2019q4 the timing of the next recession vf · 2019-10-10 · full history: 12/1/1995–9/24/2019...

The Timing of the Next Recession

4th Quarter 2019

Joseph ZidleManaging Director and Chief Investment Strategist

Byron R. WienVice Chairman, Private Wealth Solutions

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For Discussion Purposes OnlyBlackstone Investment Strategy

Introduction

Intellectual Diversity Is a Core Value

Here at Blackstone, diversity of thought is prized as an indispensable strength. Views that are unpopular or otherwise out of consensus are welcomed, not discouraged. The rigorous exchange of ideas shapes every decision at Blackstone, and it’s no different for us as the firm’s strategists. We constantly discuss and challenge one another’s interpretation of the world; we are stronger for it as thinkers, and the firm and our clients benefit from the continuous refinement of our views.

This quarter, we are going to try something different by giving you a look behind the scenes. We will highlight the elements of the macroeconomic outlook in which we have differing opinions, especially on the timing of the next recession, and will lay out arguments for each side. We hope it stretches your thinking, and that you’ll come away enriched from the discussion. Let the debate begin.

Joseph Zidle, Chief Investment StrategistByron R. Wien, Vice Chairman, Private Wealth Solutions

Topics We Will Discuss

Timing of next recession Yield curve inversion Inflation Interest rates Equity returns over the next decade Top questions from our clients, including on Brexit and the 2020 electionNote: As detailed in the “Disclaimers” section, the above reflects the personal views of Joseph Zidle, Managing Director and Byron Wien, Vice Chairman in the Private Wealth Solutions Group, and does not necessarily reflect the view of Blackstone itself.

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Table of Contents

Ten Surprises and “Radical” Asset Allocation 3I.

US Growth Rolled Over 8II.

Inflation and Implications for Fed Actions 20III.

Global Economic Outlook is Dimming 28IV.

Trade Remains the Biggest Threat 36V.

Bubble in the Bond Markets 41VI.

Long‐Term Trends to Consider 45VII.

Byron’s Life’s Lessons 53VIII.

I. Ten Surprises and “Radical” Asset Allocation

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The Ten Surprises of 2019

1. The weakening world economy encourages the Federal Reserve to stop raising the federal funds rate during the year. Inflation remains subdued and the 10‐year Treasury yield stays below 3.5%. The yield curve remains positive.

2. Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15% for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest rate environment.

3. Traditional drivers of GDP growth, capital spending and housing, make only modest gains in 2019. The expansion continues, however, because of consumer and government spending. A recession before 2021 seems unlikely.

4. The better tone in the financial markets discourages precious metal investors. Gold drops to $1,000 as the equity markets in the United States and elsewhere improve.

5. The profit outlook for emerging markets brightens and investor interest intensifies because the price earnings ratio is attractive compared to developed markets and historical levels. Continuous expansion of the middle class in the emerging markets provides the consumer buying thrust for earnings growth. China leads and the Shanghai composite rises 25%. The Brazil equity market also comes to life under the country’s new conservative leadership.

These surprises were announced Thursday, January 3, 2019. The definition of a surprise is an event that the average investment professional would assign a one out of three chance of taking place, but which I believe is probable, having a better than 50% chance of happening

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The Ten Surprises of 2019 (Cont’d)

6. March 29 comes and goes and there is no Brexit deal. Parliament fails to approve one and Theresa May, arguing that a change in leadership won’t help the situation, remains in office. A second referendum is held and the U.K. votes to remain.

7. The dollar stabilizes at year‐end 2018 levels and stays there throughout the year. Because of concern about the economy, the Federal Reserve stops shrinking its balance sheet, which is interpreted negatively by currency traders. The flow of foreign capital into United States assets slows because of a softer monetary policy and a lack of need for new capital for business expansion.

8. The Mueller investigation results in indictments against members of the Trump Organization closest to the president but the evidence doesn’t support any direct action against Trump himself. Nevertheless, an exodus of Trump’s most trusted advisors results in a crisis in confidence that the administration has the people and the process to accomplish important goals.

9. Congress, however, with a Democratic majority, gets more done than expected, particularly on trade policy. Progress is made in preserving important parts of the Affordable Care Act and immigration policy. A federal infrastructure program to be implemented in 2020 is announced.

10. Growth stocks continue to provide leadership in the U.S. equity market. Technology and biotech do well as a result of continued strong earnings. Value stocks other than energy‐related businesses disappoint because of the slowing economy.

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“Radical” Asset Allocation

Decrease US allocation by 5%, increase cash allocation by 5%

Note: As detailed in the “Disclaimers” section, the above reflects the personal views of Joseph Zidle, Managing Director and Byron Wien, Vice Chairman in the Private Wealth Solutions Group, and does not necessarily reflect the view of Blackstone itself.

