The Compound and Friends - Living in a Post Cycle World

Episode Date: October 11, 2024

On episode 161 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, to discuss: inflation, the economy vs the market, the downside of a strong dollar, the problem with tariffs, and much more! Thanks to Public for sponsoring this episode! Visit: http://public.com/compound to lock in a 6% or higher yield with a Bond Account. Sign up for The Compound Newsletter and never miss out! https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Public Disclosure: A bond account is a self-directed brokerage account with Public Investing, a member of FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. As of 9/26/24, the average, annualized yield to worst (YTW) across the Bond Account is greater than 6%. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule. Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See https://public.com/disclosures/bond-account to learn more. Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

We're going to have a lot of fun today. The dock is packed. Market is at record highs. We now have a will they or won't they cut, which is like really interesting to me. I know you think that they're going to cut no matter what. I think they are. Yeah. I think so too.

But the fact that we're even discussing it, if they paused, I think it would spook the market and not really accomplish anything anyway. Absolutely. I mean, I think the problem is they should have started earlier. They should have started in June and then they go 25, 25. Now I've heard people criticize them saying, oh, you're just cutting that because the election's coming up. But no, they're not.

Yeah, you can't avoid it now. Well, exactly. I mean, I've always said they wait too long and then they do too much. And you know what? That's exactly what they just did. Yeah. No, it's true. And they put themselves in that position.

It didn't have to be that way. You can talk about the Knicks. Yeah, the Knicks, of course. This morning, my five, my seven year old was looking at, I'd like the 2021 yearbook from the Knicks, and there's one player on the roster. Are you a Knicks fan at all? No.

Mitch Robinson's the only player, so. Yeah. Unbelievable. And it was necessary. So, did you have fun with Future Proof? Yeah, I did. I mean, I did a lot of podcasts. I just was going from tent to tent to tent.

Well, people saw that you were there, and everybody had to get a piece of that Dr. Kelly action. JP Morgan sent a lot of people. Yeah. And it was cool to see the interaction and people, because in the independent channel, a lot of people use JP Morgan Asset Management for different allocations

and I guess they don't often see JP Morgan at RAA events. So people seem to be really into it. Yeah, we have a lot of events that we host for individual RAAs. Yeah, your own events. Yeah, you're right. The asset management has been wildly successful with advisors. I remember when you guys, I think, launched, you started with short-term fixed income,

if I remember correctly, on the ETF side. And that was, what was that, six years ago, seven years ago? Yeah, it was a little small. We just decided to, eventually, having not done ETFs, we decided to get into it in a big way. Now you're monsters. Yeah. Biggest active ETF, shot to Hamilton.

Absolutely. Well, and I think, to be honest, I mean, a shout out to my boss, George Gatch, who's, you know, realizes that if you don't evolve with the industry, you're dead in the water. And so at some stage, it's not a matter of, you know, if you can't beat him, join him. If you can't beat him, join him, then beat him. Yeah, mission accomplished. Join first, then become the category killer. Yeah, exactly.

You guys seem to be one of the most innovative, large issuers these days. And that's not what most people would have guessed when it was like, oh, JP Morgan's going to get into ETFs. People would have expected like very conservative approach. Started that way. Well, I don't, yeah, I suppose we started small, so we had to be conservative.

But generally, I think JP Morgan Acid Management has just been a different kind of firm than you'd expect within a bank. Yeah, we've had. I definitely we've had an awful lot of basically ability to do what we needed to do to grow the business. And I think I think my boss is very careful about hiring. And we hire no jerks. They're all great people. And I think that's the first thing you do.

We have great relationships with all your people. I know Steve through our kids. Kids go to camp together. But we've talked to Anthony over the years. And we've gotten to know a lot of your team. And it's great. It's a really nice relationship. Did you see that I was on the cover of Investment News I've talked to Anthony over the years I'll autograph this for you if you want. You know this magazine, right? Vestman News.

Alright, very nice. Did you take that? Is that from like Tony Soprano pose? That's what it looks like. Yeah, where is that from? We took that against the black curtain right over there. Duncan actually took, right? Did you take that picture?

Did they give you a credit for that? I don't know. I don't see one. What does that say down there? I will find a way to give you a credit for that, okay? You got to be careful with photographers. I remember a few years ago I had somebody from... I was actually doing a piece in Barron's and they said I had a photographer

and I had a flight to catch and so long as the thing was over in an hour, I was good. This guy was going on two hours just to get the light this way. I was getting more and more annoyed and it was getting self-evident. I was sort of, instead of muttering comments, I was kind of shouting comments across the room. And of course, but the problem is he had the last laugh because he gets to pick the picture. And so the picture is, I look like J.P. Morgan himself

on a bad date. He caught you with a scowl on your face? Yeah, just looking like Mr. Moneypants with a scowl on his face. It's really bad. But that's the impression you made on him because you were like, I have a flight to catch. What are we doing?

It was his fault. Just stop being such a perfectionist. Yeah, he shouldn't be shooting you like it's for the cover of Italian Vogue. Yeah. Let's start with that. This is the subject matter here doesn't warrant. Precisely. That level of primping.

Yeah, what can you do anyway? So I used to do these features for Fortune magazine, and they used to do this like, you're looking forward round table. And I would either be like on the round table or one year they let me host it. And this is when Fortune was part of like all those magazines. So they would, one year they had a Sports Illustrated photographer shooting us. And he wanted us to like do something. Because he shoots Derek Jeter.

You know what I mean? So we're just like standing there in our suits. It's like me, Savita, I forget who else. Maybe Chanoz was part of it. So it's the Sports Illustrated photographer that normally shoots Serena Williams. Like action shots on the court. So he's like, what can we do with your arms maybe? I'm like, I don't know. Like you want me to fold them? He's like, what can we do with your arms maybe? I'm like, I don't know,

like you want me to fold them? He's like, better. What else? I'm like, dude, this is like a financial, I had to explain to him like, none of us want to do what you want us to do. Yeah, you're never going to be excited about this photography. That's just the way it's going. There's no upside. And the final picture didn't come out badly, but it it uh It was kind of a process of us wearing him down Yeah, like none of the other people that were part of this wanted anything to do with what what he wanted to do How we do are you shooting me now? Do you want me to do something with my arms? All right. All right. The gang is back. Don't be welcome back It's not the same without you dude, you know know that, right? Are you happy to be back?

Yeah. Yeah. I mean, I feel like I was here. I was editing. I know. I know. You're never too far away. Three claps. Let's do it. What do we got? The Compound and Friends, episode 161. Whoa, whoa, whoa. Stop the clock. John, before you clap, here's a word from our sponsor. Today's show is brought to you by public. Duncan, did you know that the 10-year treasury yield

is up around 50 basis points since the Fed cut overnight rates by 50 basis points? Yes. You did know that. OK, well, you're very on top of interest rates. That's not great for borrowers. However, for investors, that's wonderful news. If you're interested in learning more

about how you can lock in 6% or higher yields with a diversified portfolio of high yield and investment grade corporate bonds, check out public.com slash compound. Again, that's public.com slash compound. Member of FINRA and SIPC, as of 9-26-2024, the average annualized yield to worse across the bond account is greater than 6%. Yield to worse is not guaranteed, not an investment recommendation. All investing involves risks. Visit public.com slash disclosures slash bond dash account for more info. Welcome to The Compound and Friends.

All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. 161. Every time I hear the number, I'm surprised. It's a lot of shows. We started this in June of 2021. So we are now through three years. It's 161 shows.

Not bad. Shout out to Duncan who returns this week. Dan's here. John, Nicole. Rob is in the corner. You look super relaxed right now. Is that the vibe? All right, I didn't hear what you said.

I got headphones on. All right. Hey everybody, welcome to the Compound and Friends. I didn't hear what you said. I got headphones on. All right. Hey, everybody. Welcome to The Compound and Friends. My name is Downtown Josh Brown. You are now rocking with the number one investing podcast literally in the world. Nowhere will you have more fun and obtain more information in roughly an hour than right here on the show.

And let me tell you something. We have a monster guest with us this week, returning champion, fan favorite, long distance runner, Irish hooligan. Dr. David Kelly is the chief global strategist and head of the Global Market Insights Strategy Team for JPMorgan Asset Management. JP Morgan Asset Management,

Global Market Insights Strategy Team claims more than two trillion in AUM. I would tell you it's way more than that because of how influential you guys are on people who aren't even directly invested with you. JP Morgan is JP Morgan, and you sit at the head of this team and it's a lot of responsibility. It's a lot of fun also.

I'm sure it's fun. It's a bull market. Well, it's a bull market, but it changes all the time and we're always looking at the economy and looking at the market and trying to figure out, you know, can these things get in sync? And they're never quite in sync. No. But it's... You never get 10 green lights. You get eight and two red lights.

And you got to interpret the red lights. It's like the market and the economy are more in sync now than they have been over the past couple of years. In direction, yeah. But the problem is that we've been... We've got this slow, soft landing scenario which has been played out every... You know, get confirmation, confirmation, confirmation. And that should allow for a decent level of valuations. The problem is people keep on piling in, okay, confirmation, let's put some more, confirmation. And that should allow for a decent level of valuations. The problem is people keep on piling in, okay confirmation, let's put some more money in. And the market's going up and up and up

on a basically slow and boring economy scenario. And I'm not saying there's anything wrong with it. The economy's actually pretty good, but you do worry that there's a lot of concentration issues, there's a lot of valuation issues which are occurring just because nothing's rocking the boat here. Well, we have this in the doc, we'll get to it later, but we've been talking on the show,

but there's just so much money and is it possible there's a scarcity of assets compared to how much money there is? Oh, oh yeah. And I think you can see that in the bond market. I mean, it's what's happening is the stock market has done so well that people are trying to rebalance portfolios. And you know, when I look at the economy right now, I mean, we've got an inflation report today and it's, it's, it's okay.

But I mean, it's patients still not too, but you you got a 10-year Treasury down at four and it shouldn't really be that low but the problem is everybody's having to rebalance back into into fixed income we're creating we're creating two derivatives that are that trade based on how stocks trade mm-hmm just because it's not enough stocks so you now have a shareholder base in, I don't know, Dude, Nvidia. Nvidia. So a $3 trillion market cap is not enough. We got to have $5 billion, $6 billion in triple lever ETFs to track it. And there's no particular end to it because we've just seen this enormous accumulation of wealth. I was writing something about this two weeks ago.

In the last five years, American households have added $50.1 trillion in wealth. Right. Now, I was trying to think, well, what's the biggest number I could possibly talk about? And I was thinking, well, how about the growth in government debt? That's $11 trillion over the same period. That's $50.1 trillion. And we've added $50.1 trillion in assets. And it's just, and I don't think we think about this enough.

I mean, there are a lot of people, you know, yeah, we know about the stock market, but think about housing. There are a lot of people a few years ago, they weren't sure if they should they sell or not, could they fund a retirement. There are people now sitting on hundreds of thousands of dollars of home equity because home prices went up and they didn't refinance and they still got the old mortgage

but just an awful lot more equity. So there's just a huge surge in wealth and that wealth, every time we confirm, yeah, we're on a soft landing path, people say, okay, let's put some more money in the equity market. You're right, bonds too. Investment rates spreads, high yield spreads, tightest they've been in years. Everything's tight. Yeah, exactly.

I want to start with inflation and we're going to get to the rest of that stuff, but this is fresh data today. We got CPI, US inflation weakened in September, extending a streak of cooler readings. Consumer price index rose 2.4% from a year earlier after rising 2.5% in August. Core prices rose 3.3% over the last 12 months, slightly hotter than the 3.2% rise in August. Economists were looking for 2.3% in September and core prices rise 3.2%. So roughly in line, give or take like a tenth warmer

than what people expected. This was not enough to stop the stock market from rallying, but it did sort of create like this new thing where it's like, oh, maybe the Fed will pause in November. You seem skeptical about that, I am too. Yeah, well, first of all, I don't think the inflation number was much of a surprise. In fact, inflation numbers never are.

Because when you get to the day of the inflation report, you're in the middle of the month. You've got a lot of data. You know what energy prices did, you know what gasoline prices did, you know what new car prices did. We've got a lot of reads in different parts of inflation. So we rarely miss by more than a tenth. And if we do miss by more than a tenth, it's usually because of something that's clearly out of whack and it's going to reverse next month. So what happened, you know, this month we saw a jump in medical

services and also particularly jump in airline fares. Okay, fine. But it doesn't change the overall mosaic. I mean, the truth is inflation is cooling, it's just cooling slowly. It's kind of like, you know, my wife's a great baker. She makes these wonderful chocolate chip cookies and she's got a habit of taking them out of the oven just as I walk in the door after a run and she's just coming out and it smells so good and I want to eat them. But the problem is they're still too hot and they are cooling. They're just cooling slowly and inflation is just cooling slowly and we're going to have to wait for it to happen.

But it is happening. We're very confident of that. So you wrote this week, of all the major central banks, the Fed probably feels the most comfortable today. And the gist of the piece was you've got the four major central banks, Japan, England, DCB, and the US Fed. You wrote about why we should not be waiting with bated breath for a slide in the dollar. You're probably not going to get that. Why is this important, whether or not the dollar remains strong or falls off?

I understand for allocation reasons it matters, for international equities, for example, but why did you choose to write about the dollar this week along with your US central bank commentary? You know, it's really interesting. I think it's interesting that you asked me that question because it says something about how US centric American investors are. I mean, 64% of global stock market capitalization

is just in the US. But when I talk to financial advisors, I usually run in front of a crowd and say, so how many of you would say your clients are overweight international? Crickets, nobody. In our defense, we allocate globally, and then the US stock market does 3x the rest of the world.

No, no, no, exactly. And the international allocation shrinks. And then we say we have a home bias. No, we don't have a home bias. Everything else just sucks. No, well, I know that's what the history has been going back to 2008. But if you're looking forward as an investor, you really need to think about how do you offset some of this concentration risk in the US?

Because you're really concentrated in large cap US mega caps. And some tech stocks, and something could go wrong. I mean, my home base is Boston. And we had 20 years of the Patriots. And it was lovely. But you know what? Oh, you guys deserve 50 years of the Kobe Percent. That's what I wish on you.

No, I know. The worst is we get no sympathy. By the way, starting Drake May against the Texans is an interesting choice. Like, why not hold out for a week or two? Or starting against the Dolphins last week. I don't, you know, the rec is just going to be years before we're there.

