In the lobby of an upscale Tel Aviv hotel, Abby Joseph Cohen, perhaps one of the best known market strategists and economists in the US, could be mistaken for a garden-variety American tourist. She carries a little black backpack and wears sensible flat shoes and a conservative cardigan. Her curly hair gently frames her face and she keeps her voice calm, more like a teacher than a Wall Street savant.
But she imparts her knowledge with authority and clarity. In an interview with The Times of Israel last week, the conversation ranged from global trade wars to anti-immigration sentiment to US corporate debt to the impact of Brexit on the world.
Cohen was in Israel to take part in the Global Forum of the National Library of Israel to discuss migration, borders and identity with some 80 other prominent figures from around the world in the fields of literature, diplomacy, journalism, academia and economics. She is on the US board of the library.
Cohen was born to a Jewish family of Polish immigrants in Queens, New York. But she declined to talk about her personal life and preferred to focus the interview on US economics, where her primary expertise lies, she said.
There is a global backlash against immigration which can be noticed in many countries, and in the US “we now have a president who has taken on some very anti-immigrant positions,” she said.
But what is interesting about this anti-immigrant position in the US, she said, is that the US is actually “dependent upon immigration.”
“One of the reasons our economy has been stronger and grown faster than the economies in Europe and Japan — and I’m comparing us to the developed economies — is because we have faster population growth. And we have faster population growth in large part because of immigration,” she said.
Cohen, an advisory director and senior investment strategist at Goldman Sachs, where she has worked since 1990, said that in December 2018 her team released a research paper that studied the growing disparities between the various states in the US. The paper was made available to Goldman clients and employees.
The research found that large cities in the US, in which some 30 percent of the population is made up of immigrants, “are doing extremely well,” with a rise in jobs and income since 2009. This same prosperity has not been seen in the smaller towns and rural areas, where the immigrant population is under 5%, Cohen said.
So notwithstanding a national “push back against immigration,” in rural areas and smaller towns there is actually very little immigration, and immigration has “very little to do with their problems,” she said.
Immigrants are the focus of political discourse because they have become “scapegoats,” she added, and “not because of any reasonable analysis.”
A very similar pattern of anti-immigrant feeling linked to economics can be found in Europe and the UK, she said. “But in most cases the immigrants are not responsible for the problems,” she said.
Controlling immigration was one of US President Donald Trump’s main election campaign pledges, with the president urging limited entry into the US and proposing a wall along the US-Mexico border.
A 2016 report by the International Monetary Fund shows that though it’s politically controversial, migration makes a lot of sense economically. Indeed, the main findings of the report show that immigration significantly increases GDP per capita in advanced economies and that both high and lower skilled migrants can help raise labor productivity; as low-skilled migrants take on manual and routine tasks, the native-born population tends to move on to more complex work needing language skills.
Over the longer term, workers who migrate bring benefits to their new home countries by increasing income per person and living standards, the report said.
“The immigrants who have come to our country deserve every opportunity and one of the things that worries me is that if we look at the data, since Mr. Trump has become president the number of people applying for student visas has gone down and the number of people receiving specialty visas has gone down,” Cohen said. “What we don’t know is if this is because there has been a slowdown in the processing, or if there has been a decline in interest. This is of a concern. It worries me… because many of our PhD students in engineering and applied science are non-US.”
These visas create a “group of well-educated people who go back to their home countries with hopefully a positive view of the US and of Western culture,” she said.
Rather than immigration, Cohen said, the main problem affecting economies “has to do with an industrial shift.” Economies today are moving to advanced technologies and services that need higher levels of education and specialized skills.
At the end of the 19th century, when 90% of Americans worked in agriculture, “people did the wringing of the hands and said we have to protect our farmers,” Cohen said. “Now farming represents 2% of our population, and somehow our economy has grown and people have gotten wealthier…. So, it is a question not just of industrial change — industrial change will always happen. The question is how do you prepare your population for that industrial change.”
This can be done by investing in education and infrastructure, and also by welcoming not just immigrants from other countries but also migration from other parts of the US, to ensure there is an inflow of people, she said.
The ‘myth’ of the perpetual bull
As chief forecaster for Goldman Sachs until March 2008, Cohen gained her fame in Wall Street by predicting the bull market of the 1990s early in the decade, and she was named Institutional Investor’s top strategist in 1998 and 1999. Her career has been the subject of a Harvard Business School case study and a BusinessWeek cover story.
In subsequent years, however, she was criticized for being overly optimistic and her reputation as a Wall Street prophet was hurt on claims she failed to foresee the bear market of 2008, the most significant financial and economic upheaval since the Great Depression. The crisis, which began in the subprime mortgage market in the US, saw financial institutions globally writing down trillions of dollars in assets and the collapse of investment bank Lehman Brothers in September 2008. In a 2008 book by Barry Dunstan about “Investment Legends,” Cohen is dubbed the “Optimist.”
