Hi. I'm Joan Solitar, Senior Managing Director of External Relations and Strategy at Blackstone. Thanks for joining us today for the Blackstone webcast, the 10 surprises of 2014, featuring Byron Ween, Vice Chairman, Blackstone Advisory Partners. Following Byron's formal comments, there'll be 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 this webcast. At the bottom of the console, you'll see a series of widgets. By scrolling over them, you'll be able to download slides and refer a friend. We plan to keep this webcast to 60 minutes, including Q and A. Please see a full list of disclosures at the end of the presentation.
Thanks for joining us. And with that, I'll turn it over to Byron Ween.
Thanks, Joan. This is the 29th year of the 10 surprises and I really look forward to talking with you about them. I'm going to try to do this in a balanced way where there are potential conflicts among the surprises, I'll try to highlight those and rationalize my thinking. So let's get right into it. The first surprise is that we expect it to be a Dickensian market thinking back to the tale of 2 cities which was the best of times and the worst of times.
I think the worst of times may come first. We have a very extreme condition today in investor sentiment. Almost everybody out there is bullish. The strategic forecast for the year We're very positive as usual up 10%, but the whole mood of the market is very positive and it usually becomes vulnerable when everybody is on one side of the boat. I also think that the world is vulnerable to some geopolitical unsettling conditions either in Syria or Iran or elsewhere.
So I think the market could suffer its first 10% correction in a while. But I do think that for the year, the market will be up 20%. Years where the market is up more than 25%, every single time since 1991, when the market's up more than 25, the following year is a positive year. And I think this year is going to be particularly positive because I think the economy is going to do better, which was not the case in 2013. So the second surprise is that the economy finally breaks out of its doldrums.
The economy grew only at about 2% in 2013, but I can think it grow at better than 3%, maybe quite a lot better than 3%. Most people are expecting 2.5% to 3%, but I think the surprise is it's going to be in excess of 3 maybe even as much as 3.5 in 2014. The third surprise is that the dollar is going to be strong. Historically, when the U. S.
Is growing faster than other parts of the world, that's usually good for the currency. But I think the dollar has been ruled by Federal Reserve policy in contrast to European Central Bank policy. The European Central Bank has been more disciplined. Bank loans have been paid off in Europe and the European Central Bank balance sheet has shrunk. But that's only begun to happen.
It isn't actually going to shrink in the U. S. But the Fed tapering process where they've already announced that in January, they're going to buy $75,000,000,000 worth of bonds rather than $85,000,000,000 is a positive. So most people think the dollar will be somewhat stronger, but I think it'll be a lot stronger going to $1.25 against the euro and $1.20 against the yen. So a strong U.
S. Currency stronger than the consensus expects is going to be a surprise. I want to make 2 points about the surprises in general. First, they are surprises. They are not predictions.
They are things that I feel have a better than 50% probability of taking place where the average investor would only give them a 1 out of 3 chance. So they're probable events. They are not outright predictions, although I do take responsibility for them and I do score myself on them at the end of the year. Okay. The 3rd the 4th surprise is that Japan has another good year.
That was one of my only big hits from last year and I think the Nikkei 2.25 can get to 18,000. I do think though that increasing the sales tax from 5% to 8% and the aging population and the decline in the workforce will cause a very serious correction in Japan in the second half. The 5th surprise is on China. In the 3rd plenum that took place in Beijing in November, the new leader, Xi'an Li said that they were going to try to rebalance the economy in favor of the consumer. They were going to try to reduce the economic dependence on investment spending, which was going into infrastructure and state owned enterprises.
They can't do this without slowing the pace of the economy. Almost nobody thinks that China will grow a whole lot lower than 7.5%. They feel the new leaders couldn't afford to allow that to happen. But I think if they're really serious about rebalancing the economy in favor of the consumer and having it on a sounder footing for the longer term, the growth rate has to slow down. And I think it'll slow down to 6%.
That is a surprise. It isn't in the direction of this consensus or more extreme. It's much more of a contrary point of view. The 6th surprise is that the emerging markets have another year of non performance. Almost everybody believes that.
