Good morning, everyone. Thanks for joining us today. This is Joan Solitar, Senior Managing Director of External Relations and Strategy at Blackstone. So today, we'll have the Blackstone webcast, the 10 surprises of 2015, featuring Byron Ween, Vice Chairman, Blackstone Advisory Partners. Following Byron's formal comments, there will 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 any time during the webcast. At the bottom of the console, you'll see a series of widgets. This interactive feature will allow you to access additional functions by scrolling over them such as Twitter, Wikipedia, download slides and refer a friend. We plan to keep the webcast to 60 minutes that's including Q and A.
And at the end of the PowerPoint, you'll see a full list of disclosures. So if you're wondering why you don't see Byron on screen, he apparently challenged Andre Agassi to a tennis match and won the match, but broke his hips. So we have Byron dialed in through audio. And with that, I'm going to turn it over to Byron Ween.
Thanks, Joan. It wasn't Andre Agassi and that wasn't even that hard a shot that I fell on. But here I am laid up, But I hope it's only going to be for a couple of more weeks. And the recovery seems to be going very well. Let me just talk about a few general themes for the 10 surprises.
First thing is, this is the 30th year of the 10 surprises. I started doing these in 1986 and the idea of it was these are all things that tend surprises are all things I think are probable, but the average investor would give them no better than a 1 out of 3 chance of taking place. The goal of them is not to get a high score. I know this is Wall Street and everybody keeps score and everything. But my idea with the 10 surprises is to stretch my own thinking and get you to think about some things that perhaps you weren't thinking about in a certain way.
There are a couple of themes that run through the 10 surprises. The first is that the decline in the price of oil is a positive. It's a positive for consumers everywhere. It's a negative for some producers. But some of the producers I think on a geopolitical basis will respond favorably to it and we'll get into that with the actual surprises.
The second is that the dollar strength is not a negative that the United States will in essence benefit from that. It may hurt our exports, but exports are relatively small, maybe 12% of total GDP. So I don't think it's a profound negative. So let me get into it. But before we do that, it's worth taking a brief review of 2014.
The 10 surprises there started out with my saying it would be a Dickensian market with a pretty sharp decline. I had it at 10% and turned out to be 8%. And I said the market would be up 20% on a total return basis and it was up 15% at the peak on a total return basis. So that one worked out pretty well. I also said that the U.
S. Economy would be strong growing at 3% and the final quarters were 5%. And I also said unemployment would go below go to 6% and it's 5.8%. Probably the riskiest of the surprise is the one that came through. I had the dollar dropping from $1.37 to $1.25 against the euro and going to $120,000,000 against the yen.
And it got to both of those targets and actually exceeded the 1 against the euro. I also said Japan would get to $18,000 It got to $7.90 I think. And I also said the economy would run into trouble later on in the year. In the 5th one, I said China would slow. I think they are slowing.
Almost every parameter I look at for China indicates that they are slowing, but they're not reporting it. They're reporting still 7% of real growth. And the 6th one is emerging markets proved treacherous and that certainly was the case. So the first 6 came out pretty well and then I ran into trouble. I said oil would go to 110 and actually in June went to 107.
But then as we all know it collapsed. I said that commodities would do well because of emerging market demand and that wasn't the case. The agricultural commodities declined in price. I also said that the 10 year treasury yield would rise to 4. It started the year at 3 and dropped to 2.
So I got that one wrong. And finally on the 10th one, I probably got that half right. I said the Affordable Care Act would have a remarkable turnaround. Everybody was pronouncing it dead at the end of 2013. It did have a turnaround with 9,000,000 people signed up.
But I thought that would help the Democrats in the November election and that didn't turn out to be the case. Okay. So here are the 10 surprises. I'm sorry, the also ran for 2014. I'm not going to do all 4 of them, but I am going to do one of them.
Overcoming objections from the Cuban exile community, President Obama opens discussions on initiating trade and diplomatic relations with Cuba. A reduction in sanctions is proposed as well as limited financial support in the form of bonds are quickly dubbed as gastro convertibles. So I got at least one of the also ramps right. Okay. Here are the 10 surprises for 2015.
The first one and I'm just going to comment on these surprises, give you the highlights and you can see them posted in their entirety on the Blackstone website. And the essay with the 10 surprises and an analysis of last year will be out probably today. So the first one is the Federal Reserve Act sooner rather than later. I know everybody thinks that's not likely. The consensus view is the Fed will raise rates in June.
I think they may do it in the Q1. You can say why will they do it with Europe in such terrible trouble. I think Europe Mario Draghi will ease and that will encourage people about Europe. But I think the momentum of the U. S.
