Hi.
I'm Joan Solitar, Head of Multi Asset Investing and External Relations at Blackstone. Thanks for joining us today for the Blackstone webcast, The 10 Surprises of 2016, featuring Byron Wehn, Vice Chairman, Multi Asset Investing. Following Byron's formal comments, you'll be able to ask questions. At the bottom of your screen, you should see a Q and A option where you can submit your question any time during the webcast. You'll also see other options including Twitter, Wikipedia, download slides, and refer a friend.
On the last slide, you'll see a full list of disclosures. We plan to keep today's webcast to 60 minutes, including Q and A. Thanks for joining us. And with that, I'd like to turn it over to Byron.
Thanks, Joan. Well, we've got a lot to talk about today. The market is really off to a rough start. So let's have a brief review of the surprises of 2015. Just to summarize my approach to this, the definition of a surprise is an event that I believe has a better than 50% chance of taking place, where the average investor would give it no better than a 1 out of 3 chance.
I've been doing this, believe it or not, for 31 years. And usually, I get 5 or 6 of these sort of right. Last year was a below average year according to my grading system I got about 4.5 right. So it was a little below the norm. But I found that there's more information content sometimes in the ones I get wrong than the ones I get right.
Let's take a look at 2015. The first one was the Federal Reserve raises rates early. Well, that's clearly wrong. They raised rates in December and they only did that reluctantly. My thinking was that the economy was going to be growing faster than it turned out to grow.
I thought we would be at 3% growth by year end. We struggled to stay above 2%. The second one was our luck runs out on cyber invasions. That one was right. There's no question that cyber hackers, terrorists have gotten into both government systems and corporate systems.
Happily they haven't gotten in the banking system to the point where they can force the banks to shut down and stop taking deposits and allowing withdrawals. But basically cyber attacks have risen to an important part of the awareness of both corporate and government life. The third one, I thought the market would be up 15%. And as we all painfully know it was only flat for 2015 and if you really go into the anatomy of the market it was worse than that. The average stock was down, a handful of stocks really provided the performance to get the market to even.
So it was a very rough year and as you'll see in the surprises of 2016, I expect 2016 to be a rough year too. The European Central Bank eases aggressively. That did happen. Mario Draghi became concerned that the European economy was slipping back into recession and agreed to do whatever it takes and pump money into the European economy as vigorously as he possibly could. And I think it's working.
I think Europe will grow it between 1% 2% in 2016. Number 5, Japan has a tough year. It did but I still thought it would be up in yen but down in dollars it turned out to be up in both. But the Abenomics program which is designed to put Japan on a sustained growth path really didn't work as effectively as many people had hoped. On number 6, I thought China would finally admit it wasn't growing at 7% and it did.
It said it's growing at 6 or somewhere between 6 and 7 but clearly China is slowing down. Now the part of it's slowing down is the manufacturing sector. The service sector is actually improving but service jobs don't pay as much as manufacturing jobs and their exports are down, their imports of raw materials are down. So as you'll see in the surprise of 2016, I don't think they're growing anywhere near 7%, but they'll probably report someplace between 6% and 7%. The Iran deal is signed.
There was a lot of controversy at the beginning of the year. There was even controversy when it was signed, but I thought it would be signed. I thought it should be signed. I know there are a number of people on the other side of it. And now we have a further problem because of the conflict between Iran and Saudi Arabia.
I thought Brent would get down to $40 and it went below that and I thought it would rise later in the year. So I got the low part of that right but not the high part. And we'll talk more about that when I talk about the surprise of 2016. I think we're going to see the price of oil and relatively low levels for a reasonable period of time. Number 8, I thought there would be some opportunities in the high yield sector because the distressed debt was had been beaten down badly.
There were a few windows during the year where you couldn't make money but basically I don't think I got that one right. And the final one was the Republicans tried to position themselves as a party that can get something done. I think the American voting public is dissatisfied with the ineffectiveness of Congress, the ineffectiveness of the presidency in pushing legislation through. And I thought that that would Republicans would try to seize that opportunity and show that they could get legislation passed. Now that Paul Ryan has taken over as Speaker of the House, there's been some progress made.
He has gotten a budget bill through and I think he's trying to reposition the party as the can do party. But the distraction of Donald Trump, Ted Cruz, Ben Carson and others has made the extremists the focus of attention in politics right now on both sides. Bernie Sanders on the Democratic side as well. And so getting legislation passed has really disappeared from the consciousness. And now we're in the lame duck year and I don't expect much to be done but I think Obama is going to try to move forward certainly on gun control.
Now what are the key points in the outlook? They will be summarized in the 10 surprises but the first thing is I think the Fed is in a tightening mode and you shouldn't fight the Fed. But I don't think as you'll see in the surprises they're going to do as much as everybody expects. 2nd, there is a general agreement among strategists that the S and P 500 is going to be up 10% in 20 16. I've studied this for 50 years.
Strategists and analysts almost always think the market's going to be up 10% regardless of whether it's been down or up 20% in the previous year. I think that's going to be wrong. I don't think the factors are in place for the market to do that well and we're certainly off to a bad start. 3, wages are increasing and companies don't have much pricing power. So profit margins which are near an all time high have to be squeezed.
And that's obviously going to have an impact on the way investors perceive equities. So I think we're going to be in another year of disappointing earnings. The high yield market is in disarray. There's no liquidity in the market. And this is particularly true in commodity and energy issues.
So I think it's going to be hard to make money in high yield. So if you're going to do that and my radical asset allocation has money in high yield but in the very riskiest part of the high yield market because I don't think we're going to have a recession this year. The consensus estimate for world growth is 3%. I think and for the U. S.
It's 2% to 2.5%. I think the U. S. Could grow at less than 2% and I think world growth could be ratcheted down to something like 2%. So I think it's going to be a tough year for growth around the world.
And finally fear of terrorism is dampening consumer confidence. They're having people are keeping higher cash balances than usual and I think they're a little apprehensive or there's revelation of anxiety about personal spending and so I think that's going to affect the economy. You certainly see it at the corporate level in capital spending. So I think we're in for a rough year even though it's an election year in 2016. So now let's take a look at the surprises of 2016.
Well, it's election year and you have to make a judgment. I think Hillary Clinton is going to win the election. I don't think that's a surprise. The Democrats have a leg up in the electoral college. She probably needs only 50 to 75 electoral votes other than California and New York, which she's likely to get.
The real surprise is on the Republican front. I think Ted Cruz will be the candidate. I think Marco Rubio is the favorite now but the extremist Ted Cruz, Donald Trump are very much in the lead. They have twice the poll ratings that Marco Rubio has. I don't think the Republicans will nominate Trump but I think they could nominate Cruz.
One of the things I follow very closely is the momentum of the candidates and Ted Cruz has the momentum And I followed momentum carefully in 2,008 and that's why I picked Obama to be the Democratic nominee and the victor in the 2008 November election. And I think Cruz is in a similar, not as strong a position, but in a similar position. So he may surprise everybody and be the Republican candidate but I don't think he'll win. The second surprise is that the U. S.
Equity market is down. Now those who have followed my work for a period of time know I'm basically optimistic and I think I'm an optimistic person but I think the confluence of factors here indicate that the market is going to be down And I have to look out all year. I know January so far has been a very difficult beginning, but my view is the year will be down. I don't think we're going to have a bear market. I don't think we're going to have a recession but I don't think stocks are going to be up in 2016.
Number 3, the Fed raised rates in December. I think they may do one more rate in March. They said they would do 4, bring the federal funds rate to 135 in a year. I don't think they'll do that. And the reason is that they say they're data dependent.
They say they're focusing on the data and the data won't support it. The economy won't be growing fast enough for them to feel comfortable raising rates 4 times this year. That's what they said in December that they would raise rates 4 times and I think they'll do one and by the end of the year they may be rethinking that and thinking of reducing it. The 4th one is that the world economy is softer than people think and that the dollar appreciates, I mean depreciates. What we have here is a weak American economy and that it gets reflected in the currency.
Right now, the dollar being long the dollar is the most crowded trade out there. Investors believe the dollar now around 1.10 is going to go to par to even with the euro and my belief is the dollar is going to be weak against the euro. Even though the European economy won't be robust, I think the European economy relative to what people think is going to be better than expected, the US economy is going to be worse, The dollar will depreciate and get to 120 against the euro. On China, I still think they're going to avoid a hard landing but I think things are very tough in China. Almost all the figures that I look at on the manufacturing side indicates that China is going to be very slow, maybe 5% or less.
They are rebalancing the economy and that is a piece of good news. The service sector is growing but people are paid less there. Manufacturing is shrinking. Services are now a larger portion of the Chinese economy. But overall, I think the economy isn't going to grow at 7 or even 6, it's going to grow at 5.
And there are a lot of people out there who believe even 5 is an optimistic number. But that's a long way from a recession. It's a long way from a hard landing. And I think China will continue to be a relatively strong economy among the developing countries. Number 6, I think the refugee crisis is going to strain Europe.
We're already seeing the collapse of open borders. I think the European Union has been questionable as a result of Greece and some of the other southern peer countries. And my thinking is that the European Union isn't going to break up. I think the British referendum when it comes will probably argue that Britain should withdraw from the union. They're already not a part of the currency.
But I think the whole European Union will come into question. Remember when it was founded and when it went into effect in the 1990s, the hope was that it would lead to a political union. Well, they're a long way from that. They haven't really even formed a banking union. So you can't really have a monetary union without a fiscal without some fiscal harmony and they don't have that.
And I think with the strains of the refugee crisis, there's going to be much more talk about the European Union breaking up and going back to the national currencies. We'll see if that develops. Number 7, oil will languish in the 30s. The 2nd most crowded trade is that everybody thinks oil is going to go up And I believe oil is going to go up eventually, but not this year. There are heavy inventories.
Production is still continuing. Demand is diminishing and Iran is going to be able to ship oil in international markets. All of those factors are going to keep oil in the 30s, whereas the consensus is it'll move to 50 to 60 this year and 70 beyond that. I don't think that's the case. I think we're going to see oil stay in the 30s, may have blips up into the 40s but basically it's going to be consolidating at present levels.
Number 8, high end real estate is in trouble. Who are the big buyers? The big buyers are hedge fund managers in the U. S. And they're having a tough time of it.
Russian buyers, Middle East buyers, Chinese buyers and all of those places are not doing as well as they were. And we have a lot of high end condominiums in New York that are for sale. A lot of buildings are being built. A lot of houses in London are for sale at very fancy prices. And I think there's going to be a severe correction in the residential market.
I don't think this is going to be true in the commercial market, but I think high end residential in New York and London is going to suffer a setback. Number 9, the soft U. S. Economy and a soft equity market causes the 10 year treasury to trade consistently below 2.5%. The 3rd most crowded trade is everybody believes that the 10 year treasury is going to have a 3% coupon by year end.
The yields are going to go up. And I don't think the economy is strong enough to support that. I think and not only that, but I think investors are seeking liquidity. And so I think you're going to see the yield on the 10 year stay below 2.5%. And finally, burdened by heavy debt and slower global growth, world growth stays at 2% comes down to 2%, not the 3% that everybody expects.
Okay, there are the 10 surprises. As most of you know, every year I always have a few alternatives. Also RANS, these are ideas that either I didn't have a 50% or better conviction they would take place or I didn't think they were as relevant as the 10 I picked. So number 11, as a result of the security efforts that are going on around the world, we do not have a major terrorist attack in 2016. I think almost all of us expect one to take place after what happened in Paris on November 13th and I think everybody says these are too bearish, here's a bullish one.
I don't think we're going to have a major terrorist attack in Europe or the United States this year. I hope that isn't wishful thinking. I know it's against the consensus, but I think you'd be astonished to see the extensive efforts in cybersecurity and in police efforts that are going on around the world and I hope they continue to be successful. Number 12, I left this one out because I had one on Japan last year. But I think the Japanese currency will depreciate to 130 against the dollar, but the market will rally to $22,000 Number 13, I think investors are beginning to get a little impatient with the fact that companies are using financial engineering to substitute for growth, that they're using share buybacks and mergers and acquisitions because they don't see the revenue increases that would allow them to have higher earnings per share.
And so I don't think investors are going to pay as much for those earnings as they have in the past. But this is an idea that may take a while to marinate before it is accepted by investors and that's why it's an also ran. Number 14, there are going to be a lot of breakthroughs in biotechnology. I know the political candidates are criticizing drug pricing. But if you can have a pill that can substitute for a hospital's today, it's worth paying a lot for that pill.
And I think that we're on the brink of breakthroughs in heart disease, cancer, Alzheimer's, Parkinson's, diabetes and I think that's going to be some of the good news of 2016. And finally, I would love to be bullish on the emerging markets and at some point I will be but 2016 is not the year. I don't think prices are stabilizing. I think they're still soft. I think the emerging markets are in recessions and I don't think their markets are going to rally.
So this one didn't I couldn't bring myself to more than 50% conviction that this would take place. So those are the also RANs. They're worth thinking about but I don't think they're likely to take place in 2016. This is my radical asset allocation. I've made some changes in it.
Global Large Cap Model Nationals have gone from 10 to 5. Other U. S. Still at 10. European at 10.
Emerging markets down from 10 to 5 Japanese equities staying at 5 hedge funds at 15 private equity at 10, real estate at 10. I think alternatives are going to provide good returns. I've eliminated my gold position. I think gold is going to work at some point, but I think we've got some space between now and when it does. I still would have 5% directly in natural resources and I still would have 20% in very high yield securities.
These are leveraged loans, mortgages and the riskiest end of the high yield market, not conventional high yield bonds. And I have 5% cash on the sidelines to take advantage of opportunities as they develop in the difficult market circumstances that I foresee for this coming year. It's not advancing. Here we go. Well, went too far.
Let's go back. Try it. No, no. Okay. Okay.
So here is the crowd sentiment poll. The best time to buy stocks is when investors are bearish. They're sort of neutral now, but the events of the last few days I think will make them bear move us into bearish territory. And I think we'll spend a reasonable amount of time in bearish territory. But I wouldn't jump yet.
I don't think the market is egregiously oversold. I think we have to wait a while for that. This shows what institutions have done since 2002. In 2002 endowments were 50% in equities. They're now 36 percent and they were 24% in alternatives.
They're now 51%. So we'll see if that works out. But there's been a heavy shift to alternatives and that's probably good for Blackstone. We'll see if it works out. But I think it's a pretty dramatic change and I think we all should be aware of it.
I think investors are too pessimistic about equities. They're going to be served well this year, but there's going to be an opportunity that's going to develop from that pessimism. This shows that pension funds are too optimistic about returns. The median assumption is close to 8% on investment returns from a diversified portfolio for pensions. They haven't gotten that.
The 1 year return is much lower than that around 5%. So my view is that pension funds and endowments are going to have to trim their sites and be more modest in their objectives and they're going to have to construct their portfolios for lower expectations. This one is the one to focus on the Fed increase its balance sheet from 1,000,000,000,000 to 4,500,000,000,000 since 2,008 and they're not paying any of those bonds. They're not selling any of those bonds. The European Central Bank has started to ease aggressively.
And my view is the Fed is still accommodate because it isn't selling any of its bond, it isn't trying to trim its balance sheet but the European Central Bank is more aggressive. The point is that the stock markets around the world and the economies around the world have been heavily dependent on monetary stimulus for growth. They haven't had growth from natural buying by consumers and corporations. And so this is artificially inflated bull market over the last 6 years and this year I don't think the earnings are going to be there to support it. And that's why I have a negative stance.
This shows that it's best to be in equities when the Fed is easing and when the Fed is not accommodative, the market usually has a difficult time and the Fed has moved to a more restrictive monetary policy. This one shows this chart shows that what we've really had in this cycle is a doubling of profit margins from 4.7% to 9.2%. So this has been a period where corporations have benefited at the expense of workers and so profit margins are at an all time high and I'm not convinced that they can stay at these levels. I think they're going to be squeezed. If you're trying to forecast the price of oil, the best thing to do is look at what world growth is.
There's a high correlation between world growth, which has come down from 3.6% down to 3% and the price of oil has come down with it. So overall demand is the principal factor determining the price of oil. Demand for energy has come down and that's why the price has come down. There's been more supply in addition to that. And that's certainly been a factor.
But it's really the slowdown in world growth that has been the principal cause of the decline in the price of oil. Looking at the U. S. Economy, we're not growing at the 3% to 4% rate. We have been growing at, we've been growing at 2% to 3% and I think this year is going to be closer to 2.
The Economic Cycle Research Institute, which has been a good indicator serve me well as predicted recessions is not predicting a recession this time but is does have a reading consistent with 2% growth. And you see it in terms of real GDP, nominal GDP is projected to be around 3%, real GDP a little over 2%. So we're going to be in a slow growth environment. And you can see that the soft part of the economy here and in China is manufacturing. Manufacturing is below 50% on the ISM reading and services are being pretty close to 60%.
So the economy is being held up by service sector strength, not manufacturing. And that'll keep us out of recession, but it won't allow us to have robust growth. Here's revenues for 2015. You can see revenues, all revenues were barely up. Revenues, if you added if you took energy out, would have been up 3%, still not a very promising figure.
So the companies aren't able to have the to satisfy world demand. World demand has been diminished. So revenues are very modest and that's been the problem for earnings and I expect that to spill over to 2016. This shows that earnings were basically flat in 2015. And if you take energy out, they were only up 6.5%, not the 10% that I think most people were hoping for.
And I think that's going to continue into 2016 as well. This shows that the average person has not has recovered from the low point of this business cycle. But in terms of real median family income, the average investor is only where they were in 2 1,007. They haven't improved their standard of living. People in the top 10% have improved their standard of living because they own their own homes and they have holdings in the stock market and real estate prices have gone up and stock prices have gone up.
But if you don't if you rent or if you don't own an expensive home or if you don't have stock holdings behind your retirement program you really haven't benefited. And I think this is the inequality issue, the fact that the middle class doesn't feel they're making any gains is going to be a very important election issue. I think the top 20% of the population since 1980 have improved their standard of living. The middle 60 have held their own and the bottom 20 have suffered. And this is going to be a very important social and political issue going forward, not just this year but going forward.
Okay, the consumer is saving more because of his or her anxiety about the outlook and I expect that to continue. The unemployment, we're all celebrating the fact that we've gotten unemployment from 10% down to 5%. But if you adjust the unemployment for the decline in the participation rate, it's a different story. We all know the participation rate has gone from 66% in the before the recession down to 62%. Now some of those are legitimate retirees from the baby boom era, but some of them are people who have been so frustrated looking for a job that they've given up on it.
So if you make an adjustment, the unemployment rate is really pretty close to 7, not 5. It's not the way the government looks at it, not the way the politicians look at it, certainly not the Democrats But in fact, our unemployment rate is higher than the reported number. On consumer spending, it too hasn't really budged by very much since the recession. It recovered, but the consumer is not going to the malls with any real enthusiasm. They're buying necessities and perhaps a few luxuries but basically the consumer is holding back.
In terms of productivity, that's another item on the disappointing side. We used to have productivity pretty consistently above 3%. Now with unit labor costs going up around 2% 2.5 percent productivity has come down to below 1%. Now our standard of living is really dependent on growth. Over the past 50 years, we've had a growth of 3.8%, 1.9% from population growth, 1.9% from productivity growth.
Well, we're not having the population growth of close to 3% 2% and we're not having the productivity growth. And so therefore, we can expect stagnant standards of living going forward. And I don't think the general public is prepared for that. This shows productivity another way. You can see here in the 1950s 1970s, we had productivity at 4.2%.
Then it came down to 3.1%, then came back up to 3.9%. Percent but now in the period from 2,005 to 2015 it's only been 1.8%. Productivity is accounted for 1.3 but hours worked have only accounted for 0.5. So the drivers of standard of living have really moved into a disappointing pattern and I think that's something watch productivity. It's something that is going to give you a clue to how well profitability is going to develop because you get you improve earnings by getting better revenues and they've been disappointing in getting more productivity.
We're back up into a layoff mode where companies are continuing to try to provide or buy capital equipment that allows them to get the goods and services out the door with fewer workers and look at this, this one is worth spending a minute on because what you have here is that the profitability per employee has been increasing and capital expenditures have gone down. So companies since they don't have any need because of reduced demand, they don't have any need for more capacity. Capacity is at 77%. They don't need to build new plants. So they buy equipment that gets the goods and services out the door with fewer workers and therefore they have higher productivity or higher profitability per worker.
This is the real story of this cycle and it's the real problem with unemployment. Housing, there are 2 parts of the economy that are favorable. Housing and the consumer, have already talked about how the consumer isn't as favorable as we like it. Housing is favorable. We're over a 1,000,000 starts and the people in the 25 to 34 age group are finding jobs and they're willing to get married, form families, move into their own home.
So I think housing is going to continue to be a positive for the U. S. Economy. I think the consumer will do okay but there won't be a consumer spending boom. Our average capital stock is old enough to vote.
It's 22 years old. We've never had a capital stock. This is private sector. This isn't roads, bridges and tunnels. This is our private sector capital equipment is older than it ever has been.
So we not only need infrastructure spending at the civic level, we need it at the corporate level. This shows that the rig count is down and so at some future point with the depletion of wells and the increase of demand, we're going to have a supply demand constraint and the price of oil is going to go up but that's not going to happen in 2016. This shows that inventories are pretty high too and that's going to weigh on oil prices. This shows that corporate profit margins are pretty near their all time high, unit labor costs have been relatively flat but now unit labor costs are rising. So that the employee portion of GDP is going to be increasing and that's shown here corporate profits as a percentage of GDP are pretty near an all time high Labor share of GDP is pretty near an all time low.
We're a long way from convergence here, but I think labor share of GDP is going to be increasing and corporate profit margins are going to be coming down. Taking a look at the market, I think analysts are too optimistic about earnings. You can look on the left and you see they don't expect much in terms of revenue growth, but they do expect that earnings are going to increase faster than revenues. And that means profit margin improvements, and I think that's unlikely. So be very suspicious of earnings estimates for the companies you like.
You can see here that most of the S and P 500 is expecting to have expanding profit margins just a few at the bottom are having contracting profit margins, materials, healthcare, telecom and energy. My view is that profit margins are going to be under strain pretty much across the board and energy is going to be a big part of it. Energy earnings are down 60%. In terms of multiples, I had expected the multiple to get up to 20, but now I think we're going to stay at the median, pretty close to the median, which is 15 to 16 times. Looking at inflation, you would think you might get up at this inflation level to maybe as much as 18 times.
But I think the fact that earnings aren't growing is going to put a lid on the multiple expansion. The stocks are not egregiously expensive as they were in 2000. But here are the leaders and they've moved up now to multiples that are worth some scrutiny. Only Apple is really at a bargain multiple. The others are at pretty high multiples now.
Exxon is suffering because of the price of oil and Amazon is suffering because it's trying to get into every business imaginable. But my view is there's going to be multiple contraction and earnings disappointment and that's why I think the market is going to be down this year. On the other hand, stocks have an earnings yield of 5%, whereas the 10 year treasury is yielding 230 and on that basis, the earnings yield justifies holdings in equities. I just don't think equities are going to be strong performers this year. And this shows that buybacks are up to or exceeding the pre recession levels And I think that's where the earnings have come from in this cycle, the expansion of profit margins and financial engineering.
I don't think profit margins are going to continue to expand. I think they're going to contract. I think financial engineering is going to continue to be pursued, but I think investors are going to take a tougher look at it. This shows that mergers and acquisitions are still going on at a pretty hefty pace because companies are trying to have strategic acquisitions because they don't have the revenue improvement. In terms of our fiscal dilemma, just a point on the election, the Democrats seem to want somebody with Washington experience.
The Republicans want an outsider and that explains a lot why Hillary is in the lead and why Donald Trump and Ted Cruz are in the lead. The point of this chart is only to show you that while the consumer is still pretty close to 70% of the economy, health care and other entitlements are a big part of it. The consumer discretionary part, the part that they can spend at the mall has really declined since 1960 and they're spending more money on healthcare and other programs than they were 50 years ago. This shows that in terms of Social Security, I don't think retirees have to worry now but the number of people being employed versus the number of people retiring is continuing to decline and eventually that will create a crisis. This shows income tax as a share of taxes paid and the top 1% are paying almost 40% of all income taxes.
And the bottom 50 are paying only 3%. So they don't have much skin in the game. They want more benefits. And everybody criticizes the top 1% but they're the top 1% even at today's tax rate are already paying close to 40% of all federal income taxes. Just take a look at the European economy, it's projected to grow between 1% 2%.
So Europe is doing pretty well. Almost all the countries in Europe are having a purchasing manager index in pretty positive territory. So the economic health of Europe is probably better than most of you perceive. In terms of the emerging markets, China is drawing down its reserves in order to fund the growth of the economy. They have substantial reserves and they're willing to use them to stimulate the economy.
You can see here on the left that services are now more important than manufacturing in the Chinese economy. And on the right, that's being reflected in service sector growth versus manufacturing growth. So I think China is slowing, but I still think it's going to grow faster than almost than any developed economy. And the residential real estate market is still reasonably healthy. Everybody talks about these gold cities but they have people starting to move into them and property prices have held up.
The one thing to focus on is how important China is to commodities. And if you're an emerging market that produces commodities and you're counting on China being a customer and if China's manufacturing is declining, you're in trouble. This shows that China consumes generally between a third and a half of all industrial economies. And the fact that China's growth is slowing down is one of the reasons the emerging markets are suffering recessions. But there are emerging markets that are doing well.
India is doing well. Indonesia is doing well. So there are pockets of opportunity out there. Just talking about Japan. I like Japan.
I continue to have Japan in the portfolio. There are a number of companies that are showing earnings improvements in Japan and the price earnings ratio of Japan is below that of Europe and the United States. So I think global portfolio should have some representation in Japan. So that concludes the formal comments I wanted to make this morning. More of you are listening or watching this webinar than ever have before.
I really appreciate that. But now I'd like to turn it over to Joan to see if any of you have any questions that I can tackle.
Great. Thanks, Byron. Definitely the most bearish we've heard in a while. So just as a reminder, if you have additional hot topic, for everyone. So you a hot topic for everyone.
So you rightly assumed that prices would drop. And when I looked at your chart showing the correlation with growth, it kind of stops at 3%. But one of your surprises is that global growth could actually drop further into the 2. So does that imply that we could see oil in the 20s? Or is there some base?
And then a follow on to that, what pushes us back over 50?
Okay. Great question. I don't think it's going to go much below 30. Demand in the emerging markets, even though their recessions is continuing to increase, their companies are cutting back, Saudi Arabia isn't but some companies are cutting back production. Wells are depleting.
So how does so I think the price will stay in the 30s. But Goldman Sachs has an estimate in the 20s, so it's certainly not out of the realm of possibility. The important point on that surprise is prices are going to stay low rather than go up. And the consensus view is that prices for oil are going to rise even this year. Now why are they going to rise in the future?
Because nobody's looking for it now. The rig count is down by 50%, and capital expenditures in the energy industry are down generally by 50%. So why will the price go up? It will go up because nobody's finding it and the wells, the 95,000,000 barrels a day that are being produced are depleting at about 5,000,000 barrels a day. And the demand is increasing at 3000000 to 5000000 barrels a day.
And pretty soon you get to a collision course on that where the depletion and the increase in demand are such that the price is squeezed and starts to go up. And I think that's 3 years out. So I do think it's reasonable to expect a price of oil at $70 3 years out, but not this year. I don't think you're going to see much price movement this year.
And moving to U. S. Equity Markets, in the past you've talked a lot about the strategy, I don't know if it's a strategy, but corporate strategy behind share buyback and that been a big part of fueling earnings per share. But you mentioned this year, you're expecting slowdown, which is what you think in part will contribute to weaker markets. Are we not going to see more buybacks?
No. You're a CEO. Your compensation is partly tied to the stock price. You want to do everything possible to get that stock price up. You also have options that you want to exercise.
So you want a good stock price. So what but you don't have the revenue growth. So and margins are shrinking. So here you sit in your office with shrinking margins, disappointing revenue growth, you got to do something. So what do you do?
You have 2 alternatives. Well, 1 3 alternatives. You can increase the dividend. That helps. You can buy a competitor and fire some of the salesmen and some of the administrative people, and that will boost the earnings per share of the combined entity.
Or you can buy your own shares back. You can even borrow money at a lower rate to do it. And that's what they're doing. But is that contributing to long term growth of the company? I don't think so.
Now up till now, investors have applauded that kind of behavior. I think investors are beginning to think that through more deeply than they have in the past. But I may be the only person in Western civilization that has that thought. And that's why I made it an all solar in.
Okay. So if you tie together where you think interest rates are going, which is you don't necessarily think the Fed's going to hike again? And also thinking about your call on the dollar, which again is against consensus. How does that then flow through your global economic scenario? So you have a somewhat weaker dollar and interest rates stay low.
Does that change any of your assumptions?
No. I think the weaker dollar could help the U. S. Economy. But I try to make these internally consistent.
And so my feeling is that the weak economy, the fact that margins are that earnings are going to be disappointing. And the fact that people are going to want to have more liquidity and they're going to look to where they can put it. Some of that money will go into dollar assets, but my view is that the dollar can depreciate 9%. The view I have is contrary to the consensus. And I think that some people will unwind the most popular trade of all, which is the dollar is going to par against the euro.
And I think that that isn't going to work out. And so I think the dollar is going to weaken. Now whether it gets to 120 or not, I don't know. But I don't think it's going to get to even with the euro.
And as you mentioned and showed really interesting chart about the shifting allocations of endowments, particularly coming down on equities and moving up on alternatives. But as we take it beyond endowments, thinking about pension funds individuals, there's been a lot of capital return because realizations have been so high. It's very hard to find returns in the traditional asset classes. And so, it feels like there's even more pressure to put greater percentages into alternatives. And you don't have a very positive outlook on equities yourself.
So how do you see that positive outlook on equities yourself. So how do you see that playing through?
Look, I mean, it isn't that I'm talking my own book here because of the businesses Blackstone is in. But I think alternatives, we don't have to swing at anything but the fat pitches. So we don't have to have a diversified portfolio. We have to have an opportunistic portfolio. So I think the returns in private equity and real estate can stay reasonably strong.
But and pretty and if the market is down, even a 2.5% yield on 10 year treasuries will be attractive. And so maybe the public, which has been shifting money from equities into bonds, isn't as dumb as everybody thought it was. So I think there'll be some buying of bonds because 2.5 is better than a negative number and there will be more buying of alternatives. But I think if I'm right and the market is down, there is going to be an opportunity in equities brewing here too. And I think individuals should be alert to it.
And that's why I have 5% cash in the asset allocation.
And we have time for one more question. So maybe a regional question, which is given your outlook with China slowing, Europe slow but not doing too badly, maybe better than people think, U. S. Slowing and major issues in Brazil and other countries. How do you think more defensive than I have been
in the past. I would be more defensive than I have been in the past. I have people say I've always been bullish. I haven't always been bullish. I was at the end of the millennium in 1999, 2000, I was pretty bearish.
But I wasn't but right now, I'm cautious. And so I think now is a good time to have relatively high cash reserves and I put that to work personally. So that's one thing. But I wouldn't be out of the market entirely. I think there are going to be opportunities.
I think if the market sells off, I think biotechnology is going to provide an opportunity, as I indicated in one of the also brands. And some stocks are going to get down to irresistible prices. So be looking for opportunity. I don't think the equity market is dead. I just think it's going to suffer a be a period of opportunity for investors.
Great. Thank you, Barn. Any closing remarks?
No. Be careful this year, and I look forward to giving you an update in April when we'll have the next webinar. Thanks very much for watching and tuning in.
Yes, great. Thanks and please join us. That's the next webinar will be on Thursday,