Good morning. This is Joan Solotar, Senior Managing Director, External Relations and Strategy, Blackstone. Welcome to Blackstone's webinar this morning featuring Byron Wien, Chairman, Blackstone Advisory Partners. We plan to keep the webinar to 60 minutes, including Q&A. If you have a question, you'll see the button at the bottom left-hand corner of your screen. Feel free to push that at any time during the webcast or following Byron's presentation. With that, I'm going to turn it over to Byron Wien.
Good morning. Well, we have a lot to talk about today. The markets, having been resisting all the geopolitical events around the world during the summer, suddenly have run into trouble here at the end of September and the beginning of October. We'll try to explore whether that's a profound change in direction or whether or not we're going to resume the uptrend anytime soon. Here are some of the 10 surprises. I'm still thinking the market's going to end the year above 2,000, even though it's had this recent setback, and I definitely think the U.S. economy is on a path to grow at 3%. In spite of all that's happening in Europe and Asia, I still think the U.S. economy is expanding.
Probably the biggest surprise that I had in the list of 10 surprises, I'll announce the 2015 list in January, but the one that probably surprised most people, and even me, is the dollar. It started the year at $1.37 against the EUR, and now it's $1.26. I definitely think it'll hit my beginning of the year target of $1.25, and there are plenty of estimates out there at $1.20, and JPY 110 on the yen, and maybe even JPY 120 on the yen. A number of the surprises are working out. I'm not going to bore you with all of them here. Another one that is working out is number 10, the Affordable Care Act, which everyone was talking about how it had gotten off to a bad start.
I think it's now very much underway, while we can't say it's a resounding success, I think it is working much more effectively, the glitches are being ironed out. This is my radical asset allocation. I didn't make any changes in it this quarter. It's 45% long only, 10% in global multinationals, 10% in other U.S. stocks, 10% in Europe, 10% in the emerging markets, and 5% in Japan. 30% in alternatives, 10% in real estate, private equity, and hedge funds, 5% in natural resources and other commodities, 5% in gold, and finally, 15% in very high-yielding securities. These are leveraged loans, mezzanine financing, mortgages, and high-yielding emerging market debt. The important characteristic of this portfolio is that it's basically an all-equity portfolio. I think investing in U.S. Treasuries, European sovereigns, and traditional high-yield bonds and corporate bonds is not going to be rewarding.
I have taken an equity approach to the entire institutional portfolio, and I recommend you do the same. This chart probably explains the turmoil the market is experiencing now. When investors are pessimistic, when they're despondent about the outlook, it's usually a good time to be a buyer. When investors are euphoric or optimistic, it's usually setting us up for a period of trouble. During the summer and for most of the last quarter, investors have been very optimistic, so the market was vulnerable. It resisted all of the geopolitical events that were going against us during the summer, but now here in the middle and end of September, the beginning of October, the market is correcting. I view this as a correction in an ongoing bull market. It was long overdue. We haven't had a 10% correction in the market in a very long time.
I don't think it's the beginning of a bear market. I'm going to try to convince you of that with some of the slides later on. What I am saying is that the overbought nature of the market, the over-optimistic view of investors, made the market vulnerable to a 5%-10% correction, and that's what we're going through now. Another way to look at the market is to examine complacency. Usually, when the market is doing very well or very poorly, there's a high degree of viewership of business media. Here we have a chart of CNBC viewers in the very valuable 25-54 age range, and what you see is viewership is very low. That's in spite of the fact that the market was making an all-time high. People were very complacent, sort of bored by the market.
They kind of figured that good times would always be there. There were more entertaining shows on television than Squawk Box and the rest of the shows that CNBC has during the day. Viewership was low, and that was a sign of complacency, and in my judgment, an additional sign of market vulnerability, which is what we're going through now. What we have here are seasonal characteristics of the market during a midterm election year. The blue bars are a typical year, regardless of whether there's a midterm or any other kind of election going on. The red bars are midterm election years. The first part of the year is usually good for both, not so good in midterm election years. During the summer, the sell in May and go away syndrome applies. The market usually goes up somewhat, generally, but down in midterm election years.