Economy is strong enough for the Fed to take the first step. Remember, the first step is going to be a small if it goes from a quarter 1% to half a 1%, those rates are still pretty low. The key thing about the first surprise is that the yield curve will flatten and that long rates won't go up in sympathy with short rates. And I think that's an important money making opportunity. The second one is our luck runs out on cyber terrorism.
Hackers from abroad attack a major money center bank and force it to close for 5 business days, while they resolve the accuracy of the deposits and withdrawals. There is nothing that our foreign enemies want more than to hamper the U. S. Economy and there is no way to do that more effectively than closing down the banking system or at least a part of it. So I think this is we all know what the hackers did to Sony.
That's only a glimpse of what they could do. The thesis behind this one is that the people doing the hacking are smarter than the people doing the cybersecurity. So I think this is a serious one to worry about. The third surprise is that in spite of all the things that are likely to go wrong this year, I think the U. S.
Market is going to have another double digit year. The consensus view in Barron's was 10% in The Wall Street Journal was 8%. I think it could be as much as 15%. I'll show you in terms of valuation, revenues and earnings. Revenues will be up 4%, earnings up 8%.
There'll be some share buybacks to do that and I think there'll be some multiple expansion. So I think we could have another double digit year in 2015. I think Mario Draghi finally will do something in terms of quantitative easing. And I think it'll work at the beginning, but not have a long term effect. So I'm concerned that quantitative easing won't have the same effect in Europe that it might have had in the United States, although I was skeptical too.
And I think Germany is the engine of growth there. And the real problem in Europe is that the structural improvements that they needed to make when times were better were not made. Number 5, I think Japan will be in trouble. Also they will do everything possible to pull out of the recession that appeared in the Q3. But I still think Japan is going to have a tough time of it.
I think the Nikkei 2.25 will be flat for the year, but I think it will be down in dollars. The 6th surprise is that China finally admits it isn't growing at 7%, that it's going to do something about it, that what it's going to do is more fiscal spending, but not on housing and state owned enterprises and roads and airports. It's going to do the spending on pollution control, air, water and land. And the 7th surprise is I think the price of oil finally has an impact on Iran. I think it brings Iran to the negotiating table and I think they come to an agreement with the West on their nuclear arms development policy.
I think that Iran realizes that they have very little to gain on that and they have a lot to lose. They want the sanctions lifted. They want to play a role in the opportunity economic opportunities that the West has enjoyed. And I think they're going to move away from their nuclear weapons policy. And I think that's going to be an important positive.
On the 8 Surprise and this one I can tell you already is the most controversial. I think it's going to have the drop in the price of oil is going to have a similar impact on Russia. I think Russia is really suffering under the sanctions. The revenue they're getting from oil has declined sharply. Their foreign exchange reserves have taken a sharp dip down.
I think they're going to become more conciliatory on Ukraine and possibly recognize the territorial integrity of Ukraine giving some autonomy to Eastern Ukraine. I think this is Putin I know enjoys a very favorable approval rating, but I think that his abdication on this, his failure to respond effectively to the drop in the price of oil, the economic calamity that is facing Russia is going to cause his fortune to turn around and he will resign by year end. Almost nobody thinks that's possible. And I also think finally on this one that the price of oil will be moving up by the end of the year as a result of continuing demand from emerging markets. So I don't think we've seen the last of $70 oil.
Whether it gets back over $100 again anytime soon is more conjectural. Number 9, I think that on this one, you're going to have a buying opportunity in high yield bonds. They've taken a sharp hit because while energy is only 7% of the U. S. Economy, it's 17% of the high yield bond market and it's not the whole high yield bond market down.
And I think there are going to be some big buying opportunities there. And finally, number 10, I think the Republicans are going to try to position themselves for victory in the presidency of 2016. And the way to do that is to broaden their base. So I think they're going to try to prove to be the activist party. Instead of suing Obama on Obamacare, they're going to try to pass legislation now that they have both houses of Congress.
So you're going to see them move on the Keystone pipeline in spite of Obama's veto threat. They're going to move on immigration reform. I think they're going to even suggest some changes in the tax code. I think they're going to support Jeb Bush as their nominee, because he can siphon off some of the Hispanic vote that voted overwhelmingly for Obama and was 17% of the electorate in 2012. And so I think you're going to try to see you're going to see the Republicans reposition themselves as the activist party.
So those are the 10 surprises for 2015. I think you'd agree they are surprises. Some of them may be delusionary, but we'll see how they work out. Again, they're to stretch your thinking not to get a high score. Then IF4 also runs water becomes the preoccupation of environmentalists.
