Intl. Women's Day with Abby Joseph Cohen

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot com, and of course on the Bloomberg What a joy it has been through surveillance this morning to speak to any number of women who have been out front with academic courage and uh professionalism within the industry, including Julia Cornado with us earlier and now for the

entire hour. Thrilled to bring you Abby Joseph Cohen, who's had a wonderful commitment to my work at Bloomberg on the economy and Bloomberg Surveillance, and that she would commit an hour to us this morning is greatly appreciated. Abby. Um, you are the permeable, but the pros who know you know you're not. And you have shifted over the last number of months. Why have you shifted from a real optimism on the stock market and on making money over

the long term to something that is more cautious. What brought about that shift? Well, thank you very much for including me in your programming today. I'm flattered to be given this much time. In response to your question, I'm going to quote Lord Maynard Kines, who one asked why he had changed this forecast. He said, when the facts change, I changed my mind. What do you do? And as I take a look at things right now, UM, we have this very mixed picture. It's almost bipolar, uh, in

terms of one extreme versus the other. On the one hand, the fundamentals of the U S economy looks lalid. The economy is growing well, g d P is rising, the unemployment rate is moving lower, corporate profits moving up. All of that looks great. And this is against a backdrop in which inflation interest rates are rising only in a very modest way. But what are the concerns? I'll start with valuation. You know, if something good is already priced in,

where are the surprises likely to come from? And I would say that what is priced into bonds right now is that inflation um will stay extremely quiescent, and that demand for US bonds will stay extremely robust. And I think if anything we are making as a marketplace, UM, we we're all too complacent about that. I think rates are rising, and I am concerned that demand for treasury securities, particularly among non American investors, may in fact be declining somewhat.

The second thing I would point to is the following. We are all creatures of our arithmetic. We run the valuation models. We have numbers for earnings, numbers for g d P, numbers for job gains. What we have a harder time building into our models are some of the other things, the other factors. And right now I think we're looking at notable changes in government policy, and some

of these are not for the better. You know. Just a few moments ago, Mario drag when he was asked about the European outlook, which is improving, growth is accelerating there. When asked what he was concerned about, he says, the number one risk was trade protectionism in the world, and I am concerned about that, particularly since the United States UH seems to have thrown down the gauntlet and thrown down the gauntlet in a in an ill considered manner,

So that to me is a risk. I also think there are risks in terms in terms of some of the other policies that have already been implemented UH that I think there were errors made, for example, in the tax policy, but there are also errors in terms of the things we're not doing, And we could spend a whole hour on this, but basically, long term growth of any economy is tried arithmetically to two things. Number one, how many workers do you have and is there growth

in that labor force? And secondly, how productive are each of those workers the labor productivity? And when I take a look at policy initiatives that, for example, number one, may reduce the pace of growth in our workforce because of the changes in immigration, that is concerning. And number two, when we take a look at are we investing sufficiently in the future to bolster the productivity of all of our workers, Um, it's not looking as propitious as it

normally does. In the United States, there have been cutbacks, for example, in government funding for research in R and D,

and it's still early innings here, I know. But when we take a look at what corporations are doing with their prodigious cash positions and cash that will be increasing because of the reduction in the corporate tax rate, so far, the number one use of those funds seems to be scare we purchased rather than doing things like raising wages or in terms of long term investment, putting it back into the company in the form of Capex. Having Joseph Corner, I just want you to comment on when you went

to Cornell. I believe that it was one of the few Ivy League schools that admitted women into the into the study of economics and science. And I'm wondering if that has changed to such an extent that the way we view markets and investing has changed money. If you could just give us your thoughts on that historical change. Well, you know that's a great question, UM and takes us

back many years. The answer is yes. When Cornell was found in eighteen sixty five as the land Grant College UM for New York State, it accepted women immediately, but it was harder for women to be accepted than for men for a whole variety of reasons. That has now changed. If we take a look at Cornell or any number of other schools, we now see greater balance in things like engineering, applied science UM and in the medical college at Cornell more than half of our female half of

our students or women. So yes, there has been an enormous change over this one generation. And I would say good news, not just for the women, but also for our population. Good news for our country overall. Well, let's come back at Joseph Cohen with us here for the A lot of things we'll do Central banking here next, with huge changes at the fount of course, Mr Drug so terse statements today on multilateral and unilateral trade dynamics

as well. Abby. We have a new vice chairman, Richard Clarida, who, well, at least we believe he will be appointed. I guess that's where we are in the mix. Who will be a monetary economist to assist Jay Powell? Explain to our audience how someone of the academic abilities of Richard Clarida dovetails with a Wall Street veteran like Jerome Powell. How

does that work? Well, I think it's a wonderful question Tom, and really raises a broader issue, and that is the members of the Board of Governors of the Settle Reserve are supposed to be diverse in their backgrounds, and when the ft was originally put together, the idea was diverse in their business backgrounds and also their regional backgrounds, which is why you have the various regional banks around the