In the final months of the year, in midterm election years, the market usually does very well no matter what the outcome is, because the political situation is clarified. I think that's what's going to happen this year. It's gotten off to a bad start, but I think the fourth quarter will be good, and it will put the market above 2,000 at year-end. Another consideration we have to take into account is where we are in the age of the bull market. The average bull market lasts 57 months and goes up 165%. This bull market is already 66 months old and has gone up almost 200%. From a historical perspective, you would say it's time for the market to peak and the market to begin to decline.
I don't think that's going to be the case, but there are a number of people out there. I don't think we're forming a bubble, and I'll try to prove that to you later on. There are some reasons to think that the market is topping here, and age is one of them, and we all should be aware of that. The market usually gives you some warning signals, and I'm going to show you some of those as well. Central bank policy has been crucial to this market. I believe that Federal Reserve easing is a very inefficient way to try to stimulate the economy. That was the only tool left in the box. We weren't going to have any fiscal spending beyond the April 2009, $787 billion stimulus program.
It was up to the Fed if it was going to provide any impetus to the economy whatsoever. The Fed balance sheet in 2008 was $1 trillion. It took 95 years from the Fed's founding in 1913 to 2008 to get to $1 trillion. It's over $4 trillion today. That's an enormous expansion of the balance sheet. My view is that three-quarters of that money goes into financial assets, keeping interest rates low and driving stock prices higher. Only one quarter goes into the real economy. The Fed is still expanding. It's going to stop its bond buying program sometime during October, but I still think that the Fed will be in a generally expansive mode. Everybody is wondering, when will the Fed tighten? The consensus, probably the middle of next year. I think it'll probably be later rather than sooner if it differs from that.
As far as the European Central Bank is concerned, it didn't do much after the initial expansion when the subprime crisis hit the U.S. and Europe in 2008. When Italy and Spain got into trouble, the European Central Bank was even more expansive than we were as it loaned money to various banks to buy Italy and Spanish sovereign credit. Those purchases proved to be very profitable, and the European Central Bank was paid that back. The balance sheet of the European Central Bank actually shrunk during the time that the Fed was expanding, and that's why the euro was strong against the dollar. Now the European Central Bank, Mario Draghi, is talking about expanding money supply while the Fed is going to be less expansive, and that's one of the reasons the dollar is strong. I think that's going to continue.
I don't know how much below 125 it's going to get, but I do think relative to the euro, the dollar is going to be strong, and that's going to be true of dollar yen as well. We all have to face up to the fact that the world growth is slowing. We were growing on a worldwide basis, primarily because of the emerging markets at better than 4%. We're only growing at 2% because China and other emerging markets are slowing down. We have to adjust ourselves to a slower growth environment, slower in China, slower in Europe, and of all the developed markets in the world, the U.S. probably looks the best. Let's take a deeper look at the U.S. economy. This is the Economic Cycle Research Institute survey, accurately predicted the economic slowdowns in the summer of 2010, 2011, and 2012.
Didn't forecast a slowdown in 2013. We didn't have one. Is not forecasting a slowdown now. I don't think we're going to have one. I think we're in a position where the U.S. economy is going to continue to expand. I think the third and fourth quarter are going to be trending toward 3%, and I think the outlook for 2015 is favorable as well. On the other hand, who is benefiting? People at the upper end of the income stream are benefiting, and that's exacerbating the inequality problem. The average worker who's drawing a paycheck every two weeks, working in a fast food establishment, a retail store, or on a factory line where they get biweekly paychecks, the real median family income of that level of worker has not expanded since the economic recovery.