There are 100 of millions of people in China and India without safe drinking water. And I think that's going to be the focus of environmental attention. 2/12, Internet net commerce comes into trouble. You're already seeing that with Uber and the New York City Taxi Medallion holders. I think Airbnb and Uber and other Internet Commerce Companies are going to be forced to pay the same taxes and have the same insurance as their commercial competitors.
Number 13, probably the one I have the least conviction about, this is that Brazil becomes a favorite of the emerging market investors. That would require Dilma Rousseff to become more business friendly and not much sign of that so far, but I think it's a possibility, but again an awful ramp. And finally, number 14, already a lot of attention being paid to this. Hillary decides not to run. She wants to be the 1st woman President, but she doesn't want to be the 1st woman candidate to run and lose.
And she's worried that Jeb Bush is a formidable competitor because of his ability to appeal to Hispanics. She's also worried that she's too conservative for some liberals and they'll stay away from the polls. Obama only won by 3 percentage points. So, Hillary has a lot to worry about if she loses some of the liberal and Hispanic vote, again, an also ran, but one worth thinking about. Okay.
Now turning to page 4. This is my radical asset allocation. It is an asset allocation not a trading template. So I make changes in it generally once or no more than twice a year. I've made some changes here.
It still has 10% in global large cap multinationals. That stays the same. It has 10% in other U. S. Stocks.
That stays the same. I've taken my European position down 5%, because I'm worried that Europe is going to have more economic difficulty this year in spite of the quantitative easing. I've taken my emerging market percentage down 5%. So both of those are now 5% rather than 10%. I've got now 10 percent that I can invest elsewhere.
I'm going to put 5% of it into hedge funds, because I think the market is going to be less correlated this year and longshort equity hedge funds are going to do better. I still have 10% in private equity, 10% in real estate, 5% in gold, I'm not giving up, 5% in natural resources. And finally, I use the other 5% to increase my non conventional high yield to 20%. So I mean, I do have a fixed income component, but it's high yield mortgages, leverage loans, mezzanine financing. I can tell you that there is no portfolio anywhere in the world and I've looked at a lot of them that looks like this.
This is a this portfolio is radical. It's basically as an all equity orientation. It's designed to give you some ideas to think about because there are very few portfolios that have this kind of emphasis in non conventional bonds. Turning to Page 9. The investors are still pretty optimistic, not as optimistic as they were.
The 1st few days of the New Year have sobered them up somewhat. But so I don't expect the market to run away here. But I do think over the course of the year, you will see a 15% return. The next page 10 shows that people aren't as interested in the stock market as they used to be. You see that CNBC has moved their offices from New Jersey to Midtown and the viewership is down.
All of the business programs are down. Even though the market is flirting with an all time high, people don't seem to care as much as they used to, but I think that might return. One reason people might be a little nervous is shown on page 11. This bull market has gone 70 months. The average of the historical bull markets is 57 months.
So we're pretty long on the tooth here, but the fundamentals are very strong. I think we could be in a situation as we were in the 1990s where the market performs in double digits for a number of years in a row. The fundamentals are very good in the United States right now with 5% real GDP growth, auto sales strong, unemployment coming down. I'm looking for housing and capital spending to provide a positive. So my view is that 2015 is going to be a good year for the economy and the market.
Looking at page 12, you can see there's going to be a reversal here. The Fed has been easing. That's the light blue line. The European Central Bank has been restrictive. Now we know the European Central Bank is going to be more accommodative and the Fed is going to raise rates and that's one of the reasons why the dollar is strong and is likely to stay strong.
The Federal Reserve balance sheet in the last 6 years having taken 95 years to get to $1,000,000,000,000 it only took 6 years to get to over $4,000,000,000,000 And as you see on 13, mortgage backed securities are a big part of that. Looking at 14, you can see the dollar has been very strong against many currencies, not just the euro and the yen, so across the board. And overall, it's up 20% from its low. So I think it can go a little bit further, but probably not a lot further. Looking at 2015, the world GDP growth has really come down.
It's come down because of China, which is growing over 10%. It's coming down because of the United States, which is operating at a slower rate and it's come down because of the emerging markets. In June of 2010, world GDP was growing at 4.36%. Now it's 2.55%, but that's still satisfactory. That still doesn't mean we're going to have bear markets across the board.
I still think that we can have a good market this year. And the world is more independent as we see on 2016 that the IMF shows that that world good exports are running in the 20s. So countries are interdependent on each other. Fortunately, the United States is not a big export economy. So the U.
