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1:04

Welcome back, everybody. We got another awesome

1:06

show today. Our returning guest is Dr.

1:09

David Kelly. Dr. Kelly is

1:11

the chief global strategist and head

1:13

of the global market insights strategy

1:15

team for JP Morgan Asset Management.

1:18

He also publishes notes on the week ahead, which

1:20

is read by over 100,000 people. Dr.

1:23

Kelly, welcome back to the show. Glad

1:25

to be here, Matt. Last

1:28

time we had you on, which

1:30

would have been January of

1:32

2023, I think. It's

1:35

been a while. I asked you what sort of

1:37

view did you hold that most of your peers

1:39

didn't hold. I'm going to read you

1:41

your answer. You've probably long forgotten this. It

1:44

said, I think this was

1:46

a brief cameo from inflation and

1:48

it's going to fade again. Hey,

1:51

you're going to take a little victory lap. I think you

1:53

end up being right on this one. You want to tell

1:55

us about it? Yeah,

1:57

I feel good about that. I mean, it's nice

1:59

to have a prediction that actually. comes true. And

2:01

somebody certainly reminds you of it. But yeah, that

2:03

this economy is not an inflation prone economy. And

2:06

if you look at what happened with inflation in the 1970s, you know,

2:09

it spikes up and then it spikes

2:11

down on enormous the same way. And

2:13

that's what happened. We had the

2:16

pandemic, which mess up

2:18

supply chains with a policy response, which is very

2:20

important, and giving a lot of money to lower

2:22

and middle income households, they spent

2:24

that money push up the price of food, push up

2:27

the price of energy, push up the price of all

2:29

sorts of core goods. And then

2:31

you had Ukraine and that and that's further

2:33

amplified. And so by the summer

2:35

of 22, we were up at 9.1%

2:37

year over year inflation. But everything that I've

2:41

seen about the operation of the US economy over

2:43

the last few decades suggested that when you begin

2:45

to fade those things, when you get rid of

2:48

the pandemic age, when you try and get back

2:50

to when you get back to normal, those that

2:52

in that sense, and even as

2:54

the world adjusts the supply shocks caused by

2:56

Ukraine, once that happens, inflation will come right

2:58

back down to 2%. And

3:01

that's exactly what's done. So

3:03

when you sort of think about what's transpired in what

3:05

is that almost year and a

3:07

half, almost two years since then, you know,

3:10

it seems everyone was always

3:12

wringing their hands upset about this

3:14

impending recession. But it

3:17

seems like times are kind of good. You want

3:19

to walk us through kind of what you guys

3:21

are seeing right now? We never declared that we

3:23

thought we'd see a recession. I think we were

3:25

careful not to make that call. And,

3:27

you know, long experience watching American consumers makes

3:29

me an optimist on this. I mean, we

3:31

have the most reckless consumers in the

3:33

world, they are more willing to spend money they don't

3:36

have and stuff they don't need than anybody else. And

3:39

that really has powered us through

3:41

this. And even in the third

3:43

quarter of 2024, we

3:45

saw real consumer spending growing at 3.7% annualized

3:48

pace. We're seeing broad

3:51

gains in consumer spending across the board

3:53

from richer people because of huge gains

3:55

in the stock market and household wealth.

3:58

But even from lower middle income households,

4:00

we're seeing good gains in things like food

4:02

and clothing and energy spending, because

4:04

we've seen 18 straight months of

4:07

rising real wage gains, wages have been going

4:09

up fast and inflation. So I think people

4:11

still feel like they're grumpy about high prices

4:13

and don't ever expect those prices to get

4:15

back down to where they were before the

4:18

pandemic. But the rate of change in prices

4:20

has come down. And that has allowed the

4:23

average American to get a little bit ahead of

4:25

the game. And that's kept consumer spending going. So

4:27

I think that's the biggest part of it. I

4:29

think we've also seen pretty good spending on AI,

4:31

corporate profits are very strong. I think corporations are

4:33

willing to do some capital spending. And that's just

4:35

really kept us going here. Inflation has gone away,

4:37

but it wasn't because of an economic slowdown, because

4:40

that slowdown just didn't occur. It

4:42

feels like the sentiment of the consumer, if

4:45

you were to tell me kind of everything in the way it

4:47

looks, I would assume it'd be a lot more

4:51

bubbly, but it seems kind of dour. Is

4:53

that the case? What are the surveys kind

4:55

of saying? The consumer doesn't seem like they

4:58

should be as happy as they should be.

5:01

They should be a lot happier than they are. I mean,

5:03

one of the ways I measure this is there's an old

5:06

index, which you call the misery index.

5:08

And that's just the sum of inflation

5:10

unemployment, the CPI inflation rate you add

5:12

on the unemployment rate. Well, right now,

5:14

the CPI inflation rate is about

5:17

2.4% unemployment rate running 4.1. You add those

5:22

together, 6.5%. That is lower than it's been 87% of the

5:26

time over

5:29

the last 50 years. And so yeah,

5:32

that's actually a sign of a pretty healthy economy.

5:34

But yet, you know, consumer confidence is down and sort of

5:36

the bottom 20% of the last 50 years. So people

5:41

don't feel good, even though the numbers

5:43

suggest that they probably should. Now, I

5:45

think, you know, what's causing it, I

5:47

think one of the reasons is it

5:49

has been unequal. And consumer confidence surveys

5:52

count by people, everybody gets one vote. But

5:54

the economy doesn't count by people, the

5:57

economy counts by dollars. And so the

5:59

spending of richer households is much more

6:01

important to the economy than the spending of

6:03

poorer households, because they just don't spend as

6:05

much money. They don't have as much money

6:07

to spend. So the economy can be doing

6:09

pretty well, but it won't feel that great

6:11

to all the households. And that's an issue.

