Hi. I'm Joan Solitar, Director of External Relations and Strategy at Blackstone. Thanks for joining us today for the Blackstone webcast, Better Second Half or Not featuring Byron Ween, 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 and A box.
Feel free to click on that at any point to submit your questions anytime during the webcast. 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 downloading the slides and referring a friend. We plan to keep the webcast to 60 minutes, including Q and A. And at the end of the PowerPoint, you'll see a full list of disclosures.
Thanks for joining us. And with that, I'll turn it over to Byron Ween.
Thanks, Joan. Well, this is going to be a very controversial call because I'm taking a firm positive position on the remainder of the year. The title of it is better second half or not. I'm saying it is going to be a better second half. And I would say the consensus out there is either very uncertain or on the negative side of it.
The market hasn't done much so far this year. The earnings outlook is not very positive. And so as a result of that, investors are very cautious. They're not probably not cautious enough yet and they'll probably get a little more cautious, but I view that favorably. The more cautious they are, the better the platform is for a better second half.
So let's look at the key points that we're going to make. In the first one, the U. S. Economy is going to have a better second half. I definitely think things are in place.
Initial unemployment claims are at a 40 year low. Monetary policy is easing in Europe and that Europe is getting better and the Greek crisis is behind them. Abenomics is working in Japan. So I'm optimistic that both Europe and Japan will have about 1% growth. China is slowing.
I don't think they're really growing at 7%, but they are not going to have a hard landing in spite of what the stock market has said. The market stock market was up 150%. The fact that it's corrected a third of that is not a big deal. And most of the people who were hurt by that were speculators. I think the Fed will tighten in September or December.
I don't think that that's a major factor. A lot of people are worried about that because you shouldn't fight the Fed. But my view is that even if they do tighten, they're not going to tighten much. They may raise rates 25 or 50 basis points and they may do that every couple of meetings or so, but they're not going to do it every meeting. So the long term average of Fed funds is about 3.75% and they're a long way from that and it's going to take a long time to get to that.
I think the S and P 500 will rise 10% for the full year and that would mean a lot of work would be done in the second half. I think intermediate long term yields are going to rise somewhat, but not a lot. So I think the interest rate background is going to remain favorable for equities. And I think average hourly earnings are going to be increasing. There's going to be more money in workers' pockets.
But I don't think inflation is going to be a problem. So I think it's a generally favorable environment. Earnings for 2015 are probably going to be flat with 2014. And so for the market to rise, you're going to need a little help from multiples, but the stock market is just a little bit above the long term average, a long way from bubble territory, although I know there are some observers out there who are screaming that the market is in a bubble. The most probably the most important thing I'm going to say today is that there is no recession in sight.
Traditionally, the stock market peaks in anticipation of a recession, But non farm payrolls are accelerating. They're starting to go up. Labor share of GDP is low and just starting to pick up. Wage growth is improving, but it's still below the 4% trigger point. The yield curve is not inverted and consumer confidence is an uptrend.
So I can give you 20 things that usually appear before a recession begins and none of them are in place. I'm not saying we're never going to have a recession, but I don't think we're going to have one this year or next year or maybe not even the year beyond it. We may go for a period of several more years before recession. And that's a good thing because if we do get into a recession, I don't know how we're going to get out of it. Usually, a recession is caused by the Fed raising interest rates to cure the excesses in the economy.
Bull markets, as you'll hear me say in a moment, bull markets die of excesses according to a colleague of mine at Omega, Steve Einhorn. They don't die of old age. Now this one is a little long on the tooth, but the excesses have not appeared yet. And when they do appear, the Fed usually does something like raise rates abruptly in order to cure it. But rates are low and even if they start to go up later this year, they're not going to go up to a significant point.
So the Fed is praying that we don't have a recession. The Fed is praying that what I've said here about the lack of indicators indicating a recession is imminent. They hope that I'm right because they don't have the tools to help the economy out. If we get into a recession, interest rates are already low. They can't lower them further.
So we don't have the tools to cure a recession other than fiscal spending and getting significant amounts of fiscal spending through a Republican Congress is going to be very difficult. So let's hope that this economy continues to grow for an indefinite period. Here's my radical asset allocation. I didn't haven't changed it in the past quarter, 10% in Large Cap Multinationals, most based in the U. S, 10% in other U.