No, that's exactly my point. The Texans have a great defense. The Dolphins don't. They shouldn't have played last week. There's something wrong with your game plan if the basic problem is which quarterback do you want to protect with an ineffective offensive line? Yes.

Well, in year one, you could forgive the nurturing instinct. But, you know, getting back to the dollar. So I do think it's important for asset allocation reasons because I think if the reason international has underperformed the US for years, one big reason is because the dollar's been going up. And every time the dollar's been going up. And every time the dollar goes up 10%, your international stocks are worth 10% less the next day. If the dollar begins to fall year after year, then people are going to look at their portfolios

and see, hey, the international stuff beat the... Why don't I have more international stuff? And so you could have a long trend. So that's the first thing. But the second thing is actually matters for this country. The dollar is too high. And we have lost millions of manufacturing jobs. We've hollowed out manufacturing because we have allowed the dollar to stay too high. We've been running a trade deficit in this country since 1975.

Every single year. And it's caused an awful lot of hardship in this country because we've been, you know, basically we're buying everybody else's stuff and they don't want to buy ours because it's too expensive, but the money comes back in, buys our stocks and bonds, pushing up the stock market. It's making the richest people in America wealthy, but it's making it very difficult for manufacturing workers to get by. And that has had tremendous social consequences in this country. You had two accelerants of that.

The more recent one was allowing China into the World Trade Organization. The one before there's NAFTA. Both of those things happened within a 10 year period of time. And it was like squirting gasoline on a fire. And the side effect, I was reading your piece and I wanted to yell into the PDF, yeah, but look at the stock market. That's the side effect is that we have the best capital markets in the world because so much money recycles its way right back into our assets.

Treasuries, stocks, et cetera. Absolutely, and so a lot of rich people got richer. And a lot of middle class people got richer too. But I do worry about inequality in this country. I worry about the populism which this breeds because ultimately, how can, how does this, you know, how can this really hurt us? It can hurt us if we implement policies which, you know, just hurt the economy because we're so angry about how people are getting left

behind. And you know, that's why I worry about tariffs. So Trump thinks the solution to this is tariffs. Biden doesn't, but kept the Trump tariffs on anyway. So like there is some protectionism happening no matter what already right now. And depending on the election it could get worse. Why did he keep them on if he didn't like them? Did he forget they were there? What? Well, Biden. Because it made no sense to take them off against who they were protecting.

Well, that's right. Politically, nobody gets any points for being nice to the Chinese. I mean, that's the reality. But, nobody gets any points for being nice to the Chinese. I mean, that's a reality. But no, I really worry about this. I mean, the problem is that we've got checks and balances in the system. Chances are, I would say the chances are in this election, it's going to be very, very tight at the top.

Chances are we end up with divided government. But that means you don't get a huge fiscal push one way or the other, because whatever the candidates say, they're not going to be able to implement it all through a divided Congress. But tariffs are different. Over the years, Congress has basically ceded to the president the right to oppose tariffs, because it's a national emergency or whatever, and he puts tariffs in place. We saw this with the last Trump administration, and you're right, the Biden administration kept those tariffs in place and added a few more small tariffs.

But so I mean nobody's, nobody's. And nobody votes on this. So this is like one of the big fiscal things that can happen where the executive branch basically calls the shots. But you know, people ask me all the time, what are risks? This is a big risk because tariffs are stupid. They are a stagflation elixir.

There are very few medicines you could apply to the economy that will both boost inflation and put you in recession at the same time. Tariffs could do that. What if, but can I... So I'm not like a Trump guy, but let me play devil's advocate. The media screamed at Trump for threatening to leave NATO, and lo and behold, here's the result. Every single European country kicked in the amount of money that they were supposed to

for years prior to that and got really serious about defense spending. So maybe that accomplished its aim. The tariff thing, if they were so terrible for the economy, we wouldn't be printing 3% GDP growth seven years after they were implemented. And Biden would have pulled them off if only for political expediency and sometimes you need to be able to make the credible threat of tariffs even if you don't want to put them on and in a lot of cases that's like sort of what Trump has been doing

all these years so if he's screaming about tariffs now doesn't mean he's gonna do anything about it. It just might be a useful tool in his arsenal as he deals with, uh, with Asia. Well, you know, I'm not, I'm, I'm, I'm going to try and steer clear of the politics. Let's get you in hot water. But you know, to me, tariffs are kind of like a nuclear threat. If you end up using them, you failed. So yes, I don't

think it should be used as a credible threat, but if your object is to get them to remove their trade barriers to you, fine. And by the way, I agree that the dollar is too high and we ought to allow the dollar to come down gradually and that's the right way to equalize trade. But you know what we did in the past, first of all we had a lot of stimulus in the economy at the same time that this was going on because the 2017 tax cut was a huge amount of stimulus in an economy that was already heading towards full employment. So of course the economy kept growing and then we had all the stimulus during COVID or after COVID. And that's part of the story of where we are today. And I think all those factors kind of overwhelmed