S. Can do well even though our exports may suffer because of our trading partners. But that will be offset by the lower price of oil. The lower our trade balance is improving because oil is our most important imported commodity and that's cheaper. And so even if we don't have the same exports we were hoping for, we still are likely to have a very favorable balance of payments.
Now let's take a look at Russia on page 17. What you see here is that the ruble has collapsed from $33,000,000 to $79,000,000 and their foreign exchange reserves have plummeted. So Russia is in real economic trouble. Now Putin has said the Russian people are used to suffering and I know they are, God knows the 2nd World War was proof of that ability to endure pain. But I think too much is going on here.
And my view is that the Russian people are going to move against them. The sanctions are hurting. He could lift the sanctions by pulling back from Ukraine. I think that's what he's going to do. I think he'll be humiliated in the process.
And I think he'll resign before the end of the year. As I said, I get more pushback on that than anything else, but I think at least a part of number 8, which shows more conciliatory attitudes on the part of Putin is going to happen. Turning to Page 19 on the U. S. This is an important page because the Economic Cycle Research Institute accurately forecasts the business slowdowns in the United States in 2010, 2011, 2012 did not forecast 1 in 2013 or 2014, but now is headed down.
So this would indicate that we're in for some economic trouble. So far, we haven't seen it yet, but this is a leading indicator and it says we should watch out for it. If it turns out to be right, then we should have a softening of economic activity sometime in the middle of the year. I think that'll be a temporary condition. I think the year will come in at 3% or better, but this is a warning signal that we've got some tougher days ahead.
The real problem in the United States is median family income. Page 20 shows that the median family income today real, these are real figures, not nominal. The real median family income is lower than it was in 2,007. So most of you on the line are probably in better shape than you were in 2,007, because you have holdings in the stock market and because you have a house well above the median price. So expensive houses and stock holdings have appreciated and that's really helped the top 20% of the income stream.
But the middle 60% have struggled to hold their own and the bottom 20% have actually lost ground. Now that situation is improving. If you look at 2021, wages are moving up. I think wages are going to be rising at about 2.5% rate this year and that's going to be an important positive. That's on 2021.
On 2022, we didn't get the health this year that I thought we might get in housing. Housing is definitely off the bottom, but it hasn't surged yet. With lower unemployment, higher wages and improvement in the employment of 16 to 34 year olds, I think they're going to be more family formations. So I'm looking to housing to be one of the favorable aspects of the economy in 2015. Housing starts are not contributing yet, but I think that's going to turn around.
That's shown on page 23. And house prices are still appreciating. They're not appreciating as you see on page 24. They're not appreciating at 10% or better anymore, but they are still appreciating at 5%. And there's nothing to get you to buy a house faster than knowing that it's going to be more expensive if you wait 6 months.
As I said, I also think capital goods is going to be a positive. Page 25 shows capital goods in a clear positive uptrend. Up until now, most of the capital goods spending has been for labor saving equipment that's allowed the goods and services to get out the door with fewer workers. I think that's going to change. I think there's going to be more capital spending by small businesses.
Their optimism is improving. So I think that's going to be the 2nd favorable thrust for the U. S. Economy in 2015. Page 26 shows that we're now exporting more oil than we ever have before.
We've relaxed the requirements on U. S. Exports and that has helped our trade deficit as has the decline in the price of oil shown on page 26. And we should all celebrate the fact that now the United States is the largest producer of crude oil in the world more than Saudi Arabia and that's shown on page 27. Russia is 3rd and then comes China, Canada etcetera.
So we're producing oil at a healthy rate, but we're still a net importer. Page 28 shows that the China and India are relatively low consumers. The U. S. Uses 21 barrels of oil, 22 barrels of oil per person per year, China less than 3, India less than 2.
There's no way China and India are staying there and that's where our marginal demand is going to come from. How quick we'll see that and how much we'll see is indeterminate. But I think years from now the price of oil won't be where it is today. And it will be because of emerging market demand. That will be the case.
Why did the price of oil decline in the 1st place? Was it a plan by Saudi Arabia or Russia or someone else? I think not. I think it was a simple economic force as shown on Page 29. There you see that the price of oil has essentially tracked world GDP.
World GDP has been declining because of the factors I cited earlier and the price of oil has gone down with it. There's also some evidence that the amount of oil used per unit of GDP, which used to be there used to be a roughly 50% correlation. Now it's closer to 25%. So that's been an important factor. We're not the world is slow world wide demand is slowing and worldwide usage in relation to demand is slowing and that's why the price took such a sharp drop.