But I singled out 2 emerging markets that I think can do well. The first is Mexico, which is going to benefit from an improvement in the U. S. And the second is South Korea, which in spite of the fact that China is going to be slowing, I think South Korea can do well. The 7th surprise is on U.
S. Treasuries. I'm sorry, on oil. The consensus view is that oil will decline in price because of increased production from Iraq and Iran. I think that that's very optimistic.
I don't expect significant production from overseas facilities. And I do expect increasing consumption from the developing world as well as the United States as a result of the improving economy. So in contrast to the consensus view, which is that there'll be a decline of oil from the 90s into the 80s, I think the price of oil will actually go up because worldwide demand is increasing faster than worldwide production. The 8th surprise is on commodities. This is one I had last year.
Almost everybody is bearish on commodities, agricultural commodities in particular because they think production will exceed demand. I think that there is going to be very extreme weather conditions this year. We're already experiencing it now both cold and warm. There are going to be more droughts as well as more cold spells and as a result I expect corn, wheat and soybeans to rise in price. The 9th surprise is that the U.
S. Treasuries yield continues to rise. It went from 172 to 303 in 20 13. I think it's going to go up to 4%. Most people are bearish.
This is one of the surprises that is in the direction of the consensus but more extreme. I think the 10 year treasury yield can get to 4% and you can say how can I be bullish on the stock market with interest rates rising? I'd remind you that the market was up on a total return basis 32.4% as measured by the S and P 500 and the 10 year treasury yield went from 1.72 to 3.03 in 2013. And finally, the 10th surprise and this would really be a surprise. This is very contrarian.
I think the Affordable Care Act will come together, the computer glitches and the difficulty of signing up will be diminished and the younger people will begin to enroll and as a result the disastrous start of the program will be a turnaround. I also think that that will help President Obama's approval rating and will help the Democrats in the November election. And I have the Democrats actually gaining seats in Congress in the November election and retaining control of the Senate. And I haven't seen anybody who's willing to make that forecast. So those are the 10 surprises for 2014.
I generally get 5 or 6 of them right. I didn't do as well as that last year. I hope I do that well or better this year. I know there are some that really seem pretty far out, the 10th one being the best example perhaps, but I'll be reporting to you on the progress of them as we go through the year. Now let's go into some of the reasoning behind some of these surprises.
Oh, before we do that, I also have 4 also rants, 4 surprises that didn't make the top 10, but that I do I did consider for a period of time. These are either not as important as the top 10 surprises or I didn't have a better than 50% conviction that they were going to be probable events. So the first one is that Ted Cruz emerges as likely candidate for the Republican Party in 2016. This is a very smart guy who has shown flexibility in the past. And while he's clearly identified with the Tea Party now, I think he could become more moderate and eclipse Chris Christie as the likely candidate.
The second surprise is on bitcoins, which have risen in price to from $25 to about $1,000 They don't have any backing in as gold does as accepted store value over 1,000 years. And I think they could collapse because their principal utility right now is as a medium of transaction for business dealings where anonymity is important. So I think their popularity today will not endure through the year. The third one is on Cuba. I say that we will finally reduce the sanctions and begin diplomatic relations with Cuba, which haven't existed since 1959.
There'll be objections from the Cuban exile community, but I think that's something that is going to happen and will provide financial aid in the form of bonds, which I think the market will refer to as Castro Convertibles. And finally in the 4th one, I have Hillary Clinton saying that she has too much work to do with the Clinton not for profit initiatives. That work is very important and unfinished and as a result she's going to step out of the presidential race. This one is really out of the consensus and so much so and I didn't have enough conviction on it to make it one of the top 10, but I don't think it's a 0 probability. I think it's probably a 1 out of 3 probability.
This is my asset allocation. I've talked about this in the past, but I just want to review it briefly in the context of some of the economic points I'm going to make in the subsequent slides. I have 10% in high quality multinationals, 10% in other U. S. Long only, 10% in emerging markets, 10% in European, long only, 10% 5% in Japan, 10% in private equity, 10% in hedge funds, 10% in real estate.