Federal Reserve system. For the Board of Governors itself. I think it's critical to have people with business experience, banking experience, but also the academic economic experience. We saw just how

valuable that was under the last two FED chairman. So, for example, Ben Bernankee, his academic expertise was in the Great Depression of the nineteen thirties, and so when the financial crisis hit here um and around the world in two thousand and eight two thousand nine, there was probably nobody better informed than Mr Bernankee to think about what could be done going forward. And similarly, when Janet Yellen was chair of the Board of Governors, her expertise was

in labor markets. And if you think about where the stresses and strains have been in our economy, it has been with regard to the workforce facing both cyclical and structural issues. These have been her areas of experts ease. So I think it's very appropriate to have somebody with academic expertise come onto the Board of Governors, whether if it's not going to be the chairperson, at least there

is that strength there. And let's not forget the very capable staff that supports the Board of Governors in Washington Abby, Joseph Cohen, what kind of guidance or perspective can you offer individuals, whether they be professional investors or people that are concerned about their retirement, paying for healthcare, caring for members of their family, or even I dare say it,

paying for tuition. What can you offer them in terms of a new federal reserve governor what is important for them to understand that would affect the way that they plan for their financial future. Well, there are so many different elements that one needs to take into consideration. And let me begin with one group that you mentioned, and that would be individual investors. I think that many individuals

really should begin with a financial plan. Uh. You know, I've spent my career working primarily with institutional investors, but individual investors need to take into consideration many of the factors to which you just alluded. So, for example, what are their long term goals with regard to education for their children, their own retirement, but also what is their

tax situation? Uh? And are they saving appropriately? I think as a nation we are facing some problems and that we are finding that many families are not saving adequately, and we really need to start there. So before we even get to the individual investment decisions. Let's make sure that households are saving enough of their current income to

plan for their future needs. Okay, So in that context, if you went around Goldman Sacks or any big institution and you ask people to raise their hands to say how many people have six months worth of what it takes for them to live in cash? Do you think you get a lot of hands raised. Well, I'll give you an example from Goldman Sachs because you specifically asked about it. We do, in fact provide access to financial

planning advice. So you would think that so many people who are involved in the investment business would not need or want that kind of assistance. In fact, they do um because even in a firm like ours, you know, more than a third of our employees are in technology, they're not really investment people per se. And we give people access to others who can help them on these issues about how much they should be saving, what the tax issues are in terms of long term saving and

preparing for these long term goals. I don't think there is anyone exempt from needing this sort of assistance and help abby with then, where we are right now and within the central banks, well, let's do this. Let's come back and do this right. We're thrilled, Dave abbe Joseph Cohen for a lengthy time and instead of cutting her off here as we move to the market openings, let's

do this right and come back. That means Joseph Cohen on central banking, and I really want to talk to her also about the state of her global Wall Street as well. Mrs Joseph Cohen is with Golden Sack. What a joy, Abby, Joseph Cohen with us. We've been talking about the equity markets, a little bit on central banks and some of the dynamics that we saw from Mr Droggy, Abby Pim and I would like to talk to you

about the evolution we've seen. You've been hugely active within the c f A Institute program, writing trenched uh financial articles with some heavy duty mathematics to it. I would suggest, unlike the gloom in this country about a brain drain or a dumbness, the industry gets smarter and smarter and smarter and smarter. How much smarter are we now than when I did the sea if A are you to the c f A, Tom, I think that as a

profession we have gotten smarter because we have better tools. Um, and I think that the average professional investor is now much more quant savvy, knows where the data are, knows how to use it and so on. And one of the things I am concerned about as we look intermediate to long term is that we become too complacent because they become so focused on those models. And what we have to ask ourselves are the models to use the

statistician's expression? Are the models properly specified? That is, are the equations correct? Are there other factors out there that we're not yet taking into consideration? I mean, I look at this Pim Fox and can you imagine Ms Joseph Cohen that Goldman sex She shows up the first day? Well, tell us about it, Joseph Calm. What was it like walking in the door at Goldman Sachs when you first arrived there? Um, it was a delight because quite frankly,