I'm sorry, I didn't see this coming beforehand, but in spending a lot of time trying to analyze the causes, this seems to be the best explanation I've been able to find. Now if you're worried about the U. S. Energy area, look at page 30. Our the hydraulic fracking wells in both North Dakota and the Eagle Ford, Texas range are all profitable above 50.
So I think that you're going to see all of the hydraulic fracking producers continue production, but what they'll hold back on is new investment. Now if you wonder why so many middle class people are complaining, look at page 31. In this cycle, profit margins have reached an all time high. They're down a little bit from the peak, but they're still way up there in relation to earlier cycles. But unit labor costs haven't increased at all.
So the average worker drawing a paycheck every 2 weeks in a plant or restaurant or hotel, their earnings haven't increased. Their dollar earnings haven't increased and their real earnings haven't increased. They've actually declined. So this is the biggest problem. And this is the heart of the inequality issue.
And I think this is going to be a very important topic in the 2016 election. So this chart shows why corporations have done well and that is related to individual stocks having performed. But it also shows that workers haven't participated. So if you're an average person in the United States, the economy has recovered, the stock market has almost tripled, but you haven't benefited and you're having trouble making ends meet. And I think that's going to be the key political issue in the next presidential election.
And there are some other factors afoot. If you look at 32, you can see that the number of people, the percentage of the workforce in relation to population is down. We used to have about 74% of the population of the 16 to 54 year olds working and about 72% of the overall population. But the numbers are down. They're moving back up again, but they don't look like they're going to get to the previous levels anytime soon.
So there is a dropout rate in the workforce. But happily, the most productive and the highest spending component, the 16 to 54 year olds, they are improving their position. So we hope that leads to household formations and a better housing market. Consumer sentiment on page 33 has come back, but it's not nearly where it was in 2,007. Consumer net worth is at an all time high, but that's benefited people in the higher ranges of income who have stock holdings and own their own homes.
But there are broader signs that the economy is doing well. If you look at page 34, you can see that bank loans are increasing almost exponentially. So companies are willing to borrow to improve inventories. They're willing to ship Railcar loadings are looking pretty good, a little more volatile than usual. But these are broad signs of how the economy is doing and I think the economy is doing well.
The most encouraging one is a new chart in this series, small business optimism is improving. And there's nothing that creates jobs faster than small business. There's nothing that is likely to improve capital spending faster than small business. So a favorable trend in this indicator is very encouraging. Now let's take a look at earnings.
If you look at world GDP that would argue that U. S. Profits are going to be pretty flat, but every other indicator is argues against that. Page that was on Page 37. Page 38 shows something I'm going to remind you of every time I make a webinar and that is security analysts are always too optimistic.
I had a $115,000,000 estimate for the S and P last year. Everybody else was $120,000,000 will probably come in at 1 17 or 18. Analysts are always too optimistic. Be wary. Now the next page 39 shows that revenues are look at the right hand because the left hand is 4th quarter revenues are going to be increasing at 4% for the S and P 500.
And the next page shows that earnings will probably be expanding at about 8% for the S and P 500, because profit margins probably won't improve much, but we'll continue share buybacks. Now here is the key page. This is the median multiple. I know there are a lot of people who think we're forming a bubble. Many people arguing the market is expensive.
But right now, the market is probably at about 17 times earnings. Bubbles occur at 25 and 30 times earnings. We're nowhere near a bubble. I know I've said that every webinar I've had and that's been the case pretty much since 2,009. I do think I don't I'm not arguing that the market is going back up to even 20 times earnings.
But if it goes to 18 or 19 times earnings with an 8% earnings improvement, we could definitely have a 15% appreciation in the S and P 500 this year. The next page 42 shows the Shiller index. And what this argues is that the market shouldn't be 2,100 or 2,000, it should be 1300. Schiller's approach is different from mine. I use trailing 12 month earnings.
He uses normalized 10 year earnings, which are held back by the 2,008, 2009 recession. So he comes up with the market being very expensive. My argument is the market isn't cheap. It's fairly priced, but it can be but before it's over, it's going to move to a higher multiple. Page 43 shows the various other assets.
If you're not going to put your money into equities, what are you going to put it into? Houses, if you turn the rental that you're likely to get on a house into a PE, houses are more expensive than stocks. Bonds are certainly more expensive than stocks. So in terms of those two alternatives, stocks are relatively attractive today in the U. S.
