ago. what was your first day like?

what is she doing here? abby: it was actually wonderful. i was hired by the director of 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. tom: we see it with madame lagarde or frankly madame joseph cohen. i think of sallie krawcheck and how she did. my perception of it is women not so much work harder, but work smarter towards that marginal effort to gain on wall street. where are we within the investment firms right now? are the women outdoing the men? abby: i do have to disagree with you, tom. i think women work harder. they are also better prepared and we basically find women are succeeding most in categories that are easily measured, so whether it is investment

research or 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 street in the period preceding lost their jobs or industry. -- decided to leave the industry. so we are missing some of those people who should now be moving into important middle-management positions. tom: how do you respond -- full disclosure, you worked with cornell afterwards -- how do you respond to the lecture you give to parents who picked up the zeitgeist of 2017 -- stem, stem, stem, stem, stem. my experience is is not that it doesn't work, but you have to have the broader experience. when you lecture at goldman sachs, 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. so for example, about a third of the workforce at 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 liberalrts as literature, history, learning to think in different ways. so we need the analytical skill of stem, but we also need the more qualitative approach. that can move out of the paradigm more easily. tom: what you have done with 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 and on. i see it coming back. i'm optimistic about a new history. abby: i think 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 desks, all of our people, experienced than the younger -- and the 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. so to 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 from is when you see people advance. i have always followed people's careers. it has given me confidence as well. ruth goes from morgan stanley to google, and transforms google. there is an example of going across industries and had a profound effect. abby: she was also involved in the community. 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. tom: this is a wonderful follow-on conversation from what we heard from madame lagarde a few weeks ago. we have to go now. we could have spent the entire hour with abby joseph cohen speaking about the tumult of 2016. that shocking night -- not shocking for mr. trump -- the shock as we move towards late

january and president trump. we continue our conversation with abby joseph cohen when here ahead. ♪

♪ pres. elect trump: we are representative to what is happening in the world. the world is going to start looking up to us again. we will be good for the world, not just good for the country. tom: he will be president trump, and it will be an extraordinary four years by any analysis or definition. we welcome you back to our "brilliant surveillance" special. i'm tom keene here with abby joseph cohen, goldman sachs senior investment strategist.

you and i could go, i am thinking 4-5 hours on the impact of this election. what was your thought on election night? abby: like many people, i was surprised by the result. clearly this big gap between the popular vote, which mrs. clinton won versus electoral college, is something that 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 going to be, and i think much of the rise in a stock prices early on was related to people selling their treasury securities, likely waiting to see if mr. trump was elected or not, the rise in inflation and interest rates.

the industries that have benefited, 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 much more interesting. it is a rotation towards those companies that benefit from ongoing economic growth. economy continues to grow, cyclical stocks do well, commodity stocks do well, and all of this is internally consistent within the market. tom: there are eight ways to go here, and as we look ahead to 2017, the question for all of our viewers and listeners of all walks of life is do we shift the distribution of gains 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? lagarde mentioned a few days ago, a few weeks ago rather, can we shift our coefficient? 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, it is in their subtitle. one s 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. but the name of this book -- tom: but you grew up in rural new york? abby: i did grow up in rural new york. right near queens farm, by the way. that book is called "white trash."

there is a second book called "city of dreams." it also has a subtitle of a 400 year history, but this is the 400-year epic history of immigrants in new york. the contrast between the two books is phenonal because groups of people, both urban and rural, are fighting dissemination. they come with less education. they come with reduced economic opportunity. you see in the cities of united states, people have done better because the educational systems are better, job creation is better, and so on. to try to answer the question of what happens next, let's talk about 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 mean to pick on mr. trump. in a broader sense over the last decade or two decades, is it a plutocracy or gilded age that we need to fear? abby: when you look at the employment data, 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? we'll it include protections for

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

♪ tom: "brilliant surveillance" and our "brilliant surveillance" special. abby joseph cohen, goldman sachs senior strategist. we went under intense negotiation for me to do this one hour special. i said, we can do this special, but for one section of this special, i have to go along with abby joseph cohen.

graham dodd was basically an industrial book that you took the net income statement down to the bottom menu and looked at 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 want to broaden it out. tom: please. abby: number one, if we had this conversation had decade ago, we would have been talking about an accounting system in the united states that most 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. in 1999 and 2000, 70% of the 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? abby: absolutely. capital spending, r&d, even cash acquisitions. it is now 42%. so much of the cash is going for share repurchase. this is an important question because 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 repatriation of profits that u.s. companies now have overseas. if that money comes in, and there are no restrictions in 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 share repurchase 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, can provide the guidelines so that apple computer, or a mid-cap stock that you and i don't know the name of, 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 corporate tax reform. democrats and republicans were talking about using that money to fund infrastructure, to fund job creation, and in some instances, putting limits on how the cash could be used at the corporate level.