So that's 45% in equities, 30% in alternatives and then I have 5% in gold, 5% in agricultural commodities and 15% in the non conventional high yield securities, mortgages, leverage loans and mezzanine financing and 0 cash. But I have more enough long only so if their cash needs those securities, those instruments can be liquidated. This is a measure of the crowd sentiment poll. One of the reasons I think the market could be vulnerable during the first half of the year because investors are too positive. Usually when they're as positive as this, the market is vulnerable to a correction and I think it could be as great as 10%.
This shows the support for the position that the market is almost invariably up in any year where the market in any year after the market is up 25%. So it's not always up big. There are some single digit years, but the year following a 25% year since 1991 has been up on an average of 16 percent and I have it up 20%. This shows the some measurements of the old adage sell in May and go away. The light blue bars and this shows it for various decades on the left and for longer periods on the right.
But you can see that the November to April period is generally much more favorable than the April to November the May to October period. So it's usually good to be fully invested at the beginning of the year and not so good to be invested over the course of the summer. And if you look at the recent period in the years, the half century prior to 2013, the difference between November to April and May to October is really quite dramatic. Now I think there's a lot of speculation going on in the market and that in addition to the bullish sentiment is one of the reasons I think we might have a correction in the first half of the year as you see here margin debt is at an all time high. But for the S and P 500 that's been a brutal experience, which is one of the reasons I think hedge funds have had a tough time of it.
The light blue line is the percentage of the capitalization of the S and P 500 that has been short. And you can see that hedge funds and other short sellers have reduced their short positions as the market has gone up. They've tried to cover the positions and we have the lowest short position now that we've had over the past couple of years. This shows Central Bank policy and it refers back to the point I made when I was discussing the 10 surprises. One of the reasons that the euro has been strong during the past 6 months is that the European Central Bank has more been more disciplined on its monetary policy.
It's actually reduced its balance sheet by about €500,000,000,000 whereas the Federal Reserve balance sheet has continued to expand. And the Federal Reserve balance sheet will continue to expand, but just at a slower rate as a result of our slowing down the bond buying program, the first tranche of which will take place in January. Now let's take a closer look at the U. S. Economy.
I think this shows one of the reasons why the Federal Reserve was nervous about its heavy position in U. S. Treasuries. If you go back to before QE3, before this heavy buying of bonds took place. The Federal Reserve balance sheet in 2,008 was only $1,000,000,000,000 and Treasury securities were less than 10% of it.
Today, the Federal Reserve balance sheet is $3,500,000,000,000 and treasury securities are 25% of its balance sheet. That's why Bernanke wanted to taper. That's why he finally did taper when he thought the economy could handle it and so far the economy is handling it. This shows a very reliable forecast of economic activity. If you look at the Economic Cycle Research Institute, it has foretold a slowdown in the economy in 2010, 'eleven and 2012.
But in 2013, the slowdown didn't occur and this indicator is still headed up. So I'm optimistic that we're going to have a stronger than expected economy in 2014. This shows that real family income has been relatively flat over the last few years. I think one of the big issues over the 2014 is going to be the inequality issues. And one of the problems behind it is that median family income has been stuck at around $60,000 It hasn't gone up in spite of the fact that the market has risen, house prices have risen and household net worth as we'll see in a few slides have gone up.
But the average family doesn't feel it's better off in spite of the recovery in the economy and the stock market. And if you wonder whether we're in better shape than we were a few years ago, just look at this chart on food stamps. This is really telling. We would all agree that Hurricane Katrina was one of the worst periods in American economic history. We had 15,000,000 people on food stamps at that time.
We have 45 1,000,000 people on food stamps today and that's why so much of America feels that they're hurting during this period of economic recovery. Now for some good things that are going on in the economy. Auto sales are very strong and I think that's going to continue. During the uncertain part of the early phase of the recovery, people didn't buy cars. The average car age I think out there is 11 years, not my cars.
The newest one I have is 21 years old. My cars can all vote and drink. But at any rate the automobile sales are strong and they could and that's likely to continue. Another favorable indicator is manufacturing Purchasing Manager Index, very strong. I think that's one of the reasons why the economy is going to surprise the consensus and grow at a faster rate in excess of 3% in 2014.
What you see here is housing reacted negatively to the increase in interest rates. And when the Fed gave a hint of tapering in May, the 10 year treasury yield went up 100 basis points in a very short time and that caused some problems in the housing market. But I still think housing is going to be a favorable part of 2014 and you'll see that when you see housing starts at $1,000,000 in November. This is on the left hand side, you can see that affordability has come down through a combination of rising interest rates and rising house prices. But housing starts were over $1,000,000 for the first time in a long time in November.
This shows that the median house price is rising and that's favorable because that will get people to buy houses. Mortgage rates are discouraging, but the reason you buy a house is because you think if you wait, you'll pay more for it. And so the monthly payments may be a little greater, but mortgage rates are in the 4% area. And on a historical basis that's very favorable. And the right hand side shows another favorable aspect of the U.
S. Economy, the trade deficit has been flat and the figures that were reported this morning $34,000,000,000 in trade deficit, That was a very favorable figure and supports my view that the economy is going to be stronger this year than the consensus expects. What we see here is energy. I have a few slides on that. The U.
S. Is still dependent on overseas imports for its energy needs, not oil, only oil but other things. And when you take a look at oil, we're in better shape than we were because we're producing more oil than we ever have. But we're still a fair distance away from energy self sufficiency. We still need to import about 9,000,000,000 barrels of oil a year.
This shows the situation on a worldwide basis and why I think the price of crude can be $110 The demand from the developing world is and so worldwide demand is increasing faster than worldwide production. And I think that's why we're going to see 110 for West Texas Intermediate during 2014. This shows on the left hand side that the developing world is now consuming as much oil as the developed world that the developed world has been fairly disciplined in reducing consumption either because the economies have slowed or they've engaged in conservation practices. But that reduction in consumption has been more than offset by the developing world. And the right hand chart shows the principal culprit which is China.
China has increased its consumption enormously over the last few years. And if you've been in a traffic jam at midnight in Beijing as I've been, you know that the number of vehicles there is increasing virtually exponentially. If you look at this chart, you can see on the right hand side that China and India are consuming very few barrels of oil per capita. China had more than 2, India had only 1 compared to 21 in the United States. So the United States is very profligated in its consumption of oil, 21 barrels of oil per person per year.
Western Europe, South and Japan at around 13, Russia and Brazil less. But the key variables are going to be from China and India. They have 2,500,000,000 people in those two countries and they have 1 to 2 barrels of oil consumption. So that's where the pressure on production is going to occur and that's the principal reason why I think that the price of oil is going to rise this year in contrast to the consensus view which is that oil will drop from the 90s into the 80s. Now I referred earlier to the inequality issue and here's one of the reasons behind it.
The light blue line is profit margin showing that corporations are able to maintain almost record profit margins, while the unit labor costs are not going up at all. So the average worker hasn't increased, improved his position or her position during this recovery period since June of 2009. But corporations have. Corporate profits are up a lot and corporate profit margins are virtually at a record. And so the beneficiaries of the recovery are people in the top 20% of the income stream and people who are invested in the stock market and hold or live in more expensive homes.
But the average working person with an hourly compensation has not benefited. Unilever costs have stayed fairly flat. What this shows is that the number of manufacturing workers continues to decline. Manufacturing is a fairly small part of the workforce. This is primarily a service economy and that's shown on the left.
So that even though we're repatriating jobs and there's a lot of press about that, but I've tried to delve into it and we've only been able since 2010 to bring about 50,000 jobs back into the U. S. Economy in a workforce of 136,000,000. The right hand chart shows that we lost more jobs in this cycle than we ever have before and they've come back more slowly. So I think we have some structural problems in the economy that are going to keep the unemployment rate relatively high.
But I do think that this year with a strong economy, the unemployment rate will come down from 7% to 6%. And that's one of the surprises. This one shows that the unemployment rate for so called U6, those working part time that would like a full time job has come down a lot from its peak, but it's still higher than the previous peak at 2.6% of the workforce. This one shows that the that we've made some improvements in the unemployment rate reducing it from 10 down to 7. But you can see here that we're only producing about 200,000 jobs a month whereas in the previous cycle before the 2,008, 2009 recession, we were producing well in excess of 300,000 jobs a month.
And that real GDP has been in the 2% to 2.5% range, whereas it was above 3% in the previous cycle. So there are some structural problems that have been holding back growth. But I think that they're going to be they won't be eliminated but I think they'll be reduced in 2014 and we'll have a faster rate of growth, not in excess of 4, but in excess of 3%. Here shows the improvement in consumer confidence since the end of the recession, but it isn't anywhere near where it was prior to the 2,008, 2009 period. And the right hand chart shows that new consumer net worth is at well above where it was prior to the recession.
But it's accrued largely to the high end of the income stream, which has investments
in the stock market,
which have benefited from the recovery. People who don't have significant stock holdings, don't own expensive houses have not benefited as much. This chart shows retail sales and they're hovering at around the 4% level. And I think they actually, if I'm right and the unemployment rate drops from 7% to 6 then I think you'll see an improvement in retail sales and that will be one of the favorable parts of the U. S.
Economy this year. What this shows is something that I think will be a change. Capital spending has been significant disappointment in this cycle. The money that's been spent on capital equipment has been essentially for labor saving robotic devices that allow companies to get the goods and services out the door with fewer workers. But now we're up to 79% operating rates.
And I think we'll push into the 80s. And in the 80s, you do see a pickup in capital spending. So I think one of the surprises this year is that capital spending for new plant and equipment will pick up. It won't be a boom, but it will be better. And this together with retail sales, I think will be one of the positives in 2014.
Now let's take a look at the earnings outlook. What you see on the left is that the S and P 500 was able to rise this year in spite of the fact that treasury yields rose And not until treasury yields get above 4% is it going to be a hurdle for the market to get over. And what you see is that multiples have been essentially at the historic level that multiples actually do their best when the 10 year treasury is yielding between 4% 6%. When the yield is below 4%, people are worried about the pace of the economy. My view is that the yield will go to 4 and the multiple can rise in that environment.
Now earnings improvements have been very, very disappointing. Last year the stock market was terrific, but earnings were only up about 4%. So it wasn't a great year for earnings or a great year for revenues, but it was a great year for the stock market and you can thank Federal Reserve Monetary Policy for a big part of that. This is an interesting matrix, which shows that if profit margins stay flat at around 9.2%, we really need about 5% revenue growth in order to hit the consensus estimate of $115 So revenue growth was only was less than that, only about 2% and expectations are for it to be about 3%. But you really need it to be 5%.
I think revenue growth can be 5% in a 3% real GDP economy because that would mean nominally the economy would be growing at about 5%. So revenue growth only has to keep pace with the nominal growth rate of the U. S. Economy and I think it will. So I think we will hit the 100 and 15 earnings target, but we're going to need 5% revenue growth in order to do it.
This shows that what people are expecting for all corporations and non financial corporations is 3% to 4% revenue growth. And this shows that earnings growth has been around 4%, but it's really been picking up here. You can see it was very disappointing over the last couple of years. But in the later part of 2013, you do see an improvement in earnings and I think that's going to carry through into the current year. This shows profit margins flattening out at above 9% and we need to hold them there.
And what you see is that there are some warning signs. I was determined to try to make this a balanced presentation and give some arguments against my position in addition to the ones for it. And what you see on the left hand side is that the companies that are giving earnings guidance are basically guiding analysts down. They think that analysts are too enthusiastic and they are, whereas I think the consensus of top down estimates is 115, the bottom up estimate is 122. And the right hand side shows that a number of companies are missing their revenue targets as well.
So we've got to keep on monitoring this to see whether my expectation of 5% revenue growth is going to hold true. And earnings growth will go from $108 in $2013,000 to 115 1,000 are up about 7% in 2014. You can see here that the multiple is not excessive. We could see a multiple as high as 20 at some point in this cycle and we're really right at the average on a trailing 12 month basis at 16.2. And a lot of people are worried about inflation, but don't worry about inflation.
Inflation is only less than 2% right now. You don't really have trouble with the market until inflation significantly exceeds 2%. The market can do well in terms of multiple expansion as long as we don't go above 4% in inflation. And I don't think that's likely to happen anytime soon. This shows something that I think is important to focus on.
During a couple of quarters in the last year, we had actually negative net income growth for the S and P 500. It's positive now, but not very positive. Net income is only growing at about 1% 1% to 2%. But share buybacks have accounted for as much as 3% of total capitalization. So that you can thank share buybacks.
We had about $500,000,000,000 in share buybacks or about 3% of the capitalization of the S and P 500 last year. You can see that on the next slide where you can see that buybacks were running at a $346,000,000,000 rate, but they will end 2013 and at close to $500,000,000,000 and that accounts for a significant portion of the earnings per share growth. Let's just talk about our fiscal dilemma which isn't as bad as it used to be. First of all, if you think that raising tax is going to do any good, forget it. We've had all kinds of tax rates from 25% up to 50%, 70% and still we only collect 15% to 20% of GDP in taxes.
When the tax rate goes above 20% of GDP, people seem to figure out a way around it. What we see here is some good news. As a combination of the sequester and increasing taxes, revenues have increased and the government has been fairly disciplined. So that we've gone from a government deficit of 10% of GDP, which is where we were in 2010, down to 4%. So we could spend some money on infrastructure, education and research and development if we could get those programs through Congress because the 4% number now is likely to go down to 2% in 2014.
So we've really made very significant improvements in the budget deficit over the last 3 years. Now let's take a look at Europe. Europe did recover as did the United States after the recession. But then it went back into a recession. I think Europe is going to have a positive growth going to have positive growth this year, not very much less than 1%, but at least it won't be in recession anymore.
You can see here Europe is still negative but I think it will turn positive sometime during 2014. Germany, this shows the European industrial production still pretty flat, but I think it will turn up and go above 100. And this shows Germany consumer confidence really being in a positive trend. And I think Germany is the bright light in the European Economic Outlook. But Europe still has a significant unemployment problem.
You can see here Europe still has a 12% unemployment rate and youth unemployment is twice that whereas the U. S. Is 7% and I think it's going down to 6%. Now let's take a look at commodities. We know that gold had a very tough year last year.
And who bought the gold that was sold? China and India were the principal buyers. They bought the gold to hold it. If there's ever a reversal in the sentiment toward gold and it's very negative right now, I think the price of gold could increase because I don't think that the Chinese and the Indians who were the major purchaser of gold in the sell off last year are going to be sellers when the market improves if it ever does. What we see here is the commodity index has suffered, But I think if you look at this, the correlation in commodities is at a low point.
If you look at previous points of the commodity cycle, when correlation is low among the various commodities, there's usually a turn coming. I think it will come. That's a very out of consensus call, particularly in agricultural commodities. That's probably my most out of consensus call for 2014 and we'll see if it takes place. Looking at China and the emerging markets.
First of all, the emerging markets have significantly underperformed but they're cheap. On the left hand side, you can see the multiple has been is very low in contrast to the developed markets. And when you look at the cumulative performance, the emerging markets have been very disappointing. Here is China's GDP at 7.5%. And I think because of the reforms that have been proposed, you're going to see it slow further.
That's another very out of consensus call. And what you see here is that China has been financing at 7.5% growth rate with heavy use of debt. I think it's going to reduce the debt, reduce the dependence on borrowing both at the federal and local level. And as a result I think that's going to have an impact on GDP. It's a risk I think the new leaders are prepared to take.
So real GDP has been in the 7s. I think there's no way you can rebalance the economy and make the consumer more important without reducing GDP from something above 7 to something in the 6 range. What you see here is something to watch. It's electricity production and it is indicative of the pace of the economy and it's trending down. Housing however is not a problem.
Many people point to that, to the empty cities and empty buildings. But so far housing has held up very well in China. This shows the principal problem China has. The infrastructure and state owned enterprise investment spending is 45% of GDP, the consumer is 35%. The new 5 year plan wants to reverse those and get the consumer back up into the 40s.
We'll see where they can do that, but there's no way they can do that without slowing the pace of the economy. We a lot of people are turned off on the emerging markets, but they're 45% of global abdominal GDP. I think they have to be a part of your portfolio. You have to be very selective. I've picked Mexico and South Korea this year, but I don't think that you should be totally out of the developing markets because I think that they're going to be an increasing proportion of the investment landscape.
Now let's look at one of the bright spots, it's been Japan. You can see here that Shinzo Abe's policies have worked. Japan has come out of its recession. It is going to have positive GDP this year in the 1% to 2% range. I think the Japanese government bond yields will improve and I think you will see some inflation.
So Shinzo Abe has been successful in doing something his predecessors couldn't do and that is get Japan out of its 20 year deflationary recession. Here you can see the yen is depreciated. It's above 100 against the dollar and I think it will go to 120 and Japanese government debt is at an all time high, but that doesn't seem to slow the economy or the stock market. The Japanese stock market was up 60% in 2013. And this shows that it's the Japanese stock market is up, but it's been in a consolidation phase and I think it will go up and make another leg up in 2014.
So now we're at the disclaimers and the question and answer period. And so I'm going to turn the session back to Joan Solitar.
Great. Thanks, Byron. Just a reminder, if you look at the lower left hand corner of your screen, you'll see a Q and A box to submit your questions. And now for our first question. So as you pointed out, we're very early in corporate profit recovery, only turning positive maybe a couple of quarters ago in dollar terms.
So as you think about that and where we're headed, multiples not high, maybe average, maybe even slightly below average. Why not be even more bullish? I look back at your chart where you show 19 95, 6, 7, 8, 9 market up more than 20% every one of those years?
Yes. Well, you know what happened after that. Look, I have a 20% year over year total return this year. I don't know anybody who's that optimistic. The consensus is around 10 and a lot of people are below that.
There are even some people who are flat for the year. I think I'm bullish enough. I think it reflects I need to get revenue improvement and earnings improvement in order to get that. I think there will be some multiple improvement. But I also have interest rates rising and the Fed tapering further.
And so I think 20 percent is a pretty ambitious forecast. A lot of I've been badgered about since the 10 surprises come out, how can you be so optimistic? And there's one fellow out there who has a negative set of surprises and he's posted mine next to his and asked various readers of the blogs to vote for 1 versus the other. So we'll see how the work how it works out, but I'll be glad to get my 20% and so will all of you.
So you mentioned Fed tapering and how can we have it both ways where we've had a market that's been at least partly if not majority fueled by Fed action moving up and then also continuing to rise as the Fed tapers?
Well, I think it's got to be an offset against the improving economy. Bernanke wouldn't have announced the taper in his last meeting, the last meeting of his term without pretty high conviction that the economy was strengthening. And I had been pretty blue about the economy, pretty negative on the economy until the Q4 when I began to see improvements in capital spending, durable goods, retail sales, housing. So I think thought that there were enough engines pumping for the economy so that we were going to have a good 2014. So we're aberrationally low in interest rates with a 3% 10 year treasury.
I think it can easily go to 4. I think the Fed can taper a lot further. Remember, it isn't tightening. It's actually reducing the bond buying program. So the Fed will still be accommodative.
It won't be as egregiously accommodative as it was in 2013, but it will still be pumping money into the system and the market will benefit from that. It just won't benefit to the same extent it did in 2013.
So shifting over to Europe, if you look at your expectations for earnings growth there, it seems to lag the U. S. By maybe 12, 18 months. So why not allocate more to Europe and get him ahead of the trend assuming that it will follow suit?
Yes, I think that's a fair point Joe, because people are more negative on Europe than they are in the US. But Europe didn't have a bad year last year. I do have a 10% position specifically in Europe in my radical asset allocation. I do think investors should be exposed to Europe, but I'm a little more confident about the U. S.
Economy than I am the European economy.
And as you think about your interest rate predictions both short and long term, it looks like we're headed for a much steeper yield curve than we've had in any recent period, which is typically pretty favorable for certain markets. So as you think about your credit allocations, where would you be investing there?
