Episode #463: J.P. Morgan’s Dr. David Kelly on Why He Believes Foreign Stocks Are Attractive, Inflation Will Subside, & The Debt Ceiling is a “Doomsday Machine”

Episode #463: J.P. Morgan’s Dr. David Kelly on Why He Believes Foreign Stocks Are Attractive, Inflation Will Subside, & The Debt Ceiling is a “Doomsday Machine”


Guest: Dr. David Kelly is the Chief Global Strategist and Head of the Global Market Insights Strategy Team for J.P. Morgan Asset Management.

Date Recorded: 1/11/2023     |     Run-Time: 49:32

Summary: In today’s episode, Dr. Kelly shares his view of the investment world today. He shares why he expects inflation to subside this year, why he loves the set up for international stocks, and why he doesn’t expect much fiscal help in the next 2 years. He also shares some changes he’d like to see to improve the US, like immigration and education reform, and why he thinks the debt bubble is a doomsday machine.

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Links from the Episode:

  • 1:22 – Intro
  • 2:06 – Welcome to our guest, Dr. David Kelly
  • 3:06 – David’s current view of world markets
    4:30 – A hot take on the transitory state of inflation in the economy
  • 8:45 – Why US stocks are more attractive than international assets
  • 14:23 – The impact of China’s reopening
  • 21:51 – Why David believes consumer spending will slow
  • 24:30 – How recent US federal policies are playing out in the economy
  • 28:06 – What an impending recession might look like
  • 31:58 – Economy-boosting policy changes he would make if he could change anything
  • 37:00 – David’s suggestions for teaching today’s youth to be financially literate
  • 39:38 – David’s favorite indicator
  • 42:03 – His most contrarian beliefs about inflation and international investments
  • 44:13 – His most memorable investment
  • 45:06 – Comparing the current inflationary environment with that of the 1970s
  • 46:19 – Learn more about Dr. Kelly; LinkedIn; Podcast: Notes on the Week Ahead; Podcast: Insights Now



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Meb: What is up my friends? We got an awesome show for you today. Our guest is one of my favorite financial commentators, Dr. David Kelly, Chief Global Strategist and head of the Global Market Insight Strategy team for JPMorgan Asset Management. Today’s episode, Dr. Kelly shares his view of the investment world today. He shares what he expects inflation to do this year, subside, why he loves the setup for international stocks, and why he doesn’t expect much fiscal help in the next two years. He also talks about some changes he’d like to see to improve the U.S., like immigration and education reform, and why he thinks the debt bubble is a doomsday machine. Please, enjoy this episode with JPMorgan Asset Managements’ Dr. David Kelly.


Meb: Dr. Kelly, welcome to the show.


Dr. Kelly: Glad to be here.


Meb: For the listeners, where’s here? Where do we find you?


Dr. Kelly: I live in Acton, Massachusetts, which is about 20 miles northwest of Boston.


Meb: We are recording this in the second week of the New Year. Happy New Year. Do you have any resolutions? Is there one kicking around? Do you do resolutions?


Dr. Kelly: I do resolutions. Yeah, I sort of do them continually during the year. So, at this stage, I don’t have a new set. I’m going to be running the Boston Marathon again in April. I run it every year for Dana-Farber. So, that’s sort of my big thing right now is just trying to get this creaky old body fit enough to tackle the Boston Marathon again.


Meb: If you do it every year, is it sort of a continual training, or do you say, “Two months ahead of time I got to put in the work?” How does it work for you?


Dr. Kelly: We need to put in the work about five months ahead of the time, but the other seven months of the year you can do what you like. But the less fit you get, the more you have to train up again to get going. So, I try not to get too far out of shape during the year.


Meb: I’ve only got one under my belt and that was enough. You’re one of my favorite commentators on the markets to listen to. I heard you years in L.A. in person, so we’re remote. This is the second best we do, but you definitely have a passion for markets. What does the world look like to you today? We’re going to hand you the mic. We’ve had a pretty weird last couple of years, pretty weird decade really, but let’s start. What’s your view of the world today?


Dr. Kelly: It’s kind of the opposite of the start of “A Tale of Two Cities” because it’s not the worst of times and it’s not the best of times. And I think people take a very extreme view of where we are right now. But what I see is we’ve been through this huge rollercoaster of political rollercoaster but then the pandemic, the policy response, Ukraine, food prices, oil prices, inflation, federal reserve raising rates, the market having a terrible 2022. With all of that, I think people are pretty bewildered, but as we go into this year, looks to me like inflation is coming down. The economy is soft. It might be on the edge of a recession, but that’s close. We may not have a recession but we are going to see slow growth. Meanwhile, the valuations are a lot better than they were a year ago. As an investor, do I see things out there that I’d want to buy right now? Absolutely. Buying at this point for the long run makes a lot of sense given valuations. As I say, not the best of times, not the worst of times kind of outlook.


Meb: Well, let’s start with inflation. I mean, that’s a topic that, for the better part of my life, hasn’t really been front of mind for U.S. investors for the most part. I mean, it’s been in a nice trend or trajectory directionally, which has been down and ignoring other investors around the rest of the world, Brazil, and Argentina, and all sorts of other places, Turkey. It’s something that all of a sudden popped back up. We did a poll on Twitter last year at one point. We said, “Which hits 5% first?” Maybe I said Fed funds, I can’t remember. It was basically bonds or inflation. “Who’s going to cross 5% first?” And looks like it might be a horse race. Give us a little more insight into this inflation discussion.


Dr. Kelly: This is one of those cases where you’ve just got to be honest about the story, even if it’s a little bit unpopular, to be honest. Because the truth is what we’ve had is a transitory bout of inflation, but it has been extended by what happened this year with Ukraine. So, why do we have inflation? It’s not because of the Federal Reserve, it’s not because of printing too much money. The connection between the growth of money and inflation has broken down for decades. What really happened is you had the pandemic, which restricted supply, and then you had the policy response, which not only ballooned the budget deficit but it gave money, large chunks of money to lower and middle-income households in America. And so we had lots of spending power with nothing to buy, and so the prices all shot up. And that’s really what kicked off this inflation.


And we were beginning to turn the corner on that. And I think we would’ve turned the corner on that in the first half of 2022, except then we had Ukraine. And Ukraine caused a huge surge in energy prices, and people are very sensitive to energy prices as a bellwether of inflation. And then we also had a spike in food prices. And all of that kept inflation going through the summer, got very hard over the summer. It’s been cooling since then. And I do think that going forward, unless there’s some other big shock, the inflation rate will continue to gradually come down. I don’t think we’ll get to 2% year over year by the end of 2023, but I think we’ll get close. I think we’ll be down to three-point something. And I think by the end of 2024, we’re going to be down at 2%, probably below 2%. I can easily see a situation whereby the middle of this decade inflation’s below 2%, and the Federal Reserve is busy trying to boost it back up to 2% rather than the situation we’ve seen right now or over the last two years.


Meb: Thinking of that playbook, is that a scenario that we look around and say, “Man, 4% bond yields screaming by?” If that does indeed occur… I mean, I think I’ve seen some of the projections where people were really expecting 2% to 3% even this summer with some of the… I think it was the futures, I can’t remember, but what are the implications for that? Is that baked-in consensus, or is that something that you don’t think the market really appreciates?


Dr. Kelly: I don’t think the market fully appreciates it, but I think its biggest implication is for stocks and not bonds. The bond market is cheaper than it’s been for a long, long time. Really you have to go back to before the Great Financial Crisis to find bond deals at these levels where you can get a 9% yield on high-yield bonds, you can get over a 4% yield on a 30-year bond. I mean, these are better yields than we’ve seen for a long time. If you go back a few decades, historically, it’s still not that great. On a 10-year treasury right now, you can make about 3.6%. But over the next 10 years, what’s the inflation rate going to be on average? You know, if it’s 2%, then you make 1.5% in real terms per year. That’s not actually historically a great return on financial assets. So, when I look at the stock markets, and particularly when I look at international stocks, I can see much better returns going forward than I can see in the bond market. But I still think that bonds should be part of a portfolio. And they look much more attractive today than they have for many, many years.


Meb: Yeah, I mean, foreign stocks is something that we have long been a proponent of, and it feels a little bit waiting for … where historically speaking, U.S. foreign coin flip in any given year, there’s periods where each does better. And not even that long ago, you know, the post-2000 turn of the century foreign had a nice long run but it feels really long to experience this U.S. stocks being the only game in town. Are there any signs that point to a catalyst where this might be a turn? Or is it hard to say?


Dr. Kelly: Well, first of all, you’re quite right that it’s been a very long time. One of the ways we look at this is we look at relative valuations. So, let’s not focus on performance. Let’s just look at what price-earnings ratios have done overseas relative to the U.S. Since 2008, international PE ratios have been falling relative to U.S. PE ratios almost every year, and now they’re about 30% lower. Now, if you think about it, you know, there’s no particular reason why a dollar of foreign earnings should have a lower PE ratio than a dollar of U.S. earnings, but they’re 30% cheaper. They’ve also got almost twice a dividend yield.


What’s been going on is I do think the U.S. has had a somewhat smoother path of it since the Great Financial Crisis. We didn’t have the European debt crisis, we did have the Trump tax cuts, which made U.S. corporate profits, after-tax profits look better. We did have a more aggressive response to the pandemic, which allowed for the economy bouncing back faster. And uncertainty, in general, tends to favor the U.S. dollar, and that tends to push money to U.S. equities. So, we can sort of see what’s happened.


Where we are right now is the U.S. dollar got to an extremely high level in the middle of last year. In rural terms, the highest we’ve seen since the mid-1980s. And international stocks were very cheap. So, since about October of last year, we’ve seen international stocks actually beat U.S. stocks, they beat U.S. stocks for all of last year put together. We’ve seen the dollar come down. We think it could come down a lot more.