Asset Class Allocation Note

Global Large Cap Multinationals 5% Fair value in terms of yield and multiple

Other US Long Only 10% Growing downside risk

European Long Only 5% Slowing growth

Emerging Market Equities 10% Relative growth attractive, dollar stabilizes

Japanese Equities 5% Better opportunities elsewhere

Hedge Funds (all strategies) 10% Selected strategies attractive

Private Equity 10% Competition intense for deals

Real Estate 10% Still finding opportunities

Gold 0% No change

Natural Resources and Agricultural Commodities 5% World standard of living rising

Non‐conventional High Yield Fixed Income (Mezzanine, Leveraged Loans, Emerging Market Debt) 15% Still some value in selective categories, willing to

take credit risk over duration risk

Cash 15% Increasing cash for tactical opportunities

Total 100%

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75.7

51.9

68.1

43.8

54.8

73.5

46.6 49.7

71.9

42.5

70.5

49.9

69.5

47.6

72.2

38.0

58.1

37.1 32.5

30.9

62.2

46.8

69.8

51.3

70.7

40.5

73.0

50.3

63.2

38.4

70.7

47.2

68.3

48.2

71.6

55.2

73.9

53.3

73.3

45.8

66.6

42.8

69.9

52.7

78.9

43.9

71.1

53.453.5

59.4

30

40

50

60

70

80

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

S&P 500 Composite Index

Source: Ned Davis Research, as of 9/24/19.

NDR Crowd Sentiment Poll (7/31/2002 – 9/24/2019)

NDR Crowd Sentiment Poll

Extremes generated when sentiment reading:Rises above 61.5% = Extreme OptimismDeclines below 55.5% = Extreme Pessimism

Average value of indicator at:Optimistic extremes (down arrows) = 68.6Pessimistic extremes (up arrows) = 46.9Average spread between extremes = 21.5

Arrows represent extremes in optimism and pessimism. They do not represent buy and sell signals and can only be known for certain (and added to the chart) in hindsight

Sentiment must reverse by 10 percentage points to signal an extreme in addition to the above extreme levels reached

Extreme Optimism (Bearish)

Extreme Pessimism (Bullish)

9/24/19 = 63.4

S&P 500 Index PerformanceFull History: 12/1/1995–9/24/2019

NDR Crowd Sentiment Poll is: % Gain/Annum % of TimeAbove 66.0 ‐3.38 25.5157.0 – 66.0 From Above 1.27 18.2657.0 – 66.0 From Below 20.51 19.20Below 57.0 10.89 36.57Buy/Hold = 6.88% Gain/Annum

II. US Growth Rolled Over

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Recession Checklist Monitor

Primary and secondary recession indicators are mixed

Source: Blackstone Investment Strategy and Strategas Research Partners, as of 9/30/19. (1) Federal Reserve, as of 8/31/19. Average hourly earnings for production and nonsupervisory employees. (2) Conference Board US Leading Index, as of 8/31/19. (3) NDR Crowd Sentiment Poll, as of 9/24/19. (4) Conference Board, as of 8/31/19. (5) Bureau of Labor Statistics, based on four‐week moving average of initial claims, seasonally adjusted. Represents the period 1/1/67 through 9/30/19. (6) I/B/E/S data from Refinitiv, based on estimates for the S&P 500, as of 9/10/19.

Indicator NoteTech

BubbleHousing Bubble Current

Pri

mar

y In

dic

ator

s(S

ign

als)

Average Hourly Earnings Growth

Wage growth of +4% y/o/y creates inflation concern Currently 3.5% growth and growing slowly(1)

Leading Economic Indicators (LEIs)

Negative LEI growth precedes economic contraction LEIs rolled over; growth remains positive but is declining(2)

Yield Curve: 10Y/2Y Spread

10Y/2Y spread inverted on closing basis on August 26th Inversion of 10Y/2Y precedes recession by avg. of 20 months Other parts of the curve, including 10Y/3M spread, have been inverted

by significant amount and for significant period of time

Indicator NoteTech

BubbleHousing Bubble Current

Sec

ond

ary

Ind

icat

ors

(Nec

essa

ryC

ond

itio

ns)

Investor Sentiment

Euphoric sentiment leads to speculative buying Reflected by wild price swings or extreme investor bullishness Investors are currently skewed towards optimism, but not euphoric(3)

Consumer Confidence

The Conference Board Consumer Confidence Expectations Index less the Present Situations Index reaches a cyclical trough before recessions

Indicates consumers are less confident about future growth prospects Indicator appears to have hit cyclical trough in early 2019(4)

Unemployment There has never been a recession with jobless claims falling Claims trough on average 15 months before recession(5)

On average, claims rise by 66,000 by start of recession

Corporate Earnings

Never a recession with corporate profits rising Corporate profits have been flat for two quarters, at risk of contraction(6)

Earnings recessions (negative for at least 2 consecutive quarters) coincide with economic recessions 57% of the time

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(5%)

0%

5%

10% Real GDP vs. (Productivity + Labor Force) Real GDP6/30/2019 = 2.3%

Average = 3.1% (—)

Productivity + Labor Force

6/30/2019 = 2.3% (‐ ‐)

Source: Ned Davis Research, Bureau of Labor Statistics and Blackstone Investment Strategy, as of 6/30/19. All percentages are year‐over‐year growth rates.