6:14

But also, I think this this you know,

6:16

the prolonged election campaign, the social media feed

6:18

that people get, basically the all these algorithms,

6:20

whether it's in conventional media, social media, what

6:22

they are basically designed to do is make

6:24

you scared and make you angry.

6:27

And we've got populations walking around scared and

6:29

angry. And I think to some extent, we

6:32

are manipulation into that perspective. But that certainly

6:34

makes people take a negative view on the

6:36

economy as well as many other things. You

6:39

know, this is actually a pretty profound

6:41

insight. You had a quote earlier

6:44

this year in Barron's that we pulled out where

6:46

you said often at speeches, people ask me for

6:48

advice, I say get a pitcher of water and

6:51

a baseball bat. And if you kindly

6:53

drop your cell phone into the pitcher of water

6:55

and take the baseball bat to your TV, you'll

6:57

feel much better. And I wonder

6:59

how structural this sort of

7:02

social media degradation of mental happiness

7:04

is, you know, I was watching the World Series,

7:06

my seven year old, and I joked

7:09

on social media, I said, you know, hey, this

7:11

is really a special time, my son

7:13

and I get to watch the World Series. And

7:15

I finally get to explain to him what

7:18

erectile dysfunction, psoriasis, transgender surgery, we

7:20

spent like three innings talking about

7:23

side effects, because every single advertisement

7:26

was like a pharmaceutical advertisement or some

7:28

terrible political ad. I'm like, how are

7:30

any of these appropriate for

7:32

a young kid audience? That's the World

7:35

Series. But I wonder if there is

7:37

a actual structural input to

7:39

the samples, because people are

7:42

struggling with some of the inputs you mentioned. Oh,

7:44

absolutely. There's actually a very good book

7:46

written recently called I think it's called

7:49

The Anxious Generation, just about

7:51

the effect that the introduction of

7:53

smartphones appears to have had on

7:56

teenagers since 2012 when they arrived at the

7:59

scene. And just, you know, literally

8:01

can see rising levels of depression,

8:03

rising levels of anxiety, people

8:05

scrolling, losing sleep, people sort

8:07

of comparing themselves to other people on social

8:10

media. It's very detrimental to people's health. You walk

8:12

along the street, people have all got their heads

8:14

in their phones. Humans are not built to do

8:16

this. Humans are built to look at other

8:19

people in the face. We're getting this synthesized

8:21

life that we're looking at over social media

8:24

instead of the real stuff. So I think

8:26

it's dividing us. Again, all the

8:28

messages are designed to, a lot of the

8:30

messages are designed to make us angry and

8:32

scared because that's what tends to cause humans

8:34

to react. And that's, you know, Madison

8:36

Avenue learned that years ago. The problem is they've

8:38

got so many more tools at their beck

8:40

and call. And so I think it has

8:42

a profound effect on us as human beings.

8:44

And we should, we should really think about,

8:46

you know, doing something radical

8:49

to try to dewire ourselves from some

8:51

of this stuff because it's not

8:53

doing us any good. All right. Well,

8:57

when you figure it out, let me know because I'll be the

8:59

first to sign up for Dr. Kelly's

9:02

service here. There's one area

9:04

of the world where people aren't

9:08

sad and grumpy. And

9:10

there was, I don't know if you saw

9:12

it yesterday's report from the conference board was

9:15

talking about where they asked investors,

9:18

do they expect higher stock returns in the

9:20

next year? And I

9:22

believe it was the highest reading ever on record

9:24

going back to 1987. So

9:27

maybe there's one area of the world

9:30

they might be interested in. That's with

9:32

US stocks at all time high.

9:34

But a lot of the other sentiment surveys,

9:36

you know, may or may not agree with

9:38

that, you know, or at least not as

9:40

crazy as they are with AI survey. And

9:44

then the one that does rhyme with

9:46

that is the percentage of

9:48

household net worth that's allocated to stocks is,

9:51

you know, at these all time highs. Talk

9:53

a little bit about that, about

9:55

kind of this wealth surge, what

9:57

kind of implications this has as well. Well,

10:01

first of all, on your first point, I mean,

10:03

that is a big contra indicator, because

10:05

when everybody feels very optimistic about stocks, it usually

10:07

means all the available money is now in the

10:09

market. Of all the things we might

10:11

talk about, that's the most worrying sign for the stock

10:13

market. But there has been an enormous surge in wealth.

10:16

I mean, I wrote something about this a few weeks

10:18

ago. We estimate that the

10:20

net worth of all American households rose

10:23

by $50.1 trillion in

10:26

the five years it ended in the third quarter of 2024. $50.1 trillion.

10:28

I mean, to give you a sense

10:32

of how big that number is, the growth

10:34

in the federal debt over that five-year period

10:36

was $11 trillion. But

10:38

this is $50.1 trillion, and it's had

10:40

a profound effect. And it's because what's

10:42

happened is we've had two massive

10:45

booms at the same time. We've had a

10:47

massive boom in the stock market, but we've

10:49

also had a massive boom in home prices.

10:52

And while those higher home prices are

10:54

a locking out a lot of Gen

10:57

Z families from ever buying

10:59

a house and millennials too. So there are

11:01

a lot of detrimental aspects to it. But

11:03

two thirds of Americans actually own a home

11:05

with without a mortgage. And they've all seen

11:07

a significant increase in home equity, almost all

11:10

of them. And that's really a part of

11:12

a big explosion in wealth. So this isn't

11:14

an economy that's worked for everybody, but it

11:16

certainly has worked for investors over the last

11:18

few years. There's a

11:21

stat that I came up with

11:23

recently, and it's technically not concluded

11:27

because it's a year end staff. But when

11:29

I did it, it was as

11:31

a year to date. And

11:34

that was the number of times

11:36

both gold and stocks

11:39

are up 25% in a year, number

11:42

of times that's happened in history.