in 2017, when we see the actual language of the legislation, we will be able to judge better. at this point, quite frankly, my crystal ball is very foggy. tom: very quickly, the top line of the income statement. do you see nominal gdp or better in 2017, when we see the actual language of the legislation, we growth for next year? abby: if you look for ways in 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 accelerating note. tom: abby joseph cohen with us. we are really, really pleased you are with us. we have so many topics we have spoken on through this hour. i really want to end on some important books 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. thanks to our team for putting this together. we knew this would be a joy with abby joseph cohen. she with goldman sachs, their senior investment strategist. i said, ok, this is great, we will talk about investments. i want to talk to abby joseph cohen about where this nation is going, and for that matter, the world economy as well. abby joseph cohen on american exceptionalism. the book last year, robert gordon, northwestern university, we did it in the 20th century, maybe we will do it now. i had a great conversation with professor robert gordon. are we reliving the glory days from previous times? abby have 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. we are now down to 2.5%, which puts us in the middle of the oecd pack instead of being far out in front. tom: the middle of the pack is not exceptional. abby: not at all, particularly because we could be doing much better. tom: this idea of jumpstarting to something new, where does it come from? does it come from government policy? does it come from crisis? abby: what 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 resnse, 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. would it have been better to do it 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 back at centuries of analysis, the government contributes mode to spending on things where tres no profit motive, big projects where there might not be revenue at e end of the day. whether it was eisenhower's highway system. whether it was the space program and so on. that is how the united states establishes itself.

to help me with the dollar. u.s. dollar. there is this wonderful book a few years ago, 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 become an increasily important regional reserve currency in asia. a few years back, 40% of all trade in asia was in dollars, even though the united states was only 10% of that trade. china has moved in. let's keep in mind the following, over the last three years, the trade weighted dollar

has risen about 25% or 30%.whils something about the u.s. being strong, it also is an impediment to economic growth. with our cost of 25% to 30%, that makes it much more difficult for exports to grow. tom: help me wh this concept of americaexceptionalism and what we have witnessed in the campaign, tpp down in flames, both candidates, and the idea of a new isolationist, zero sum, neo-mercantile america. is that a genuine fear for 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 that china, or someone else for that matter, takes the vacuum of not just isolationism, but our reticence to move abroad? is there a fear that china takes our place? abby: 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 td you mentioned that goldman sachs is a technology company.

one of the hallmark moments of 2016 was the passing of john glenn. you and i both grew up in space families. here was the icon of a generation truly, and it meant fearless innovation, testing, and i mean this with the immense respect for all, risk-taking. have we lost that? 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, the basic research and so on. we don't do that. tom: we don't fail like we used to. abby: we are not willing to fail, that is a great way to express it. it is on the government that can

find that kind of thing. when i say government, i am referring to government everywhere, not just the u.s. government. by not providing the basic research, not providing the capital, and, by the way, not providing sufficient encouragement for our young people to become scientists, and to really explore the facts and the data out there in the natural world, we put ourselves at an enormous disadvantage. tom: i like the book, "the curse of cash." the author has been widely criticized for it. india and their own experiment, and he has been critical on how india has tactically imposed this reduction of cash. abby joseph cohen, on our future with cash. are we going to be a cashless society? abby: not anytime soon. what we are seeing is a reluctance on the part of many peopleo give up their cash.

and one of the issues now is not a theory about going cash less, it is the reality of cyber security. people worry about the loss 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 in the united states, our currency, our large nominations, our used heavily in places like russia. tom: i look at all of this and the mixture of international relations and finance investment and economics, and i have to

abby: here too we don't quite know what will happen. the british government has not made the decisions on how to move forward under rule 50 and so on, but let's talk a little bit about what led to that brexit vote. what we have seen in the u.k., which is very similar to the pattern here on november 8, is 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. tom: a bimodal united kingdom. abbyplaces 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 are 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 our federal government. one question is have people voted against their own self interest? and in the u.k. and in the u.s., what will the new policies look like? will the new government be able to provide those middle income and lower income families feeling economic pressure? will they be able to relieve the pressure? tom: maybe you and 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 end special. this is bloomberg. ♪

♪ ♪ ashlee: if you are having tea with a giant hello kitty doll, then you are almost certainly in japan. ♪ ashlee: this is a ple