GDP Growth Is the Sum of Growth in Productivity and Labor Force

0%

2%

4%U.S. Labor Force Growth(5‐Year Rolling Average) 6/30/2019 = 0.9% (—)

Average = 1.5% (‐ ‐)

(10%)(5%)0%5%10%

1957 1964 1972 1979 1986 1993 2001 2008 2015

GDP ‒ (Productivity + Labor Force)6/30/2019 = 0.0% (—)Average = ‐0.6% (‐ ‐)

GDP Growing Faster than Potential

GDP Growing Slower than Potential

0%

1%

2%

3%

4% Nonfarm Productivity Growth(5‐Year Rolling Average) 6/30/2019 = 1.1% (—)

Average = 2.1% (‐ ‐)

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US Potential Growth Is 2%

Growth slowing to potential, as effects of the 2017 tax reform wear off

Source: CBO and Federal Reserve, as of 6/30/19. Data after this date represent estimates. Real potential GDP is the CBO’s estimate of the output the economy would produce with a high rate of use of its capital and labor resources. Real potential GDP of 2% is the average of CBO’s estimates from 2002‐2022.

0%

1%

2%

3%

4%

2010 2012 2014 2016 2018 2020 2022

US Actual and Potential GDP Growth(YoY % Change)

Potential Real GDP Growth Actual Real GDP Growth

President Trump Takes Office

2017 Tax Reform

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Leading Indicators Point to Further Slowing

US leading economic indicators continue to decline

Source: Bureau of Economic Analysis, Conference Board and Bloomberg. Leading economic indicator data are monthly as of 8/31/19 (lead by 12 months); GDP data are quarterly as of 6/30/19.

0%

1%

2%

3%

4%

0%

2%

4%

6%

8%

2012 2013 2014 2015 2016 2017 2018 2019 2020

YoY % ChangeYoY % Change

US Leading Economic Indicators (LHS) andReal GDP Growth (RHS)

US Leading Economic Indicators, 12 Month Lead (LHS) US Real GDP Growth (RHS)

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Most Reliable Recession Signal Is Flashing

10Y/2Y spread inverted before each of the past five recessions

Source: Federal Reserve, as of 9/30/19.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

‐3%

‐2%

‐1%

0%

1%

2%

3%

1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

10‐Year to 2‐Year Treasury Yield Spread

Recession Shading 10Y/2Y Spread

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0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0%

5%

10%

15%

20%Last Five Inversions

Fed Funds Rate 10 Year Yield

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2017 2018 2019

Most Recent Inversion

But the Way It Inverted Is “Different This Time”

Most recent inversion caused by long end falling, not short end rising

Source: Federal Reserve, as of 8/31/19.

Fed stopped hiking before inversion; long end fell below

short end

Fed hikes rates and does not stop until after short end rises above the

long end

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Consumers Comprise 70% of the US Economy

Consumer income and spending continue to grow, as debt burden remains low

Source: Federal Reserve.(1) As of 8/31/19. (2) As of 6/30/19.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

2007 2009 2011 2013 2015 2017 2019

Real Consumer Income and Expenditures(1)

Real After‐Tax Personal Income (YoY % Change)

Real Consumers' Expenditures (YoY % Change)

0

0.

0.

0.

0.

0.

0.

0.

0.

0.

1

9.5%

10.5%

11.5%

12.5%

13.5%

Household Debt Payments as % of Disposable Personal Income(2)

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Wage Growth Benefitting Low‐Income Workers

Lowest percentile of earners have had 8.2% increase in wages since 2015

Source: Bureau of Labor Statistics and Deutsche Bank Global Research, as of 3/31/19. Based on annual data set. Represents all civilian workers.

‐2%

0%

2%

4%

6%

8%

10%

10th Percentile Median 90th Percentile

Total Change in Real Earnings by Income Group(2015–2019)(1)

Wages Benefits

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But Cracks Starting to Show

Growth in hours worked, payrolls, and job openings are all trending down

Source: Bureau of Labor Statistics. Hours worked as of 6/30/19, job openings as of 7/31/19, payrolls as of 8/31/19.

1.3%

1.7%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2011 2013 2015 2017 2019

Private Nonfarm Hours and Payrolls(YoY % Change)

Hours Worked (Private Nonfarm)Payrolls (Private Nonfarm)

‐3.1%

‐10%

0%

10%

20%

30%

40%

2011 2013 2015 2017 2019

Job Openings, Total Private(YoY % Change)

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S&P 500 Earnings Expectations

Narrowly avoided an earnings recession in 2019, poised to rebound in 2020

Source: I/B/E/S data from Refinitiv and Blackstone Investment Strategy, as of 9/30/19. (1) All data for 3Q’19 and after are forecasts.

‐75%

0%

75%

150%

225%

‐15%

0%

15%

30%

45%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

% Companies Missing Earnings Growth

Quarterly Historical S&P 500 Data(1995–2020F)

Percent of Companies Missing Estimates (LHS) YoY Earnings Growth Rate (RHS)

Projected(1)

CY20191.8%

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1‐YearEPS($)

10 Year Treasury Yield1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00%

152 7,340 5,409 4,282 3,544 3,023 2,635 2,336 2,097 1,903 1,742 1,606 1,489 1,389

154 7,437 5,480 4,338 3,590 3,062 2,670 2,366 2,125 1,928 1,765 1,627 1,509 1,407

156 7,534 5,551 4,395 3,637 3,102 2,704 2,397 2,152 1,953 1,788 1,648 1,529 1,425

158 7,630 5,622 4,451 3,684 3,142 2,739 2,428 2,180 1,978 1,811 1,669 1,548 1,444

160 7,727 5,693 4,507 3,730 3,182 2,774 2,459 2,208 2,003 1,833 1,690 1,568 1,462

162 7,823 5,765 4,564 3,777 3,221 2,808 2,489 2,235 2,028 1,856 1,711 1,587 1,480

164 7,920 5,836 4,620 3,823 3,261 2,843 2,520 2,263 2,053 1,879 1,732 1,607 1,498

166 8,017 5,907 4,676 3,870 3,301 2,878 2,551 2,290 2,078 1,902 1,754 1,627 1,517

168 8,113 5,978 4,733 3,917 3,341 2,912 2,581 2,318 2,103 1,925 1,775 1,646 1,535

170 8,210 6,049 4,789 3,963 3,380 2,947 2,612 2,346 2,128 1,948 1,796 1,666 1,553

172 8,306 6,120 4,845 4,010 3,420 2,982 2,643 2,373 2,153 1,971 1,817 1,685 1,571

174 8,403 6,192 4,902 4,057 3,460 3,016 2,674 2,401 2,179 1,994 1,838 1,705 1,590

176 8,499 6,263 4,958 4,103 3,500 3,051 2,704 2,428 2,204 2,017 1,859 1,725 1,608

178 8,596 6,334 5,014 4,150 3,540 3,086 2,735 2,456 2,229 2,040 1,880 1,744 1,626

180 8,693 6,405 5,071 4,196 3,579 3,120 2,766 2,484 2,254 2,063 1,902 1,764 1,645

182 8,789 6,476 5,127 4,243 3,619 3,155 2,797 2,511 2,279 2,086 1,923 1,783 1,663Source: Blackstone Investment Strategy, as of 9/30/19. (1) Note: Assumes that S&P 500 Earnings Per Share start the period increasing/decreasing to level indicated in first column, before increasing/decreasing linearly over 2 years to a 4%

nominal growth rate and remaining there in perpetuity. Further assumes dividend payout ratio remains at prior year’s level of 34% and equity risk premium is a constant 3.7%.

Dividend Discount Model(1)

III. Inflation and Implications for Fed Actions

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Wages Growing at Fastest Levels since 2009

Strong labor markets should lead to further gains in wage growth

Source: Bureau of Labor Statistics, as of 8/31/19. (1) Average hourly earnings growth represents 3‐month average of year‐over‐year growth for total private production and nonsupervisory employees.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.0%

2.0%

3.0%

4.0%

5.0%

1987 1991 1995 1999 2003 2007 2011 2015 2019

Average Hourly Earnings Growth(1)(YoY % Change, 3 Mo Avg.)

Earnings Growth

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Core Inflation Surprised to the Upside

Core inflation grew by the most this cycle, highest since 2008

Source: Bureau of Labor Statistics, as of 8/31/19. Represents Consumer Price Index for All Urban Consumers: All Items Less Food and Energy.

2.4%

0%

1%

2%

3%

2003 2005 2007 2009 2011 2013 2015 2017 2019

Core CPI (YoY % Change)

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But Inflation Gains May Be Temporary

Markets and consumers think that US inflation growth will slow

(1) Source: Bloomberg, as of 8/31/19. The 1 Year breakeven represents 12 month rolling average for smoothing. (2) Source: University of Michigan and New York Federal Reserve, as of 8/31/19. Represents 12 month rolling average.