11:45

And the answer is zero. And

11:47

I'm not really including 1933 because

11:49

it was kind of illegal

11:51

to own back then. But there's some

11:53

weird forces going on. Is

11:56

that something that surprises you to see gold

11:58

and stocks both wrong? and stomping

12:01

this year, or is it creating some

12:04

sort of offsides imbalances? What do you

12:06

think? Not particularly. So

12:08

I think that this surge in

12:10

stock market is having a lot of side effects,

12:13

because what's happening is people's portfolios are getting

12:15

completely out of whack in terms of balance.

12:18

And so every quarter, people are looking at them,

12:20

I feel very rich, but boy, should I have

12:23

all my money in the stock market, particularly if

12:25

all my money is in US stocks and it's

12:27

so concentrated in just those mag seven stocks. So

12:29

maybe I ought to diversify, reallocate. Well, how do

12:31

I diversify? Well, I suppose I better buy some

12:34

bonds. And so we've seen, we've seen long term

12:36

interest rates, I think be lower than they otherwise

12:38

would have been, because people are trying

12:40

to desperately buy some bonds to try and

12:42

balance it out. But also people say, well,

12:44

I should be in some alternatives. And I

12:46

heard from somewhere that there was going to

12:49

be inflation or inflation might come back, maybe

12:51

I should hold some gold. And what it's

12:53

doing is this tidal wave of rising stock

12:55

well, is actually causing these ripples into all

12:57

these other markets as people try and rebalance

12:59

portfolios. I think it's leading to high valuations

13:01

within the bond market, is leading to tight

13:03

credit spreads. I think it's leading to a

13:05

lot of interest in alternative assets. And

13:08

if gold is one of those alternative assets, then it's

13:10

leading interest in gold. I think that's part

13:12

of it. I would also say there may be an

13:14

issue with just the boom in the Indian economy, because

13:16

the Indian public like no public

13:18

on earth loves gold. And so India

13:21

is doing really well, gold prices usually

13:23

go up. That's a great

13:25

point. How much of this I wonder is

13:27

what's going on

13:30

with the dollar? I know you've talked about the

13:32

dollar being on the expensive

13:34

side. And it's always funny when

13:36

you have a political election going on

13:38

in seasons of what everyone's talking about,

13:41

because people talking about the dollar being,

13:43

we want a strong dollar, but the dollar's

13:46

too high and China's doing this and somebody's

13:48

doing that. What are your thoughts on

13:50

the dollar today and expensive or

13:52

where do you think it's going to be? What

13:55

we should be doing, where should we go on going forward? Well,

13:57

I think the dollar is too high. My best.

14:00

evidence of that is the United States has not

14:02

run a trade surplus since 1975. We've

14:04

run a trade deficit

14:07

every single year since then. People

14:09

don't want to buy our stuff because it's too

14:11

expensive, and we want to buy their stuff because

14:13

it's cheap, and that's because the dollar is too

14:15

high. And that may sound like, well, that's nice,

14:17

we can buy cheap stuff, but it has served

14:19

to decimate US manufacturing. And

14:21

a lot of the empty factories in the

14:23

industrial Midwest, a lot of the people that

14:26

find themselves in dead end jobs or ghost towns

14:28

has come from having a dollar that we allowed

14:30

to be too high for too long. I

14:32

mean, the very phrase strong dollar, weak dollar,

14:34

has a judgment in it. But

14:36

why should we want a high dollar? I mean,

14:39

the dollar is not our national flag. The Stars and

14:41

Stripes absolutely fly as high as you can. The

14:43

dollar is an economic instrument, and you want to

14:45

set it to the level that does you the

14:47

most good. And the level that does you the

14:49

most good is one that would be probably aligned

14:51

with having a trade balance rather than a trade

14:53

deficit running at over a trillion dollars a year.

14:56

So I think the dollar is too high. And

14:59

I would like it to come down slowly. I think

15:01

that is a much better policy decision than to

15:04

try to get into a tariff war, a trade

15:06

war. But there are things the government could do

15:08

if we set about it, to bring the dollar

15:10

down gradually. And I think we should work with

15:13

trading partners to try to get them to help

15:15

with that. And if we can

15:17

bring the dollar down to a level which

15:19

is in the long run consistent with trade

15:21

balance, I think it's just more healthier for

15:24

everybody. So I do think that we should

15:26

try and bring the dollar down gradually. And

15:28

I think ultimately, because any other solution to

15:30

trade deficit is just counterproductive, I do think

15:32

we will ultimately make that decision as a

15:35

country that we need to just try to

15:37

bring the dollar down. I

15:39

was wondering at what point the big T word

15:41

would come into play and that being tariffs. This

15:45

has been of the word cloud, probably

15:48

the most discussed

15:51

word, probably in the economic cycle.

15:54

What's your thinking on,

15:56

is this something a good return to tariffs

15:58

here in 2020? 2024,

16:00

2025, or I should say more tariffs. How

16:03

do you think of those? What should investors think about

16:05

them? Tariffs are a terrible idea, period.

16:08

Because the first problem with tariffs

16:11

is they push out their tax on your own

16:13

consumers. So everybody has to pay more. I mean,

16:15

you get more inflation out of that. And

16:17

the stuff that we import, a lot of

16:19

it is bought by low and middle income

16:21

consumers. So it's a pretty unfair tax. It

16:23

tends to tax lower income consumers more than

16:25

up-rink of consumers who buy more services. That's

16:28

the first thing. The second thing, though, is

16:30

that everybody else is going to retaliate.

16:32

What do you think is going to happen? I mean,

16:34

to assume that people aren't going to retaliate, it's kind

16:36

of like a two year old punches somebody in the

16:38

nose and then they punch them back. She punched me

16:40

back. Well of course she punched you back. What do

16:42

you think was going to happen? So we put

16:44

up tariffs. They put up tariffs. Now where

16:46

are you? You've got taxes on their consumers

16:48

so their economy down, your taxes and your

16:50

consumers, so your economy down. But what's more,

16:52

we've got taxes now. It makes it harder

16:54

for us to export. So all of our

16:56

capital goods exporters, our technology exporters, our

16:59

farmers try to export commodities, they all take a

17:01

hit because they can't export the stuff. So it

17:03

slows the economy down. It slows their economy down.

17:05

You know, tariff for a tariff will make the

17:07

whole world poorer, period. Tariffs

17:09

should never really be considered as a long term policy.

17:12

As I said, good idea to bring the dollar down,

17:14

but not have tariffs permanently. Now you could

17:16

use tariffs as a threat. You could

17:19

say if you don't play fair, we'll

17:21

put a tariff on you. Fair enough.

17:24

Maybe you even put a tariff on temporarily until

17:26

they play fair. Fair enough. It's kind

17:28

of like a strike. You either threaten to go out

17:30

of the strike or actually you do go out of

17:32

the strike. But nobody should ever want to be permanently

17:34

on strike. That's just stupid. And a

17:36

permanent tariff is just stupid. The problem

17:38

is then if you look at tariffs as a source

17:41

of revenue, if you take, oh look,

17:43

all this money is coming into the tariffs.

17:45

We're going to use it for doing that.

17:47

Then they've got, they have a tendency to

17:49

become a permanent. It's a very, very dangerous

17:51

game to play. The United States is full

17:53

of some of the most competitive, energetic, innovative

17:55

people in the world. We are quite capable

17:57

of competing with the world on the level

17:59

of the world. playing field. As I say,

18:01

the currency ought to come down a bit,

18:03

but we shouldn't try to put up trade

18:05

barriers. We can benefit from trade by exporting

18:07

smarter, by building better industries.

18:10

Our living standards can get improved

18:12

by what we do in our schools, not what we

18:14

do in our ports, in terms of trying to

18:16

put trade barriers in people. Well, I

18:19

mean, it seems like, you know, as we

18:21

go through these cycles, you

18:23

have politicians, regardless of kind of what side

18:25

of the aisle they're on, they

18:27

complain about the deficit, and they complain about things

18:29

like that. Is that a concern to you? Or

18:31

do you ever worry about our US government deficit?

18:34

Is it something that you have any particular prescriptions

18:36

for how they should deal with it? Or is

18:38

it not so much of a concern? It

18:41

does worry me, because essentially, what it means is that

18:43

we as a country are living beyond our means today.

18:45

And this is kind of like a family

18:48

budget. If you commit yourself to living beyond

18:50

your means today, then in some time in the future, you

18:52

have to live beneath your means. And so

18:54

as we accumulate foreign debt, and as the

18:57

government accumulates a liability to

18:59

richer households in the United States and around

19:01

the world, eventually, they're going to have to

19:03

raise taxes or cut spending, which is going

19:05

to hurt particularly lower middle income consumers in

19:07

the United States who are more dependent on

19:10

government services, or through higher taxes. So it'll

19:12

hurt you in the long run. I

19:14

think it makes sense to try to reduce

19:16

the deficit. I also think that the danger

19:19

is we're not just keeping the deficit. The

19:21

debt is growing as a share of GDP.

19:23

The deficit's running at about 6% of

19:25

GDP right now. So the amount that you are

19:28

spending is exceeding our taxes

19:30

is equal to about 6% of GDP, almost

19:33

$2 trillion right now. At that pace, the

19:35

debt, which is the accumulation of all these

19:37

deficits, is going to grow from about

19:39

100% of GDP right now up

19:42

to, say, roughly speaking, 130% to 140%

19:44

of GDP 10 years from now. And there is a possibility that

19:50

at some stage the world says, you know what, you

19:52

ain't ever going to pay this back, are you? And

19:55

then long term interest rates go up, treasury interest rates go

19:57

up, and you could have a crisis. the

20:00

case if the debt's rising and you've no plan

20:02

to deal with it. I mean, other

20:04

countries, my own native Ireland had a terrible

20:06

debt problem after the great

20:09

financial crisis because of a lot of

20:11

betting out Irish banks. But

20:13

nobody doubted that the Irish people were willing

20:15

to take the tough decisions to pay down

20:17

that debt. And so because the Irish political

20:20

system was responsible and people realized you guys

20:22

will pay, it's usually a matter of credit.

20:24

Credit is just the same thing as trust.

20:27

And if people can trust the US political system to

20:29

pay down the debt, then we can

20:31

get away with it. But I think it does

20:33

mean that we have to approach this like adults

20:35

and the voters need to be

20:37

adults also. The voters need to vote for

20:39

people who will tell people the tough truth,

20:41

which is that either through spending cuts, which

20:43

we're going to specify or through tax increases,

20:45

which we're going to specify, we have to

20:47

pay for the things we want to do.

20:50

Now, I don't think you have to go cold turkey here.

20:54

I don't believe in a fiscal cliff. I believe in

20:56

a fiscal ladder. You gradually run by run, bring the

20:58

things down. If you could bring the deficit down from

21:00

say 6% of GDP, even to 3%

21:03

of GDP, if you could do that much, then over

21:05

time, the debt to GDP ratio will fall and you

21:07

can get out of trouble. But

21:09

you do need to have that determination. And unfortunately,

21:12

that is lacking in US politics today. But

21:14

one of the things y'all been talking a

21:17

lot about recently is kind of your annual

21:19

state of the markets and your

21:21

long term assumptions.

21:23

And if we

21:25

go back to our survey where everyone expects

21:27

the stock market to go up, what

21:30

are you guys thinking? We're going to do 15% a

21:32

year like we have been doing for the past 15

21:35

years or something more

21:37

sober or something even better? Now,

21:40

I think something more sober, to be honest. In

21:43

a lot of the bottom of our literature, we

21:45

usually have some boilerplate which says your past performance

21:47

is not indicative of future returns, which

21:49

is actually not accurate. Past

21:52

excellent performance is indicative of future

21:54

mediocrity. The better it's

21:56

been, the worse it's going to be. And

21:58

that's just matter evaluations. stocks selling at 22

22:01

times forward earnings. The top 10 companies

22:03

in the S&P 500 are selling at

22:05

almost 30 times forward earnings. That's expensive.

22:08

That will tend to come down over time. And

22:11

in a slow growing economy which starts out in full

22:13

employment, I think that's going to be a problem. So

22:16

I think US stocks can still give you a positive

22:18

return over the next decade. I think it'll be a

22:20

positive real return. I would not be

22:22

surprised if you and I are still

22:24

in the business and talking 10 years from now if

22:26

we look back and said, well, that wasn't so great.

22:29

We only went up on average a lot of bumps

22:31

on the way and we averaged like 5 percent total

22:33

return out of US equities. That wouldn't surprise me at

22:35

all. Now there are ways

22:37

of beating that trap. How do you beat the 4

22:40

percent or the 5 percent trap. You don't have

22:43

to buy the whole stock market. There are parts

22:45

that are expensive but outside of the mega caps

22:47

it's not expensive. It's just the mega cap stocks

22:49

are expensive. And then international stocks

22:51

are significantly cheaper than US stocks. And

22:54

then there are alternative investments which also

22:56

can be used to try to provide

22:58

decent returns are better than returns

23:00

you get in public markets. So there are ways of

23:03

getting a bit more return. But it gets trickier. The

23:05

more the market goes up the harder it is to

23:07

get good returns from here. And sometimes you know when

23:09

you get wealthier I think

23:11

it's really important to think about OK now you

23:13

know five years ago I didn't have this money

23:15

and I had all these things I was worried

23:17

about in terms of how do I save retirement.

23:19

What I want to do if you're wealthier today

23:21

then maybe you should think about well you know

23:24

actually I've got enough now don't I have actually

23:26

got enough so that I can actually take less

23:28

risk. And what's actually happening is a lot of

23:30

people are in that position because how well markets

23:32

have done. But if they actually look at their

23:34

portfolio they're not less risky than they were five

23:36

years ago. They're more risky because they are overweight

23:38

the overpriced most expensive stocks in

23:41

the market. And something to think about is

23:44

you know this growth in wealth is

23:46

a signal that you people need to

23:48

reassess where their wealth is relative

23:51

to their goals and relative the amount of risk they

23:53

ought to be taking. And I

23:55

feel like that's something we could say

23:57

we might be saying it again next year

23:59

because it's that at last year. perhaps on

24:01

international stocks. What's it going to take for

24:03

there to be a rotation? I

24:05

love your charts on percent of

24:08

global market cap. And it shows

24:10

the US is like two thirds

24:12

now of the globe, which is

24:14

10 times

24:16

bigger than any other country and five

24:19

times bigger than like Europe.

24:22

What's it take for this to shift

24:24

this regime that seems never ending? Well,

24:27

rotation is a nice word. It's kind

24:29

of like deflating a bubble. I've never

24:32

seen a bubble deflate bubbles

24:34

burst. And

24:36

generally speaking, if relative valuation is completely

24:39

out of whack, the most likely scenario

24:42

is some great shock hits markets, and

24:44

people get suddenly get very scared. And

24:46

then they ask themselves, what is it that I own? And

24:49

the things that are most overpriced in that

24:52

regime, the things that get absolutely covered. For

24:55

example, back in the dotcom bubble,

24:58

the NASDAQ was where everybody was speculating. And

25:00

the overall stock market took a tremendous hit.

25:02

It was down 50% from peak to trough.

25:04

But the NASDAQ was down 80% peak to

25:06

trough. That's

25:08

kind of what happens. So I

25:10

would like to say we're gonna have a

25:12

benign rotation by which everything else moves up.

25:15

And the mega cap stuff just stops going up.

25:17

But I don't think that's what's going to happen.

25:19

I think some shock is going to cause this.

25:21

Now, in terms of the international story in particular,

25:23

though, I think the dollar is very important, because

25:25

I think the strength of the dollar has been

25:28

going on. You know, it's really synchronous with the

25:30

outperformance of US equities. The dollar has been rising

25:32

since 2008, seemed to peak in 2022, and come

25:34

down a bit. But

25:36

it really since then, US interest

25:40

rates have been higher than international interest rates,

25:42

US growth has been higher. And so I

25:45

think the dollar is still too high. But if the dollar

25:47

starts falling, the thing about the dollar is if the dollar

25:49

folds 10% overnight, then

25:51

your international stocks are worth 10% more in

25:53

the morning in US dollar terms. One

25:56

of the problems about international, I would say

25:58

the biggest problem for international equities isn't actually

26:00

about earnings or what's going on over there,

26:02

what's going on over here. It's actually US

26:04

investors. I mean, you mentioned

26:06

that the US is 64% of global stock

26:09

market capitalization, but if you think about it,

26:11

we're probably more than 64% of

26:15

global stock market investing. We

26:17

are the world's great stock market investors. And if

26:19

we hate international, international is not going to

26:21

do well. And I speak

26:23

often at conferences with financial advisors. Standard

26:26

question I ask people is how many of you

26:28

would say your clients are over-wage international? Absolute

26:31

crickets. Nobody. Nobody.

26:33

Everybody hates it. But

26:35

because of that, I think that's really been holding

26:37

back international. If the dollar falls

26:40

for a year or two, and then

26:42

people's international equity is actually doing better than everything else, then

26:44

people are going to say, why don't

26:46

I actually have more international? I mean, I'm going to go

26:48

5%. It's nice to see it do so well, but why

26:50

not have more? And so if

26:52

you can get a trend where a falling

26:54

dollar amplifies return international investments, I think that

26:56

can move things. But so I think that's

26:59

going to, one possibility, or then just some

27:01

really significant problem in the US, which

27:03

could absolutely happen, causes people

27:05

to flee to the safety or perceived safety

27:08

of the euro or European equities or the

27:10

Japanese yen or Japanese equities. I think that's

27:12

the sort of thing that might happen and

27:14

causes this rotation. But the rotation is not

27:17

likely to be gentle and benign. It's much

27:19

more likely to be violent for all the

27:21

painful. Yeah, as they often

27:23

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27:53

I spend a lot of time thinking, I

27:55

saw my Ritholt's buddies the other day, they

27:57

were talking about a survey where it asked

27:59

people, people, is it a good idea to start a business?

28:02

And in other countries and regions, it was

28:04

like five or 10%. And

28:07

in the US, it's like 95%. So

28:10

there's definitely this culture of entrepreneur,

28:13

which I think translates to investing,

28:16

but you've seen other countries that

28:18

definitely get the investing bug. It may not

28:20

last forever and it may be more trading

28:23

oriented, but why

28:25

don't we have the same culture

28:27

of everyone investing in

28:30

many of the countries around the world? And I'm talking about

28:32

like this average citizen retail,

28:36

John, this is just because they didn't have

28:38

a Jack Bogle? Like what's the reasons behind that?

28:40

Or am I wrong on this? No,

28:42

I think you're right. I think that this is

28:44

a very long-term thing, but the US

28:47

in the last century or in the 19th century

28:49

was really the powerhouse of the global

28:51

economy growing very fast. A lot

28:54

of Americans, new immigrants, so

28:56

for generating a lot of wealth, but they want

28:58

to put the wealth to work. And

29:00

I think that in other countries,

29:02

particularly in European countries, you had

29:04

a lot more structure, a lot

29:06

more government, a lot more sense

29:08

of your community responsibility.

29:11

And because of that, I think corporations were held

29:14

in some contempt in Europe still

29:16

are. People think that business people

29:18

are greedy and the government needs to take action to

29:21

push up corporate taxes and to rein them in and

29:23

to look out and do this and make sure they

29:25

don't do that. And

29:27

in the United States, we've had a much more

29:29

free way of not

29:32

regulating. I think maybe US politics has

29:34

been a little corrupting over the years,

29:36

so for whatever reason, the

29:39

US, for the most part, the US

29:41

has been much more friendly to corporations.

29:43

Now that is a self-fulfilling process, maybe

29:46

a virtuous cycle, because what that means is the people

29:48

who did invest in the stock market made lots of

29:50

money that encouraged other people to invest in the stock

29:52

market. And so we built a stock market culture. Meanwhile,

29:56

in Europe, business was at walls

29:58

and still is fine. finance mostly

30:00

through the banking industry. People

30:02

expect the government to look after them in their

30:05

old age, or perhaps through private

30:07

business, or perhaps through real estate. But in

30:09

most other countries in the world, people

30:11

don't really look to the stock market as a source of

30:13

wealth. And it's actually a big advantage

30:15

the United States has because in other countries, people look

30:18

at real estate as a source of wealth, for example,

30:20

in China or in Japan back in

30:22

the 80s. And I

30:24

think that the problem about real estate is if you got overpriced

30:27

real estate, then it'll just linger. If

30:29

the stock market has got an evaluation problem, it can fix it

30:31

in a day as it did in 1987. So

30:34

I think the US does have this culture just

30:36

built over the years. And as

30:39

I say, it's somewhat a virtuous cycle, whereas

30:41

in Europe, because there are fewer shareholders, the

30:44

governments can be less friendly to the stock

30:46

market and that gets in their way. They

30:48

just don't appreciate the advantages that a booming

30:50

stock market has had for the United States.

30:54

It's interesting. Yeah. I love

30:56

having these conversations with friends and locals

30:59

as I travel the world and always curious to

31:01

kind of get the feedback. We'll

31:03

see if it changes. Who knows? If I talk to members

31:05

of my family in Ireland, I mean, it's always about buying

31:07

a piece of real estate. You've got some

31:09

money, let's put it in real estate. That's always what they assume. They

31:11

don't believe in shares. As we

31:13

look around the globe, are there any

31:15

regions in particular that you think look

31:17

more or less interesting? We've seen this

31:20

giant divergence in emerging markets where Indian

31:22

stock market has gone great,

31:24

whereas China has gone poorly.

31:27

Our friends over in the UK seem

31:29

just to be going sideways forever. What

31:32

looks good? Japan, you feel free to talk about anywhere.

31:35

I think the US stock

31:37

market is priced for perfection. The

31:39

UK stock market is priced for dejection. I mean,

31:41

they just feel miserable and you can see that

31:43

in Britain, you can see that in

31:46

the Eurozone. The first thing

31:48

is just need to look at, when you think

31:50

about investing, these are kind of all value plays.

31:52

I think there's promise in Europe

31:54

in terms of some of

31:57

the luxury good makers, but also there's

31:59

plenty of technology. company, plenty of pharmaceutical

32:01

companies, plenty of green technology companies. You

32:03

can find individual companies and they all

32:06

sell at a bit of a discount

32:08

because they're European. I

32:10

would say the same thing probably about

32:12

Japan. I mean, Japanese stocks have taken

32:14

a huge shellacking. You can buy good

32:16

Japanese companies at a cheap price because

32:18

they've got the Japan discount. So I

32:21

think you can find good companies in

32:23

stable places like Japan, the UK, and

32:25

the Eurozone. China, I

32:27

think it's too early for me to make

32:29

a positive call in China. I realize they're

32:31

trying to stimulate their economy, but you can't

32:33

stimulate confidence. And the problem is

32:35

that so much of Chinese public

32:38

confidence is wrapped up in real estate. And

32:41

consumers and small business companies

32:43

really are intertwined in

32:45

the real estate market. They've got

32:47

too much real estate. The prices aren't going to go up. They're going

32:49

to go down. The population is shrinking. And

32:52

so that's a really big problem

32:54

for China. And the second big problem is

32:56

that for the best part of 50 years or 40 years after the

33:00

death of Chairman Mao started by

33:02

Deng Xiaoping, there had been a move

33:04

in China, a gradual transition

33:06

to more openness and

33:09

engagement with the West and

33:11

the rest of the world. And that seems to

33:13

have reversed under Xi Jinping. And I

33:15

think that that is rattling a lot of Chinese.

33:17

They don't want to criticize it. It's more than

33:19

life is worth probably to criticize a Communist Party.

33:21

They don't want to do it. But

33:24

at the same time, they're not willing to

33:26

spend or invest until they have confidence that

33:28

they're returning to the idea that

33:32

China will be more engaged with the

33:34

rest of the world and more supportive

33:37

of free enterprise. I think China's

33:39

got some issues. India is booming,

33:41

but it's hard to find a cheap Indian stock.

33:43

That's the issue. The rest of

33:45

Southeast Asia, though, I think is doing pretty well. I think that

33:48

from time to time, different parts

33:50

of Latin America are going to

33:52

do very well also because of

33:54

a rerouting of trade away from

33:56

China to places like India, Mexico,

33:59

Brazil. So I think there's some

34:01

opportunities there also. And again, they

34:03

may not be sparkling opportunities, but

34:05

you can buy them at pretty cheap prices. As

34:08

you flip through your guide to the markets, what's

34:12

Dr. Kelly's favorite chart or charts in

34:14

there? Well, there are two

34:17

charts that I particularly like from the perspective

34:19

of investing. One of

34:21

them is we have this chart, which

34:23

is a z-score chart, which looks at

34:25

valuation measures across the US growth

34:27

and value, but also things

34:29

like emerging market stocks. But

34:32

because we're able to use the z-score, we can look

34:34

at the valuation measure. Each of them is different. For

34:36

emerging market stocks, you want to look at price to

34:38

book. For US growth equities, you want

34:40

to look at price to earnings. For

34:43

bonds, you could yield to worst. But what we do is

34:45

we put it all in one chart and express it as

34:47

z-score. So you can see in real time,

34:49

you can compare apples and oranges and bananas.

34:51

What asset classes are actually looking cheaper over

34:53

the last 25 years? And what asset classes

34:55

are really looking expensive? I think it's very

34:57

clarifying in terms of where the real value

34:59

and opportunity is and where some of the

35:01

risk is. That's one of the

35:03

charts. Another chart I like is our PMI

35:05

heat map, because it's a composite of both

35:07

services and manufacturing around the world. So

35:10

if you ever want one chart to tell you

35:12

literally at a glance how the global economy is doing, the

35:14

chart will tell you. If the far

35:16

right is looking red, it's in bad shape. If

35:18

the far right is looking green, it's in good

35:20

shape. And you can see that in two seconds.

35:23

I like a lot of the econ charts also, but

35:26

I'm not sure I've got a favorite child there. One

35:29

of the areas we haven't spent much time at

35:31

is a little bit of a head scratcher to

35:33

me, is the 40

35:35

and the traditional 60-40, which is bonds, where

35:39

you have this world where T-bills have gone

35:41

from nothing to something and not

35:43

just a little something, like a pretty good something. And

35:46

you have the rest of the bond

35:48

curve not being like crazy amount

35:50

of spread. I mean, you guys got a

35:52

chart on corporates that shows there's

35:55

not a whole lot of juice in

35:57

the spread of corporates versus something like T-bills.

36:00

bills versus history. How are you

36:02

thinking about fixed income right now?

36:04

Is it looking interesting, not interesting,

36:06

opportunistic? What's the vibe? Well,

36:09

fixed income is not supposed to look interesting. I mean,

36:12

fixed income, I've always thought that fixed income

36:14

is like the broccoli on the portfolio plate.

36:17

It's supposed to look boring. We sort

36:19

of got away from that because for

36:21

many years, because interest rates were falling,

36:23

it's kind of like broccoli dipped in batter and

36:25

deep fried because every year you get a capital

36:27

gain from your bond portfolio, you're not supposed to

36:29

get a capital gain for your bond portfolio, supposed

36:31

to give you fixed income. And

36:33

so I think we've kind of returned to that. I

36:35

think yields in general are okay. And

36:37

I would have said that for most of the

36:39

last 25 years, I was said they're too low.

36:41

I'm not saying they're too low anymore. I think

36:44

they're okay. But I don't expect to get much

36:46

of a capital gain. And from again, getting back

36:48

to something I talked about earlier, I think that

36:50

the fact that spreads and corporate bonds are so

36:52

narrow is part of the

36:55

overflow from a booming stock market. People are

36:57

just buying bonds, if they can find anything,

36:59

the reasonable coupon they buy it, of course,

37:01

that's pushing down those spreads. And

37:04

then equally, T-bill rates, your right, are

37:06

higher than a rate on 10-year treasuries.

37:08

And that is because people expect rates

37:10

will come down. The Federal Reserve said

37:12

they will come down. But

37:14

I think that this demand for bonds coming

37:16

out of an attempt to rebalance portfolios is keeping

37:19

long term yields low, is keeping

37:21

spreads tight. And it's really kind of reducing

37:24

the opportunity to make a big gain in

37:26

the bond market. So I think people should

37:28

have bonds in a portfolio to provide income.

37:30

I don't think it gives you as much

37:32

diversification as it used to. Usually

37:35

the idea is that if stocks zig, bonds are

37:37

supposed to zag. Well, I think if

37:39

you've got a big zig and stocks get a small

37:41

zag in bonds today, so I don't think you get

37:43

that much diversification because these yields are already fairly

37:45

low. I think that's where we are. I think overall

37:47

these yields are low, these spreads are tight, because there's

37:50

just a lot of money that needs to reallocate out

37:52

of stocks just to keep everybody balanced. What's on your

37:54

brain as we start to look out to 2025? Are

37:57

there things you're thinking about, things you're interested in?