I have been recruited to Goldman. Uh. They knew what they were getting and that's what they wanted. Um. They wanted somebody who had background in quantitative analysis and also economics. And this was fairly new because at that point, portfolio strategy was often done by pardon me for saying this, UM a mature gentleman, UM, not a Goldman. But at other places, uh, sitting back smoking a pipe, perhaps pontificating about markets and the Goldman. Excuse me, you're you're describing

Bloomberg surveillance at the softball Go for it. Continue. So what we basically have UM at Goldman is this focus on let's really do the homework. Let's dig into the data on economics, on corporate performance, work the valuation models and use that as a critical portion of our theme uh and our conclusions. And we always start with that as the base, uh, be at fixed income or equities, US or non US markets. And then I think the art form UH that's involved here is to say what

are we missing what's not included in those models? And one of the things that we are focused on right now are policy switches of somewhat inconsistent nature that are occurring right now. UM. What would be the largest one that that that you think people are not paying attention to? What would you tell them to focus on? Well, there are two right now. One is the tax cut. The short term aspects of the shortcut are favorable. We see that corporate profits in cash flow or moving up and

so on. But long term, what that tax cut has done has basically been to take away a lot of the seed corn that would normally be used for future investment. And that's of concern in terms of what this means for longer term economic growth. What does it mean in terms of increasing the deficit, interest rates, treasury borrowing, and so on. The second one, which of course is still up in the air because the President's statements are changing, uh, literally from hour to hour, is what are we doing

with regard to trade policy? Uh. Mario Draggy, the US Chamber of Commerce, many others just over the last twenty four hours have said that they believe that this movement towards potential movement towards protectionism would endanger global economic growth. The United States would not win a trade war. Nobody wins a trade war. It basically is not a zero sum sort of thing. Uh. Protectionism and trade friction basically reduces economic activity globally, as was seen in the nineteen thirties.

So I think that that is the single biggest concern I would have, you know, I take a look at the analysis that's being done, because we have to do something in terms of working numbers to see, you know, on the margin, which industries would be helped, which countries might be helped, and so on. That's only part of

the pictures. Okay, but let let's say, can you just give us the global g d P. Can you give us worst case scenario for someone or an institution that is using an exchange traded fund that invests, say in the SMP five worst case scenario for let's go backwards to start with trade policy and tax cuts. What happens

to that SMP five portfolio. Um, the valuation work that we do, which assumes a modest rise and interest rates and inflation, assumes that the fair value for the SMP five hundred is roughly so that's the level which is supported by the strong underlying fundamentals right now in the United States. Um, what we did see when there was the first beginning of talk about trade problems and so on, is that we backed off level which is where we were a few week weeks ago. And normally, normally volatility

is typically within the ten percent range. I'm not making a forecast. I'm just saying historically that's what it's been. But the other thing to look at is risks, potential risk to the upside, potential risks to the downside, potential risk to the upside. Could the economy be much better and corporate performance much better than what's already priced in. Perhaps, but it's not a high probability event. Could there be

these unpleasant policy surprises UM to the downside? Yes, And my personal view is we're more skewed to the downside at this point than the upside. Well within that caution, skewed to the downside. Does that be Joseph Cohen believe

cash is an asset. When we UM advise institutional clients, which again is my primary UH conversation level, we are saying, you know, take a look at a little bit of cash, a little bit of dry powder, because if we have a situation where volatility in the markets just returns to normal UH, there could be some interesting opportunities to get back into assets which are long term agreeable UM, but at lower prices. So the answer is, yes, a little bit of cash on the sideline not a bad idea.

And our biggest concern TOM with regard to valuation is not equities, it's really fixed income. UH. Interest rates in the United States are likely to rise, we don't think very much. On the other hand, inflation we believe has bottomed in the United States. The said is likely to raise short term rates four times. And we are concerned about the demand from foreign investors. You know, at this point they have typically owned well more than of U. S. Treasuries.

If the dollar becomes something that is not needed as much because it's no longer as important in trade, that's initiative. Correct with the savvy Joseph cohe of golden sacks at generous hour, and that's allowed us to go deeper here

than we usually do. Abby, I interrupted you so rudely there as we went to break and Um, we're talking about if we get a week dollar, what are those ramifications if we get you know, I guess with some higher inflation and some dynamics of fiscal policy, the surprise of a week dollar, what will that mean for investors? That is a whole big area of discussion, Tom, because there are also the technical aspects of supply and demand for U. S. Treasuries. Um, not that long ago foreign

investors owned about of the U. S. Treasury market. They're down to now. Some of that was a portfolio decision, some of the money has gone into higher yielding corporate bonds. But we have to keep in mind the following technical aspect. Not all trade UH involving dollars involves the United States. Okay, So, for example, in Asia, more than half the trade is actually denominated in dollars, even though dramatically less than that,