Looking at Page 44, what we see is that manufacturing productivity has come down a lot from where it was in the early part of the new millennium, but it's still at better than 2%, which is more than satisfactory for an earnings improvement. And Page 45 shows that share buybacks are increasing at a pretty impressive rate or have been maintained at a pretty impressive rate. The corporations have a lot of money on their balance sheet. What are they going to use it for? They can increase dividends, but that forces the taxpayer to pay taxes on it.
They can buy their own shares back. That is a very tax efficient way to reward shareholders because it improves earnings and the shares are likely to go up. It can use the cash for mergers and acquisitions and buy a competitor, eliminate some sales and marketing people and some administrative people. And I think all of those are tools that companies are using their cash for. So I think I feel pretty solid on the idea that earnings are going to increase 8% this year and that multiples will increase modestly.
As far as being worried about the market and the bull cycle, usually the market keeps going for as long as 29 months on average after the first Fed rate hike. So it usually takes more. Edson Gould, the famous strategist in the 60s said it took 3 steps for the Fed before the market stumbled. Page 47 shows that the market is usually a leading indicator on the economy and usually leads the economy by 7 months before it turned down. And Page 48 shows the various parameters and what they usually look at before a recession is about to take place.
And what you see here is that virtually none of the indicators are in a position where it's forecasting a pending recession anytime soon. In terms of our fiscal condition, Obama, I don't think has made as much of this as he probably could have. But no matter what we raise taxes to, they still seem to come in at 15% to 20% of GDP. And we are our government spending is less than Europe. Europe is a much more socialist place than we are.
They spend 45% to 55 percent of GDP on various government programs. We spend less than 40%. We are exhibiting remarkable fiscal discipline in comparison to our European counterparts. What is really amazing to me is that our the U. S.
10 year treasury now yielding about 2% has a higher yield than the 10 year bonds of all of our trade major economic competitors. Now you would think in Europe when they're spending so much money on government programs, they would and their balance sheets don't look as good as ours in many cases, they would have higher yields. Now why is this the case? Why are yields overall so low? And why is the United States yield above those of places like Japan with a debt to GDP ratio twice ours.
And the reason is that there's so much liquidity out there. There are so many people with so much money who have accrued those cash reserves during the recovery and they're looking for a place to go to it and they're a little apprehensive about the equity markets right here, because they argue the U. S. Market has done well for a number of years and the situation in Europe and Japan isn't too great and they're worried about China. So they're looking for a place to park their money and they're parking their money in treasuries and that's keeping yields low and that's one of the reasons why I think you're going to make money in the high yield market.
In supply surprise number 9. Looking at the federal budget outlook, we've made major strides here on page 3. Budget deficit 2.80 percent of GDP, down from 10%. The thing we have to worry about is what would happen if interest rates rose. Right now, we're only paying about $360,000,000,000 to service our $17,000,000,000,000 in debt.
And if interest rates were to normalize, if we were to pay 4% on average rather than 2 percent that would be a big hit to the budget deficit. On inversions, on page 54, one of the reasons the government got so exercised about inversions is that they were soaring and the government didn't want that to happen. And I think they put a maybe not put a stop to it, but certainly slowed it down. Now taking a look at Europe. Europe came out of the recession when we did, went back into recession because of austerity, then came out of the recession and now looks like it might go back.
So that's why it's imperative that Mario Draghi tried to provide some monetary stimulus in order to keep Europe growing at least 0.5 percent. On commodities, commodities look like they might be bottoming. That's on Page 58. I'm not convinced that that's the case yet, but there are some signs of it. Why would they bottom?
Because the standard of living continues to rise in the developing world and the first thing you do is you eat better. So it won't be through industrial commodities, because I think the manufacturing in the emerging markets is slowing, but it will it could be through agricultural commodities. But I'm not ready to make that call yet. Turning to China and the emerging markets. The price earnings ratio of the emerging markets has risen, but that's because of earnings disappointment.
The markets this is on page 60. The emerging markets themselves have not done much. And I don't I think that we may have another year of nonperformance, which is why I reduced my percentage there. The one I do like is India. I think India is going to be growing at a pretty good rate better than 4% and I think its market has room to run.
So of all the emerging markets, I'm most favorable to that one, which is shown on page 61. Now turning to China, the big question on everyone's mind. Let's never forget that China is a miracle. It has shown more ability to grow. It was virtually nothing when Mao died in 1976.
When Deng Xiaoping introduced his reforms in 1978, it was about 1% or 2% of world GDP. It's about 12% of GDP. Now No country has made that kind of economic improvement over a period of less than 40 years. Now how has it done it? It's done it by increasing credit 15% to 20% a year.