Those of us at the upper end of the income stream have improved our economic condition. Those in the middle 60%, probably have held their own, and those in the bottom have probably lost ground. This is not an economic expansion that has clearly improved the economic lot of everyone. Wage costs, although, are increasing, we're not yet at 2.5% year-over-year wage increases, but wages are starting to go up as the economy improves. Housing is an important component of the economy. I would have thought with interest rates low and unemployment decreasing, that we would have had universally positive numbers in housing, in housing starts, in new home sales, in existing home sales, and in mortgage applications for purchase. While there has been a recovery off the bottom, there's been a consolidation period recently, and I do think housing needs to improve.
One of the things we all ought to think about is whether there's a secular change going on in housing. We all know that kids are living in a smaller number of square feet. They like a maximum amount of flexibility in their lives. They're getting married later, they're having children later, and that may be affecting the housing industry. Nevertheless, I expect a good year for housing in 2015. Oil has been a very important positive in the U.S. market. hydraulic fracking in North Dakota, Wyoming, Oklahoma, and Texas has been very important. We are now actually exporting oil in the U.S. as opposed to being a serious net importer, primarily from the OPEC countries. That's improving our trade deficit, which is not as bad as it was, but we're still running a trade deficit, although we've improved it primarily because of oil.
You can see here that we are now importing more oil from Mexico and Canada than we are from the OPEC countries. That's a very important change. What is really important is the production of natural gas, and what would really help the U.S. is if we could convert all of our trucking fleets, our 18-wheelers, to natural gas. To do that, we'd have to build an infrastructure of natural gas delivery systems across the interstate highway system. There are ways for us to significantly improve our dependence on Mideast oil. We are improving our situation there, but not as fast as I think we should. We need legislation and some capital expenditures to do that, and I wish Congress would enact the legislation that would make that happen.
You can see here now that in terms of world oil production, the U.S. is right on top. We actually produce more than Saudi Arabia, more than Russia, a lot more than China. We're right up there, but we are right up there with the consumers, too. The U.S. consumes more oil per capita than any other country in the world. While we've been engaged in a conservation program, we're still significant net importers of oil. We're just providing more of that oil domestically. For all the good moves we made in conservation, the emerging markets are consuming more. If you look at this table on the right, the U.S. is consuming 21 barrels of oil per person per year. Western Europe, South Korea, and Japan, 13 to 15. The real demand is going to come from China and India, 2.5 billion people.
China consuming less than three, India less than two, that is going up. It's going to be China and India that are going to really change the demand dynamics for liquid petroleum products. The real story in the U.S. economy is told probably more clearly on this chart than any other that I have in the packet. Profit margins are at an all-time high. They should be. Taxes are relatively low, interest rates are low. The real reason profit margins are at an all-time high is that unit labor costs haven't increased in this cycle. There's so many people looking for jobs. Nobody is pounding the table demanding a wage increase. Companies have been able to recover, to expand their revenues without expanding or increasing unit labor costs, and that's allowed profit margins to be up here at an all-time high.
Now, everybody thinks profit margins have to revert to the mean. Maybe that's going to be true, but it's probably not going to be true soon. I think profit margins are going to remain relatively high, at least for the next year. Corporate profits, as a result, are in great shape, and corporate cash is in great shape, which is going to result in increased dividends and increased share buybacks. Unemployment continues to be our most significant problem. While we've reduced the unemployment level in the U.S. from 10%-6%, the number of people unemployed for 27 weeks or more is still around the level of the previous peak. We have a structural employment problem in the U.S. caused by globalization and technology, that is not going away.
We have to take some action if we're going to put some of these long-term unemployed people to work. We've got to provide job training, we have to improve our infrastructure and provide jobs in that way. We're not taking sufficient action on that front, in my opinion. In terms of favorable signs in the economy that make me optimistic about 3% growth in the second half in the U.S., a number of companies are planning increased capital expenditures, new businesses, which are really the important source of job growth, are having trouble finding qualified applicants. The key point here is that they're looking for people. I think small business is going to be a more active employer and capital expenditures are going to improve. Not all of that is going to be for labor-saving equipment.