On a catalyst, I think that the most important thing to think about here is not just what’s going on here and overseas or even what’s going on with central banks here and overseas, but what’s going on in the mind of investors. Because when it comes to international stocks, when it comes to stocks, in general, the U.S. accounts for 60% of the value of all stocks in the world, 60%. What’s also true is the U.S. accounts for at least 60% of all the stock ownership in the world. We are the world’s great stock investors. Nobody does it with as much gusto or excitement as we do it.


So, if Americans decide we don’t like international stocks and we just won’t buy them, then international stocks cannot do well. So, the real question to my mind is, what makes the average American investor say, “I want to be overweight international?” And I can tell you, there aren’t many people in that category right now. I talk to a lot of financial advisors, and almost none of them have clients who want to be overweight international. What would change their minds? It’s not really about Putin, or Ukraine, or China, it’s really about performance. If you have a year or two in which the dollar falls, and guess what? The international equity part of your portfolio actually was the star of the show. If that happens for a year or two, then people suddenly say, “Oh, maybe that’s a good idea.” And that’s what I think gets people to move away from their bias against international equities. For most people, it’s just going to have to be sort of a prove it moment. International equities are just going to have to outperform probably because of a falling dollar. And they’re going to have to do that for long enough that the public just eventually buys into, “Okay, we are going to look at this based on fundamentals.”


Meb: I like to say, for investors, it’s important to try to be a little asset class agnostic, you know, not to get too emotionally attached. But there are certain assets that elicit a very emotional or religious cult-like response. I mean, crypto has got to be number one. But in this cycle, I spent a lot of time on Twitter trying to mix it up a little bit and try to make people think about the buffet of choices we have out there. And foreign stocks have been one we’d certainly talk a lot about. But I get more vitriol and anger over the last year or two about people who put all their money in U.S. stocks, but even the prospect of anything else. And it’s strange to me because it’s an odd thing to get that heated about. But sentiment certainly follows price if you get a little period. And it seems interesting enough because we run some momentum and trend strategies over the past three or four months. You’ve definitely seen a ticking up of more and more foreign sectors and emerging markets come into the mix.


Dr. Kelly: I think the thing is that, over the years, as international has continually underperformed U.S, people more and more rationalize that. So, say, well, this is because they don’t know how to deal with debt, or this is because they don’t know how to deal with growth, or this is because they’re always in political conflict. But if you look at it with an unbiased eye, I mean, the truth is there’s a conflict everywhere. There are, of course, plenty of countries around the world, which are in much more turmoil than the U.S., but there are plenty of countries, which are not. And I think it’s just important to be unbiased when it comes to this, and also buy based on valuations. But historically, that has worked out pretty well for long-term investors. You shouldn’t be in stocks at all if you’re not a long-term investor.


Meb: The challenge, particularly over the past couple of years with all the meme stocks and Robinhood, I mean, time compression. When I think of long-term, it’s 10 years plus. And I think a lot of people when they’re thinking about what long-term means, it’s quarters and months or weeks even at this point. But while we’re still on the topic of foreign, talk to us about any shifting forces last year. The curiosity was that foreign did well despite one entire equity market going to zero, and then also despite probably one of the largest economies and also largest stock markets really struggling for a lot of the year, including China. And those two may be somewhat related, but talk to us a little bit about any just general trends of the global markets.


Dr. Kelly: So, let’s talk about China, to start with, because after the initial outbreak in Wuhan, China relocked down and was the strictest big country in the world in terms of trying to contain the coronavirus. And that worked pretty well against Alpha and against Delta, but it was never going to be successful against Omicron. So, after President Xi Jinping got inaugurated for a third 5-year term, we had these protests against lockdowns. The government modified its policies a little bit, as the Chinese government often does. They didn’t make many changes, just small changes. The problem is that this disease is so contagious that even though small changes just meant they were now dealing with a massive outbreak they couldn’t control. So, at that point, they just threw up their hands and said, “You know, forget it. We’re not going to try and control this at all. We’re going to say, ‘This is like the flu. You had your chance to get vaccinated, you can still get vaccinated if you want, but right now, it’s open season.'”


And that’s what China has done, and it is suppressing all information about the actual death toll. So, you can hear sort of pretty grizzly stories about what this is doing to older Chinese people. But the Chinese population has essentially decided that it’s just not going to be locked down any longer. It can’t do that. And the reason this is important from an economic perspective is while China was threatened by lockdowns, you always had a slow-growing Chinese economy with a threat that it might slow down to a halt.


We have problems right now as Omicron is sweeping through China and the shortages of various types of workers as well as medical supplies. But this should be relatively short-lived. I mean, Omicron moves very fast through a country. So, within a few months and maybe even within a few weeks, the vast majority of people in China will have been infected by Omicron. And whatever the health result of that is, for the vast majority of Chinese people, this means they can just get back to normal. And they will.


That’s also significant because they’ve had three years of lockdown. And you saw the pent-up demand in the United States after one year of a lockdown. People really wanted to move around and see relatives, and friends, and so forth. I think you’re going to see the same thing in China, but you’re going to see a bounce back after three years of lockdown, which means the Chinese economy will likely re-accelerate pretty rapidly in the second quarter and second half of this year. So, that’s part of the overall picture.


And then you look at Europe, the Eurozone seems to be weathering the effect of higher energy prices and the Ukraine war very well. They did manage to restock the natural gas. Luckily, they’re having a mild winter in Europe, and so it looks like they’re going to get by without having serious economic disruption because of high energy prices. The Eurozone might tip into recession, it might not. It might get by without a recession. I think the UK will have a recession. But all of them, I think if you look at the global economy, in general, I think it’s a slow start to 2023 because of Ukraine, high energy prices, and the pandemic in China. But as the year goes on, I think we’re going to see a significant pickup and growth overseas.


I think that’s really significant given where we think the U.S. economy is going to be going because, later on in 2023, I think it’s going to be very apparent that the world economy has actually got better growth dynamics than the U.S. economy has at this stage.


Meb: Thinking about China’s interesting. There’s probably been no other stock market I can think of over the past 20 years. It’s really had sort of boom-bust levels of returns and valuations. Looking at some of the long-term PE ratios, I mean, back in I think ’07 during the breaks mania, China got to some pretty high multiples and then goes down, goes back up, goes down. And right now seems to be one of the cheaper multiples in its history. What do you think the kind of avoidance and poor performance for Chinese stocks has been?


Dr. Kelly: It’s not exactly Taiwan, but I think the greater conflict between China and the United States, and China and the West, the sort of nationalism of Xi Jinping has I think really rattled a lot of investors. It’s not just COVID lockdowns, it’s the tit-for-tat technology wars. It’s what the Chinese government is increasingly doing to suppress information in China. I think it’s the crackdown that we’ve seen in Hong Kong. I think all these things make people pretty nervous that, in the decades, after the death of Chairman Mao, there had been sort of a continual movement in China towards, not necessarily an embrace of democracy but an embrace of free enterprise. There was a lot more freedom in China because of that. That has really been called into question in the last few years. And I think that’s really at the heart of the concerns about China.


I think apart from that, there’s obviously a very big real estate issue in China. You can see some problems for their economy. That may be part of the story, too. I think the biggest thing is just, is China going to have collective government, even if it’s not democratic government is at least plenty of rational minds in the room, or is it going to be an authoritarian government? And I think there are fears about an authoritarian government, particularly if people believe that the ruler is likely to be more nationalistic.


And yes, I think Putin’s bizarre behavior, apart from very evil behavior with regard to Ukraine, have further worried people of maybe Xi Jinping, if there’s backwards to the world, would attack Taiwan. We hope and pray that would not happen. That would not be just an issue for Chinese stocks, that would be a huge global issue. But I think that is part of the worries. It’s really about the system of government and what the Chinese government will allow.


Meb: Just mentally trying to think of all these giant asset managers, the headache they have with a market like that. I mean, and look, the Chinese market shut down before as at Russia, so it’s not exactly new or without precedent.


Dr. Kelly: And information is very important to you because the Chinese government does not seem to tolerate any criticism or what’s perceived as criticism. It’s much easier to believe in an economy if you can read non-biased commentary on what’s going on in the economy rather than feeling that everything that’s being said is being distorted by government preference.


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Coming back to the topic of the consumer, we hit on briefly in the beginning. I know you’re a big proponent of thinking about the consumer and the impact of what’s going on. We had this situation where we had a huge savings rate during the COVID times, sort of almost unprecedented levels. And that seems to be a tough situation because, as you know, if anyone all of a sudden gets flushed with a little more money, we’re all humans and we get on that hedonic treadmill and we get used to having more money, and then all of a sudden we don’t. It’s probably harder to adjust our spending than we think. What does that look like to you? Is that something that is showing up in the data? Is it going to be a problem? Is it going to be what?


Dr. Kelly: I think it’s a very significant problem. I think when the pandemic hit, I think it was correct policy to try to help out those people and those businesses that were going to get thrown out of business or thrown out of work by the pandemic itself. But the way the government approached it, both under the Trump administration and the Biden administration, is they tried to help both households and consumers who’ve been affected by the pandemic, but they tried to help a whole pile of other people, too. And all these stimulus checks and the enhanced unemployment benefits briefly for gig workers left consumers with a lot of cash in their pockets, which caused inflation because people were trying to buy too much stuff. But it also caused inflation. Everyone was buying too much stuff.


Could landlords have increased rents as much as they did if people didn’t have that cash in their pockets? And I think the answer is no. I think that one of the reasons for these big rent increases was that landlords calculated this, maybe people don’t want to pay $2,500 a month, they’d rather pay $2,200 a month, but could they in a pinch? Well, right now they could. And that I think pushed rents up. And, of course, it’s very hard to get the rents to come back down again.


The point that you made about savings rates is very important. The personal saving rate has now fallen to 2.4% on average. And that’s the difference between total income and total spending as a share of total income. But that 2.4% compares to an average of about 7% in the 5 years before the pandemic. So, what’s happened is, over the course of the pandemic, people raised their standard of living, and they’ve tried to sustain that standard of living by borrowing on credit cards, by taking emergency withdrawals for 401(k)s, by doing a lot of other things, by not saving over the last year or so. But that means that consumers are running out of rope here. So, I think that starting from here, consumer spending will grow. So, it’s almost guaranteed to grow very slowly over the next year or two.


Meb: We kind of bounced around a little bit, but Dr. Kelly’s thinking about the economy and what’s going on in the world. What do we not talk about that’s particularly front of mind for you?


Dr. Kelly: There are a few things. I mean, one of them is what’s going on with the federal government. We had midterm elections, and although the Republicans didn’t do as well as some people had expected in the midterm elections, they did gain control of the House of Representatives. And so now you have a divided government. And I think this is significant for a few reasons. First of all, in terms of fiscal stimulus, I think fiscal stimulus is dead. There was a lot of stimulus during the pandemic. And I personally think that both the Trump administration and the Biden administration overdid it. But now all that stimulus has basically worked through the system. It’s gone. Even if the economy were to fall into recession, I do not believe a stimulus bill would pass the House of Representatives. People would say, “We’re not going to do this because this is still conflation.” So, that means that this arm of government is essentially sidelined.


So, if the economy suffers down a lot or if we have a recession, the only people that can react to it in Washington are the Federal Reserve. So, I would say that the lack of any potential fiscal stimulus before 2025, at the earliest, means that the Federal Reserve, if the economy slows down, they may have to change their tact. And while we expect them to continue to raise rates a little bit more in the first quarter of this year and maybe into May of this year, by the end of this year, they may well be cutting rates. So, I think that’s one part of the story.


Another part of the story is debt and the debt ceiling. I mean, the deficit is still too high. I get it why the deficit was very high during the pandemic, and I think we ought to bring it down at a moderate pace. But the truth is we’re in a full employment economy. We should not be running a deficit equal to 5% of GDP with the unemployment rate at its lowest level in over 50 years. The deficit also is running about a trillion dollars a year. It’s adding to the debt.


And that brings up this whole issue of the debt ceiling. If you look at the amount of money that the Treasury Department has sitting in its checking account at the Federal Reserve and then you add in the gap between total debt outstanding and the debt ceiling, you’ve got over $500 billion still to play with. So, that’s good. But it has come down a lot. And I think we’re okay through the spring, but by July or August of this year, we’re going to be bumping up against our debt ceiling.


Now, as I said, I think we should be bringing down the deficit gradually. But if we bring down the deficit in one fell swoop by a trillion dollars, immediately by essentially enforcing the debt ceiling and not raising the debt ceiling, we will cause a recession and we could well cause a second global financial crisis. It is highly irresponsible of both parties to maintain a debt ceiling. I wish everybody would understand that the debt ceiling does nothing to slow the growth of government debt. It’s a doomsday machine, and we need to get rid of it. Both parties are at fault here because either party, when they controlled the White House and Congress, they had a responsibility and an opportunity to simply eliminate the debt ceiling but they haven’t done it. And so that, unfortunately, is a big worry for me. Later on this year, we could get into a partisan fight in which somebody tries to use the debt ceiling to try to win some political concessions. And markets get very nervous indeed.


Meb: Politicians are going to be politicians, only guarantee we have. You mentioned two phrases there. One, I feel like it is not that scary. The other is a lot more scary. One being prospects of recession, which is normal and happens from time to time. The other being a second global financial crisis. You snuck that in, and that would be obviously a lot more dramatic. I imagine most of the conversations you’re having with institutions on a daily basis, does recession come up in everyone? Is that their favorite question? They’re like, “All right, Dr. Kelly, when is the recession going to happen?”


Dr. Kelly: It’s a more complicated question than it sounds. If I tell you we’ve got inflation, we can argue that back and forth, but it’s very easy. Just look at the rate of growth of CPI. So, if inflation got up to 9% year over year in June, you could certainly say we’ve got higher than normal inflation. But what is a recession? The actual definition of recession is not two consecutive negative quarters of GDP. There’s simply a back-of-the-envelope definition, which is not particularly accurate.


There’s a group called the National Bureau of Economic Research, which has been around since 1920. And they define a recession as a broad decline output that lasts for more than a few months across the whole country, which involves a decline in real consumer spending, real retail and wholesale sales, industrial production, household employment, payroll employment, and personal income outside of transfer. So, they look at these six series. They’re not all flashing red. There’s a bit of orange. You can see some problems in the consumption side, you can see some problems in industrial production, but you’re not seeing some problems in job growth yet.


So, I’d say we’re not in recession right now. We might avoid one altogether. But if we avoid one, I think it’s important to see why. One of the reasons we could avoid recession is because we’re still generating jobs. And the reason we’re generating jobs is because we came into this year with a massive pent-up demand for labor. There are still more than 10 million job openings. And not all of those are real jobs. I think over the next few months, you’re going to see job openings come down. But while that exists, people are still being hired in significant numbers. And that I think is keeping job growth going and keeping wage growth going at a time where if you’d had as much of a slump of demand as we’ve seen on the demand side of the economy, you might be seeing negative job growth and then you really would be in recession. We’re not there right now.


