J.P. Morgan Strategist: World More Balanced Despite Policymaker Actions, Not Because of Them

By
David P. Kelly, CFA

At the Sixth Annual European Investment Conference in London, JP Morgan Asset Management’s David Kelly, CFA, enthusiastically endorsed the idea that the world is becoming more balanced. But he gave very little credit for the improvements to policymakers. With the recovery not yet complete, politicians need to restore investors’ confidence, encourage an entrepreneurial attitude, and stop making Wall Street’s fictitious Gordon Gekko one of the most reviled characters, Kelly argued. An engaging yet controversial theme to his talk was that we should once again celebrate greed as a good thing.

Kelly, the chief global strategist and head of the global market insights strategy team at J.P. Morgan Funds, kicked off his review of the world with Europe, a continent that he believes is showing signs of balance and starting its long trek back to equilibrium, despite weak growth and unemployment. His view: The route is so long that there will be plenty of growth opportunities to be captured by investors along the way.

Even so, Kelly gave very little credit for this recovery to European policymakers and central bankers who, he said, picked the worst possible route to get there, making recovery more the result of luck than sound judgment. His advice to the region’s central bankers is to focus on restoring confidence in investors rather than constantly trying to source liquidity in the markets. And Philippe de Backer, for one, a member of the European Parliament who was in attendance at the conference and later addressed delegates, agreed with him very publicly on Twitter:

Interestingly, Kelly’s arguments stood in sharp contrast to remarks at the conference from European Central Bank Executive Board Member Yves Mersch, who credited European policymakers with calming markets by addressing key design problems associated with European monetary union (EMU).

According to Kelly, though, liquidity is not the problem; rather, the issue is that the market is “all petrol and no spark.” So long as headlines cite the soft economy, people will not spend and banks will not lend or make risky loans. Kelly was skeptical of the increased lending levels that are frequently lauded by policymakers because, in his view, they are merely safe loans. “When was any good done by making a safe loan? It is risky loans that make a difference,” he contended.

Kelly then skipped across the Atlantic and turned his attention to the United States, where the public does not understand debt and has worried too much about deficits turning their nation into the next Greece, he said. Kelly’s view stems from his analysis of the US federal budget deficit expressed as a percentage of GDP over time. Although news headlines have focused on the negativity around the rise of the US budget deficit in absolute terms, Kelly prefers to focus on the positive side of this relative measure. When the deficit is viewed as a percentage of GDP it has actually declined — a fact that is lost on many Americans, he argued.

Kelly also shared his view on the US level of unemployment. He claimed that the drop in the labor participation rate is not because people think there are no jobs and have stopped looking but, rather, because the workforce is going through a structural change in tandem with the retirement of the Baby Boom generation.

Still, Kelly was not entirely optimistic about the United States. This year has seen a “battle between Washington and wealth, with wealth winning.” As home prices and stock prices have increased throughout 2013, the wealth of better-off Americans has increased; according to Kelly, 75% of the private wealth within the country is now held by just 10% of its citizens. Therefore, it is simply the spending of rich Americans that has sustained growth. Kelly was, nonetheless, more enthusiastic about future US growth prospects, especially because of “pent up demand.” He cited, for example, the average life of a car in the United States: At 11.4 years old, automobile spending is likely to pick up.

Kelly’s advice to Janet Yellen, the likely incoming head of the US Federal Reserve? Get rid of quantitative easing because of the rising long-term costs of the reserves when interest rates start to climb. He likened the US economy to a slow, turning ship approaching an iceberg. The sluggish response of the economy means that the Fed must start changing course now or otherwise suffer the same fate as the Titanic.

The final stop on Kelly’s economic and financial world tour was a brief touchdown in Asia. He compared Japan with a “cat on its ninth life,” and although encouraged by “Abenomics,” he believes the nation is only one mistake away from hyperinflation.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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