S. Stocks, 5% in Europe, 5% in Japan, 5% in emerging markets, 15% in edge funds, 10% in real estate and private equity, 35 estate returns of 10% or greater and those are going to be hard to come by in the long only conventional equity investments. 5% in gold has hurt me this year, but I view that as a kind of protection, 5% in natural resources. I think oil will be headed higher in the second half of this year. I'll try to support that.
And 20% in the riskiest end of the credit curve, mortgages, leveraged loans and mezzanine financing. Now this chart is worth spending some time on. In the previous two webinars, I've talked about the fact that consumer investor optimism was too positive. What you really need for a good bull market is for investors to be pessimistic and we're getting there. The confusion caused by Iran, by Greece has made investors cautious.
And they're in the lower end of the neutral territory. I think they'll get into pessimistic territory before they're done. And that would be the perfect time to expand your investments, if I'm right, and the market does better in the second half. You almost have to get investors to turn their mood negative in order to have the second half positive as I have forecasted. Now this shows previous bull markets.
They generally average 57 months and go up 165%. This one is already 74 months old and up over 200%. So you can say that it's been good enough to us. It's time for the market to do nothing or go down. But as I said, the market usually anticipates a recession.
There's no recession in sight. So I think we have further to go, and I think you're going to see that in the second half. Don't fight the Fed is an important mantra, but monetary policy has been an important driver of markets around the world and it's worth spending some time on it. You could argue and I would argue that one of the reasons the U. S.
Market did as well as it did between 2,009 2014 is that the Fed was putting $85,000,000,000 into the market or into the economy every month. And in my judgment and I've yet to be challenged on this, 3 quarters of that monetary stimulus went into the financial markets pushing stock mark stocks higher and keeping interest rates low. The intent of the Fed was to stimulate the economy, but only one quarter of that money went into the real economy according to my analysis. Now during that time, the European Central Bank was actually reducing its balance sheet. It had expanded its balance sheet during the crisis at the end of the last decade by guaranteeing loans if the various member banks bought the securities of the 4 troubled countries, Greece, Portugal, Spain and Italy.
But then as those loans were paid back, their balance sheet shrunk. But now we're in a position where the balance sheet of the European Central Bank is expanding and the balance sheet of the Federal Reserve is flattening. And that's one of the reasons why the dollar has been strong relative to the euro and I think that's going to continue. If Greece had dropped out of the European Union and the euro currency, then there was a possibility the euro would strengthen. But with Greece still in, the euro in my judgment is likely to be weak, maybe not a whole lot weaker than it already is, but the dollar is going to be relatively strong against other currencies in the world, the euro and the yen primarily among them.
I don't expect the Federal Reserve balance sheet to shrink. It's expanded from $1,000,000,000,000 in 2,008 to $4,500,000,000,000 now. And some of the bonds that they have bought are going to roll off, but I think they'll be replaced. I've had that opinion for the last 6 months, actually not last 9 months, I guess now. And you can see that the Federal Reserve balance sheet has stayed flat.
Now I made a statement a moment ago that this has had a lot to do with what the stock market did. So just look over on the left where you see the U. S. The balance sheet went from $1,000,000,000,000 to $4,500,000,000,000 The stock market tripled from $6,000,000,000,000 to $19,000,000,000,000 Earnings more than doubled. So that at the same multiple meant that $6,000,000,000,000 of the $19,000,000,000 was accounted for by earnings improvement.
So that takes you from 6 to 12. So you had 7,000,000,000 dollars of appreciation in the U. S. Market. And I think 3.5 trillion dollars or 3,000,000,000,000 of that was accounted for by monetary expansion.
That the expansion of the European Central Bank balance sheet just started. It's gone from €2,000,000,000,000 to €2,400,000,000 And the value of stocks in Europe has gone from 8 to 10. So in my judgment, the balance sheet expansion of the European Central Bank has played a role in the rise in the European stock market as well. And in the case of the Japanese stock market, the balance sheet of the Bank of Japan has expanded by more than the stock market has gone up. And that's one of the reasons why I'm positive about Japan.