the drag effect in the economy of tariffs. But let's not leave out the supply chain issues. We had supply chain issues before the pandemic, which were pushing up inflation. And we just never got to experience it. But then the pandemic and the world falls apart. But if you do it now, particularly in the scale we're talking about, I mean, if you actually try to do 10% tariffs on the whole world plus 60% on China,

or 20% now, then you have a major impact on pushing up US prices. But what's more, they're going to retaliate. Of course they're going to retaliate. You know, it's kind of like, you know, No one ends up winning. It's who gets hurt the worst. Yeah, because a tariff for a tariff will make the whole world poor. It really will. And the reason I say this, you know, I grew up in Ireland, which

for years had protectionist policies after it got its independence. The whole, you know, and every family had immigrants, everybody, or immigrants, everybody just left the country. And then for some reason, I don't know how they figured this out, but for some reason, back in the 1970s, they figured out, you know what, we actually need to make it a nice place for companies to come and work out of Ireland. We need to be in favor of free trade and say, hey, we want free trade and we want you to base in Ireland. And Ireland has been an roaring success story economically ever since,

because it embraced free trade. You guys got high tech, you got like Dell computer over there in the 90s. They weren't building in any other European country. Yeah, because the government decided to let's see how we can make it easy for corporations to succeed. If threats of tariffs, not actual tariffs, leads to more nearshoring, friendshoring, onshoring, are those things not the stimulative counterbalance that Trump says they could be? I think it's better to allow the dollar to come down because if it's a threat of tariffs, which you never followed through, then people don't believe it.

But how does the dollar come down? Because we did all of this fiscal stimulus and of course the value of a dollar fell in terms of like purchasing power, but in terms of like global parity, like it rose against other currencies. So how do we get the dollar to come down? Well, I think first of like global parity, like it rose against other currencies. So how do we get the dollar to come down? Well, I think first of all, you change your messaging. I mean, for decades, really forever, when people have been asking the president about the dollar,

the dollar says, well, no, the president would say, well, ask the treasury secretary. The treasury secretary says, we believe in a strong dollar. Right. Why do we believe in a strong dollar? I mean, the dollar is not our national flag. You know, the stars and stripes, you fly as high as you can. The dollar is an economic mechanism.

You put it at a level which is appropriate for your economy. And the truth is, it's been too high for 50 years. Can't stand on a stage in front of an audience of regular voters who didn't study economics and say, I vowed a week in the dollar. It's not a winning message. Even if it's with the right intentions, there's almost nobody you could say that to that would understand why that's good. And that's why I don't like populism. Neither.

Because populism is when you take the left side of the brain out of the equation altogether, and you just go in pure emotion. Yeah, what will sound good? Exactly. And that's a terrible thing for democracy to do. You've got to do the right thing, and the right thing would actually be a lower dollar, gradually coming down. You don't have to try to get it to plunge, but gradually bring it down. So when we make stuff in this country, it actually is attractive from a price perspective to other people around the world, rid of the trade the trade deficit and that actually will help Grow the middle class in the United States rather than just funneling wealth towards a break of any other difficulty

There is we want a weaker dollar, but not a weak dollar See that new that nuance like we want it strong enough Like nobody would say we want it weak. We just want it weaker it strong enough. Like nobody would say we want it weak. We just want it weaker. But why do we why do we even use the word weak and strong? We don't do that for any other economic variable out there. We don't talk about a weak CPI report, a strong CPI report. You kind of explain what that means. Labor market weak, strong, hot or cold.

But weak sounds bad and strong sounds good. When for America, for the average American worker, it's been the opposite. This high dollar has been our weakness. That's such a great point. I love this. Can we do some housing stuff? Sure. So if you look at real time shelter data,

our friend Jeremy Schwartz has been all over this at Wisdom Tree. If you look at real time shelter, as opposed to the owner equivalent rent that the Fed uses, that the BLS uses, not the Fed, I'm sorry, we're already there. So headline is at 1.1, core is at 1.7,

so there is no reason for the Fed to pause. Like we're too, do you with the- You're pulling out the standard shelter data and- Real time shelter. And putting real time data instead. Real time data in there. So we're there. And this is what inflation looks like.

So if you look at that, we're too restrictive. You don't like this? No, I like that, Charlie. You know, what it shows is inflation's a rollercoaster. And the thing about a rollercoaster is no matter how wild the ride, you actually get off where you got on. We got on at 2% inflation.

We're getting off at 2% inflation. And that's where we are. And this economy just so happens to be able to crank out 2% inflation. I think that's where we are. But I do think the Fed should bring rates back down to a normal neutral level, which I would call maybe somewhere between 3% and 4% anyway. Even if, you know, if inflation stops coming down or the economy is doing fine,

I still think they should normalize over time for the sake of financial markets. Isn't it weird to say the Fed is restrictive while the economy is doing as well as it is? normalize over time for the sake of financial markets. Isn't it weird to say the Fed is restrictive while the economy is doing as well as it is? No because we've got to get over the notion that the Federal Reserve is directing the economy. I remember seeing this old movie with the African Queen, I've never seen it with Humphrey Bogart and Catherine Hepburn, but they're on this big river and it's incredibly wild. They're in these rapids in this dinky old boat and they're getting tossed all over.

And poor old Humphrey Bogart's on one side of the other paddling this way and paddling that way. And the truth is, you don't make any difference. The river is taking the boat wherever it's going. That's what the Federal Reserve has been like with interest rates. I mean, let's be honest about it. They didn't cause inflation. They didn't fix the inflation either. The only way the Federal Reserve could have fixed the inflation is by killing aggregate demand. But GDP growth has been 3% year over year.

They couldn't even do that. They didn't do that. But inflation came down of its own accord. And so from my perspective, the Federal Reserve needs to normalize interest rates, but not because of what it would do to the economy, because I don't think it will do much to the economy. They need to normalize interest rates

because having rates in the wrong place has caused a lot of mispricing of financial assets. And in the long run, I think right now it's making housing worse too. Had they never done anything with interest rates, would inflation still have come down? Yes. Absolutely. That ineffective? Completely.

Again. They could have stayed at the zero lower bound and we would have had disinflation in 2024? Yes. Wow. Yeah, well, because you went 10 years after the financial crisis, they were trying to create inflation all the time, couldn't succeed. Because you've got this old, I mean, people have got this old fashioned notion that if you raise interest rates, you're going to kill investment spending, that's going to

slow the economy down. Well, they raised interest rates and investment spending is doing just fine. Everybody's better. You're right. It was fiscal stimulus and COVID. It had nothing to do the economy down. Well, they raised interest rates and investments spending is doing just fine. Everybody's better. It was fiscal stimulus and COVID. It had nothing to do with monetary policy. Absolutely. The pandemic, the policy response and then Ukraine. That's what pushes the nation up. This is a great segue. I want to talk about mispriced and I want to talk about more

in housing. So our chief strategist, Callie, wrote about the housing market this week. And it's very uncharacteristic of her but her message was kind of like sad trombone. She basically concludes you would have to materially hurt the job market to change the current dynamic in housing affordability. I'm going to show you two charts and give you her commentary around them. So the first chart, she says over the past few years the cost of buying

a home has literally gone vertical. Just look at this chart of your monthly 30-year mortgage payment if you bought a house at the median sales price with a 20% down payment. That's not coming down. Okay, so wait. It's not just home prices. Everyone I know has a story about the insane experience of buying a house in the 2020s. There are crazy tales of fights at open houses, nasty bidding wars, exorbitant listing prices, wealthy out of stater's jumping on home site unseen. Now with rate cuts underway, there's a glimmer of hope that the housing market could come back down to earth, but I'm not so sure.

And she says, remember that chart of mortgage payments going vertical? Here it is with a 5% mortgage rate on the median home price. So Callie's point is even with a 5% mortgage rate, the cost of owning a home will still be 80% above what it was in 2019. And that's at 5% down from 7. So how do you get a mortgage rate to three? Probably an economic calamity where five percent of workers lose their job or more. So it's it sucks to have to say that out loud, but we're not gonna miraculously come up with an extra three million houses. So I don't know like is it as is it as dire as she's framing it or is there room for home prices to become more affordable absent a financial crisis where everyone loses their jobs? Well first of all there

are two sides to this. Yeah. Two-thirds of American households own a home. Yeah. And if you go back to 2019 the average home equity was $240,000. It is now $400,000. Great news. And so a lot of people, a lot of baby boomers, older people have suddenly got this housing wealth. So that is a big thing to start with. Second, you know, I'm going to say that's why I think the Federal Reserve should never kept rates that low all the way through the last decade, because that's what caused this. They allowed people, you know, suddenly you could buy a house with these, you know,

what can you afford? Well, if the mortgage rates 3% I suppose it's going to fall a lot. And so just just push up those home prices. But having got to this point, I agree because, you know, before the great financial crisis, people used to say, you know, US home prices never come down. And the truth is, that's pretty much accurate nationally, because it takes a lot to cause home prices to come down. Because what happens is when home prices fall, do I want to sell now? No, I'm going to wait a while. And so the stuff comes off the market. You know, if the stock market gets overpriced, it can fix this problem in a day.

We saw that back in 87. But the housing market is just a drip, drip, drip for years. Can I also say I don't think we had a housing crisis. I think we had a mortgage crisis. Well, you could still live in the house. You might not have been able to pay the mortgage, but the home itself did not really lose its utility. It lost value, not really. Oh yeah, we did, but we were building too much, but also, you know, essentially we built all these

derivatives on top of this housing bubble, and that caused the problem. But no, I agree, I think it's going to be years before we can repair the damage caused by the Federal Reserve keeping rates low for a decade. But the damage to younger households. Now, what can you do about it? A few things. I mean, first of all, you need to look at it. Well, you can.