2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

2015 2016 2017 2018 2019

Consumer Inflation Expectationsover the Next Year(2)

New York Fed Survey

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2015 2016 2017 2018 2019

Breakeven Inflation Rates(as Implied by TIPS)(1)

5 Year 3 Year 1 Year

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Other Key Measures of Inflation Are Negative

Core price measures are declining; import prices may have troughed

Source: Bureau of Labor Statistics, as of 8/31/19. Represents the Import Price Index (End Use): All Imports Excluding Food and Fuels, and the Producer Price Index by Commodity for Final Demand: Finished Goods Less Foods and Energy.

1.0%

1.7%

2.4%

3.1%

‐4%

‐2%

0%

2%

2013 2014 2015 2016 2017 2018 2019

Core Import Price Index and Core Producer Price Index(YoY % Change, 3M Average)

Core Import Prices (LHS) Core PPI (RHS)

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US Rates a Global Outlier

US rates are highest in the world – markets are saying they are too high

Source: Bank of International Settlements and Bianco Research, as of 7/31/19.

0%

20%

40%

60%

80%

100%

1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

Percent of Developed Countries with Policy Rates Lower than the US

Recession Percent of Countries with Policy Rate Lower than US

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Markets Have High Expectations for Fed Cuts

Markets pricing in at least two more rate cuts through the end of 2020

Source: Bloomberg, as of 9/30/19. Based on the forward rate as implied by USD Fed Funds Futures overnight index swaps.

1.12%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2015 2016 2017 2018 2019 2020

Forward Rate Implied by Fed Funds Futures

Actual Effective Fed Funds Rate Implied Forward Rate

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But Markets Have Poor Track Record

Markets frequently get it wrong when it comes to future path of Fed moves

Source: Bloomberg, Federal Reserve and Blackstone Investment Strategy calculations, as of 6/30/19.

0.0%

1.0%

2.0%

3.0%

4.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Market Expectations of Fed Funds Rates over Time

Fed Funds Futures Actual Effective Fed Funds Rate

IV. Global Economic Outlook is Dimming

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Near‐Term Global Growth Slowing

Growth forecasts for 2019 and 2020 have been further revised down

Source: OECD Interim Economic Outlook projections, as of 9/19/19.

Actual Actual2018 2018

World 3.6 2.9 3.0 G20 3.8 3.1 3.2

Australia 2.7 1.7 2.0 Argentina ‐2.5 ‐2.7 ‐1.8Canada 1.9 1.5 1.6 Brazil 1.1 0.8 1.7Euro Area 1.9 1.1 1.0 China 6.6 6.1 5.7Germany 1.5 0.5 0.6 India 6.8 5.9 6.3France 1.7 1.3 1.2 Indonesia 5.2 5.0 5.0Italy 0.7 0.0 0.4 Mexico 2.0 0.5 1.5Japan 0.8 1.0 0.6 Russia 2.3 0.9 1.6South Korea 2.7 2.1 2.3 Saudi Arabia 2.2 1.5 1.5UK 1.4 1.0 0.9 South Africa 0.8 0.5 1.1US 2.9 2.4 2.0 Turkey 2.8 ‐0.3 1.6

Forecast Forecast2019 2020 2019 2020

Arrows indicate direction of revisions since May 2019: Downward Upward No revision

Real GDP Growth(YoY % Change)

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India No Longer the Fastest‐Growing Major Economy

Growth in India and China slowed significantly, LEIs are mixed

Source: OECD Composite Leading Indicators, trend restored YoY, as of 7/31/19.

6.2%

5.0%

3%

5%

7%

9%

11%

Real GDP Growth (YoY % Change)

China India

3%

5%

7%

9%

11%

13%

Leading Economic Indicators (LEIs) (YoY % Change)

China India

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‐4%

‐2%

0%

2%

4%

Leading Economic Indicators(YoY % Change)

Euro Area Germany France Italy

‐4%

‐2%

0%

2%

4%

6%

Real GDP Growth(YoY % Change)

Europe and “Big Three” Economies

GDP growth mixed, leading indicators turning up for all but Germany

Source: OECD and Bloomberg, as of 6/30/19.

Blackstone 32


No‐Deal Brexit Would Be Costly

Without an agreement, UK GDP growth would be 2.5% lower through 2023

Source: OECD calculations.(1) For the methodology and description of various scenarios, see OECD Economic Policy Paper, April 2016, No. 16.