And then the other thing is there isn’t a huge amount of overbuilding the economy. We didn’t actually build too many houses or too many cars. We didn’t build too much inventory. We haven’t done too much capital spending. So, the most cyclical sectors of the economy aren’t really overbuilt and that means it’s very hard for them to collapse. So, for many, many years, they’ve run a macroeconomic model of the U.S. economy. And I’m trying to see, can I get GDP to turn negative in a consistent way? And I can’t right now because I just can’t find enough gravitational forces out of something that’s going really wrong in the economy to put us in recession. What I will say is we’re going to have slow growth.


One of the things people don’t talk about a lot but they should is just how much our demographics have really collapsed. It’s a sad thing to say, but the truth is that if you look, not just at people dying from COVID but also just a growth in the death rate in the last few years, and maybe some of this is long COVID, maybe it’s just the age of the population, but the number of people dying in America, unfortunately, is rising. It’s significantly higher than was last decade. And then the number of babies being born, we had a brief baby bust and then a brief baby boom in the pandemic. And again, the Census Bureau doesn’t really do a very good job in describing that. You think that would be kind of their job, but they don’t. But that’s what we had. We had a baby bust and then a baby boom, but now we’re back to the same downward trend. It’s very hard for young people to afford to have babies.


And so we could very so demographic growth and that feeds into, along with low immigration or low legal immigration, solve economic growth. So, we know at the start of 2023, we’ve got an unemployment rate of 3.5%, but I don’t see where we’re going to get enough workers starting from here, to get the economy to grow by more than 2% per year going forward. It might well grow by less than 2% going forward. So, it’s going to be slow growth, whatever. I know it is a long answer but you asked, are we on the edge of a recession? We might be, but if we are, we’re not standing on the edge of a cliff, we’re standing on the edge of a swamp. It’s not a big drop, but it’s sort of slide-in. The problem about swampiness is it’s pretty hard to get out of. I think that’s really what we’re looking at here.


Meb: So, if I give you a magic wand, and I say, Dr. Kelly, the phone rings behind you, President Biden’s on the phone and he wants some counsel as far as economic policies, in general, but you got five minutes, he’s a busy man, what do you give him? Is there one or two that really stick out as here’s something to think about or chew on, but I’ve been really wanting to chat with you about this? Anything come to mind?


Dr. Kelly: Yeah, the most obvious thing is get on television, put everything behind comprehensive bipartisan immigration reform. Because the truth is Americans are not nearly as divided as CNN and Fox News would tell you about this. Everybody realizes you’ve got to have a system of immigration in this country which is legal, which is controlled, which we do have a protected border, which treats people with respect, but we also have to deal with the demographic reality that baby boom is retiring in huge numbers. And we need immigrants right now and we need legal, educated, qualified, hardworking immigrants. And there are many legal, educated, and hardworking immigrants in America. America was built off immigrants. But we need that immigration reform because if we do that, we can make up for the lack of demographics over the next five years as the tail end of the baby boom retires, then you can get your economic growth rate up to 3% as opposed to 2%. And if you do that, you can do a lot of other things.


The compromise is obvious. The compromise is we will lock tight that border and only allow people to get in on a legal basis if having done that have a reasonable number of legal immigrants and put the money into processing immigrants in a fair way and in an efficient way. And if we did that, we could raise tons of economic growth. I think personally, it would be politically great for the President, too, but you’ve got to lead in that one because the party system will not give you a solution to that. You’ve got to get both sides on board. That would do more than anything else to lift growth in this economy and actually, in the end, reduce political division. That’s the first thing I’d say.


Meb: Let’s say he says, “Okay, well, Dr. Kelly, perfect. We’ll check that box.” We got two minutes left because you gave us a quick answer. He’s like, “I’m concerned about the state of the wealth and income gap in the U.S., which seemingly is getting bigger. You got any ideas on how to fix that or how to think about that for our administration?” What would you tell him?


Dr. Kelly: I think you have to realize that there are answers on both sides of this. It’s not just about how to stop the rich getting rich, it’s how to stop the poor getting poor. You need to have a better educational system in this country. And I think that means more freedom to choose where you want to send your kid to school. We shouldn’t use race or religion as reasons to try to have some political question about this. People need the right to choose where they want to send their kids to school so we can have competition to get better schools. We need to do that. I think there are other things that we need to recognize. Nobody will talk about it, but gambling in this country just chips away at the poor. We’ve got all these state lotteries, which do nothing but make the poor poorer. At least the state shouldn’t be in the game. We shouldn’t be just making it worse.


I think we need to do something about the healthcare system. I think we need to recognize it. Healthcare is not a particularly insurable type of thing. We need to give people incentives to be healthier, to act in a healthier way. We need to try to increase not so much lifespans as health spans. And if you do that, you take a lot of the burden off because we’ve got a lot of people in this country who are sick. We don’t do this at the largest life expectancy in the world. Nothing like it. That is actually a burden to the economy. There are things we could do there, too. But again, I really think it’s about leadership with clear ideas and leading from the center. There are things that can be done, but you have to speak over the partisan talking points. You’ve got to annoy people on your side as well as the other side to get there.