In December 2007, Cohen and her team predicted the S&P 500 index would rally to 1,675 in 2008. But that year the stock market closed at 903.25, a 37% drop and 46% below Cohen’s target, according to CNBC. In 2008 she was replaced by David Kostin as the bank’s chief forecaster for the US stock market.
In the interview with The Times of Israel, Cohen dismissed as a “myth” her reputation for being constantly optimistic about the stock market.
“In 1999, right before the technology bust, I was called the most cautious strategist on Wall Street because we were telling people that we were nervous about things. And again in 2006-2007 we were saying we were very nervous about what was happening in terms of the bond market in particular…so it is a myth that I am a perpetual bull. It is just not true and I can give you lots of other instances where I was cautious,” she said firmly.
It is also a “myth,” she said, that bankers were left unpunished for the excessive risk taking that led to the 2008 crisis, which saw massive bailouts of financial institutions and monetary and fiscal policies put in place to prevent the collapse of the global financial system. Credit Suisse’s Kareem Serageldin, an Egyptian-born trader, was sentenced to 30 months in jail for concealing hundreds of millions in losses in the bank’s mortgage-backed securities portfolio.
“Think how many banks disappeared. They were punished, their CEOs were punished,” she said. “They weren’t put into jail or beaten with a whip, but the banks disappeared, they were put out of business and reputations ruined. And, so, I think it is a myth that nobody was punished.”
Trade wars and the economic slowdown
Turning back to current events, the trade war that the US and China are waging is already contributing to a slowdown in both countries as well as in Europe, she said.
The world’s two largest economies have been disputing the added tariffs each nation has imposed on goods traded between them.
The global economy is also slowing and growth is much weaker than expected in Europe, a report by the Organization for Economic Co-operation and Development showed earlier this month.
Weaknesses stemming from China and a weaker European economy, combined with a slowdown in trade and global manufacturing “could undermine strong and sustainable medium-term growth worldwide,” the OECD said in a statement, forecasting the global economy will grow by 3.3% in 2019 and 3.4% in 2020.
“The single fastest growing sector of the US economy, for the last 10 years, has been exports,” Cohen said in the interview. “Exports have been growing faster than any other portion of our economy and we depend upon foreign trade.”
The way the trade war has been conducted, she said, “has been damaging” and the real issues, like the lack of protection of US intellectual property and China’s requirement that US firms set up joint ventures with local Chinese firms, are getting lost in the noise the Trump administration is making about the trade deficit.
With various parts of products being made around the world in so-called global supply chains, talking about trade deficit is irrelevant, she said, because a very large percentage of American imports from China are from US companies operating there.
“If we are importing iPhones from China it counts as an import even if it is a US company and the profits go to a US company,” she said. So, “the trade deficit is a silly metric that means nothing.”
The trade war with China has actually had the opposite effect on the trade deficit, which Trump has been trying to curb, she said.
“Our trade deficit has exploded during Mr. Trump’s term — it has gotten huge, huge, it has never been this large,” Cohen said. “Because American business people are so concerned about these tariffs he is talking about that they are importing everything now.”
In addition, in retaliation, China has imposed curbs on imports from the US, for example buying soybeans from Brazil instead of the US.
“Brazilian soybean exports to China have tripled, and soybean imports to China from the US have flattened, so American farmers are hurting. So, the people that Mr. Trump said that he was helping have actually been hurt. American farmers who sell to China soybeans and corn and pork and so on are all reporting that their demand is down dramatically.”
On US corporate debt and Brexit
As of November 2018, US corporations had accrued a debt of $9 trillion, which some economists fear could pose a threat to their stability should rates continue to rise and the economy weaken.
The large amounts of debt are with the “really strong corporations,” Cohen said, many of whom don’t need the money. The main concern stems not from the leverage of these corporations, but rather from that of the low-grade corporate borrowers, she said.
Large corporations are taking loans today because it is cheap, she explained, not because they need the funds. They are borrowing at cheap rates today for their future needs, she said. What is worrying, however, is that because borrowing costs are today similarly low for triple A corporations and lesser-rated corporations, the lesser rated firms are also borrowing money in large amounts, spurred by the low rates.
“Low-grade corporate borrowers now pay just a few basis points more (interest) than the really highly rated. I worry about that. I worry about the lesser corporations that are also borrowing very cheaply who may have a problem” when they have to repay their debt once interest rates are on the rise. “That to me is the concern.”
Brexit — the process of UK’s disengagement with Europe — is already having an impact globally because of the interconnectedness of the economies, Cohen said. “I think that it will be disruptive all over. More disruptive to the UK obviously than to continental Europe, but nevertheless disruptive.”
The people who voted for Brexit, she said, “were very much the people who voted for Donald Trump, people who felt that the economy was no longer working for them — the ones who were either losing jobs or weren’t being paid very well,” she said. “But the Brexit doesn’t really help them.”