Episode 1: If the economy is good, why do I feel so bad?

Transcript: Season 3, Episode 1: If the economy is good, why do I feel so bad?

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

David Bailin: Inflation is a very negative factor in how people experience their lives. If you look at employment, people have jobs. If you look at the wages that they're making, they're making more money. If you look at household wealth, it's up. So why are they feeling so badly?

Rob Kahn: Debt is one of my most significant concerns in terms of a potential trigger for crisis going forward, not just in the developing countries, but globally.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Private Bank and GZERO Media. On this program, we examine global risks and opportunities from angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group and co-host of Climate Biz podcast. In the United States, the statistics show that our economy is doing very well. Today, we're asking a big question, "If an unemployment is low, real estate prices are high and the economy is still growing, why do so many people feel lousy about it?" At the beginning of March in his State of the Union Address, President Joe Biden had this to say:

PRESIDENT BIDEN: Our economy created over 6.5 million new jobs just last year, more jobs in one year than ever before in the history of the United States of America. The economy grew at a rate of 5.7 last year — the strongest growth rate in 40 years and the first step in bringing fundamental change to our economy that hasn’t worked for working people in this nation for too long.

But just days before that speech from President Biden, a Gallup poll found that only 18% of American survey think the economy is good, so what gives?

Shari Friedman: Here to sort this out are two of the best experts we know. David Bailin is Chief Investment Officer and Head of Citi Global Wealth Investments. Hi, David.

David Bailin: Hey there.

Shari Friedman: And Rob Kahn is Director of Global Macroeconomics at Eurasia Group. Welcome.

Rob Kahn: Hello, Shari.

Shari Friedman: David, in your 2022 Outlook report to investors, you wrote, "We believe the world economy and equity markets have not peaked and have room to grow." Now, in quarter one behind us, do you still feel that way, and what's changed and what has not?

David Bailin: A great deal has changed since we began writing that report in November of 2021. The biggest change is the war in Ukraine and the impact that that has had on global supply chains and will permanently have on energy supplies and agricultural supplies and commodities going forward at least for the next several years. What the war did was basically further stress all of the global economy distortions that had taken place due to COVID. COVID basically had people buy goods over services. As a result, we began to see inflation associated with simply the lack of availability of these goods. When the war took place, it further lengthened those supply chains and distorted the economy further, and with that, inflation took off.

We've seen the highest inflation prints that we've seen in the last 40 years, and as a result of that, we've seen a crack in consumer confidence and also a lack of confidence in the investing markets as well, and all of those changes really took place in the first two months of 2022. But what's really interesting is the resilience of the economy in the U.S., and also the fact that even Europe, in spite of all of the challenges it currently faces, is still experiencing positive growth, at least for the moment. I think people are feeling far more negative than the data that exists today, and there's a definite dissonance between the two.

Shari Friedman: Right. Rob, David was just talking about what's just been happening since the war in Ukraine, and obviously, the global political picture has changed a lot, so looking back, what were the global markets like heading into 2022, and how do you see that the war in Ukraine has affected that?

Rob Kahn: I've described it as a jagged swoosh recovery. The swoosh is a reference to your Nikes, and the idea that after a very sharp COVID-driven decline and initial bounce back, we've had a gradual recovery, but one that's very uneven and volatile and varies quite a bit around the world. First and foremost, that kind of volatility that I'm describing reflects that COVID still mattered. In the third year of a pandemic, there is scar tissue that certainly had accumulated that affected economies differently, less so in the U.S., where the labor market remained strong, more worrisome in Europe and in emerging markets. But still, I started the year optimistic that the world as a whole would grow above historical averages.

The war has changed that as both a supply and a demand shock, and of course, it comes at a time where central banks were already beginning to tighten, raising the cost of funds. My estimate of the effects of the war on the global economy are very much influenced not just by the direct effects on supply and demand, but also on the policy response of the West and its allies to confront Russia and try and change their behavior and punish them for the war they are prosecuting. Those sanctions are disruptive. They’ve estimated that the cumulative effect of the war and the policies put in place will likely reduce global activity by three quarters of percent to 1% this year. Now, that's not necessarily enough by itself to cause a recession in the United States, perhaps a short-term one in Europe.