And you can't do that forever. Eventually, the economy has to take over by itself. It has to become more of a self sustaining economy. Now, spent a lot of that money improving the infrastructure and on housing, but in housing and 1st tier cities has come down a lot as shown on Page 63. But I don't think China is going to have a hard landing.
If you look at page 64, its debt to GDP ratio is about in the middle of the path. In addition to that, property prices in the major cities are about where they are in other parts of the world. So we haven't had a real bubble in China. And I can argue that the incomes are lower there, but my belief is that housing is not going to drag China down into a hard landing. I think they are going to grow at 5% or 6%.
But if the 2nd largest economy in the world grows at only 5% or 6%, maybe it is it's beholden to law of large numbers. That isn't bad for it isn't a mature economy yet. Its per capita income is a 5th of ours, but it is an economy that has grown to the size where 10% growth is probably out of the question and even 7% growth is difficult. If you look at page 65, you can see that they in 1999, they really reversed the economy from a consumer economy with the consumer at 45% and investment spending on state owned enterprises and infrastructure 35%. By 2010, the consumer was 35% and state owned enterprise and infrastructure spending was 45 dollars Now they want to reverse that.
There are there is evidence that they're doing that through the service economy. They have many more service workers, but service workers make less money than manufacturing workers. So it doesn't have the same impact on income. Nevertheless, it does put people to work and it takes them out of the countryside and that is a favorable trend. So China is on a favorable path to rebalance itself, but it isn't moving fast enough in my opinion.
And that's one of the reasons why I think it will slow below the stated rate of 7%. Turning to the final topic, Japan. Japan was in a pretty good growth phase, but then slipped back into recession in the 3rd quarter. And now I think Shinzo Abe will engage in more fiscal and monetary spending in order to bring Japan back onto a growth path. The reason I like Japan and have a 5% position in it is that there are a number of companies that are attractively priced.
The price earnings ratio for the whole market is attractive, but there are a number of individual issues that are very favorably priced. And in terms of the yen, I think it can depreciate a little bit further, but probably not a whole lot further. And I think since much of the Japanese government debt is held internally, they can continue to expand that. So I think the Japanese market can make some progress, but with the depreciation in the currency, I think it will probably be flat for the year. Okay.
Those are all the comments I wanted to make to you formally today. And now I'd like to turn it back to Joan Solitar for the question and answer period.
Great, Byron. We have quite a few questions coming in. And as you can imagine, I mean, it's really not a meeting you can have with an investor where energy doesn't come up. So we have a few on that. I'll start with the energy topic.
I guess first, can you reconcile lower energy prices with the view of a China slowdown? Aren't they one of the great beneficiaries of the drop in oil?
China and India are great beneficiaries. But as I showed you in that chart, China is using less than 3 barrels of oil per person per year, India less than 1. Oil is not the dominant factor in the Chinese economy. Food and housing are the dominant factors. And food and housing are not coming down in price the way energy is.
So I view it as a positive, but I don't view it as something that is a profound boost for the economy. It's just because China and India are such low consumers per capita that I don't think it's going to have a more dramatic impact on overall economic growth.
So taking the reverse in the U. S, we obviously are big consumers of energy and the drop has a positive impact on consumers. I mean how much of a benefit to our economy do you think that is?
I think it's a big benefit, because everybody has a car in America and most families have 2. The average family drives 15,000 miles a year, uses 1,000 gallons of gasoline. Peak to trough gasoline is down about $1 a gallon. So the average family with a median income of roughly $50,000 The average family has got another $1,000 tax free in its pocket. And it's very likely those families are very likely to spend it.
So I think it's going to be an important plus and it will be an important plus for industry too. Energy is an important component of manufacturing and of agriculture and of everything else. And with it down in price that should help profitability of corporations across the board.
And you mentioned the marginal demand clearly going to rise from emerging markets. How are you factoring that into your medium to long term outlook for oil?
Well, I think the price of oil is going up. I'm willing 5 years from now, I'm convinced it'll be well above the current level, may not be 100, but it'll be above 70. And I think that could happen much sooner than that. So my view is that within 3 years, it will be 70 because of emerging market demand. And I even suggest in the 8th surprise that it could occur this year.
That would be a big surprise however.
Yeah. And with all the liquidity that's being pumped into global economies, are you concerned at all about inflation?
Well, usually I guess the questions I've been getting emails on is on deflation. I'm not concerned about inflation. With oil down here, with agricultural commodities down, with almost every parameter down. And as I've said in the past, the inflation is really a function of wages and house prices. House prices are going up 5%, wages are going up 2.5% and commodities are going down.