Well, I wouldn't own any U. S. Treasuries. I've gone around the world and tried to convince every sovereign wealth fund to reduce their treasury positions. I would go out the higher risk end of the yield curve.
So that's mortgages, leverage loans, mezzanine financing. If you think if you agree that the economy is going to be strong and that's what I think, the default risk is relatively low and so you can still get more than satisfactory yields from those instruments. And so therefore, I would take the risk by going out the risk curve in the fixed income market.
So I assume the expectations that you've outlined for growth in the U. S. Don't include things like immigration reform. But if that did happen, what would that do to GDP growth?
Yes, last year was a very disappointing year in terms of legislation. I think it was one of the worst years in U. S. History in terms of passing bills. President Obama had to focus on the Affordable Care Act, making sure even though it was passed making sure that it wasn't repealed, focusing on the budget deficit and the debt ceiling and he really didn't have time or the patience to try to take anything else on.
So we didn't have tax reform, we didn't have any spending on R and D or education or infrastructure or immigration. So those programs which were hoped for in 2013 never took place. If we did get immigration reform, I think it would be very favorable for the U. S. Economy.
We have aging economies in Europe, in Japan and we through immigration have an economy that's getting slightly older, but still the average age is in the 30s, whereas by the end of this decade the average age for Europe will be in the 50s and I think it will be in the 60s in Japan. So we've got to take advantage of immigration to revitalize our economy. This is a country that was built by immigrants and I think it can be enriched by immigrants today. So I'm really hopeful that we see some immigration reform during 2014.
And if we can shift over to emerging markets for a moment, you've highlighted both South Korea and Mexico as areas that you would invest. And maybe just a couple of sentences on why you're so focused on those two countries?
Well, I think it's you have good leaders in both places. In Mexico, they're going to benefit from the improvement in the United States. You have a number of reforms taking place in Mexico. I think and so Mexico, people don't realize it, but it really is a very strong manufacturing economy. It has lower wage rates than the United States, not as low as China, but lower than the United States.
So I think the economy which didn't do all that well in 2013 will benefit from the U. S. Economy and grow faster than the U. S. In 2014.
In the case of South Korea, the principal argument against it is how can you be bullish on South Korea if you have a slowdown in China. But China is still going to grow at 6%, so that's still a pretty good rate. And South Korea is a pretty vital manufacturing economy on its own exporting to other parts of Asia. So I think that what you've got to look for is that South Korea has a certain inherent vitality of its own which has benefited the country over this cycle. And I think if I'm right and the U.
S. Improves, South Korea will benefit in a reflected way from that.
We have time for one more question. So just to wrap up U. S. Markets. So we have on the positive side unemployment down, housing pricing up, markets up and yet consumer confidence is low.
So there's seemingly a disconnect there. Do we need that to turn around to have greater consumer spending in the revenue growth that you're looking for?
Look, nothing could help consumer confidence more than a decline in the unemployment rate and taking some more of those part time workers who are looking for a full time job, bringing them back into the full time workforce. That would be a big positive. Raising the minimum wage would be a positive. I don't know whether that will happen, but that would be a positive. The way to increase consumer confidence is to add some vitality to the middle 60%.
The top 20% are doing just fine. The bottom 10% are really suffering. But it's that middle 60% that are disillusioned. If you can raise the minimum wage, if you can put more of those people back to work, I think you will increase consumer confidence considerably and I hope we'll see that happen in 2014.
Great. And do you have any last thoughts or comments?
Well, 2013 wasn't a particularly good year for the 10 surprises. Nobody knows that better than I. I think 2014 will be better. And if it's better for the 10 surprises, it will be probably better for all of you who have tuned into this webinar. Thanks for listening and watching.
Well, I hope you're right. And we'd like to invite you to tune into our next Blackstone webcast on Thursday, February 6 at 11 am Eastern Time when we'll have Joe Barata, Blackstone's Global Head of Private Equity talking about his investment themes for 2014. Check the Investor tab on black stone.com and click on the Events Presentations links for more information. Thanks for