Some of those capital expenditures are going to be for new plan. Consumer sentiment has definitely improved, but it's now nowhere near where it was before the real estate collapse in 2008. Household net worth is at an all-time high, but that's primarily benefited people at the top 10%, the top 1%, even the top one-tenth of 1% of the income scale. If you're a top income earner, your net worth is in much better shape than it was when the recovery began. The rest of the economy has not benefited to the same degree. One of the ways to look at it is same-store sales for Walmart. As you can see here, in the early part of the recovery, Walmart was really thriving.
More recently, when people have been more careful about their expenditures, even Walmart, which has a number of favorable price points for middle income earners, even Walmart has been suffering in terms of same-store sales. The U.S. economy has come a long way back. Capacity utilization is not yet at the 80% level where you would expect a significant improvement in capital expenditures, but industrial production has come back a long way from where it was at the bottom. It's consolidating here, but I think its recent trend has been favorable, and I think that's going to continue. A couple of other signs of a favorable trend in the U.S. economy. Corporations have enough self-confidence now that they're willing to increase their bank loans, and that's a sign that they think that they should either buy capital equipment or build inventories.
Rail car loadings, which cut across a broad range of industries, has been in a favorable trend. Had a setback recently, but I think it is also indicative of an improving economy. One of the things we have to worry about, not today or tomorrow, but longer term, is that the percentage of the working age population, working America 65 years or older is about to take off. That means there are going to be fewer younger workers supporting a number of older workers. The significance of that in terms of retirement payments and healthcare expenditures is serious. We all know that we have trouble looming in terms of entitlement costs 10 to 20 years out, and this chart just dramatizes the dimensions of it. The midterm elections are coming up and everybody is wringing their hands about the outcome.
I'm here to tell you not to worry about it. If we have a Democratic Congress, that meaning the Republicans control both the House and the Senate and a Democratic president, the market does pretty well. If we have a Democratic Senate, a Republican Congress, and a Democratic president, the market does about the same. Really, the outcome doesn't matter. As I showed you in an earlier chart, the clarification of the outcome, the fact that we'll know whether the Republicans gain control of the Senate, as the odds favor them now, that alone will be a relief to the market and enable the market to go up. The actual outcome, I don't think is going to change the legislative climate in Congress. I think it's still going to be very hard to pass legislation. This Congress is one of the least productive in American history.
That's something we've got to change, but I don't think the Republicans gaining control of the Senate is going to make a profound difference in the legislative appetite in Washington. Let's talk about some of the market aspects. By this time, we've all learned not to trust analyst estimates. The black line is where analysts thought earnings would be a year ago. The blue line is where they came in, and you can see the black line is almost invariably above the blue line. Analysts are almost always too optimistic. This shows revenue growth, and revenue growth is running 4%-5%. The question is: is that sufficient to produce an adequate amount of earnings growth? Earnings are growing 9%, so earnings are growing about twice as fast as revenues. How can that be? Well, share buybacks have a lot to do with it.
This is a matrix of next year's earnings. If profit margins stay around 10%, in order to hit $125, we have to have 6% revenue growth, and that's assuming share buybacks stay at about the same level. Well, as I said, revenue growth is only running 4%-5%, so we have to have an improvement in revenue growth, to change the earnings estimate. Their earnings estimate's well above 125. Their earnings estimate's at 127-130. Why am I only at 125? That's because the companies that are giving analysts guidance, the red line, they're more negative guidance indications than positive, that's a green line, positive guidance. As long as companies are cautioning analysts to be conservative, I want to have a relatively conservative estimate for next year.
Even on the basis of a conservative estimate of 115-117 this year, 125 next year, the market is not expensive. This shows valuation in the market is about 17 times earnings. Everybody's talking about, are we forming a bubble? Is the reason the market is correcting the fact that we're in a bubble period? Bubbles occur at 25 and 30 times earnings. We're nowhere near that. I know the Shiller P/E does give you warnings, but market capitalization as a percentage of GDP is a long way from where we were in 2007. If you look at the right-hand side in terms of where the market is at peaks, we're not quite there yet. That's where the average level is, and we're certainly not at a bubble point. This is the Shiller P/E, which a lot of people are referring to.
