Good morning. This is Joan Solitar, Senior Managing Director, External Relations and Strategy, Blackstone. Welcome to Blackstone's webinar this morning featuring Byron Ween, Chairman, Blackstone Advisory Partners. We plan to keep the webinar to 60 minutes including Q and 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. And with that, I'm going to turn it over to Byron Ween.
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 has run into trouble here at the end of September and the beginning of October. So 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. So here are some of the 10 surprises.
I'm still thinking the market is 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 the 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 and 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 euro and now it's 1.26. I definitely think it will hit my beginning of the year target of 1.25 and there are plenty of estimates out there at 120 110 on the yen and maybe even 120 on the yen.
So 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. And while we can't say it's a resounding success, I think it is working much more effectively and I think 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 high traditional high yield bonds and corporate bonds is not going to be rewarding.
So I have taken an equity approach to the entire institutional portfolio and I recommend you do the same. Now 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. So 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. But what I am saying is that the overbought nature of the market, the overoptimistic view of investors made the market vulnerable to a 5% to 10 percent 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 is a high degree of viewership of business media. But here we have a chart of CNBC viewers in the very valuable 25 to 54 age range. And what you see is viewership is very low. Now that's in spite of the fact that the market was making an all time high. So people were very complacent, sort of bored by the market.
They kind of television than Squawk Box and the rest of the shows that CNBC has during the day. So 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. 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.
So the 1st part of the year is usually good for both, not so good in midterm election years. And during the summer, the sell and may go away syndrome applies. The market usually goes up somewhat generally, but down in midterm election years. Then 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 Q4 will be good and it will put the market above 2,000 at year end. Now 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 year months old and has gone up almost 200%. So from a historical perspective, you would say it's time for the market to peak and the market to begin to decline.
Now 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. But there are some reasons to think that the market is toppy here and age is one of them and we all should be aware of that. But 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. But that was the only tool left in the box. We weren't going to have any fiscal spending beyond the April 2009, dollars 787,000,000,000 stimulus program. So it was up to the Fed if it was going to provide any impetus to the economy whatsoever. The Fed balance sheet in 2,008 was $1,000,000,000,000 It took 95 years from the Fed's founding in 1913 to 2,008 to get to $1,000,000,000,000 It's over $4,000,000,000,000 today.
So that's an enormous expansion of the balance sheet. And my view is that 3 quarters of that money goes into financial assets, keeping interest rates low and driving stock prices higher. Only 1 quarter goes into the real economy. And the Fed is still expanding. It's going to stop its bond buying program at the 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 is probably the middle of the 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 subcrime crisis hit the United States and Europe in 2,008. But then 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.
Then those loans proved to be pay or those purchases proved to be very profitable and the European Central Bank was paid back. So 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. But 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. And 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%. Now we're only growing at 2% because China and other emerging markets are slowing down. So 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 United States probably looks the best.
Now 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, 2012, didn't forecast a slowdown in 2013, We didn't have 1. It is not forecasting a slowdown now and I don't think we're going to have 1.
So I think we're in a position where the U. S. Economy is going to continue to expand. I think the 3rd Q4 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. But the average worker who's drawing a paycheck every 2 weeks, working in a fast food establishment, a retail store or on a factory line where they get biweekly paychecks, that person is 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 do have improved our economic condition. Those in the middle 60% probably have held their own and those in the bottom have probably lost ground.
But this is not an economic expansion that has clearly improved a lot, 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. But 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 some 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. Now 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 United States as opposed to being a serious net importer primarily from the OPEC countries. And 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. And that's a very important change.
And 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. But 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 United States is right on top. We actually produce more than Saudi Arabia, more than Russia, a lot more than China.
So we're right up there, but we are right up there with the consumers too. The United States consumes more oil per capita than any other country in the world. And 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. But 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 United States is consuming 21 barrels of oil per person per year, Western Europe, South Korea and Japan 13 to 15, but the real demand is going to come from China and India, 2,500,000,000 people, China consuming less than 3, India less than 2 and that is going up. So 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. But the real reason profit margins are at 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. And so companies have been able to recover to expand their revenues without expanding unit 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 United States from 10% to 6%, the number of people unemployed for 27 weeks or more is still around the level of the previous peak.