Impact on UK and EU Real GDP(% Difference from Baseline)

Impact on UK Real GDP through 2030(1)(% Difference from Baseline)

‐4.0%

‐3.0%

‐2.0%

‐1.0%

0.0%

2020 2023

UK EU (Excluding UK)

‐8%

‐6%

‐4%

‐2%

0%

Optimisticscenario

Central scenario Pessimisticscenario

Blackstone 33


For Better or Worse, US and World in This Together

US economic indicators more highly correlated to world economy than ever

Source: OECD and Bianco Research, as of 6/30/19. Represents the rolling 10‐year correlation between US and world average composite leading indicators.

0.0

0.2

0.4

0.6

0.8

1.0

1969 1979 1989 1999 2009 2019

Correlation between US and World Leading Indicators(10‐Year Rolling Correlation)

Blackstone 34


Shift in Monetary Policy

Central banks are easing monetary policy as a response to slowing growth

Source: Strategas Research Partners, as of 8/31/19.

‐$1,000

‐$500

$0

$500

$1,000

$1,500

$2,000

$2,500

2016 2017 2018 2019 2020

Global Central Balance Sheets($ in Billions, 12M Change)

Fed BoJ ECB BoE Total

Actual Forecast

Blackstone 35


But Effectiveness of Quantitative Easing Decreasing

QE likely to have less marginal impact than it did in the past

(1) Bank for International Settlements and World Bank, as of 12/31/18. Global sovereign debt represents credit to general government from all sectors at market value (USD.) Global GDP represents market value in current USD.

(2) Source: World Bank, Ayhan Kose, Various Authors and DB Global Research. Represents the average of academic studies on the impact of QE on long‐term interest rates.

$10,000

$15,000

$20,000

$25,000

$30,000

Change: 2001 to 2007 Change: 2008 to 2018

Global Sovereign Debt and GDP(1)($ in Trillions)

Global Sovereign Debt Global GDP

Debt to GDP Ratio: $1.74

Debt to GDP Ratio: $0.83

‐80

‐60

‐40

‐20

0QE 1 QE 2 QE 3 BoE ECB Riksbank

(bps)

Estimated Impact of QE on Long‐Term Interest Rates(2)

(2010)(2009) (2012) (2009) (2009) (2015)

V. Trade Remains the Biggest Threat

Blackstone 37


Decline of International Trade

World trade volumes are contracting, with further declines expected

Source: World Trade Organization, as of 3/31/19. Represents total merchandise exports for all countries tracked by the WTO.

‐35%

0%

35%

$2.0

$3.5

$5.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

World Trade Volumes: Exports($ in Trillions)

Value (LHS) YoY Growth (RHS)

Blackstone 38


Global Manufacturing PMIs and Industrial Production

PMIs are all negative, may have troughed; industrial production declining

(1) Bloomberg and Markit, as of 8/31/19. (2) Federal Reserve, German Federal Statistical Office and National Bureau of Statistics of China. US and China data as of 8/31/19, Germany as of 7/31/19. China data represent the

change in “value added of industry.”

‐20%

‐10%

0%

10%

20%

2017 2018 2019

Regional Manufacturing PMIs(1)(YoY % Change)

Emerging Markets USDeveloped Markets EurozoneGlobal

‐5%

0%

5%

10%

2017 2018 2019

Industrial Production: US, Germany, China(2)(YoY % Change)

US Germany China

Blackstone 39


Customers, Not Just Producers

China and EM have become increasingly important source of demand for DM economies

Source: IMF, UNCTAD, OECD, WTO and McKinsey Global Institute, as of January 2019.

77% 71%59%

3%6%

12%

20% 23% 29%

1995 2005 2017

Advanced Economy Exports(By Receiving Region)

Developing countries (ex‐China) China Advanced countries

$4.3T $9.6T $10.3TTotal Value

% of Total

$446

$275

$351

$276

$623

$573

$479

$352

Machinery/Equipment

Computers/Electronics

Chemicals

Auto

Advanced Economy Top Export Categories (2017, $ in Trillions)

Developing countries (ex‐China) China

Change: 2000 to 2017

+$262

+$351

+$364

+$451

VI. Bubble in the Bond Markets

Blackstone 41


Negative‐Yielding Debt Ballooning

Over $15T of debt with negative yields, comprising 45% of global debt, ex-US

(1) Source: Bloomberg, as of 9/30/19. Represents the Bloomberg Barclays Global Aggregate Negative‐Yielding Index. (2) Source: Bloomberg, as of 9/30/19. Represents the negative‐yielding portion of the Bloomberg Barclays Global Aggregate Bond Index, less the Bloomberg Barclays US Aggregate

Bond Index.

$0.0

$2.5

$5.0

$7.5

$10.0

$12.5

$15.0

$17.5

2014 2015 2016 2017 2018 2019

Global Negative‐Yielding Debt($ in Trillions)(1)

0%

10%

20%

30%

40%

50%

60%

2014 2015 2016 2017 2018 2019

Negative‐Yielding Debt(Percent of Global Debt, ex‐US)(2)

Blackstone 42


Demand Abounds for Risky Sovereign Debt

Investors snatching up sovereign debt, regardless of principal or duration risk

Source: Bloomberg, as of 9/19/19.