It worked very well in the 1980s and early 1990s, but it hasn't worked well in this cycle. It reminds me of my dividend discount model, which some of you who remember me from Morgan Stanley, remember that I used this pretty aggressively in the 80s and 90s until it broke down when interest rates stayed low and the market moved forward. Models work on a back-tested basis perfectly. They work on a forward basis for a while, but then the market wises up to them and tends to go its own way, and I think that's the case with Shiller. If this correction turns into a bear market, Shiller will have been right, and I will have been wrong. Looking at the market compared to other things you might put your money into, house prices are selling at about over 20 times rents.
Equities are at 18 times earnings. Bonds are at 40 times U.S. Treasury yields. There is a phrase going around, TINA, there is no alternative, meaning equities are the only thing to buy, and that's the way I've structured my portfolio. Everybody's worried about the length of the bull market cycle, and they're worried about when the Fed is going to raise rates. The consensus, as I said, is the middle of next year. Even that may not turn the market down because it's been so well advertised. There's an old rule developed by Edson Gould in the 1960s and '70s, three steps and a stumble. Everybody's so ready for the Fed rate hike, that the market could keep on making forward progress as long as the economy is expanding and earnings are improving.
This shows that the market peak. Sometimes on an average, it's 29 months after the first Fed increase or change in policy. In terms of the market leading, the market is an anticipatory mechanism, and it tends to lead the economic peak. Maybe the market is peaking now and headed down, and we're going to have a recession in 2015, because what this shows is the market tends to peak 7.4 months ahead of the economic peak. All of the indicators I'm looking at are clearly on a net basis indicating that the economy is still expanding. Here's a whole list of them. Everything from inflation, which is usually increasing near a market peak. The yield curve is usually inverted. Inventory to sales ratio is usually negative. You go right down the list of various indicators, employment, initial jobless claims, leading indicators.
Almost every one of these is on the favorable side, not indicating a recession is imminent. That's why I'm optimistic that the third and fourth quarters will be good for the economy, and I'm also of the view that the current market setback is a correction in an ongoing bull market and not the beginning of a bear market. Productivity is still improving, and that's very favorable for the earnings outlook. Here are share buybacks, and with cash on the balance sheet still in good shape, I believe that share buybacks are going to continue, and therefore, earnings per share will continue to expand. On our fiscal dilemma, we may increase taxes, but taxes somehow, no matter what the tax rate, always seem to be between 15% and 20% of GDP. We've actually made enormous improvement in our fiscal situation.
The budget deficit was 10% of GDP in 2010, only 3% now. We do have a worry out there, and that is we're continuing to build up the budget deficit. The government debt, which was $6 trillion in 2000 to $17 trillion now, and we're only paying the same amount, about $360 billion, to service the $17 trillion that we were paying to service the $6 trillion that we had in the year 2000. If interest rates go from 2% or 2.13%, which is what we're paying to service the debt now, if they go to 4% sometime over the next decade, the burden on the budget deficit will be interest costs and debt servicing will double, and that'll be a terrific burden for the budget deficit.
We're in a very favorable period for servicing the debt, I think interest rates are going to remain low for a longer period than most people think. At some point, they probably will go up, and it will be a hit to the budget deficit when that happens. This shows that corporate income tax is rising, but the real income tax is paid by consumers. Of the total taxes, the percentage of GDP is right now about 18%, and corporations are only paying about 3% of that. We're really making improvements in our healthcare costs. Healthcare increases year-over-year were double digits, and that was a scary situation because as the population was getting older, the healthcare burden was going to be even more intense.