So we have a structural employment problem in the United States caused by globalization and technology. And that is not going away. And 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 and we have to improve our infrastructure and provide jobs in that way. And 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 and new businesses, which are really the source important source of job growth are having trouble finding qualified applicants. But the key point here is that they're looking for people. So I think the small business is going to be a more active employer and capital expenditures are going to improve and not all of that is going to be for labor saving equipment.
Some of those capital expenditures are going to be for new plant. Consumer sentiment has definitely improved, but it's now nowhere near where it was before the real estate collapse in 2,008 and 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 1 10th of 1% of the income sale. So if you're a top income earner, you're in much your net worth is in much better shape than it was when the recovery began, but the rest of the economy is not benefited to the same degree. One of the ways to look at it is that same store sales for Walmart. As you can see here, in the early part of the recovery, Walmart was really thriving.
But 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. But 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. And 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 build buy capital equipment or build inventories.
In railcar 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 in 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. And the significance of that in terms of retirement payments and health care expenditures is serious. So we all know that we have a problem looming in terms of entitlement costs 10 to 20 years out and this chart just dramatizes the dimensions of it.
Now 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. And if we have a Democratic Senate, a Republican Congress and a Democratic President, the market does about the same. So it really the outcome doesn't matter.
But 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. But 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% to 5%. And 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% to 5%. So we have to have an improvement in revenue growth to change the earnings estimate. Now their earnings estimate is well above 125. Their earnings estimate is at 127 to 130.
Why am I only at 125? That's because the companies that are giving analysts guidance are the red line, there are more negative guidance indications than positive. That's a green line, positive guidance. So as long as companies are cautioning analysts to be conservative, I want to have a relatively conservative estimate for next year. But even on the basis of a conservative estimate of $115,000,000 to $117,000,000 this year, $125,000,000 next year.
The market is not expensive. This shows valuation and 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 30 times earnings. We're nowhere near that.
Now I know the Shiller PE does give you warnings, but market capitalization as a percentage of GDP is a long way from where we were in 2,007. And if you look at the right hand side in terms of where the market is at peaks, we're not quite there yet. And we're certainly not and that's where the average level and we're certainly not at a bubble point. This is the Shiller PE, which a lot of people have referring to. It worked very well in the 1980s 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 90s until it broke down when interest rates stayed low and the market moved forward. So 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 of Shiller. But 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 20 over 20 times rents, Equities are at 18 times earnings. Bonds are at 40 times U. S. Treasury yields. So 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.
Now everybody is worried about the length of the bull market cycle. This and they're worried about when the Fed is going to raise rates. The consensus as I said is the middle of next year, But even that may not turn the market down because it's been so well advertised. There is an old rule developed by Edson Gould in the 1960s 70s, 3 steps and stumble. Everybody is 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 is 20 or on an average is 29 months after the 1st Fed increase or change in policy. And in terms of the market leading, the market is an and 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. But the 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 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. And so that's why I'm optimistic that the 3rd and 4th 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.
And 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% 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.
But we do have a worry out there and that is we're continuing to build up the budget deficit and the government debt which was $6,000,000,000,000 in 2000 to $17,000,000,000,000 now and we're only paying the same amount about $360,000,000,000 to service the $17,000,000,000 dollars that we were paying to service the $17,000,000,000,000 to service the $6,000,000,000,000 that we had in the year 2000. Now 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 will be a terrific burden for the budget deficit. So we're in a very favorable period for servicing the debt. And I think low interest rates are going to remain low for a longer period than most people think.
But 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 interest total taxes as a 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. That was a 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.
But 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 and why not. Foreign profits as a percentage of total corporate profits is steadily increasing and we tax worldwide income at American rates. You get a credit against the foreign taxes you paid.
And so as companies have more and more of their income from abroad, they think more and more about inversions and the government 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%. And Ukraine is having an impact on Germany and Germany is the engine of growth of Europe. So we've got to hope there's going to be a detente or 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 port 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% 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, but Europe has an unemployment rate twice of ours and youth unemployment is running close to 25% in Europe. So 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 and they are weak because of dollar strength and 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. But I do think you should be exposed in the emerging markets. And 2 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 and market maybe 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 get 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. Then they said they're going to reverse them back again and they've made no progress in doing that. So it's still 45% investment spending, 35% consumer and it takes too much debt to do that. And so they've got to rebalance if they want to sustain the economy. They can't be expanding credit 15% to 20% annually.