0%

5%

10%

15%

20%

25%

30%

35%

2007 2009 2011 2013 2015 2017 2019

US and Greek 10‐Year Yields Converged

US 10‐Year Yield Greece 10‐Year Yield

Greece’s debt has had “junk” rating since 2010

(rated B+ by S&P as of July 2018)

€100

€140

€180

€220

Austria 100‐Year Bond Price

+108%

Blackstone 43


$2.2T

$0.6T

‐$500

$0

$500

$1,000

$1,500

$2,000

$2,500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

US Equity and Bond Funds Cumulative Net Flows, Including ETFs($ in Billions)

BondsEquities

Massive Bond Fund Inflows

Investors are shifting from equity to bond funds at the fastest rate this cycle

Source: Investment Company Institute and Bianco Research, as of 8/31/19. Represents net new cash flow to US domestic equity funds and US domestic bond funds. Includes both mutual funds and exchange‐traded funds.

‐$800

‐$400

$0

$400

$800

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net Flows to Bond Funds Less Net Flows to Equity Funds(Rolling 6M Sum of Flows, $ in Billions)

Flows to Equity Funds > Flows to Bond Funds

Flows to Bond Funds > Flows to Equity Funds

VII.Long-Term Trends to Consider

Blackstone 45


President Trump Needs a Deal Politically

For the past 100 years, no President has lost reelection if economy expanding

Source: Strategas Research Partners, as of 7/9/19.

President Recession? Re‐Elected?Obama No YesBush II No YesClinton No YesReagan No YesNixon No YesLBJ No YesEisenhower No YesTruman No YesFDR No YesFDR No YesFDR No YesWilson No Yes

President Recession? Re‐Elected?Bush I Yes NoCarter Yes NoFord Yes NoHoover Yes NoCoolidge Yes YesTaft Yes No

No Recession Two Years before Re‐Election

Recession Two Years before Re‐Election

Since WWII, Only Presidents with Rising Unemployment Rates Lose Reelection

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

‐3% ‐2% ‐1% 0% 1% 2%

Margin of Reelection Victory

Change in Election Year Unemployment Rate

Presidential Reelection & Change in the Unemployment Rate

'04

'96

'80

'92

'84

'54

'72

'12

Blackstone 46


Trade War with China

China’s growth has been largely fueled by trade with the US

(1) Source: IMF, as of July 2019. Data for 2019 and beyond are projections.(2) Source: US Census Bureau, as of 12/31/18. Represents US dollars at nominal value, not seasonally adjusted.

$0

$10,000

$20,000

$30,000

2004 2009 2014 2019 2024

Real GDP (Current Prices, $ in Billions)(1)

China US

Projected

‐$600

‐$400

‐$200

$0

$200

$400

$600

1988 1993 1998 2003 2008 2013 2018

US Trade with China($ in Billions)(2)

Balance Imports from China Exports to China

Blackstone 47


1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Working Age Population Ratio(1)

Africa Asia Europe LatAm & Caribbean South America US World

Global Demographic Trends: Working Age Populations

Working age populations ratios estimated to decline across the world

Source: Blackstone calculations of United Nations World Population Prospects 2019.(1) Working age population ratio defined as the population aged 15‐64 divided by population aged 0‐14 and 65+.

Projected

Blackstone 48


0%

1%

2%

3%

4%

5%

6%

1965 2015 2065

Global GDP Growth Components(2)

Employment Productivity

Secular, Long‐Term Slowdown in Global Growth

With labor force declining, productivity must pick up the slack

(1) Source: McKinsey Global Institute, as of January 2015. GDP growth represents compound annual growth rates (CAGR). (2) Source: Blackstone analysis of data from The Conference Board and United Nations Population Division, as of April 2019 and August 2019, respectively. “Employment” represents growth in

working age population. “Productivity” represents growth in labor productivity per hour worked. Based on CAGR at 5‐year intervals from 1960‐2015. (3) Estimates for 2015‐2065 assume 1.9% productivity growth (the average from 1965‐2015). Credit for chart concept to McKinsey Global Institute.

0%

1%

2%

3%

4%

Global GDP Growth(1)

Projected

Assumes 1.9% Productivity Growth(3)

Blackstone 49


Warming Climate Also a Challenge

Temperatures across the world are steadily rising, with no sign of slowing

Source: NOAA, as of 8/31/19. Compares the average temperature of land for a given month to the long‐term average temperature for the same month over the 20th century. A reading above the long‐term average indicates that the temperature in a given month is warmer than the long‐term average, and vice versa for readings below the long‐term average.