No, what you can do. I think one of the things you need to do is we need comprehensive immigration reform to try to have some steadiness in terms of overall population growth, which, because if you don't do that, then you could always get overwhelmed by immigration. I'm not saying, I think we need to be, as I said, bipartisan immigration reform, I think it's very necessary to deal with the demographic side of it. Then you have to do what you can to try to make it easier for builders to build.

But over time, other things can happen. I mean, people can decide, do I need to have this big a house? Maybe I can get by this size of a house. Well, you know, people eventually, you know, eventually spending time with their in-laws gets a little old and people will try and move in. Do you think immigration reform is likely in the next four years, given how bipartisan the desire for it seems to be? I think it is possible.

Yeah. I think it's being used as a political football right now. Until after the election and then you have to actually fix it. I think so because one of the things that I think people don't realize is both under the Trump administration and the Biden administration, they ran into a problem which is that US law states basically that if you can get onto US soil, and you can claim asylum, you are allowed due process and you can hang around the country legally. And that's what the law is.

And the problem is you can say whatever you want in terms of executive order, whether you're going to medical emergency or healthcare emergency or whatever. But in the end, you're going to lose this thing in the courts and you're going to be back to people streaming across the border. We have to have some immigration reform which says, look, yeah, you can file for asylum, but you can't do it in US soil. And once you have to, you know, have to do it in an embassy in some other country, it does, it could be a third party country, then you can sort of deal with it. But it's, there are things we need to do, but it needs to be bipartisan because we need to stop vilifying immigrants

because this country is built on immigrants and there's nothing morally wrong with immigrants. The country needs immigrants, but at the same time we can't have chaos. So Trump- Well, Trump just unveiled his new immigration policy. He said, if they're pretty and thin, let them in. And I think that maybe that won't

help with the housing crisis. But I honestly think this is like one of the reasons to be hopeful. They almost solved it bipartisan, like six months ago. It was almost the moot point. And I think American business needs it. I mean, we're still having labor shortages. We've still got 8 million job openings in this country.

There are lots of jobs which frankly, we just can't find a native born American workers to do. Well, there's such an obvious supply demand mismatch in housing. If you look at, if you sort by age, by 20 to 24, et cetera, the three largest age groups are all millennials. It's 30 to 34, number one, 35 to 39, then 40 to 44. You've got 70 million people in this age group.

And there's just- What does this tell you about home demand in the next five years? So this problem is not going anywhere. No, it's not. It is a legacy problem that a lot of people are going to end up renting for a long time. There are policies that could be put in

in a state, a local, a federal level, to increase supply, which would gradually fix the problem. But we're not going to fix the problem. But we're not gonna fix the problem through big declines in prices. The best you can hope for is that prices are fairly flat for a long time and then gradually people's incomes rise to a level by which they can actually afford those homes. The other problem is there's a big spread

between the 10-year treasury and the 30-year mortgage. Historically, the average spread is 1.8%. We're at 2.2% now. So if you normalize it, or just take the average, the 30 year mortgage should be at, I don't know, 5.8 and it's at 6.4. It's like it's... Yeah, it's a bit...

Why do you think that is? Well, they're not buying bonds. Well, I think the question is not why our mortgage rate's so high, it's why our treasury rate's so low. I mean, I think we've got a lot of demand for treasuries which is it would just keep those rates down. But you know 20, 30 basis points, I mean it's... But if the Treasury would come in and start buying mortgage bonds? Well or to increase their holdings of mortgage bonds because of course they

hold, you know, the Federal Reserve holds a lot of mortgage bonds as it is. It might help a bit but I'm not sure that that's not really the issue. The holdings of mortgage bonds because of course they hold you know the Federal Reserve holds a lot of mortgage bonds as it is. It might help a bit but I'm not sure that that's that's not really the issue. The issue is not that mortgage finance is too expensive right now. It is that it was too cheap for too long. I don't think that we're going to fix anything by giving people on today. OK, six percent mortgage, a six percent mortgage in an economy with two point something percent inflation given the risk that you might default or whatever

or something go wrong with the property, it's not an unreasonable number. What was unreasonable was 3% for years. Oh, well, is it crazy to think that houses might have been too cheap for the last decade? Well, they started out cheap once you realized, absolutely, once you realized that you could finance as 3%, then you get into these bidding wars and it just...

There's more than that. There's a lot of innovation and there's a lot of borrowing against assets that heretofore were not borrowable. Or maybe they were, but like now it's very widespread. These wealth management industry loans have had a... Absolutely have had an effect on first homes, second homes, the size of the first home you could buy, the size of the home you upgrade to, how long people can hold on to three properties if they feel like it.