Meb: You know, it’s funny you mentioned lottery. I will kind of tweet on this on occasion and say, “Look, this is, like, a prime example of how politicians can be just full of it because it’s very clear the lottery is predatory. Look, I get that it’s voluntary, but there’s plenty of less predatory versions.” I think in your heritage over across the pond, they have some, like, prize length savings and other ideas that are at least less bad. And there’s at least some interesting corp, I invested in one, but some interesting companies in the U.S. that are trying to tackle that problem. Americans love to gamble. So, I can’t imagine it’s going to take hold the same way that has in Europe, but I’m optimistic.


I actually did an article a few years ago and talked about four ideas I had, and that was actually one of them thinking about a saving space, lottery versus just one that you’re just guaranteed to lose, which is timely because, in California, maybe U.S.-wide, like $1.3 billion or whatever it’s now.


Dr. Kelly: It depresses me because the media spends so much time telling people how they can make money in lotteries than how they’re going to lose money at the stock market. But the long sweep of history suggests exactly the opposite happens. So, people would just commit to getting rich slowly, rather than pretend they’re going to get rich quickly. They do much better.


Meb: Yeah. You know, along that same topic, I mean, two of the things you’ve mentioned, education, and certainly that ties with personal finance. We’ve long moaned on the show about how we don’t teach investing or even basic personal finance in schools. The good news is the trend is moving in the right direction. It used to be, like, 10% of high schools. I think we’re up to, like, a quarter or a third now that have at least one mandatory money class. But how would you think about…? Like, are there any ways from the economist’s standpoint, we want to teach our entire country or generation to be literate in investing in personal finance? Any good ideas there?


Dr. Kelly: I think there is an opportunity because, as you and I know, the most important things are really rather simple. And I think that the perception people get when they turn on CNBC or Bloomberg and see all these numbers scrolling at the bottom of a screen or up and down the sides of it is that this is all tremendously complex. And there’s a whole industry devoted to the idea of making it incredibly complex. Generally speaking, you know, just a diversified portfolio invests in…you know. You don’t have to pick the tree, you just grow the forest or assume the forest is going to grow. I think that we get away from the basic idea of you got to, you know, pick a profession where you’re going to make a decent income, get your income to exceed expenses, know how to run a spreadsheet, know how to balance your own accounts. It’s actually not that difficult but do it. How are you going to plan your budget? How are you going to save some money? How are you going to make sure that your income grows over time in a way that’s going to actually allow you to achieve what you want to do?


You’re right, there’s a lack of education, but there’s also a taboo about talking about money in America, which is terrible. And I say this as somebody who comes from Europe. I mean, when I was growing up, my mother would know what every second cousin made, and it wasn’t taboo at all. Now, healthcare in Ireland was a very taboo subject. You never talked about your own health. Those were very private. And America’s exactly the opposite. Most people do not know where their best friend makes in money. It’d be an incredibly rude question. But I can tell you, I’ve been on long plane flights, the person beside me would explain in excruciating detail every health issue they got. And, in fact, Americans are very well educated on health. I mean, if you sit with eight people down at a table and described some symptoms to them, you’d have some excellent diagnoses. I ask them a question, “How much do I need for a retirement?” Having a clue. And it’s because we just don’t talk about it.


Meb: I wonder if it is changing a little bit. I feel like this younger generation, for better or for worse, obviously the meme stock mania is probably the wrong lessons to be learning but maybe they get the scars and hopefully learn from it. But at least they’re interested and more open about it. At least it feels that way a little bit. I don’t know. I’m conflicted.


All right. So, we’ve only got you for a few more minutes. I want to bounce on a few more questions while we’re at it. You get a new intern, JPMorgan comes in this summer and says, “Dr. Kelly, what’s your favorite indicator?” Just one in the economics world or investing markets. Is there one that you really say, “Okay, this is one that I have a soft spot for, or I really think is one that matters a lot to me?”


Dr. Kelly: My general answer to that is, sorry, it doesn’t work that way. A lot of people who don’t do any statistics will just show a charge where they show this line looks pretty much the same shape as that line, and therefore, you got a correlation, so this is how it all works. And the truth is the world is complicated. And so I run a macroeconomic model, which has got a few thousand rows to it, and it’s quite complex. It’s a big mosaic. That’s what the economy is. And there’s lots of interaction. You just got to try and understand the whole thing.


But if you’re asking me a slightly different question of if I only had one indicator based on which to know when to invest, I’d use consumer sentiment because what we’ve noticed going back over the last 50 years of the U.S. consumer sentiment index is that when people feel the most depressed, when you see a trough in sentiment, returns over the next year are excellent. And when people are most happy, returns over the next year tend to be much less promising. So, if everybody around you is truly miserable and scared, probably a good time to get invested. Pessimism and optimism always swing to extremes. And if you can latch onto one of those extremes and bet the opposite way, that generally works pretty well.