‐0.8

‐0.4

0.0

0.4

0.8

1.2

1.6

1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Degrees Celsius

Global Land Temperature Anomalies (1880–2019)

Blackstone 50


US Accounts for Nearly 15% of Global CO2 Emissions

Even if the US eliminated all CO2 emissions – it would remain a problem

Source: World Bank, as of 2014.

0%

5%

10%

15%

20%

25%

30%

35%

China UnitedStates

EuropeanUnion

India RussianFederation

Japan Germany All Others

Share of World CO2 Emissions by Country

Blackstone 51


Wealth Inequality Has Gotten Worse

Financial market gains have mostly accrued to the top 10%

(1) Source: Bloomberg, represents total return index gross dividends for the period 1/1/1988 through 12/31/2018. (2) Source: Federal Reserve Survey of Consumer Finances and Financial Accounts of the United States, as of 12/31/18. Percentiles represent wealth percentile groups.

0

600

1,200

1,800

2,400

3,000

0%

400%

800%

1200%

1600%

2000%

1988 1998 2008 2018

Financial Markets Have Created Immense Wealth

(S&P 500 Returns: 1988–2018)(1)

S&P 500 Price (RHS) Cumulative Total Return (LHS)

1988–2018:+1911% Cumulative Total Return

(10.2% Annualized)

$0

$2

$4

$6

$8

$10

$12

1989 1998 2008 2018

But Only the Wealthy Have Benefitted (Assets in Corporate Equities and Mutual

Fund Shares, $ in trillions)(2)

Top 1% Next 9% Bottom 50%

Blackstone 52


Debt Hasn’t Been a Problem Because of Declining Interest Rates

Debt increased $19 trillion from 1988 to 2018 while rates fell from 8.2% to 2.4%

1%

3%

5%

7%

9%

$0

$6,000

$12,000

$18,000

$24,000

1988 1998 2008 2018

($ in Billions)

US Federal Debt Outstanding and Average Interest Rate

Total Public Debt Outstanding (LHS) Average Interest Rate (RHS)

Source: US Treasury, as of 12/31/18. Average interest rate represents the total interest expense on the debt outstanding, divided by total public debt, as of each fiscal year end.

1988 to 2018:• National Debt: Increased +$19 trillion (+719%)• Interest Rate: Decreased from 8.2% to 2.4%

VIII.Byron's Life's Lessons

Blackstone 54


Byron’s Life’s Lessons

Here are some of the lessons I have learned in my first 80 years. I hope to continue to practice them in the next 801. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten

Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year‐end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.

2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op‐eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.

3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.

4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.

5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one‐hour afternoon nap.

6. Evolve. Try to think of your life in phases so you can avoid a burn‐out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.

Blackstone 55


Byron’s Life’s Lessons (Cont’d)

7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.

8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.

9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social services, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.

10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.

11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.

12. When someone extends a kindness to you write them a handwritten note, not an e‐mail. Handwritten notes make an impact and are not quickly forgotten.

13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.

14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short‐cuts can be construed as sloppiness, a career killer.

Blackstone 56


Byron’s Life’s Lessons (Cont’d)

15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.

16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway. I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.

17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.

18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.

19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off‐beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self‐discovery.

20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.

Blackstone 57


DisclaimersThe views expressed in this commentary and the appendix hereto are the personal views of Joseph Zidle, Managing Director and Byron Wien, Vice Chairman in the Private Wealth Solutions Group (together with its affiliates, "Blackstone") and do not necessarily reflect the views of Blackstone itself. The foregoing information has not been provided in a fiduciary capacity under ERISA, and it is not intended to be, and should not be considered as, impartial investment advice. The views expressed reflect the current views of Mr. Zidle and Mr. Wien as of the date hereof and neither Mr. Zidle, Mr. Wien nor Blackstone undertakes to advise you of any changes in the views expressed herein. No representation or warranty is made concerning the accuracy of any data compiled herein. The views expressed herein may change at any time subsequent to the date of issue hereof.

These materials are provided for informational purposes only, and under no circumstances may any information contained herein by construed as investment advice or an offer to sell or a solicitation of an offer to purchase (or any marketing in connection thereof) any interest in any investment vehicles managed by Blackstone or its affiliates.

Blackstone and others associated with it may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary and may also perform or seek to perform investment banking services for those companies. Blackstone and/or its employees have or may have a long or short position or holding in the securities, options on securities, or other related investments of those companies.

Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Where a referenced investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value or price of or income derived from the investment.

Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors. Certain assumptions may have been made in this commentary as a basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differing facts from the assumptions may have a material impact on any indicated returns. Past performance is not necessarily indicative of future performance. The price or value of investments to which this commentary relates, directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or the solicitation of an offer to purchase any security.

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