I think the Japanese market has further to go. But the transcendental point of these three charts is monetary policy has a lot to do with the appreciation in the equity markets in the 3 major markets of the world. I don't think that any of those 3 markets are going to become restrictive in terms of monetary policy. The U. S.
May not be expansive, but that but the multiple is such that it can accommodate a somewhat higher market. I'm not looking for a raging bull market, but I am looking for the U. S. Market, the European market and the Japanese market to do somewhat better during the remainder of the year. As far as the world GDP is concerned, I'm going to look at it a couple of ways, but we're in a period for a relatively slow growth.
I've got it here at less than 2%. And I've said for a long time that the biggest problem the world has is that there's plenty of demand out there, but there are a number of countries that are fulfilling that demand. In the 1940s after World War II, when the United States was the principal manufacturer in the world, Europe and Asia had been devastated. The United States accounted for almost 50% of world GDP. It's down to 22% now as you see in that box in the lower left.
Other countries are producing quality goods at attractive prices. So the middle class is expanding in the developing world, but there are plenty of manufacturers to satisfy the goods that they demand. I think it's going to get better. Right now, if you take a composite of all the various people who are forecasting world growth, they've got it at less than 2% less than 3% this year, but next year it's going to pick up to 3.15%. That's going to be accounted for largely by the developing world, notably China.
May not be growing China may not be growing at 7%, but it's certainly growing at 5%. So we've got 3% growth around the world, 2% in the U. S. The U. S.
Is going to grow faster than Europe or Japan and that should be enough to accommodate better equity markets. Here are some signs that things are getting better. Industrial production in Germany ticking up, the Japanese confidence is rising. So I think we're going to have a better backdrop in both Germany and Japan. Now there have been dark clouds over the market over the past several months and I did want to make a few comments on each of them.
It seemed to me that Greece was making the whole world markets nervous when the Syriza party won in February and Alexis Tsipras was became the Prime Minister. And he won on a platform of anti austerity and that was very popular in Greece. And he kept on pursuing that and it looked like Greece was going to drop out of the European Union and go back to the drachma or some alternative currency. And even he encouraged voters in the referendum that they had to vote no against the reforms that Europe was trying to impose on Greece. So he did a total reversal.
He turned around 180 and agreed to all the reforms. Why did he do that? He did that because he was the Greek banks were closed. The Greek did not Greece did not have and was not going to get the money to pay pensions or public employees, including the military. The borders were going to become porous and immigrants were going to flood over from Turkey and spread throughout the rest of Europe.
So and he was probably facing the risk of personal assassination because while the voters had supported him, the chaos that was going to result in Greece was going to be such that his life would have been in danger. So he decided to give in to all the reforms that were being made were being imposed on him. I think he made the right decision. Greece remains in the European Union. They're getting 96,000,000,000 dollars in direct aid, dollars 84,000,000,000 $85,000,000,000 in euros.
They're selling $55,000,000,000 of assets and they're okay for a while. But don't think that Greece is out of the headlines. 3 to 6 months from now, they'll run out of money again and they'll need another support because I don't think they're going to have a positive GDP and they're going to generate cash reserves where they can pay back some of their debt. I don't think they're going to have that anytime in the next year. They're scheduled to have 3.5% budget surplus in the next year, but I think they're going to have a tough time with that.
We have an agreement with Iran. I know it's controversial. There are probably some of you watching the webinar who are against it, who would have been in favor of escalating sanctions. But I'm on the side that I think it isn't a great deal, but it's a better deal than no deal. If they did if we didn't do the deal with Iran, they would have had a nuclear weapon in a couple of years.
Now they probably won't have one for 10 to 15 years. I know that it's going to be hard to enforce the surveillance and inspections. There are all kinds of problems associated with the deal, but I think it's better than not having done it. But I think there's some reason for optimism. Who wanted this deal more than anything else?
The people of Iran wanted the deal because the 65% of that population is 35 years or younger. They had no they didn't understand why the clerics and the leadership was pushing so hard to develop a nuclear weapon. Nobody who had a nuclear weapon has used it since 1945, including Pakistan, which is probably the country that would be most likely to use it. And so they didn't understand why the country was suffering so much under the sanctions when in fact they weren't going to use a weapon in the 1st place. If the sanctions were lifted, Iran was in a position to ship more oil, the economy which was going through a very difficult period would do better, incomes would improve, jobs would be created.