Certainly though, it raises the risks in emerging markets and elsewhere. It's also likely to raise inflation by around 1%, so this is a material global economic shock. It affects the direction of the global economy, and also significantly heightens the risks.

Shari Friedman: David, one of the biggest concerns for the average consumer right now is, of course inflation, and we're seeing higher prices on food, on gas, on other items. How bad is inflation really, and what do you think it means in terms of interest rates in the coming months?

David Bailin: I think that inflation is a very negative factor in how people experience their lives. If you look at employment, people have jobs. If you look at the wages that they're making, they're making more money. If you look at household wealth, it's up. Both their real estate assets are up in value and their securities portfolios are, so why are they feeling so badly?

The answer is that when they actually go out to spend money, they're seeing the cost of certain things, food and energy in particular, rising at a much faster rate than their wages are, and when that happens and they have that visceral experience where they have to decide to buy more gas or less food - basically to be deprived in some way, that's where the negativity comes from.

Then, when they look out into the future, they're hearing that interest rates are going to go up, and we've seen a profound change in interest rates just this last quarter. This last quarter was the worst quarter for fixed income securities in the last 25 years, and mortgage rates have gone up correspondingly. That's what's causing them to have negative sentiment, even though when you look at their household strength or their household total wealth, it's particularly high. When we look out into the future, we see the Fed raising rates.

Their ability to actually drive this type of inflation down is very limited. Therefore, what I would say is that we're in for a period when consumers are going to feel more negative, even though the economy is doing okay and they're going to purchase things as if things were more negative, and that again, is going to slow the economy. At some point, when consumers realize that inflation is, in fact, coming down because supply is moving up and when they actually see that they're going to be okay in terms of their household wealth, that is going to be a brighter moment for the economy, and that could be three or four months from now.

Shari Friedman: When you say household total wealth, could you just take a moment and define that, because it sounds like the income, if the fixed income is low, you might assume that overall assets might have gone down, and then if inflation is high, that your purchasing power goes down, so what do you mean when you say household total wealth is high?

David Bailin: Sure. What we do is we take a look at household savings, we take a look at degree of indebtedness that a family has, and we take a look at the value of the assets that they hold. One of the interesting things about this moment is that the policies that got us through the pandemic have been highly effective. Debt rates of families are down, their saving rates are up in terms of their total savings, their actual rate of savings now is back to what it was before the pandemic, and therefore, when you look at their balance sheet, their assets and their liabilities, families in general are wealthier today than when the pandemic began. That's a sign of good policy.

Their current experience of their income versus their expenditures is the negative experience. Even if their wages went up 5%, if inflation is at 8% for the things that they commonly buy and they're experiencing that every time they go to the grocery store or to the gas station, that's where they begin to feel negative, and it's what someone currently feels that determines their rate of savings and their level of optimism.

Shari Friedman: We've been talking specifically about the United States, but inflation isn't a uniquely U.S. phenomenon, so what does inflation look like globally?

Rob Kahn: People tend to want to view inflation very much as a personal and localized experience and blame their leaders for that, but what we're seeing now is really a global phenomena. Europe, for example, saw consumer prices reach 7.5% in March, which is an extraordinarily high level and is putting pressure even on the European Central Bank to switch policy around, and high and rising inflation in many of the major emerging markets, countries that have a history, a very high inflation that was politically and economically destabilizing, and so in high inflation in those countries really sends alarm bells out in ways it doesn't for many Americans. Even there, we're seeing that policymakers have had to react very strongly to try and maintain stable expectations in that environment, and that acts as a drag on optimism about the economy on spending behavior and indeed on political perceptions of people around the world. Certainly, what we are seeing is a global effect.