We've really made some strides in improving our healthcare costs, both in terms of new drugs and technology, and I hope that's a trend that continues, and I hope the Affordable Care Act contributes to it. We're hearing a lot about inversions. Why not. Foreign profits as a percentage of total corporate profits is steadily increasing. We tax worldwide income at American rates. You get a credit against the foreign taxes you paid. As companies have more and more of their income from abroad, they think more and more about inversions. It's incumbent upon the government to do something about that. As far as I know, we're the only company that taxes worldwide income at U.S. rates. Taking a look at the European economy, they've come out of a recession.
They're still growing less than 1%. Ukraine is having an impact on Germany. Germany is the engine of growth of Europe. We've got to hope there's going to be a détente or a favorable resolution of the Ukrainian situation. They're at a ceasefire now. We hope that Russia and Ukraine can work out a reasonable settlement. In addition to Germany's being affected by it, Mario Draghi has pledged more monetary expansion. A combination of German growth at 2% and monetary expansion by the European Central Bank could pull to Europe at a 2% growth rate. I don't think they're going to get there overnight, but I do think Europe in 2015 could grow between 1% and 2% if Ukraine quiets down and the European Central Bank eases. The biggest problem in Europe is the biggest problem in the United States, it's unemployment.
Europe has an unemployment rate twice of ours. Youth unemployment is running close to 25% in Europe. We really have to deal with unemployment on both sides of the Atlantic. For commodities, one of the things that I didn't adequately consider is that when the dollar is strong, commodities are usually weak. They are weak because of dollar strength. They'll probably stay weak, and that was one of the 10 surprises that's probably not going to be right this year. In terms of China and the emerging markets, I think the emerging markets are an opportunity. The developed markets have done very well since 2009. The emerging markets have not. I do think you should be exposed in the emerging markets, and two that I like right now are Mexico and India, where the locals are making their own investments.
This is a chart of India. There's a lot of enthusiasm about Modi's becoming prime minister, and I think you're going to see some favorable results about India. The market may be a little ahead of itself now, but India would definitely be part of my emerging market portfolio. China still says it's growing at 7.5%. I'm suspicious of that. I think it's taking too much credit for China to grow at that rate, and I think that their objective, which is to rebalance the economy, is going forward very slowly. In 2010, they said they wanted to rebalance the economy in favor of the consumer. The economy, in 1999, was 45% investment spending on state-owned enterprises and infrastructure, and 35% consumer. They wanted to reverse those. By 2010, they did. They said they're going to reverse them back again, and they've made no progress in doing that.
It's still 45% investment spending, 35% consumer, and it takes too much debt to do that. They've got to rebalance if they want to sustain the economy. They can't be expanding credit 15%-20% annually. One of the reasons they drag their feet on this is because the unemployment or the employment rate would likely go down. They want to create 15 million to 20 million jobs every year, and the way to do that is to keep growing at 7.5%. If they become more of a consumer economy, they're more likely to grow at 6% and create fewer jobs. The two new leaders don't seem to be willing to take the political risk that's necessary to slow the growth rate down. About Japan. Japan is definitely out of its deflationary recession, but it's taking a lot of monetary expansion and debt to do it.
As a result, I think that they're going to keep on increasing their debt obligations and increase the money supply. The real reason to be interested in Japan is of all the developed markets, it's the cheapest. Less than 14x earnings versus 17 for the U.S. and 14 for Europe. I thought the JPY would depreciate this year along with the EUR, and it's close to 110 now, and I think it can go lower, and I think the debt will continue to rise. I think the Japanese stock market, which has been consolidating and now is starting to do better, has another leg up. That concludes the formal part of the conversation. I'd like to turn it back to Joan for any questions you all might have.
Great. Thanks, Byron. I guess first to start, the Ned Davis crowd sentiment is clearly hugely positive, and yet for some time now, when you speak with investors, they're pretty skeptical around the risk-reward and credit and whether valuations in equity markets are full. How do you reconcile that? Is it that they're not really telling you what they actually believe, or is it that there just haven't been other alternatives, so they just continue to invest?