So my view is inflation may be a problem several years in the future, but not a problem now. Turning it around in terms of deflation in Europe where they did report some deflation price declines, I think Europe will be will show very little inflation, but I don't think Europe is going to be in a deflationary environment, particularly because I think the price of oil is near a point where it will be bottoming. I don't think oil is going back to $10 a barrel. I think it's going to bottom in the 40s.
And how are you thinking about flows into U. S. Market? So if you have Europe going into more of a recession, the bond rates are incredibly low, stock market there doesn't look to be a bargain relative to U. S.
Is that part of the thesis of a higher U. S. Market?
Well, the U. S. Is doing better than Europe. There's no question about it. Clearly better than Japan.
And the U. S. Market is the most transparent, the most highly regulated market. So many investors feel it's the safest market. And it's also, of course, the biggest market.
So I still think you're going to see capital flows into the U. S. But there's a final factor that I think is even more important and that's innovation. The U. S.
Is still the cradle of innovation for the world. And fortunes in the stock market are made out of innovation In technology, in biotech, in social network technology, most of those innovations are coming from the United States. So if you think that economic growth plus innovation are the heartbeat of making money in the equity market, the U. S. Really is in a terrific position.
So I think we're going to see more overseas flows into the U. S. As a result of those factors.
And do you think we can get to a point where we have euro dollar parity?
I know there are people talking about it. I'm not willing to I'm fond of sticking my neck out, but I'm not fond of having it cut off. So my view is that one to 1 against the euro is too much to ask for. But I can tell you that the day that happens, you're not going to be able to get a plane ticket to London. So my view is the dollar will show some additional strength here, but I don't think it'll go to parity anytime soon.
And Byron, where are you getting the most pushback?
I'm getting a lot of pushback on the Russian surprise. People say that Putin doesn't mind Russia suffering that he's not going to yield on Ukraine that he may run out of foreign exchange reserves, but he'll figure out some way around that. And that he won't take the action that's really necessary in order to remove the sanctions. And part of that is related to my feeling that the Russian people will turn against them and most people don't believe that's likely, because the media will control that or the military will control that. And I think that maybe that may be a 2 draconian view of it.
My view is that Russia is in serious trouble that some of it happened because of natural causes, some of it happened because of Putin. And I think there's a turnaround coming there. Again, it's a surprise, but it's one that I have reasonable amount of conviction about just as I do about the Iranian one. The surprises are based on not extrapolating what appears in the press daily. If you extrapolated that, you'd assume there never would be a Ukrainian deal and that Russia would always be hostile.
But it's often good to think in discontinuous terms. And that's what I try to do in the 10 surprises. What I'm saying is Putin was riding high after the Sochi Olympics. All of these things emanated after that. He was trying to press his bet and become acknowledged as the world leader of eminence, when Obama, the putative world leader was sagging and it backfired on him.
And I think that he realizes that there's time to get up there's a time to get up from the table and walk away and that time has come. The same is true of Iran. The Iranian people are yearning to participate in the good fortune of the 21st century. The sanctions are hurting Iran. The nuclear weapon isn't going to help Iran that much.
They should be more worried about ISIS and the Shiite, the Sunni incursion in Syria and Iraq. So I think that there could be an important change in Iran and Russia. And if those things took place, that would be very positive for the economies and equity markets around the world, including Europe and Japan. So if those surprises take place, other good things would happen. So that's what I'm hoping the surprises portend for 2015.
And then just one final. I mean there's always something to be bearish or nervous about. And so today with the Ukraine needing substantial amount of money, folks worried about Greece and the U. S, talk about the wall of student debt continuing to climb. Are there any of these areas that you're particularly concerned with?
Well, longer term, I'm concerned about the obligations of Social Security and Medicare, but not near term. But I'm more concerned, the big worry I have in the ten surprises is the cyber attacks. I think they're going to occur more frequently and more profoundly. And you could think if I'm right on that second surprise and a major money center bank is closed and you Joan have money in that bank and you can't put money in or take money out and you're worried that they won't when they come up when they open again, they won't have your right balance. That's going to make you very apprehensive and going to make you want to hoard cash.
We may go back to mattresses as a place to sort. So I'm probably more worried about cyber terrorism than I am about student loans.
Great. Well, thank you, Byron. A lot to think about very, very interesting. Do you have any final comments?
No. I think we're going to make some money this year and I think some good things are going to happen geopolitically. I hope I'm right. But if I'm not, believe me, I'll be here a year from now to explain why things went wrong.
Well, it's a great way to start the year. So thanks everyone for joining and we'll see you next quarter. Thanks, Byron.
Thanks all of you for listening in.