38:00

it confused about, excited about as

38:02

we turn the page on

38:04

the year? Well, lots. I mean, I think

38:06

there's one issue is immigration. I

38:08

think it's been a huge

38:10

political issue for many, many years. But

38:13

I think we need to recognize two things. One

38:16

that in the long run, immigration has

38:18

been a tremendous positive for the US

38:20

economy. You know, why is the US

38:22

economy growing faster than the German economy

38:24

or the Italian economy or the Japanese

38:26

economy? And in relative terms, you

38:28

know, I mean, in truth, the US economy is

38:30

doing much better than the Chinese economy, even if

38:32

the nominal GDP numbers don't quite say it. But

38:35

a lot of it is immigration. I mean, that allows us

38:37

to grow our workforce, and that has helped us over the

38:39

years. The problem is we need

38:41

to have new law, which

38:44

is updated in the 21st century so that we

38:46

don't have people piling over the

38:48

border in darkness and just filing for asylum and

38:50

getting stuck in this limbo. It's no good for

38:53

them. It's no good for the country. So

38:55

we need to have comprehensive immigration reform

38:57

to make the laws humane

39:00

for those who do come into this

39:02

country, but also firm in

39:05

not encouraging people to, you know, if you want

39:07

to come to this country, then head

39:09

off to your embassy, make your case. I think

39:11

we do better if we have broad immigration over

39:13

time. But we need to do something about that.

39:15

I think both parties sort of have led this

39:18

issue faster for political reasons, and they need to

39:20

just, you know, do what the American public wants

39:22

them to do, just come up with some reason

39:24

to compromise that issue. So that's something I'll certainly

39:26

be looking for. I will also be looking to

39:29

see if we ever get any

39:31

sanity on the issue of the debt and

39:33

the deficit. I would like to see

39:35

some, you know, it's I'm not not as hopeful in that

39:37

one. I think I'm a little hopeful in immigration, not

39:39

very hopeful in doing something about our debt.

39:41

But really, the stability

39:43

of our democracy in the long run depends upon

39:46

us making adult choices. And

39:48

one adult choice we need to make is make the

39:50

tough choices on taxes and spending to do something about

39:52

the debt. So I'll be looking at those things. And

39:54

then I'll also be, you know, just looking at what

39:57

individual investors are doing. How are they adjusting

39:59

to a world where there's plenty

40:02

of risks, but they really are wealthier than they

40:04

used to be. Does that make them

40:06

more or less risk

40:08

averse? How do they adjust things around? And then

40:11

obviously the last thing is, and perhaps it should

40:13

be the first thing, is the

40:15

thing that I didn't expect. This century

40:18

has been a long list of things nobody

40:20

ever expected would happen, which have

40:22

actually ended up defining the

40:24

period that we're in, things like 9-11 or

40:26

the pandemic or the great financial crisis. I

40:29

don't want any of those things to happen to us again, but

40:31

something will happen. And that's what we've

40:33

spent our time in 2025 thinking about. It's

40:36

like the old chart of markets and people

40:38

love to use the US, but I think

40:40

the global is a better example

40:42

where it's that classic chart since 1900. And

40:45

every year there's something awful that happens. There's

40:48

no years that something awful doesn't happen. So

40:50

you have Vietnam War, you have Spanish

40:53

flu, you got 9-11, and

40:55

yet that stock market relentless climb

40:57

up and to the

40:59

right, even on the log chart, is a

41:01

beautiful thing to behold. But in

41:04

the meantime, there's always something nutty going on

41:06

in the world somewhere. Well, that's

41:08

right. But that's again, so getting back to

41:10

how we started here, I think people are

41:12

sold the idea that they've

41:14

got to be really worried and really scared.

41:16

And those headlines really dominate the conversation. But

41:19

meanwhile, 330 million

41:21

people who are hearing these headlines get up. They

41:23

want to buy more stuff. They want to work hard

41:26

and they want to get ahead. And

41:28

their collective efforts to get ahead tends to

41:30

move the economy forward and the stock market

41:32

benefits from that. That's really the truth

41:35

of what's going on. Well, since we started

41:37

with this question and you may have answered it, but

41:39

if not, we can re-answer it or talk about

41:41

it. What's your most non-consensus

41:43

view today? Well, there are a

41:45

few things and they're not very

41:47

non-consensus, but I'm always nervous about

41:49

being too non-consensus because consensus

41:52

isn't always stupid. But I think

41:54

I'm a little bit calmer about the national debt in the

41:56

short run. I don't think that's going to blow us up

41:58

in the short run. even though it

42:00

is going the wrong direction. I

42:02

think I'm probably more convinced that inflation is going

42:05

to continue to come down. This is not an

42:07

inflation-prone economy. I see a lot of people disagree

42:09

with me on that on stage, on

42:11

panels and stuff, talking about this. And

42:14

then there are other risks that I think we need to think about.

42:16

There are geopolitical risks, there

42:18

are US political risks, and

42:21

then there are things that could happen to

42:23

us. Potential weather events, of course, always, but

42:25

with global warming a little bit more often.

42:27

But then things like cyber attacks. I mean,

42:29

we've got this AI, which is full of

42:31

possibilities, which are positive. But are they

42:33

also an AI will empower the bad guys

42:36

as well as the good guys? And I

42:38

think the growth in AI probably exposed us to

42:41

a lot of fresh threats that we

42:43

need to think about. And we need

42:45

to have the imagination to

42:47

see what could go wrong here in order

42:49

to maybe forestall it from

42:51

actually happening. Yeah, well

42:54

said. Dr. Kelly, it's

42:56

been a blessing. Thanks so much for joining us today. Anytime

42:59

though, it was a pleasure. Podcast

43:03

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43:05

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