Meb: My favorite sentiment. Well, there’s two that I really like, but AI is one that I think is fun to watch, really to me when it gets to kind of the extremes. But my favorite statistic of it has been going back 50 years or whatever. The single most bullish stock reading was December ’99, and the single most bearish reading was March 2008 or March 2009, excuse me. You couldn’t come up with a theoretical that was more ridiculous than that setup. But it’s interesting to compare it to the investor’s intelligence. Leuthold does some good work on that where they’d look at the sentiment over the course of an entire year. And really up until this last period has been consistently high, obviously a decade of U.S. stock out performance. But historically, that meant future returns, a little more subdued. So, we’ll see.


What does Dr. Kelly believe economics investing, take your pick, that the vast majority of your professional peers, so your contemporaries don’t believe? And there’s probably a handful. I’ve been tweeting out a list of mine that’s up to almost 20 now. But is there anything, in particular, like, “Look, this is a belief I have and none of my friends in the economics investing world agrees with this?” So, anything come to mind?


Dr. Kelly: I think we’ve mentioned two of them. In economics, one thing that people somehow have latched onto is the idea that things have permanently changed in terms of inflation and inflation is back. And when I look at the long-term drivers of inflation, which is greater inequality, greater information technology, demise of trade unions, all that seems to be in place. I think this was a brief cameo from inflation, and it is going to fade again. I think a lot of people don’t believe that. And then when it comes to investing, I believe there’s a lot of opportunity in international equities and for a very good reason because of years of underperformance. Nobody wants to recommend international equities with their clients.


Meb: Well, it’s career risk.


Dr. Kelly: In my own personal investments, I can do that. Even my wife gives me a hard time about it, but when I look at valuations, both at the dollar and international equities, I’m quite happy to put my chips in that square and let this thing play out.


Meb: Yeah, we used to have a slide in presentations where it would be global market valuations, and on the left side, it’d be the cheap countries, the right side, it was the really expensive ones. On the left side, I didn’t label Cheap, I labeled Career Risk. I was like, “If you go home and you come back a year from now and these countries do really well, great, you may get a pat on the back. Your wife tells you, ‘Okay, well done, doctor. It is your job.'” Your clients say, “Okay, well, cool.” But if they do poorly or poorly for an extended period, your head’s on a spike, “You’re an idiot, Dr. Kelly. Why would you possibly recommend? We know U.S. stock are a better deal.” So, that’s part of it, maybe.


Dr. Kelly: I think it is at this stage. But, of course, you don’t have to put all your eggs in that basket either. It’s just most Americans are very underweight in international equities. And I think the first step, at least getting a level weight might be an idea.


Meb: What’s been your most memorable investment over your lifetime? Good, bad, in between, just anything that sticks out burned into your memory.


Dr. Kelly: The best investment I ever sold was, my grandfather brought my father and mother a house back in the 1960s, which my mother then sold at the peak of the Irish real estate bubble in 2006.


Meb: Was there any magical timing behind that, or it was just time, or?


Dr. Kelly: She hung on longer than she should have because she didn’t have her act together, but she managed to catch the absolute peak of the market, and essentially beat Warren Buffett in terms of returns. Yeah, investing in Irish real estate has been from trough to peak, was about the biggest boom that I ever saw.


Meb: I was going to make a comment before I forget, and it’s a little disjointed, but as we were thinking about what you believe that others don’t on the inflation topic, I was going to comment. I was going to say I wonder how much of the narrative, for a lot of economists, particularly is some PTSD about the 1970s where you had this initial inflation, it looked like it was going away, and then bang, like, it got way worse and kind of the second run up. I wonder how much, like, in the back of the head, if you’re the Fed or you’re economist, like “Look, I don’t want to be known for doing this again.”


Dr. Kelly: I’m afraid that is what it is. But remember how different this country is. I mean, back in the 1970s with strong trade unions and when prices went up, workers went on strike until they got wage increases to compensate them. And so you had a price wage spiral. There is no evidence that that’s really going on right now. And in between, we’ve had this huge growth in inequality, which I think funnels money towards financial assets and away from goods and services. I don’t really see that changing. And also information technology just makes everything a commodity. With one click of a mass, I can buy the cheapest anything. And that simply wasn’t the case in 1970. So, I think we’re going to be careful about the lessons from history because more has changed in terms of the inflation dynamics since the 1970s than has stayed the same.


Meb: Dr. Kelly, where do people go if they want to find you? They can’t find you on Twitter. Where’s the best place to find your research, what you guys are up to?


Dr. Kelly: If you want to read, you can find me on LinkedIn or on JPMorgan Asset Management’s website. But we also put out two podcasts, one called “Notes on the Week Ahead,” another called “Insights Now,” and you can find them wherever you find podcasts, I suppose Spotify or something like that. But I’m not very good at finding podcasts, but those who like podcasts can find them. So, it’s “Notes on the Week Ahead” and “Insights Now.”


Meb: Well, you’re one of my favorite people to listen to, particularly in person. So, thank you so much for joining us today.


Dr. Kelly: Anytime, Meb. I’m very glad to be able to do this.


Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We’d love to read the reviews. Please, review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.