They haven't been driven. Now they're in a somewhat different position, where the market has gone through a couple of weeks of erratic behavior. I think that at the end of a bull market, investors get nervous. They know valuations are high. They know sentiment is extreme. When you talk to them, they talk to you about their worries. When you look at what they're doing, they're not taking action. They're what I call parlor bears. They talk a negative game, but they aren't taking action in their portfolio. We know from history they're usually a little bit late in taking action. They really need the market to tell them they're in trouble.
Some of them will respond to the decline in the market we've had over the last few weeks, and that may turn what I think is a correction in the market into something much more serious. I don't think that will be the case, but I do think that even though investors tell you they're worried, it's what they do in their portfolio that really counts, and they've only started to take action in their portfolio in response to the erratic behavior of the market itself.
Sticking with sentiment, but shifting over to consumer sentiment. We've talked in the past about housing being the greatest asset for a lot of individuals, and we've had a nice housing recovery with probably more to go. Why isn't consumer confidence higher?
I think consumer confidence isn't higher, not because of housing. Housing is generally favorable, but it's because of wage growth. Wages haven't expanded for the average worker. Even for high-end workers, they haven't expanded. Most of us in the top 10% have benefited from the appreciation of our stock portfolio, and maybe if we live in an expensive house, that's gone up too. Our wages haven't gone up, our salaries haven't gone up. Salaries haven't gone up across the board because there's so many people looking for jobs. You have the nervous feeling you could be replaced by somebody younger and maybe cheaper. My feeling is you need wage growth to really make people feel good about the outlook, and we haven't had that. That's why consumer sentiment hasn't improved at a steeper rate.
You mentioned job training is one way to actually get some of that higher wage level employment base up. If you look at the cost of job training and the time that it takes and the pace that we're moving in technology, is that really feasible on a large scale basis?
Yeah, you raise a very good point, Joan. It could be running in place. In other words, we could train people for the jobs that are out there. As we train them, some of those jobs are eliminated through technology. That's what I mean by running in place.
Yeah.
The way to think about it is this. What we really need to do is there are a lot of jobs that are open. There are $4.6 million jobs open in the United States right now. You need a lot of technical skill in order to hold one of those jobs. I could take you for a drive down Silicon Valley, and you would see on every chain link fence a sign, we're hiring. You've got to have pretty significant computer skills to get those jobs, and a lot of people don't have them. We've got to improve the number of people graduating high school, the number of people getting technical training in junior colleges or four-year colleges. Again, the point you raise, it's a long-term process. What we really could do to improve employment is engage in a full-scale infrastructure program.
You would put a lot of people who are out of work back to work, you've got to get that legislation through Congress. God knows we need a revitalization of our infrastructure, you need congressional expenditures. My belief is we have the money to do it now. We should do it, I don't know that you can get the legislation passed to get it done.
That's a good point. Shifting over to Europe, we do have positive growth now, but it's still fairly anemic and well below where the U.S. is. Other than Germany, are there additional catalysts? What gets Europe going or at least catching up?
Well, there were two countries that were in trouble, Italy and Spain. The numbers coming out of Spain are very encouraging, but Italy is slipping back into recession. I don't think we can expect much more than the status quo in France. The U.K. is a net positive, although there's been some slowdown there, too. Basically, I think we need the situation in Russia, Ukraine to stabilize. I think that'll improve confidence. That'll improve the situation in Germany, and the Netherlands and Holland will become favorable as well. The other thing that could happen and should happen and probably will happen is that Mario Draghi and the European policymakers have moved away from austerity. You almost never hear that come up in a conversation now. They've learned a lesson from the U.S. They've learned that monetary easing can do some good.
I think they're going to have a more expansive monetary policy, and that's going to put Europe above 1%. If the U.S. is growing at 3% and Europe is growing at 1%, and the emerging markets are growing around 4%, I think that's good news for the world economy. Again, I think the world economy is going to grow a little more than 2%, whereas five or eight years ago, it was growing at 4%.