This is an young educated population. They had so much to gain from doing the deal and that's so I think it was the push from the bottom rather than the decision at the top that caused the deal to be done. It has to be monitored carefully and I think there are going to be problems with that, but I'm glad it was put in place. Everybody's worried about China's stock market predicting a hard landing there. The stock only 7% of the population participates in the stock market.
It's a very speculative arena. I call it a mainland Macau. And my view is that the Chinese economy will continue to expand at least at a 5% rate. And China will not will have a soft landing, but not a hard landing. And finally, the U.
S. Economy is showing all the signs of improvement in the second half. So these clouds, which have hung over the market during the 1st 6 or 7 months, I think are now going to be lifted and I think we'll see higher equity prices as a result. So let's take a look at some of the aspects of the economy. At the last webinar, I was very worried about the Economic Cycle Research Institute, which had turned down.
This is an indicator that it accurately predicted the slowdowns in the U. S. Economy in 20 10, 'eleven and 'twelve not in 'thirteen, not in 'fourteen. It looked like it was predicting 1 in 'fifteen, but now it's turned up and I think that's a favorable sign. Earnings forecasts have been revised down.
The number of estimates have been adjusted upward. The 3 months ago, it looked like 2nd quarter earnings were going to be down 6%. Now it's down 3%. I think it will probably turn out to be even better than that. Companies are actually guiding analysts more favorably.
And so I think earnings are going to be flat for this year at about $120 The big problem that we have in the U. S. Economy is with the middle three quintiles of income distribution. If you look at the real median family income, it is not going back to where we were in 2,007. The average family in the United States is not better off than it was before the recession.
Probably all of you who are on this webinar have a higher net worth than you had in 2,007. But that's not true of the average American That real median family income is still below where it was in 2,007 and that's why the vast proportion of the population feels that it's not participated in the recovery. This is going to be a very important factor in the election because the income inequality has widened during the recovery over the last 6 years, not diminished. And the candidates that promise something to those that feel they haven't kept pace with the recovery in the economy are going to be in a better position to gain votes in the next presidential election. Wages are starting to go up, but they're only going up at about a 2.5% rate.
That's a modest increase, but a long way from the 4% that they're usually rising at the peak of the cycle. In terms of hours worked, that's up and that's a favorable sign. So we do have some wage average hourly earnings increase and increase in hours worked and that's going to be good for consumer spending. But the biggest problem the economy has is there are 5,000,000 jobs open and a lot of the people who are looking for jobs don't have the quantitative skills to fill them. So people are applying for these jobs, but they're not being hired.
They're still open. And what we've got to do is retrain a number of the workers who have been displaced, so that they're able to take these jobs. Here, there's a University of Michigan study that shows that a lot of people who have jobs are worried. You can see that on the right hand chart side of the left hand chart. They're worried about losing it in the next 5 years.
I claim that half of all Americans go to bed scared every night. They either don't have a job, they don't have a job that pays all their bills or they have a job, but they're worried about losing it. And that chart on the left shows the support for that point. And either the company is going to get in trouble or they're not their particular segment of that company is in trouble. So they're worried about losing their job and that's going to affect consumer spending.
On the other hand, jobless claims are down. So people are finding jobs and the report that came out earlier today is indicative of that. One of the biggest problems we have and I think this is an aberration in the recent figures, but I wanted to show it. The labor compensation is improving. There was a sharp tick up recently, but as a result of that productivity has been down.
Now this cycle has enjoyed increasing productivity throughout and that's how your standard of living rises. Standard of living goes up as productivity improves. But for the last couple of quarters, we've had negative productivity. And that means that the standard of living would be stagnant or declining. I don't think that this is a permanent phenomenon, but I did want to point it out.
I don't think we have an alarming level of inflation. I think inflation is going to be around the 2% or 2% to 3% level. But the recent numbers in both Europe and the United States have been above 3%. So I don't think inflation is worrisome yet, but it's something to keep your eye on. One of the favorable aspects of the U.
S. Economy is housing. This is probably the most important positive that's going to drive the second half. You see starts now over $1,000,000 And in addition to that, you can see that the payroll employment in the 25 to 34 year old age group, that's where household formations take place. That's been improving quite dramatically recently.
So I think housing is going to be the most favorable part of the U. S. Economy. The part that needs to improve is capital spending. That's a problem both in the United States and in Europe.
Capital spending isn't going much up much in Europe. I think the Greek cloud has been a factor there. Capital spending has been improving in the U. S, but had a recent turn down. But the capital spending that's been done in the United States is to buy capital equipment that allows you to get the goods and services out the door with fewer workers.
So you haven't built we haven't built a lot of new plants in the U. S. That would cause a sharp upturn in employment. And you can see here that the reason for that is operating rates are below 80%. 80% is trigger point where you start to build a new plan.
And we should be doing it because not only is American infrastructure aging, but the capital stock in American industrial plants is aging. It's older than it's ever been 22 years. So we really have to replace a lot of the equipment in our manufacturing plants. So we have an infrastructure problem not only in the public sector, but also in the private sector. So we should be improving capital spending throughout the economy.
We haven't seen signs of it yet. It could be a terrific boost to the second half if it starts. One of the problems in capital spending is oil. Oil was an important component of capital spending. Today, July 23 is the 1 year anniversary of the price of oil in West Texas Intermediate being $107 And nobody including myself when it was 107 said this is the top tick, Oil is going to be down 50%.
I can't find anybody who said that, but it was down 50%. Now that has important implications for capital spending. This chart shows that it usually takes about 10 months from the peak in oil prices to for capital spending to improve. So now you're going to see some the price of oil except as a result of the Rand deal has taken a tick down. But I don't think that the 1,000,000 barrels out of 94,000,000 barrels produced every day is going to be that big a factor.
But you should start to see some improvement in oil industry capital spending, because it's been a year since the peak and we went down very fast. You can see that the price of oil usually has a B bottom. That's been the way it's been in the past cycles. In bottom, it's at 43 and it's headed up. Now has had a minor correction, but I think it's going to head higher during the second half of the year.
What oil is really related to world GDP growth and when GDP growth stalled a little bit as a result of the turbulence over Greece and the Iran deal. I think that hurt the price of oil. Inventories were very high As you see on the left side and the rig count dropped to the point where oil should start to move up in price. I think there's still a lot of importing oil. China imports almost all of its consumption.
The U. S. Even we're a long way from self sufficiency. We're still importing about 6,000,000 barrels about 25% to 35% of what we consume every day. So I think one of the areas of opportunity is energy segment high yield bonds.
There's still a good spread with treasuries. They still represent a significant portion of the total high yield market. They're second only to technology. I think there are opportunities in both energy and technology fixed income securities. The biggest problem that we have in the economy is this.
We're all enjoying the benefits of very high profit margins for American Corporations. Profit margins are around 10% and they've risen very sharply during this cycle. Unit labor costs haven't gone up at all. So what's happened in this cycle is that corporations have benefited at the expense of labor. That's why you're hearing so much talk about raising the minimum wage because corporations have benefited at the expense of keeping late wage rates flat.
I think wages are going to start to move up and that may put a little pressure on comp profit margins, but that this is the reason why corporate profitability has improved so dramatically in this cycle. Here you see the consumer sentiment has improved quite dramatically. I think that's going to help consumer spending, but we're not back to where we were in 2,007. Household net worth is at an all time high, but in my view that has accrued primarily to those in the top quintile of income distribution. Those in the 3 middle quintiles have held their own and those in the bottom quintile have actually lost ground.
So the top quintile has a lower propensity to spend than the lower 4 quintiles. And so that's why you haven't really seen it in retail spending yet. If I'm right and wage rates are going up and the pace of the economy is going to improve, then maybe you'll see some improvement in consumer spending. Attitudes seem to be improving. And so that's part of my reason for being optimistic about the second half.
What you see here is that companies are willing to take out bank loans. Bank loans are back to where they were in 2,007. That shows that there's been a renewal of business confidence. And retail sales are have been steadily rising, but the last couple of readings have been negative. But I think they'll resume their positive trend as we go through the rest of the year.
Who has benefited from this recovery? Those who have stock holdings because the stock market has tripled, those that own expensive real estate, the high end of the real estate market has benefited. So that's the top quintile that's improved their net worth. And I'm hopeful that the benefits of the recovery are going to broaden out as we go through the remainder of the year. Just look let's take a look at earnings.
Analysts have been too high. Now maybe they're too low, but we've all learned that we shouldn't trust analyst estimates. But earnings have been very disappointing. And the reason they've been disappointing is energy. Here's revenues.
Revenues are up. If you take energy out and I show this for information purposes, but obviously energy is an important part of the overall economy. But revenues are up 8% if you dropped energy out, but they're only up a small amount, 1% to 2% if you keep energy in. The same is true of earnings. Earnings would be up 8% if you took energy out, but they're only up marginally if you put energy in.
But I'm estimating that S and P earnings are going to be flat for the year and around $120,000,000 That obviously includes energy. But if the price of oil starts to rise even energy earnings should improve. I just wanted you to see that energy earnings are down 60% this year. So and I don't think they're going to stay there. So I think the price of oil is going to rise somewhat not back to $107 but I think we could see the price of oil rise to $70 or certainly $60 plus by year end and that would help overall earnings.
Here's a matrix which shows that if profit margins stay at around 10% and revenues improve 4% to 5%, percent, which I think is possible, we could have earnings for the S and P at around 120% or flat with last year. So the question is, if earnings are flat at 120, is the market expensive? Well, it certainly isn't in bubble territory. Bubbles occur at 25 30 times. We're a little above 17.
So my characterization of the market is that the market is somewhat overvalued, maybe modestly overvalued, not cheap, but not in bubble territory. There are other ways to look at it. And as I said, I've always wanted to have a balanced presentation. But if the market is somewhat overvalued, why is it not going down? And the reason is that the earnings yield is attractive.
You can see here that the earnings yield and the 10 year treasury yield are usually pretty close together. But now the earnings yield on the market is above 5%. The 10 year treasury yield is a little above 2%. So the spread, the earnings yield spread with treasuries is quite favorable. And that's why the market has been able to hold its own rise slightly in the face of a great deal of confusion about earnings.
It's because of the earnings yield concept not the absolute earnings level. Here's the Shiller way of looking at it, which takes earnings over a decade. On that basis, the price earnings ratio is 27 times. And so he's arguing that the market is very overvalued, but he's been arguing that for a long time. You could argue that the market is dangerous because the number of IPOs is so great.
It certainly was great, reached a peak in 2014. But IPOs are running at about half the level they were running at in 2014. So there's still a healthy IPO market, but it's not as vigorous as it was last year. And here we have merger and acquisition activity. It's very intense both in Europe and the United States.
And what's the reason behind it? Well, as I said, there isn't enough demand out there to have significant revenue growth. Revenue growth, I think, this year will be about 4% overall in the U. S. So if you have modest revenue growth, you're looking for other ways to improve your earnings per share.
That's why you see so much financial engineering going on. You see a heavy use of share buybacks and you see a large number of strategic acquisitions. Why do companies do that? They make a strategic acquisition because they can cut back on the workforce, they can cut back on the administrative expenses And if they don't have significant revenue growth, they can have a rise or an increase in earnings per share. So the intense deal activity is because it's the only way they can show earnings progress.
They can't show it by coming out with a new product or because the demand out there is causing significant sales increases that will improve their profit margins. So share buybacks and merger and acquisition activity is intense because that's the only way CEOs can show earnings improvement. This shows Warren Buffett's favorite measure, market capitalization as a percentage of GDP. It's not at the 2,007 peak, but it is up there. But I think U.
S. Companies are very global right now. So I think just looking at the market capitalization as a percentage of U. S. GDP is too narrow a view.
This shows share buybacks. I do think that they'll year to date or with these figures they were low. But I do think as you'll see in a subsequent chart this one share buybacks are going to be at about the same rate as they were last year. M and A activity will be right up there with the peak. Bond issuance will be lower.
Dividends will be higher, capital expenditures will be higher, but that will be for labor saving equipment rather than building new freestanding structures. Corporate cash balances are very generous, so the companies have the money to do all of this. Buying your own shares back has been good for of our corporations. The companies that have been buying their own shares back have shown better market appreciation than those that haven't. In terms of our fiscal dilemma, no matter what the tax rate is, tax revenues should always come in between 15% 20% of total GDP.
We've improved our budget deficit down to 3% less than 3% of GDP. So I think we're in a position to do the kind of infrastructure spending, job training and R and D that would improve the economy. The thing we have to worry about with rising interest rates is that it increases the cost of care of servicing the $17,000,000,000,000 in debt. So we want interest rates to go up somewhat because they're aberrationally low, but we don't want them to go up too much because that would put a burden on the budget deficit. The federal government which has been a drag on the economy is now going to be a positive contributor and that's one of the reasons for optimism.
But this is health care. It's a new chart. And you can see that going back into the 60s, we were only spending about 2% of GDP on health care. Now it's 15%. We're spending 15% of total consumer spending.
Total consumer spending is 68.5% of GDP and 15 percentage points of that 68% is on health care. Back in the 1960s, we were spending the consumer was 60% of GDP and healthcare was only 2%. And here's a chart probably very few of you have seen. This is a daily caloric intake in the United States. And look at how fast that's risen since 1980.
So obesity is one of the major problems in the U. S. And it leads to diabetes and a host of heart disease and a host of other health care problem. So if we really want to improve our health care expenditures, improve reducing the number of overweight people would really be a strong step forward. I showed this chart to a foundation yesterday, the day before yesterday and they have a program on obesity and they're going to step it up.
Now there's a lot of talk about the fact that the fat cats in the society have had it too good. This shows that in 1996, the top 1% were only paying 26% of total taxes. Now they're paying 38%. So the question is what is the fair share? A lot of people think taxes on the 1% should be raised.
Maybe that's right, but they're already paying 38% of all taxes. The real problem is that the bottom 50% are only paying less than 3% of all taxes. And they were in 1996 paying more than double that. So those are so the people who want entitlements to expand don't have a lot of skin in the game. And this is going to be an important issue in the election where you're going to hear Hillary Clinton say she wants to end inequality.
One of the ways to do that is to increase entitlements. Another way is to increase job opportunity and I hope she goes that route. But the bottom 50% of income earners are going to clamor for more government intervention to improve their lot. And they're going to want to take it away from those that have benefited the most. So maybe taxes on the rich will go up, but I'm not sure that government expenditures are going to solve this problem.
I think the real problem is that we have to create more opportunity in the economy and that is going to come through getting the economy growing faster and creating more job training programs. Just going around the world, Europe is going to grow between 1% 2% now that the Greek cloud is lifted. I think European retail sales are going to be positive. So Europe is going to be on a shallow growth path. European exports around the world are going to improve.
The emerging markets have done nothing. I like a few of them. One of them you can see some of them are doing well, but Brazil which is one of them is not. You can see India is doing well. Indonesia is doing well.
China is doing well. But the 3 that I like the most are India, Mexico and South Korea. This shows that India in dollars has had a correction, but generally has done well since Modi has been elected. Mexico is doing relatively well. And if I'm right and the U.
S. Economy has a stronger second half, Mexico will benefit from that. This shows that China still has a problem in trying to increase the consumer as a percentage of GDP, but they're doing that and they've got to keep doing that. And that's the route to a healthier Chinese economy. They've enriched the economy by too much infrastructure and state owned enterprise spending and they've got to do make the consumer a more important component of the economy and they're doing that.
Turning briefly to Japan. They've had negative growth, but it's positive now. Abenomics is working as I said. I think Japan will grow at about 1%. But this looming problem of the aging population is a significant one.
Japan is a miracle. It has to import all its natural resources. It has an aging population. But I think it will grow at about 1.5% this year. I think corporate governance is improving there, wages are going up, which has been an important objective of Shinzo Abe's 3 year old program.
And as a result of that, the earnings per share for the DK225 have been expanding. The multiple in Japan is lower than it is in Europe and Japan in Europe and the United States. And so there are a lot of attractive companies there. And Japan has picked up the buyback bug. The yen has been weak.
That's helped their exports. The government expenditures and government debt has expanded and the economy has started to pick up a little momentum on its own. And this shows the stock market has responded both in yen and in dollars. And here's a chart of the buybacks and they have been quite strong. So that's all I wanted to say formally.
Here are disclaimers. But now I want to turn the call back to Joan to see if any of you had any questions that I might be able to shed some light on.
Great. Thanks, Byron. We have time for a few. So I'm going to bundle them here in topics. So there are several questions around Greece.
And clearly, this is an area many economists, investors, regulatory government bodies are spending time on. So the first question is, it's a small economy. Why are we spending so much time on it? But maybe more importantly, what more does Greece need to do beyond austerity to move the economy forward? And will it be viable?
And do you think that what happens with Greece will be a trigger either way for Eurozone staying together or its dissolution?
Well, I think it's absolutely clear that the powers that be in Europe, which are mainly Germany and France, particularly Germany, want to keep the euro together as long as possible. I mean, as Paul Krugman and others have argued, it's a flawed concept. I mean, the original idea was, it would be a monetary union, but it would lead to a banking union and ultimately some form of political cohesion. And they've made no progress on those last two points. So it's a flawed concept, but they're going to try to hold it together as long as possible.
What could Greece do? Well, look, there some of those reforms make sense. Greece has one of the most generous pension programs of any country in Europe. So they've got to trim that back. They've got to make the wage the work rules more flexible.
It's very hard to break into a lot of the trades in Greece. They've got to do something to stimulate the economy. So right now it's pretty much tourism and olive oil. They have really no manufacturing base, but they've got to make tourism as attractive as possible. So they have to there are a number of the reforms that are being imposed on them that actually could help the economy.
I don't think they're going to have a budget surplus anytime soon. So I think they're going to have to have additional help. But my view is that it's only 2% of the Eurozone GDP and I think Europe is prepared to pay that price. So they're going to try to sustain Greece as an economy that needs aid for an indefinite period.
And then 2nd on energy. When you looked at the average multiple, you correctly pointed out that S and P multiples up. But how much of that is really attributed to lower expectations on energy earnings and earnings related to that? And second, what do you see as the catalyst to rising oil prices given the slowdown in China?
Well, look, what I said is that the price of oil is really you can look at the price of oil in relation to world GDP growth. And world GDP growth that I showed early in the presentation was below 3. It's expected to be above 3 next year. So the best thing that can happen to oil is that world GDP growth increases. And it's true that Iran is going to be putting some oil into the market, but I don't think that's going to make a major difference.
I think the world in 2016 is going to grow above 3% and that's going to help oil prices, not push them back to 107%, but allow them to go back to 70%. So it's worldwide demand. Why is that going to happen? Because you're going to continue to have an expanding middle class in India, in China, in Indonesia and Mexico and a number of developing countries. And that's where the demand for additional oil is going to come from.
And then finally, you raised 2 potential solutions to continuing to improve our economic growth. 1, infrastructure spending 2, job training. And those ideas have been talked about for years. I think it's hard to find folks who don't think they're a good idea. But so what does it take to actually drive that forward?
Well, what I think it takes is a belief that GDP would improve. I mean, if you you're going to hear a lot of people, a lot of candidates, the 16 Republican candidates and the half a dozen Democratic candidates, they're going to talk about creating more jobs. And the best way to create jobs is to stimulate GDP. And the best way to stimulate GDP is to have infrastructure spending. So they're definitely going to have that.
And supplementing or providing job training for those who have been displaced by the recession and by the automation of industrial plants, that's a positive too. So I think the only thing that's going to turn that around is the political process where both the Republican and the Democratic parties are going to try to appeal to the middle class that feels displaced by the feels disadvantaged by the recovery. So my hope is that both parties embrace the infrastructure argument, both parties embrace the job training argument and the government expenditures expand because we can afford it. And right now you've had the Republicans resisting it and I hope they soften their position on that because that would really get the economy going again and we need it. I showed you where the private sector capital stock is 22 years old.
God knows how old the public sector capital stock is. We haven't had any bridges collapse or disasters. But if we don't do something about it, we're going to find that we have a 3rd world infrastructure that's really endangering our population.
Thank you, Byron. Do you have any final remarks?
No. But I have an optimistic view of the outlook. We'll have a Q3 webinar in October and I certainly hope things are going my way by that time. I would say of all the webinars I've made in the last 6 years, this one is probably the riskiest because I'm saying that we're going to have a clear recovery in the second half and we'll see whether that's developing in the October webinar. So I hope you'll all be listening and watching at that time.
Great. Thanks, Byron. Yes, please join us on October 29 for Byron's next webinar and thanks for joining us today. Thank you, Byron.