maybe ten or fift involves the United States. And over the last few years, we've seen that the Chinese have moved aggressively to try to denominate trade contracts in Redmond b rather than dollars. And if that happens, there's less foreign demand for U S treasuries. Consider, for example, that decomposition of who does China really trade with. What we see is that about fifty percent of Chinese exports go

to the nations of the new Trans Pacific Partnership. This is the trading block that the Trump administration pulled us out of as one of the very first policy actions when they came into office. So fifty of UH Chinese exports go to t p P and sixty of Chinese imports come from those TPP nations. Almost all of that is now denominated in dollars. It's very possible with the us not being part of that trade pact, We're going to see less demand for the dollar as that denominating

currency in foreign trade. And of course, if our policy becomes increasingly uncertain in the eyes of others around the world, the dollar loses some of its aura as a safe haven. Our belief at Goldman Sachs is a decline in the dollar, which began in the autumn of two thousand and sixteen, will continue. That's an interesting uh called pimp. Well, I just want to get your thoughts on comment that was

made by Daniel Pinto. He is the JP Morgan Chase executive and he warned that equity markets could fall as much as in the next two to three and the media picked up on but it was that banned. Well, okay, let's say that's still a big, a big gap. Could this Do you believe that this deep correction could happen? Um. I've had the opportunity to look at least at the Bloomberg coverage of his statement, and he said something ahead of that possible correction, and that is markets look good

for the next year or two UM. So that intermediate to long term forecast is something that I suspect everyone would want to be well, how do the facts on the ground actually develop in the meantime and what will the valuation look like? UM. If we look at the valuation right now, UM, I would say that equities are pricing in a realistic positive scenario. UM. And that's why our teams think is fair value for the SMP five hundreds this year. UM. It is the credit markets UH

that look overvalued UM. And that is something that we probably need to be focused on sooner than that two to three year horizon. And let me go back to a point PIM that you raised earlier, and that is

what about individual investors? UM. We have seen over the last ten years that individual investors, particularly those who have lost their defined benefit pension programs and have gone into define contribution and are now running more and more of their own retirement money, they have skewed much more towards sixth income equity. And I think that there is a false sense of security that these are safe investments. If interest rates go up, the value of those assets will

go down. But have you a cardinal rule here that's so important to Pim's comments is you can't invest unless you're stealed for a twenty five or decline somewhere along the road. It's going to happen. And I would suggest a generation or two have lost that understanding. They're clearly has been in a sense of complacency now with a very low volatility, both in equities and fixed income. And

it's not just in the US, it's around the world. Um. And when we take a look at surveys of individual investors, they nevertheless believe that fixed income is much safer than equities. And I would argue it depends upon the valuation. Um. What is priced into bonds to me is unrealistic um And and therefore I would be more concerned there. But you're absolutely right. We have a generation of investors who have been burned by the equity market, not by the

fixed income market. Bonds have been in the thirty year bull market. I believe that that has either ended or will soon end. What do you believe will happen with digital currencies? Do you foresee a time when all money will become digital? No? Why? Um? This is not my area of expertise. You know, I do have a lot of mathematical and computer training, um. And I'm very impressed by things like blockchain and and some of the things

that underlie cryptocurrency. But as I studied currencies, UM, usually the ones that succeed are backed by the full faith and credit of a nation, of an economy um and UH to quote somebody else, these are backed by the full faith and credit of air. I would say, maybe the full faith and credit of electrons um and and so um. Is there a role for electronic exchanges, absolutely, um, But whether it takes the form of a currency per se,

it's not quite clear. The greatest enthusiasm for using cryptocurrencies has been in number one, areas that don't want to be tracked um because of perhaps you know, dealings that they do not want in uh to be a transparent uh. The second possible use has been in nations UH that are really undergoing you know, economic herm oil uh and therefore the cryptocurrency is not tied to their troubled nation. But for cryptocurrencies to become major elements UM for developed

economies with central banks and so on, I don't. I don't see it in the nearer intermediate term, asked me again. In a couple of years, as as this developed, as we see what the regulatory process is for them and also as the exchanges for the cryptocurrency has become more mature. Right now they are not mature. Ebbe Joseph Cohen, thank you so much for your commitment to the show, your appearances today with Bloomberg Television and Bloomberg Radio and Bloomberg Surveillance.

Abbe Joseph Cohen, folks of Golden Sax and I really want to say thank you as well to State Global Advisors for their commitment to what we're doing here today with International Women's Day as well. So thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio