Joan Solotar - Head of the External Relations and Strategy Group, Senior Managing Director AND Senior Managing Director for External Relations & Strategy
Byron Richard Wien - Vice Chairman of Blackstone Advisory Partners Lp and Director of Blackstone Advisory Partners Lp
The Blackstone Group L.P. (BX) Blackstone Webcast: Can Macro Problems Scuttle The World Recovery? October 3, 2013 11:00 AM ET
Hi, I'm Joan Solotar, Senior Managing Director of External Relations & Strategy at Blackstone. Thanks for joining us today for the Blackstone webcast, Can Macro Problems Scuttle the World Recovery? featuring Byron Wien, Vice Chairman, Blackstone Advisory Partners.
Following Byron's formal comments, there'll be an opportunity for you to ask questions. If you look at the lower left-hand corner of your screen, you'll see a Q&A box. Feel free to click on that at any point during the webinar to submit your questions.
At the bottom of the console, you'll see a series of widgets. This interactive feature allows you to access additional functions by scrolling over them such as Twitter, Wikipedia, download slides and refer a friend. We plan to keep this webinar to 60 minutes, including Q&A. At the end of the PowerPoint, you'll see a list of disclosures.
Before we begin, I'd like to invite you to join us Tuesday, January 7, at 11 a.m. Eastern when Byron will announce his Top 10 Surprises of 2014.
And with that, I'll turn it over to Byron Wien.
Byron Richard Wien
Thanks, Joan. Well, this is going to be more talking than pictures this time because there are a lot of issues. You would think the market would be really soaring at this point because we're all worried about so many things over the Labor Day weekend. If you think back on it, on Labor Day we were worried about whether Obama was going to send missiles into Syria, whether the tapering was going to take effect, whether Larry Summers was going to become Fed Chairman, whether Iran was going to pursue its nuclear ambitions. And when you look at where we are now, Summers has dropped out of the Fed race. The government decided -- or the Federal Reserve decided not to taper. Iran indicated that they're willing to talk with the international community. So we're in much better shape.
The one thing that is hovering over the market and preventing stocks from making forward progress is obviously the budget and the debt ceiling. And it looks like the Republicans are going to fold in the continuing resolution with the debt ceiling issue and they're still digging their heels in on trying to de-fund ObamaCare, the Affordable Care Act, as the price that they're going to pay for supporting raising the debt ceiling. I don't think that the Democrats are going to yield on that. And I don't know what the compromise is going to be. I did think that the consensus view that the government would only shut down for 1 day or 2 was too optimistic. I thought we'd be in store for a shutdown of a week or more and that looks like the way it's going to play out.
So the market is not taking this well. And it's going to have an effect, I think, on fourth quarter GDP.
But let's go to the slide. The impact of not tapering. My view is that, that was a good decision. If you had read any of my essays, I had made the point along the way that I didn't think that the economy was strong enough for the government to do the tapering. The economy was bumbling along at a 2% rate. I know it was 2.5% in the second quarter. But it didn't seem to me that a better than 2% rate was sustainable. And I thought that the stimulus that the Federal Reserve was supplying was important. Now my view is that 75% of that monetary easing goes into financial assets, pushing stock prices higher and keeping interest rates low. But 25% goes into the real economy, and that's better than nothing. And if Fed started tapering, I think that, that would be taken adversely by the market and it would have a negative effect on the economy. So I'm glad they didn't do it. And when will they do it? They'll do it some time. We know that. But Bernanke may abdicate doing it and defer it to Janet Yellen or whoever succeeds him in January.
The direction of interest rates and the impact on housing, I think rates are headed up. The long-term history of the 10-year Treasury is that it generally is roughly congruent with the nominal growth rate of the U.S. economy. That's 2% real and 1.5% to 2% inflation. So the 10-year Treasury should be 3.5% to 4%, and it's 2.60%. So I think rates are going higher. And while housing is an important strength of the economy, I think if rates do rise, as I think they will, that will slow it down; not stop it, but slow it down.
Fourth quarter earnings. I think if you look at the revenues, it came in on the third quarter, and revenue trends, and I'm going to show you some pictures of that, they are negative. Revenues have been disappointing, and I think fourth quarter earnings will disappoint. I think you'll see a glimpse of that when the third quarter earnings start to come out.
Europe's recovery is real. I was in Europe in May. I recommended to investors that they increase their European positions because Europe was flat on its back then, and Europe has done better. So my view is that Europe is muddling through. There are opportunities in Europe. They're not going to have any strong growth, but they're going to have better -- but they're coming out of their recession.
The Middle East is going to continue to be turbulent. One thing that you don't hear a lot about is the refugee situation as a result of the Syrian problem. Millions of refugees, maybe as many as 2 million, have poured out of Syria into Turkey and Lebanon and Jordan. And this is Syria's economic and social problem for those countries and it's de-stabilizing the region. So one of the problems with Syria is that Obama had stated that he wanted Bashar al-Assad out as the leader of Syria. But the fact that we're negotiating a deal with him for him to surrender the chemical weapons in Syria probably means he's going to stay in control. Egypt remains very unstable, and we don't know whether Iran is serious about negotiating on their nuclear weapons program. They say, and I attended the session with the Iranian President, they say that they only have a peaceful purpose for their nuclear program. But I don't think anybody believes that. So we'll see how far that gets. But in any case, the Middle East continues to be unsettled, and I think there's a Middle East premium in the price of oil. My view is that the price of oil, both Brent and West Texas, would be $10 lower if it weren't for the instability in the Middle East.
China is definitely coming back. They always said they were going to grow at 7.5% and now I think they really are, and I was skeptical over the summer.
Japan is real. And this is a strategy of monetary and fiscal stimulus that could end badly. But right now, Japan is recovering. The numbers are coming in. And I would definitely have a position in Japan.
And finally, the slowdown in the emerging markets, I think, is a problem. I've reduced my position in the emerging markets, but I would still have some exposure there.
So let's go right to the radical asset allocation that I introduced first 2 years ago. I've made some minor changes in it. And I've made some more changes here.
So I would have 10% in global multinationals. I've had that since the beginning. That's a sector that's done well and I think it will continue to do well. I would have 10% in other U.S. long only. This is a new category. And I would have 10% in Europe as a result of my belief that Europe is pulling out of its recovery. So that's 20% in new positions. I reduced my emerging market position by 5% to partially fund that. I reduced my hedge fund position by 5% partially to fund that. I put a 5% position in Japanese equities. Private equity stays at 10%. Real estate, which has been the strongest part of this portfolio, I've taken some profits there and reduced that by 10% -- by 5%, down to 10%. Gold remains at 5%. It's been a hit to the portfolio this year. But the countries around the world are continuing to debase their currencies, and I think you should have some insurance protector. Gold has provided no protection. It's actually hurt the portfolio, but I would still hold the gold position in the 1,200s. I still would have a 5% position in agricultural commodities and natural resources to benefit from the standard of living rising around the world. And finally, I reduced my position in very high-yield fixed income from 20% to 15% and I eliminated my cash position. So I got 5% from cash, 5% from bonds, 5% from real estate, 5% from emerging markets, and 5% from hedge funds. And that made up the 25%, 10% of which went into U.S. long only, 10% of which went into European long only, and 5% into Japan.
I've said at the outset that this is an equity-like portfolio, all the way down to the fixed income component. And it's going to be more volatile and less liquid than what most of the institutional investors are used to, but I think it'll provide good returns as a result. I said also at the beginning that there was no portfolio that look like this and I still believe that there's no portfolio that looks like it. But I've gone around the world and talked about it and I moved a number of institutions in the direction that this represents.
Now why am I worried about the fourth quarter? I'm worried because I think earnings are going to be disappointing, and investors are very optimistic. And this crowd sentiment poll shows the level of optimism of investors and I've looked at a lot of other measures of investor sentiment, particularly in the institutional investor sentiments. And I can tell you, investors believe they were going to end the year higher, and I think we may end the year about where we are right now.
Now here's some concerns about the fourth quarter. First of all, housing has been one of the clear positives. And I think the rise in interest rates from 1.70% to 2.60% is going to slow that down somewhat. Although the numbers are still coming through, but I think interest rates are headed higher.
Secondly, I'm worried about some things in the energy. Most of the incremental production in the U.S. is coming from hydraulic frac-ing. There are some environmental problems there, some greater earthquake incidents. The cost of lifting oil out of hydraulic frac-ed wells is higher and the half-life of these wells is shorter. So my belief is that the 2 big positives in the U.S., housing and energy, are still going to be positives, but they may not be as strong as they had been earlier in the year.
The last area is that there is a certain amount of enthusiasm about U.S. manufacturing. There's a belief that we may, in fact, be in a manufacturing renaissance. And I think that's a little too strong. I've tried to determine how many jobs have been repatriated by the 220 to 250 firms that are doing it and it's only 50,000 jobs, which is about 10% of the increase in the workforce since 2010. We also have an advantage of natural gas. It's only $4 here in the States, it's $10 in Europe and $16. But I've analyzed every major industrial category and energy, as a component of cost, is relatively small in almost every industry except for agriculture, hunting and forestry. So we do have cheap natural gas, but labor is a much more important component. And Asia, still, has a terrific advantage over us in terms of labor costs.
There's also a lot of concern earlier in the month -- in September about an op-ed that Vladimir Putin of Russia wrote about American exceptionalism. And most people believe that America is exceptional and I do, too, but I think dwelling on exceptionalism can be counterproductive. American exceptionalism developed during the period after World War II from 1945 to 1980 when the United States was the dominant economic -- military and academic power. Politically, we had more influence around the world because of our economic and military strength and we didn't see that eroding. It started eroding in 1980 when Europe was back on its feet and competing economically and Japan was producing automobiles and consumer electronics we wanted to buy. And then that was followed in the 1990s by the emerging markets. So whereas we had 48% of the world GDP in the late '40s, we're down to 23% and declining currently. So United States isn't quite the dominant power economically.
In terms of exceptionalism, we're exceptional in terms of our military strength, in terms of our willingness to use it to maintain peace in the world, in terms of our commitment to human rights and in terms of our innovation. Those are clear areas where we are, in fact, exceptional. But on the other hand, we -- our primary and secondary education has slipped considerably. We're in the middle of the pack. We need to do work on our infrastructure. Our legislative bodies are virtually dysfunctional as we're seeing from the trying to resolve the budget and deal with the debt ceiling. We haven't been able to create jobs the way we have in earlier cycles. Usually at this point in the cycle, the unemployment rate is 5% and it's 7.3%. We haven't been able to pass a useful guns control program to reduce civil violence. And we are still struggling with implementing a universal health care program.
We did use our military strength and I think it was an important factor in getting Syria to surrender its chemical weapons and getting Iran to come to the table, so that they are relieved of the sanctions imposed on them. But I think that we should understand our weaknesses, as well as our strengths and be careful when we use it in negotiating with countries that we want to exact some agreements from.
Okay, let's get into some of the pictures. We've been in an extraordinary period of monetary expansion. This shows that the Bank of England, the Swiss National Bank, the Federal Reserve have been quite vigorously expanding their money supply. So it isn't just the United States. Actually, the European Central Bank has drawn in. They paid -- some of the banks there have paid back some of their loans to the ECB. And the Bank of Japan, which we think because of the stimulus program has been very vigorously - they've doubled, virtually doubled their money supply, but they haven't increased it as fast as plenty of other places.
Looking at it just from the United States point of view. As I said, I believe monetary expansion has been a big part of the reason the stock market is higher. The economy has not performed well enough to drive the stock market to its present level. It's because nobody wants to own bonds these days and because so much of the liquidity that the Fed has provided has gone into equities. That's why the S&P is where it is.
Let's take a look at the U.S. economy. One of the reasons the Fed was talking about tapering is it was feeling a little guilty about how many treasuries were appearing on its balance sheet. The Fed was the buyer of last resort for Treasuries and the holdings at Federal Reserve -- the Federal Reserve of U.S. Treasuries have build up a lot and they were beginning to think maybe they should taper. They decided the economy couldn't handle it. And as I said, I think that was the right decision.
Now one of the reason the economy is doing relatively well here, if you look here, it's the Economic Cycle Research Institute. And the arrows point to slowdowns in the second half in 2010, '11, and '12. But there was no slowdown this year and that's why everybody's optimistic that the fourth quarter and the third quarter are going to be strong. But my view is they're going to be closer to 2% than the 3% a lot of people were looking for. And so that's why I think there may be some earnings disappointments coming. So I'm at 2% for the second half.
The other thing that people are concerned about, and I think you're going to hear more about it when the campaigns get underway for Congress in 2014 and the presidential election in 2016 and we're already experiencing it in New York in the mayoral election where Bill de Blasio is talking about how the rich have benefited New York, but the middle class and lower haven't, so there are some things to focus on. The top 1%, in 2008, they received 23% of all income. And in 2012, the top 10% took in 50% of income. The top 1% that took in 23% of income in 2008 took in just 8% of income in '79. And the top 1% in 2012 took in 20%. So the point is that, since 1980, the top 10% and even the top 1% have benefited enormously from the growing wealth in the United States. The top 20% have clearly gained ground. The middle 60% have held their own. And the bottom 20% have lost ground.
So in terms of the stock market appreciation, 90% of all equities are owned by the top 10% of households. And the minimum wage, if you gross it up for inflation, it was $10.74 in 1968 and it's $7.25 now. And real household income has remained flat at around -- this is real, at about $51,000. And the poverty rate is 15%; it was 12.5% in 2008, '09. So we've got some problems to do to revitalize opportunity for all but the top 10%.
There are 2 more developments that are worth thinking about. The first is that capital equipment expenditures have gone primarily for laborsaving devices. That's one of the reasons why we have a structural employment problem in the United States. There's been a pretty high correlation between investment and profits. But profits have done very well. Profits have reached 12% of GDP and -- whereas investment is only 4%. Usually, they're roughly the same numbers. And the 4% that has been done has been done for laborsaving devices. So my view is this has political implications. And you can see, and we would all agree, that Katrina was a dark period in American economic history. There were 30 million people on food stamps during Katrina. There are 45 million people on food stamps today.
Now getting down to what you're all interested in. Look at these red lines. The 2.5% is considered the normal growth -- normalized growth rate for the U.S. economy. And since the recession, the red bar is going down. There have been still more red bars below 2.5% than blue bars above that level. So we're struggling to grow at 2%.
And for -- in terms of housing. The homebuilders are reacting to the rise in interest rates and 30-year mortgage have risen. So I think the housing numbers, which continue to be good, I want to emphasize that the numbers are still good, but I think that housing is going to slow down if interest rates rise as I think they're going to.
In terms of energy. This shows the exponential increase in production from hydraulic frac-ing in North Dakota and that's really been a game changer for employment there. So I think that's good and it's creating a situation, which we should applaud. I definitely think that North America will be self-sufficient in energy as a result of U.S. production, Canadian production and Mexican production. We'll definitely be self-sufficient by 2020 and maybe earlier. So that good news continues. I just don't think it's going to be as fast as everything else. And those are the 2 good things in the U.S. economy. But the unemployment problem is the most serious negative that we have to deal with.
This shows a chart I've shown before. We just sometimes try to solve our employment problems with leverage. But it's taking more leverage to increase jobs than it has before. This shows that after the war, $5 of debt -- or $1 of debt created $5 of GDP growth. But now we're down to $0.30. You put a $1 -- you increase that by $1 and the GDP only increases $0.30. So this is a capital productivity chart, and capital is less productive as time goes on. Why is that? There's an interesting book that came out recently called, The Age of Oversupply, and the writer, Daniel Alpert wrote an op-ed in The New York Times on, I guess, Tuesday, in which he talked about oversupply. My point is that there isn't enough demand out there and that we've got to create more demand if we want to create more jobs. And why isn't there more demand? There is plenty of demand, but it's being satisfied by so many new sources in Asia and even Africa and in Eastern Europe. So that we have so many folks making so many goods and the United States and Europe are facing very rough competition. It's a very hard problem to solve. As a result, you can see here that growth has steadily ratcheted down and this is support for my position that we're only going to have growth of about 2%.
Productivity was very strong after the recession ended. But now, it's down to the traditional levels of about 1% to 2%. So that's going to -- that's satisfactory, but it's not going to be a big profit producer for corporations.
Average hourly earnings are flat and the relevance of this is that we're not going to have much inflation. As I've said in earlier webinars, inflation derives from house prices and wages. Wages aren't going up at all. And houses -- house prices, maybe not in Manhattan but where real people live, house prices are going up very modestly.
This shows -- this is probably a better picture of what's going on in the economy than I have anywhere else in the presentation. What it shows is that unit labor cost are not increasing, but profits are. So if you ask me to utter a single sentence about the character of this recovery, it's that profits for corporations have benefited at the expense of labor. Labor has not benefited as it traditionally has. Usually, labor has participated in the recovery as people have been rehired. Those that were laid off are rehired. Those that stayed on job have gotten raises. But this time, unit labor costs have stayed flat. Part of that is productivity, but part of it is just that wages have remained dormant and profitability has benefited. And that's helped the stock market. But as I said, that's generally benefited the top 10% of the population.
This shows -- the right-hand chart, which I've shown before, I just want to emphasize that this recovery is different from others. We lost more jobs and they've come back more slowly. We have a structural employment problem in the United States and we are not facing it. The federal government isn't facing it. That's one of the sad things by Obama putting the Affordable Care Act ahead of job creation. He exacerbated this problem. He should have made jobs his #1 priority. And when he was -- in his first 2 years, he had control of Congress, he could have implemented an infrastructure program that would have put a lot of people to work and that would have helped solve this problem.
This shows consumers sentiment has come back, but it's nowhere near where it was before the recession began. And household net worth is at an all-time high, but it's primarily benefited the top 10% of the population.
I think there are some earnings disappointments coming. As I've shown before, if you look at the right-hand side, profits recovered faster than sales that had never happened before. You can see the deceleration of earnings per share growth and that's one another reason why I think profits are going to be disappointing. This chart shows that profits as a percentage of national income look like, to me, like they're rolling over. And as a percentage of corporate sales, they're rolling over.
This gives you a few warning signs. Corporations that are giving analyst guidance on third and fourth quarter earnings are guiding them downward. 80% are encouraging analysts to be very careful. And I think that a large percentage of corporations are showing revenue shortfalls. And I think this is an early warning sign also of potential earnings problems.
This shows that there's plenty of speculation in the market. I showed you sentiment figures, but debit balances in margin accounts are at an all-time high. Now some of that is hedge funds that are hedging positions. But I think there's a fair amount of speculation in the market. And if I'm right, there are earnings disappointments that could dampen the performance. Most people think the market's going to end the year strongly, and I think the market may struggle in the fourth quarter.
On the other hand, I could be wrong because the market is not overvalued. We're not at 30x earnings as we were in 1999. We're not at a peak as how we were even in 2007. So from a valuation point of view, the market isn't cheap, but it is fairly valued. But it's fairly valued on earnings expectations. And if earnings are disappointing, I think the market may have a certain degree of vulnerability.
This gives you an indication that revenues are decelerating and that's one of the things that influences me to think that earnings may follow.
Actually, if you look at net income, most people focus on earnings per share, but over the last 2 quarters net income has actually been down on a year-over-year basis. Earnings per share have been up and that's explained by share buybacks. Companies have an enormous amount of cash on their balance sheet. They know that buying their share back -- shares back may be the best use of that cash. It will inflate earnings per share and it may raise the price of the stock. So there's been a vigorous activity in share buybacks and that's one of the reasons why in the phase of lackluster net income, earnings per share have continued to show improvement.
Just a few things on our fiscal dilemma. This is a chart I've shown before that shows we must do something on entitlements. And don't think that we can raise taxes. We've had all kinds of different structures in taxes. But taxes have remained between 15% and 20% of GDP. If you try to raise taxes on the rich, there seems to be a way that they always seem -- the tax rolls always stay between 15% and 20%. So in terms of generating revenues for the federal government, that's the range we have to think about.
On the other hand, as a result of the sequester and as a result of raising taxes on those making more than $250,000 and eliminating the payroll tax holiday, we've really increased revenues. In 2010, the budget deficit was 10% of gross domestic product. This year, it's going to be 4% because revenues have increased because of the tax increases and the sequester. And because of the sequester, expenditures have declined. So we've really made a lot of progress here. And as a result, the budget deficit is only 4% of GDP and it's going down. So we do have some room to spend some money on infrastructure and job retraining. But there is no appetite in Congress to do that.
And one of the reasons that we're in better shape in terms of the budget deficit is that we've reduced the troops in Iraq and Afghanistan. The war cost us a lot of money. If you look at this on the left-hand side, you have the a number of troops on the ground in Iraq and Afghanistan. This is a new chart. And on the right-hand -- that's the left-hand scale. The horizontal scale is the budget deficit. And as you see here, when we were building up troops through 2008, the budget deficit was increasing. And as we withdrew the troops down and we're continuing to do that, we were in better shape on the budget. So the war cost us a lot and rolling back the troops is saving us a lot of money. That's one of the reasons that Obama was adamant that we weren't going to put troops on the ground to resolve the conflict in Syria.
This is a chart I showed before. It's worth reminding everybody that the top 1% are paying 38% of all taxes and only 50% of the population is accounting for all of our taxes. And that wasn't always the case. As recently as 2000, only 34% were paying no taxes.
Now let's go abroad briefly. Europe was still in a recession. But I think they're coming out of it. And this shows a blip up in expectations. And I think Europe will have growth between 0.5% and 1% next year. They still have a major unemployment problem in Europe, and it's 12% versus our 7.3%.
In China and the emerging markets, this is a new chart. And I think I had attended a breakfast at the end of the summer with Mike Milken and he showed me this chart. And he showed me how the United States -- people in United States spend their money versus people in Asia. And you can see here that housing is 33% of our expenditures whereas. It's a much smaller percentage in Asia. Food is much bigger in Asia. But the most interesting number is the amount of money that Asians spend on supplemental education for their kids. It's the second biggest category in Asia and it's in double digits, and it's only 4% in the U.S. So we do send our kids to after-school training, but we're not as preoccupied with it as the Asians. And their educational performance reflects that, particularly true in Singapore and Korea.
Okay, here we are. This shows Chinese GDP at 7.5% over the summer because of electricity production. I was skeptical about that. But now it looks like exports have improved, industrial production has improved and China really is growing at 7.5%. But they're doing it on the basis of credit. Bank credit and other credit is really driving the Chinese growth and they're still engaged in it. You can see that financial institutions, loans as a percentage of nominal GDP are very strong. So credit is the driver of Chinese GDP. As I said, I was worried about electricity production there, but now that's recovered up to 10%. And there are a lot of stories about see-through apartments and offices, but housing in China is still and the 100 major cities is still increasing. The big problem continues to be that China has failed to rebalance the economy. Investment spending is 45% of the economy. Consumer spending is 35%, and they like to reverse those percentages and that's the biggest challenge facing Xi and Li.
I've shown this chart before, but it's worth reminding you China is filing 0.5 million patents every year, the same as we are. They're determined to be an innovator as well as a low-cost manufacturer.
On the emerging markets, they've lagged behind. I've reduced my position there, but they should be a part of your portfolio. And I think there are opportunities in China. And I like Mexico, which isn't part of many portfolios. The reason I think that is that the developed markets are 55% of GDP, but the emerging markets are 45% and they should be represented in your portfolio. Brazil is growing only at 2.5% and I've deemphasized it, that stocks are cheap there. And it's probably time to initiate some positions. And both the market and the rupee have gone down in India and I would have some representation there.
But I do like Japan. I think the fiscal and monetary stimulus is really working there. The yen has depreciated, which has been great for exports. The government debt has gone up even though it was high to begin with. Shinzo Abe was very ambitious in being willing to take the risk of increasing the debt-to-GDP ratio. As a result, the Japanese market really took off starting in November of 2011. And it's had a corrective pace, but it's -- I don't think it's overvalued at this point. It's interesting to look at trader behavior. When the market was going -- Japanese market was going up, plenty of foreign money went in -- went through a correction. A lot of that money came out. But now it's coming back in again.
So that concludes the formal remarks that I wanted to make today, and now I'd like to turn it back to Joan for the question-and-answer period.
Thanks, Byron. Well, definitely, a lot of questions. So why don't we just launch into those. Starting off, why do you think the market have virtually shrugged off what could be pretty dire consequences, what's happening in Washington with the government shutdown and all of the negatives to follow that?
Byron Richard Wien
Because I think that going into the government shutdown, they figured somehow the air traffic controllers will be paid, social security checks will go out and the whole thing will blow over in a week. But I'll tell you, the 2 parties look like they're farther apart than they were when the shutdown began. And I think it could go on longer. I think that is the big wild card in this situation. We could go on. We've already gone on a couple of days and there's no sign of a settlement. So I think it's a more serious situation than the consensus expects.
Do you think in an odd way the market might just be assuming this keeps the Fed active?
Byron Richard Wien
Well, I'll tell you, Bernanke is really glad he didn't taper. Now maybe he had a premonition of this and that was behind his decision on September 17. And he did reserve the right to actually increase the monetary easing. I don't think that'll happen, but I do think the easing will go on. My own view is it'll go on till the end of the year and he'll turn over the decision to his successor who will probably be Janet Yellen.
And how do we reconcile -- so we have liquidity being pumped into the market clearly going into financial assets and the expectation that tapering would drive rates up would likely impact stock market and yet we're trading at pretty reasonable levels?
Byron Richard Wien
Yes, I just think that the Federal Reserve views its role as trying to keep the economy, trying to keep employment as high as they can and trying to keep inflation down. And if Milton Friedman were alive and he saw the amount of monetary easing that was going on, he would be very screaming that this is going to create a typical inflationary situation. Now he can only roll over in his grave. But my belief is that, because there's so much competition for jobs, wages are dormant and house prices haven't increased so we've gotten away with it. But I do think that rates are going to up because I think the Fed doesn't want to build up too much in terms of Treasury securities on their balance sheet. So inevitably, tapering will take place and I think you will have rise in rates. Remember, if rates go to 3.5% on a 10-year Treasury, that's still way below the long-term rate, which I think the long-term average is around 6%. So we're still enjoying a very favorable period for interest rates. But if the mortgage rate goes from 3.5% to 4.5% and then goes higher, that'll slow down housing. So I think that's something that we have to worry about, but it isn't here yet.
So sticking with wages and jobs. Clearly, that's a huge driver of this growing wealth gap. How can we resolve it? You mentioned the potential for greater infrastructure spending, which you don't think is happening, but should. What else?
Byron Richard Wien
Well, we could take advantage of our innovative capability. First of all, we should change the visa situation for foreign nationals that go through our university. We train them and then they go back. But in the old days, when the visa restrictions were less onerous, they stayed. We've got to capitalize on our innovative capabilities. We've got to retrain some of the people that are out of work. They have skills that don't apply in today's knowledge economy. And we have to do what we can do to revitalize American manufacturing. We've shown how difficult that is. But we've got to do what we can do. And we should be very lenient on allowing drilling. We should extend the Keystone pipeline to the Gulf, and we should try to do whatever we can to stimulate the exploitation of our enormous natural resource capability.
You mentioned China's growth as accelerating. And clearly, some of the emerging markets benefited when it was stronger before and they've lagged now. So just thinking about Brazil and other countries, are we better served potentially increasing our allocation to those markets beyond what you've suggested on the assumption that China demand will pull them up again?
Byron Richard Wien
Well, China is the engine of growth in emerging markets and it does -- has helped Brazil. But it isn't all the story. They sell to us and to Europe, too. And we're -- Europe has been in a recession and we've been in a very slow growth mode. So I think that the emerging markets will benefit from China's growth. But they would benefit more if growth were revitalized in United States and Europe.
And how do you think the European recovery will be affected by what's happening in the U.S. today?
Byron Richard Wien
Well, I think we slow down seriously, that'll affect Europe. Remember -- the important thing to remember about Europe is Europe is only muddling through. They haven't made -- I mean, my disappointment with Europe is they haven't made any of the structural changes they need to make. During UN Week I had an opportunity to meet with several foreign European prime ministers. And they should have a banking union by now. They should have some form of fiscal convergence where the various members of the European Union submit their budgets and if they run deficits greater than 3%, they are penalized in some way. And they should have made more progress in coming together than they have. They've only jury-rigged and papered over some of their problems. Sure, they're going to be recovering and maybe have positive growth next year. But they haven't solved any of the structural issues that will sustain the European Union on a long-term basis and that's my disappointment there.
Let's move over to interest rates, which is, of course, a pretty important topic. Where do you think rates will go? When will they rise? And at what point will we start to see flows from equities back into fixed income?
Byron Richard Wien
Well, rates are well below, I think, a level. If you look at the earnings yield versus the bond yield, you're still much better off in equities. And we've now convinced everybody they should own equities and not own bonds. I think you will get some migration back in the bonds when the 10-year Treasury goes above 3%. And if it goes above 4%, I think it'll be pretty noticeable. But I think you need rates to go up a lot from these levels before you get significant remigration back into the bond market. Remember, people are in bonds. For the last decade, they've been disenchanted with stocks and they put money in bond funds. They've just started to take money out of bond funds and put it in -- put money into equities. That's just beginning. And that could be the beginning of a long-term trend. So I think there's going to be attrition in the fixed income market for a number of years.
Do you have a view on the Affordable Health Care Act in terms of what that could mean for the shape of employees, more part-time, fewer hours, impact on small businesses?
Byron Richard Wien
Well, look, every small business, they could be below 50 employees, is trying to get as many employees down to 29 hours as possible. I think, they're -- look, any broad act like that, if you go back to the modifications of Social Security during the '30s and some of the other entitlement programs that were enacted then, there are a lot of changes that take place in the early years. I've spent a lot of time trying to understand the Affordable Care Act. And we saw that the sign-ups for participating in these various insurance exchanges ran into a lot of glitches at the beginning. I know -- I've talked to a lot of people about it. I know nobody really claims to understand it, and I certainly don't. I think this is a work in progress. I think it is probably going to get off to a slow start. But I think it's a noble objective. I think universal health care is something we should have in the United States. I'm not sure this plan is perfect. I know it's imperfect. I know there are changes that need to be made. But it is the law of the land. It has been approved by the Supreme Court. I don't think that it makes sense to try to roll it back or defund it.
And can we talk about stock buybacks? The chart's pretty stunning in terms of the rise in the amount, yet buying back one stock at market doesn't seem to add a tremendous amount of value. What is your perspective? That must be a minority view.
Byron Richard Wien
No, if you look, it's the best thing that you can do if you're a company is increase revenues. If you increase revenues, you hire people to produce those revenues. And you pay them and they spend the money. So you want to watch the revenue line. The best thing that could revitalize America is more demand, which would create more revenue. Now the companies, as I've shown on the charts there, are having trouble increasing the revenue. So what do they do? They engage in financial engineering. What is the noblest form of financial engineering? Share buybacks. Because you use the cash on your balance sheet, you shrink the capitalization, you increase earnings per share and the stock price goes up. So that's what's going on here. It is a good, practical decision and it's worked over time. But it isn't what the country needs. What the country needs is more revenues and more jobs.
And then a final question, which comes from the outside. Someone's asking, what is your favorite book?
Byron Richard Wien
What is my favorite book?
Yes, or a recommended book, from an investor.
Byron Richard Wien
Okay, if I were an investor, I mean, I love things like the Extraordinary Popular Delusions and the Madness of Crowds and that sort of thing. But a book that's been an issue the last 5 years is Charles Murray's Coming Apart. And it really talks about the change in America since the 1950s with the liberalization of sexual practices, the changing mores of the middle class, the change in the political structure. I would definitely read that. And I would also read Nate Silver's book, the noise -- I don't know, the noise is in the title. But Nate Silver is this pollster [ph] that's had outstanding degree of success and accuracy. And what he talks about is the gerrymandering of political districts. The Democrats took their eye off state legislatures in 2010 and they went Republican and they redistricted every state in the union and gerrymandered those states so that they were biased toward Republicans. And one of the reasons that we're having so much trouble in Congress is that the Republicans control Congress and this shows how they did it. So those are 2 books that'll increase -- they're not fiction. I mean, I have a lot of fiction books I like from college days that I still reread. But at any rate, those 2 books will increase your insight into how America got into the predicament it's in right now.
Thanks very much for watching. I look forward to coming up with 10 Surprises for 2014. It'll be almost 30 years that I've been doing it and I hope I come up with some good ones. And I hope that they prove to be helpful to you. Thanks very much for watching.
Great. Thanks, everyone. Just a reminder, we will have those 10 Surprises on Tuesday, January 7 at 11 Eastern. Thanks for joining us.
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