The euro, you made a great call this year on where a dollar-euro would be. Given where the euro is, should that help?
Well, it'll certainly help the euro. The question is, how much will the strength of the dollar hurt the U.S.?
Yeah.
Happily, exports are not a big part of the U.S. economy, only about 10%, 12%. I don't think exports are going to hurt us, even though they may be dampened somewhat by the strength of the dollar. The great thing about America is we're still the most innovative society, and we still create products that may be expensive, they have a high value added, but they're wanted around the world. That's good news for the U.S. The strength of the dollar is going to hurt us somewhat, but it's already helped us in terms of energy. We're buying energy at a lower cost, and that's helping the trade deficit. Maybe our exports will be diminished somewhat, but our imports will be improved as well as a result of the strength of the dollar.
When you think about emerging markets, the bloom is off the rose, I guess, in certain countries that folks were very optimistic about, and you mentioned Mexico. Lots of favorable conversation about Mexico. How should we think about the drivers of what makes, today, a successful emerging market? Is it a pro-business, stable government? Is it access to resources? Is it demographics based on population growth? How do you triangulate different factors?
Well, productivity has always been one of the things, productivity is actually slowing down even in the emerging market. Look, stable government, that's terrific, but there are a lot of places where you don't have it. What's going on in India is an improved government. The rally in that market was totally caused by Modi's election victories. The improvement in Mexico is caused by the strength of the U.S. Mexico reflects U.S. growth, and if the U.S. is doing better, Mexico will do better. Debt to GDP is an important factor. The emerging markets generally have a much lower debt to GDP ratio than the developed markets, certainly than Japan and than the U.S. That's favorable because it means that the government has money to spend on infrastructure and corporate development. The real indicator for me is, what are the locals doing?
I would look for emerging markets where the locals are investing their own money. Where the locals are pulling their money out, as they are in Russia, as they are in China, and they are in certain other countries. That's a place to be careful of. Where the locals see opportunities, as they do in India, as they do in Mexico, as they do in a number of Latin American frontier markets, not so much Brazil, but in Peru, in Colombia, that's a sign. If those countries are good enough for the locals to put their money to work and they're not putting their money in U.S. Treasuries, that's good enough for me.
Great, we have time for one more question, which is, as you travel around meeting with the biggest institutions everywhere in the world, what are they most concerned about, and what are they most optimistic about?
I think the two biggest concerns are China has been so important to emerging market growth, and they're worried about a serious slowdown there. With the Hong Kong situation erupting, they're worried there could be some political instability in China, and that's something the Chinese themselves are very worried about. They're also worried about the dysfunctionality of the U.S. government, and our inability to get things done. The U.S. has always been viewed as the driver of global growth, if the U.S. can't grow at 3% because of the dysfunctionality of government, because we implement policies that don't make sense, that's of concern around the world. I think we have to be concerned that there are so many geopolitical trouble spots, whether it's in Russia, Ukraine, Israel, Gaza, the Iranian nuclear threat, the South China Sea.
Investors have the general attitude that all of those situations are going to be resolved favorably and won't have impact on economic expansion around the world. One of those could go terribly wrong at any time. In the back of their minds, they're concerned about that and the implications for the financial markets as a result.
On the optimistic side?
On the optimistic side, the U.S. continues to forge ahead, Europe grows better than 2%, China rebalances, Japan recovers, and we have another number of years to run. There are very few excesses in the world economy right now, and bear markets and recessions are created out of excesses, and we don't see too many at this point in time. One of the favorable surprise, I'm not willing to sign on to this one yet, but one of the favorable surprises is the period of a longer expansion with continued earnings growth and low interest rates. That period lasts a lot longer than most people expect.
Well, I hope that's right, and hope you're right on the fourth quarter, too. Do you have any final comments?
No. I hope you're all there for the 10 Surprises of 2015.
Yeah. On that point, please join us Thursday, January 8th, and that's when Byron will be