It is capturing what is perhaps the biggest worldwide risk to this recovery and how policymakers respond to it, not just in terms of trying to stabilize economies, but to meet people's expectations for their living standards, for jobs and the like will be really one of the critical issues for us in the remainder of the year.

Shari Friedman: What about debt, and going back to developing countries who are already burdened with a trillion Dollars of debt at a time when prices for food and fuel are skyrocketing, what's the ripple effect there?

ROB KAHN: Debt is one of my most significant concerns in terms of a potential trigger for crisis going forward, not just in the developing countries, but globally. There are a couple of factors that you can highlight here. Certainly, part of it is we've had a very long period of time in the industrial world, 20, 30 years of relatively low interest rates both in headline terms and also adjusting for inflation. I think all of that has created a comfort level for people acquiring debt and leverage in terms of their own behaviors that leaves them very exposed should there be a rapid increase in the costs of that debt, but particularly for the developing countries, where high levels of debt are usually a source of concern for markets can often be a trigger for a contraction in credit for a crisis. Those of you who either live in emerging markets or invest in them know there have been cycles of excessive enthusiasm of capital flows, and then a pullback that characterizes these developing countries in ways that are more significant, more common, more severe than the industrial world, will know that the last couple of years with COVID has been really extraordinary.

Countries have run very large deficits, and they have financed that with debt. I think most of that was warranted. The COVID shock was an extraordinary challenge, and governments needed to do what they could to sustain people's health and welfare in the midst of this extraordinary shock, but it did mean that many of these developing countries are coming out of this with very high levels of debt, and in the context of rising interest rates are finding that the servicing that debt is taking more and more of their resources. I think this presents a significant risk that investors will lose competence in these countries, and indeed, that is one of the ways in which the shocks we're talking about today could play out in a global setting where the war in Ukraine by itself would not have caused a crisis, but on top of the other vulnerabilities, could be a trigger for a more difficult time ahead.

Shari Friedman: Right, so we're seeing the cumulative effect really being different between countries that have a greater level of resiliency for whom this cumulation of shock upon shock might cause a downward spiral. Let's talk about now how people are feeling about the economy. I mean we’ve been talking about this a bit already but I wanted to circle back, David, to something that you had said a moment ago about when people kind of see potential in the turn, that's when they will resume normal kind of spending behaviors, et cetera, and I'm wondering where does the war in Ukraine fit into the attitudes of consumers and investors?

David Bailin: First of all, the type of inflation that is caused by a shock like the war is typically not sustained, and inflation is a year over year change in price, so when we look out a year from today, agricultural prices, energy prices and commodity prices should be lower, and if you look at futures curves, that would be what it suggests is going to occur. Second of all, what consumers need to know is that interest rates aren't going to go up forever, and as we just published, we actually think that interest rates are very much near their peak right now because the Fed has indicated that it wants rates to go up, but when you take a look at the long bond, which is indicative of what people think rates will be for a long time, it's right around two and a half percent, so in an environment when we think that we are at peak rates, and when we think inflation is going to come down a year from now or six months from now, we can imagine a time when consumers are going to wake up and say, "Hey, things aren't as bad as we expected." That's precisely what we're expecting will occur over the course of the next three to six months.

When that realization occurs, their buying habits, I think will change. They'll become more willing to make purchases, and what's going to carry us between here and there is the fact that inventories are going to need to refill, so if the consumer becomes more optimistic in three to six months than they are today, we could imagine a rising stock market, rising levels of investment, and actually a reasonable outcome to what is and was a very difficult time. Now, there's risks to that, and Rob's talked about what some of those could be, right? A shock right now of any kind to the system would really set things even further off balance. We've taken as many shocks as the global economy, and frankly, many of us ethically and morally can take at one particular time, but that's where we are right now, and our job is to look ahead. When we think about helping clients invest or helping clients manage their wealth or anticipate what they should do, we look ahead, and what we look ahead to is a reasonable outcome that actually would not be bad for portfolios.

Shari Friedman: It seems like kind of coming back today and looking at how consumers are viewing their experience of the economy today, one poll from Suffolk University and USA Today, taken last month, found that 19% of respondents said the U.S. is in economic recovery, but nearly 30% said that we're in recession, and over 20% said the economy is in depression, so David, how are you explaining these numbers? Where's the actual truth?

David Bailin: Well, the joke is that they should all buy a dictionary. That's sort of my view of that. Recession requires an actual contraction in growth, a reduction in investment by companies in infrastructure, negative spending on the part of consumers, a real contraction in total economic output for the economy is a recession, and a depression I don't think anyone actually has experienced so they wouldn't know what it is, and it would require massive unemployment, obviously in a depression and unemployment increases in a recession. I think what people are doing is they're expressing fear as to what is going to occur in the future. That's what their expectations are, and that's what that survey indicates.

To me, that indicates a lack of confidence in the ability for governments to actually step in and do anything to help them. They're feeling a bit helpless. Interestingly, when consumer confidence was at its lowest, the stock market rallied 10% from its bottom during the course of the war, and so what we see sometimes is that negative sentiment can be a contraindicator for markets because it is fear and not reality.

Shari Friedman: Rob, what's your take on this? Do you think it's fear-driven? Are there other factors involved on why these survey responses are so negative?

Rob Kahn: Fear is absolutely a central element of the current environment. Now, I will say that surveys, like the one you mentioned, almost always lag the actual and underlying economic dynamics. Economists date these recessions pretty carefully, and we often see that polling subsequently shows that even well after the recession has ended, people will tell you they're still in and they still feel it, and often, they will punish the party in power at the polls because of that, so we do have to understand this, as David said, as a broader expression of anxiety about their personal economic conditions, but there is a fundamental element here. Inflation is a tax. It is coming at a time where a number of shocks are creating a lot of uncertainty about what the global economy, what the U.S. economy is going to look like down the road.

We're not going back to where we were, and with that inherent uncertainty, I think you're getting with this inflation just a certain amount of anxiety about what people's lives will look like and their opportunities going forward. In that regard, many people have not lived with high inflation. We've had low inflation for such a long period. Now, sadly, I'm of a generation that came of age when we did have very high inflation, and policymakers' intent are willing, if you will, to have a gut-wrenching recession in order to drain that inflation out of the system.

I would emphasize two points here, or risks to that scenario. One is, of course, that one of the things that we've learned from COVID is that temporary does not mean short. The supply chain disruptions we have, have been persistent and longer-lasting than we had hoped for, and they're certainly is part of the fact that it's created some insecurity in people about how long this will all last. Secondly, and this gets back to my point about the economy of the future being different in some material effects because of COVID, because of the war and the sanctions that have been put in place. How we trade and how we invest with each other and how we even work is going to be very different.

To me, it's not entirely out of the question that we could be heading back to a world that has a higher trend inflation rate than we've had over the last couple of decades. It's at least a question mark, and until we know the answer to that, some of the issues, such as where the Federal Reserve will have to go to get the economy back to stable prices and full employment is going to be, I think a bit of a question mark.

David Bailin: I couldn't agree more with you, Rob, on this because first of all, governments wanted there to be a slightly higher inflation going forward. They wanted to fight disinflation for the last decade. That's what they were worried about, but if you think about geopolitics, what's happening with China, obviously the war in the Ukraine, really, the separation between the East and the West, the risks that companies now have by having global supply chains, all of this is going to suggest that we are going to have a higher inflation rate in the future, and that was something originally desirable, and now, we're actually going to see that it's going to be consequential, so I could not agree with you more.

Rob Kahn: David, you raise a really powerful point, which is the role in which globalization or a pullback from it could also factor into all of this. Even before COVID, we were seeing the levels of trade and integration retreat a little bit from the highs of the early 2000's, and I do think that COVID, and indeed now, the sanctions that are in place on Russia are probably leaving businesses to make their own judgements that are certain about more resilience of supply chains, are certain about planning on the potential for disruption in ways that can lead to changes in the way we are integrated, that are likely, and that could have some effects on inflation over the longer term. I do think some of the inflationary forces that have been in play over the last few decades came from that increased globalization and the bringing of countries into the global marketplace.

If indeed there is at least some more sand in the wheels of global trade and finance, that will be a factor that, at least modestly works the other way. Then, I think there's another wild card, which is, "Will governments get more involved in trade and more willing to stand in the middle of commerce?" I think we're already seeing that in a more contested U.S.-China relationship. That's likely to continue, and the willingness to use sanctions against Russia are also signals a willingness to exclude countries that are acting outside the norms of accepted international behavior. All of that suggests to me that governments may be playing a more active role in the management of global trade and finance going forward, and I think that feeds into the point you were making.

Shari Friedman: It sounds from both of you, guys, that low inflation is no longer a given, that there's a lot of factors that are adding to the question and we don't know where it's going to go, and David, I'm curious to know whether you think that in the United States, the Fed can bring down inflation and increase consumer sentiment at the same time.

David Bailin: I think those things are contradictory, and in fact, I think the Fed's aggressive stance against inflation could actually be the largest risk that we've talked about today. The Fed, if it raises rates only has a blunt instrument, and that blunt instrument can slow the general economy. It can slow the purchase of cars or the price of semiconductors. It can slow the general economy, and that's the only tool that they really have. The second thing is they've got a wild card, which is that they have bought a bunch of the debt that was issued by the government, and to the extent that they released that debt, that they reduced the size of their balance sheet, other people have to buy those bonds, again, reducing the liquidity in the economy.

So if the Fed is too aggressive in its fight against inflation and inflation that I think, we think they can't really address directly, they could put the economy in jeopardy directly by doing so, and so that's our largest wild card right now in our economic outlook. On the other hand, if the Fed gets it right and they actually raise rates to a reasonable amount and inflation starts to come down as a result of a slowing economy and of the fact that actual prices are going to go down because supply and demand will equilibrate, that would be a good outcome, and we can see that, and that's our probable outcome, but I do think that this whole focus on what the Fed can and can't do is actually the right one, and right now, the Fed is making the wrong noises about their current policy.

Shari Friedman: And it's all complicated right now because, particularly in the United States and in a few other countries because this is a midterm election year, and there's including the U.S., France, Brazil, for example, and so Rob, how do you see the economy or at least consumer perceptions of the economy affecting election outcomes this year?

Rob Kahn: Well, starting with the U.S., I think there's little doubt that the Republicans appear poised to retake the House of Representatives and quite possibly also the Senate in the midterm elections. I do think that the insecurity and uncertainty of consumers that we've been talking about today, much of it affected by inflation, is one of the important factors figuring into that outcome. Certainly, the party in power often does very poorly in the first midterm elections, so some of this might have occurred in any event, but certainly, in all the polling that I've seen, the economies is really at the top of concerns of voters, and it so very much is a factor there, but again, this is not only a U.S. phenomena. We have these elections in France coming up very soon, in which it now looks like Le Pen is presenting a very significant challenge to Macron. Macron's still the favorite, but Le Pen is doing better than she has done in past rounds, and it is striking.

In Brazil, you are likely to have a battle between two candidates that really are on the populous ends of the spectrum. I think my takeaway is less a shift in the left and the right, but more a frustration with incumbents, a frustration with what government can and can't do, which is fueling anti-government candidates, more populous candidates, more nationalistic candidates in ways that could have some profound effect on election outcomes this year, and so very much, this is a global phenomena.

Shari Friedman: You could drill this down a little bit because it's not just these big level numbers, how these effect elections, also then comes down to the substory, so David, let's unpack these statistics a little bit. For example, in February, in the United States, the overall unemployment rate was just 3.8%, but it was double that for African-American workers and it actually increased for African-American women, so what does this say about COVID and economic inequality, and any other comments on how this might move perceptions coming into the elections?

David Bailin: There's no doubt that COVID and the pandemic responses really pulled the covers off of an issue that we all knew was there and actually saw, but we saw it in a very, very blunt way because the impact of COVID on the health of minorities, the impact of it on their balance sheets, on their jobs was clearly worse. Everything you said is absolutely true, and normally, you would think, "Well, that would be good for the Democrats. That would be good for the party that supposedly is taking care of ...," but that actually is not the case. A lot of the voting in black and Hispanic communities has changed for the reasons that Rob laid out, basically an anti-incumbency and anti-government fervor, and that's because at the end of the day, the idea of equality or the idea of equal opportunity is not real in their experience, and they just had it underlined through the events that just took place. I do think that there's a day of reckoning in that regard, that the Democrats have to consider what policies they want to have, because right now it's a vote against what they stand for, not a vote for something else.

I think it also speaks to the idea of what I would describe as an ESG revolution. Just have governments have abdicated their responsibility to create, let's say a fair playing field or more social justice, what you're seeing now is a revolution on the part of companies that are taking on the issues of equality, are taking on the issues of equal pay regardless of gender, regardless of race, regardless of sexual orientation, and they're doing so in very obvious ways. When you take a look at the response to the war in Ukraine, companies have, without provocation taken very big social stances against Russia and are willing to actually hurt their own income statements and bottom lines to do so. Some of the hopefulness about addressing the issues of inequality are going to now shift from government to other areas like corporations, but as you said from the outset, it has been a time when the sea went out, we saw just how big an impact inequality has on livelihoods and on lives.

Shari Friedman: I think you're exactly right, that companies, what we're seeing is companies are sometimes far, far ahead of the government, depending where the government is, on pushing them on both environmental and social issues, so it is a trend certainly to watch. At this point, I want to widen our lens a bit and look forward. Rob, I'd like to know what you're seeing coming for the remainder of 2022. We've been absorbing a lot of bad news these last few years, so if you can include any threads of optimism, that would be great.

Rob Kahn: Well, it's hard sometimes to be optimistic. I think starting point has to be that there is tremendous vibrancy to the global economy. We have seen a recovery that with that, the zigs and zags, I talked about earlier, is still on course and is likely to remain, so I would highlight two drivers, I think, for public policy of the rest of the year. One is, obviously the course of the conflict between Russia and Ukraine. My expectation is that this is likely unfortunately to end up in a stalemate and a protracted conflict.

Against that backdrop, I would expect that the West would continue to feel pressure to intensify sanctions. I think they will do that. I think that will eventually affect oil and gas purchases from Russia. That means prices of those commodities, as well as other commodities that are disrupted by the war will continue to remain high. If I wanted to draw one positive element from high oil and gas prices, I think it is a conservation-oriented one, while in the near term, I suspect Europe, in particular, will take a kind of all-of-the-above approach that will include more coal and more gas and more of other, and pretty much anything that can offset the lost supplies from Russia.

Longer term, the need of all countries, not just Europe, but importantly Europe, to improve their energy security, I think will drive a green agenda in an important way, will accelerate investment in new technologies and the like. That actually is powerful, and it does touch on one important point, that these type of shocks and part of the new normal economy is one that does create innovation to take advantage of new opportunities. It's not all destructive, and so changes in the way we work, as well as who we trade and invest with, I think actually will lead to some significant new investment opportunities. The second thing I would highlight is the relationship between China and the U.S., which is a very important part of anyone's outlook for 2022 and beyond. If I wanted to be optimistic, I would say that despite some of the recent headlines, highlighting China's close relationship with Russia prior to the war, I think China's very firmly anchored around its access to the global economy and is not willing to put that at risk in order to help Russia evade sanctions, and so actually, I do believe that China will not provide material, military or other sensitive supports to Russia during this conflict.