Now 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 15,000,000 to 20,000,000 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. And the 2 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 14 times earnings versus 17 for the U. S. And 14 for Europe. I do think the I thought the yen would depreciate this year along with the euro 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 as another leg up. And that concludes the formal part of the conversation. Now 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 in credit and whether valuations in equity markets are full. And so 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?
Well, 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 in the at the end of a bull market, investors get nervous. They know valuations are high. They know sentiment is extreme.
And so when you talk to them, they talk to you about their worries. But when you look at what they're doing, they're not taking action. They're what I call parlor bears. They talk a negative, 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. And so some of them will respond to the decline in the market we've had over the next 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.
And then 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. So why isn't consumer confidence higher?
I think consumer confidence isn't higher, not because of housing. I mean 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. They have 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.
But our wages haven't gone up, our salaries haven't gone up and 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. But my feeling is you need wage growth to really make people feel good about the outlook and we haven't had that. And that's why consumer sentiment hasn't improved at a steeper rate.
And you mentioned job training is one way to actually get some of that higher wage level employment base up. But 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?
Yes, it could be. You raised 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. And we as we train them, some of those jobs are eliminated through technology.
So that's what I mean by running in place. 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 4,600,000 jobs open in the United States right now, But 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.
But 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 4 year colleges. And again, the point you raised, it's a long term process. What we really could do to improve employment is engage in a full scale infrastructure program. Then you would put a lot of people who are out of work back to work, but you've got to get that legislation through Congress.
God knows we need a revitalization of our infrastructure, but you need congressional expenditures. My belief is we have the money to do it now. We should do it, but I don't know that you can get the legislation passed to get it done.
That's a good point. And shifting over to Europe, so we do have positive growth now, but it's still fairly anemic and well below where the U. S. Is. So other than Germany, are there additional catalysts like what gets Europe going or at least catching up?
Well, there were 2 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. So and 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 will improve confidence. That will improve situation in Germany and the Netherlands and Holland will become favorable as well. So and 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. And they've learned a lesson from the U. S. They've learned that monetary easing can do some good. And I think they're going to have a more expansive monetary policy and that's going to put Europe above 1%.
And if the U. S. Is growing at 3% and Europe is growing at 1%, I think that and the emerging markets are growing around 4%. I think that's good news for the world economy. But again, I think the world economy is going to grow a little more than 2, whereas 5 or 8 years ago it was growing at 4.
And the euro, you made a great call this year on where a dollar euro would be. So given where the euro is, should that help?
Well, it will certainly help the euro. The question is how much will the strength of the dollar hurt the U. S. Happily exports are not a big part of the U. S.
Economy only about 10%, 12%. So I don't think exports are going to hurt us even though they may be dampened somewhat by the strength of the dollar. We're still 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. So 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. And we're buying energy at a lower cost and that's helping the trade deficit. So maybe our exports will be diminished somewhat, but our imports will be improved as well as a result of the strength of the dollar.
And 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. So 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 and 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. I mean what's going on in India is an improved government. I mean that the rally in that market was totally caused by Modi's election victory. 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 then the U. S. And that's favorable because it means that the government has money to spend on infrastructure and corporate development.
But the real indicator for me is what are the locals doing? And 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. But 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 the market if those countries are good enough for the logos to put their money to work and they're not putting their money in U. S.
Treasuries That's good enough for me.
Great. And 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?
Well, 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. And with the Hong Kong situation erupting, they're worried there could be some political instability in China and that's something that 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. And 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. And 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, the 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. But one of those could go terribly wrong at any time. And so in the back of their minds, they're concerned about that and the implications for the financial markets as a result.
And 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. So one of the favorable surprises, 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 greater 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 Q4 too. Do you have any final comments?
No. I hope you're all there for the 10 surprises of 2015.
Yes. So on that point, please join us Thursday, January 8 and that's when Byron will be