They will ultimately remain in the West and in the global marketplace, and that will anchor the global recovery, but it also though, means that the contest on economic issues between China and the U.S. that we've lived through the last several years continues to be a central element of global economic outcomes and of the marketplace generally. I think ultimately though, the process of the pandemic will still be a wild card for us. The hope obviously is that with more vaccines and better coverage of them around the world, we'll get a better handle on this, and the future variants will not be as deadly as before, but obviously, that's a main element. One final point on that, in returning to China, China's zero-COVID policy likely is in the process of failing. The very large-scale shutdowns that we're seeing there are really unsustainable, in my view.

What does it mean? It means that China will get a continuing drag on activity coming out of their unsuccessful efforts to deal with COVID, and that does mean likely that China will not be the same driver for global growth that it has been in the past.

Shari Friedman: I mean, right now it feels like a pivotal moment, David, I'd like to kind of get your view on this in terms of investments. You frequently speak about the cash thief and the fact that purchasing power of every uninvested Dollar is decreasing. Given the uncertainty and that pessimism are pervasive right now, and also kind of these shifting trajectories that Rob just outlined, what would your bottom line advice be for investors?

David Bailin: My bottom line advice for investors right now is to stay invested and not try to time the markets. By watching TV, you can become a very, very bad investor. The economy grows about 85% of the time. Markets go up more than three quarters of the time by quarter to quarter, so the net reason for that is because growth, innovation, optimism at the end of the day tend to prevail, and that drives a lot of, what I would describe as positive demographics for investing. Now, of course, there are changes in industries, right?

There are beneficiaries. There are companies that are going to do poorly and sectors are going to do poorly, but the net-net of it is if you have your money invested in the market in a broad and diversified portfolio, you are way better off than if you sit on the sidelines. Everything that we've talked about today says that the cash thief is alive and well. If you've got cash in the bank, it will be worth 6% less in its buying power at the end of the year. If, on the other hand, you have a stock that has a 3% dividend and goes up by 3%, you're even, and if it makes more than that, you're actually profitable.

Over time, we think that's absolutely possible. With interest rates low and likely to stay where they are, or a little bit less in the event that the economy slows, equities are really going to be the place to be, and ultimately, valuations are going to prove that to be the case. What we're telling people now is to invest in those things that are most resilient, consumer staples, energy companies, even including alternative energy companies, cybersecurity companies, defense contractors, parts of the economy that are not going to be impacted by any of the things that we've talked about today, but rather, that can sustain growth. Take a look at some of the trends that are most important over the next five to 10 years. One of that is just simply longevity and health care.

Pharmaceutical stocks are at reasonable valuations with high dividends, so you can go across the entire equity market all over the world and identify things that you want to own. The critical factor is not deciding when to buy and sell them. Over the course of the last 10 years, if you missed the best 20 days of the stock in market, you had a negative rate of return for that decade, so you don't know when the market's going to go up and down, and that's why the emphasis has to be on quality in your portfolio, quality bonds and quality equities. If I sound like a bit of an optimist here, I am, because at the end of the day, that is what is going to be the reality. Investors who see this period through are going to benefit for having done so, and investors that decide that they're scared are going to actually have their net worth decreased by inflation and a lack of action.

Shari Friedman: This has been a really fantastic conversation, both very high-leveled and detailed. Rob Kahn, Director of Global Macroeconomics at Eurasia Group, and David Bailin, Chief Investment Officer and Head of Citi Global Wealth Investments, thank you so much for sharing your insights.

David Bailin: Well, thank you for inviting me.

Rob Kahn: Yes, thanks.

Shari Friedman: That's it for this episode of Living Beyond Borders. Stay tuned for upcoming episodes. This season, we'll explore water security, real estate, the U.S.-China relationship, and much more. For more information, head to www.gzeromedia.com and go to the Living Beyond Borders on the drop-down menu, or subscribe wherever you get your podcast. I'm Shari Friedman. Thank you for listening.