If you have zero consequences, borrow against your stock and bond portfolio. The market never really seems to knock you out. The corrections are so fast, the loan officer can't even wake up. If you have people that are able to just have money be fungible, borrow against things rather than sell them, it's like having your cake and eating it too. And you would have thought this would have blown up years ago. This is going on now 20 years. And of course, that's why even in an era of significantly higher mortgage rates than we had a few years ago, we haven't seen any deterioration in home prices because the bank

of mom and dad is able to keep the party rolling. But I don't think we should try and fix this by pushing mortgage rates down. So what's the solution? Two wrongs don't make a right. Well, some problems just have to be solved slowly over time. One solution, as I said, is to try to encourage more supply from the building industry. There are lots of ways of doing that. A lot of it has to do, I think, with state and local regulations, try to do something about the growth in demand from a demographic perspective.

But then also, part of the issue is just inequality in general. And the problem is that all these wealth gains have been... Older people made all this money because they own the house. Help for some home buyers. Does that do anything? No, you can't fix an inflation problem by throwing money at it. It's just going to waste the prices. Exactly. That absolutely will not work. And you can't do it by putting price caps on or interest

rate caps on either to try and hold down mortgage rates. I think you've got to allow you just got to allow the market to gradually work itself out over a number of years and yes it's going to be tough for people buying a house and maybe they're going to have to put it off and rent a house or rent appropriate space over time. There are things we can do but this is a problem that's just going to get solved slowly. If we try and solve it quickly, we're probably going to cause other problems. I have a question for you.

Forgive me if I'm being naive. Recessions used to be more common, this is documented, because the business cycle was mostly tied to manufacturing. This is what people did for a living. Every five to seven years, there would be a demand slowdown for goods, usually because borrowing rates went up, and then everyone would have to get laid off until there weren't enough goods

and that would start the cycle again. Okay, we're clearly, I mean, we just all learned this. We just took a masterclass in how insensitive the current economy is to interest rates. And any manufacturing slowdowns that we've seen in any sector have been like very well contained. the current economy is to interest rates. And any manufacturing slowdowns that we've seen in any sector have been very well contained. So this is my question. Can a services-based economy, as advanced as ours, even have a recession, minus an exogenous shock?

There doesn't seem to be a business cycle anymore. What it seems like we have is a crisis, we deal with the crisis, then we have a resumption of the expansion, but we're not having these business cycle, expansion, contraction, expansion, contraction, the way that we used to. Am I being like too complacent? No, that's exactly right.

I mean, people always ask me, you know, are we early cycle or mid cycle or late cycle? No cycle. We're post cycle. Post cycle. And what I would say is if we... Short them all, short them all. Oh my God.

No, no, I don't, I don't, and I'm not saying that we couldn't end up in recession. No, I know. What I'm saying is we had our period of, okay, the economy was booming and inflation went up and the Fed raised rates and that was supposed to kill inflation, but it's going to kill inflation by killing the economy. And yeah, the inflation came down, but they didn't kill the economy. So that didn't work out. But that moment of tension is behind us. We're now on the soft landing path. We've been on the soft landing path for a number of years, actually, with inflation gradually coming down, unemployment at 4 percent.

It's been we hit 4% unemployment in December 2021. So we had all 2022, all 2023, most way to 2024. It's just basically at full employment. So I think that's where we are and I think part of its manufacturing, manufacturing is a smaller part of the economy. The other thing is inventory control. Because it used to be you'd have a slowdown, but the guys at GM would never figure it out until the cars are stacked up on top of each other in the parking lot. We have so much data, we know immediately when the slowdown is occurring.

Exactly. But also if you look at the data we have on inventory sales ratios or from the ISM on whether inventories are too high or too low, it's flat as a pancake. Inventories are almost exactly right. We have just in time. Yes, exactly, we do.

And that can be a problem sometimes, but in a normal economy, it keeps you out of that trouble. So it does take a shock to put this economy in recession. Pandemic, 9-11. Exactly. Something like something outside of the market has to cause a recession. But of course, eventually something like that will happen. Of course.

And the reason you diversify is not because of what you expect. It's the stuff you don't expect that ends up destroying it. But if what you're saying becomes mainstream thinking, we are going to stop looking at ISM, we are going to stop looking at purchasing manager data. The beige book might have to be rethought. Like a lot of these things are relics of a time where a manufacturing slowdown would absolutely

lead to an economic recession. where a manufacturing slowdown would absolutely lead to an economic recession. And it's just hard to envision that if so many of us have service sector jobs where the show must go on. Well, we will stop looking at that when the Fed stops looking at it. But the Fed seems to think that they run the economy and they've got to react to every little bubble up

or bubble down. I think there's a regional thing too. Like you can't tell the person in a certain part of the country that the manufacturing powerhouses in that region are no longer economically important to the bigger picture, right? You can't tell a Minneapolis Fed you could ignore whatever's going on in 3M. It's too much institutional attachment to that idea. Well, yeah, but also it's kind of nice

if you spend your whole career to get to the job of, I am now a governor at the Federal Reserve. I mean, this is amazing. You know, I control the world. Wait, it doesn't matter what I do? You're telling me I should just be playing a game of golf? Right, nobody wants to hear that. Yeah, they want to know that what they do is important.

And 25 basis points is important. Getting back to how wealthy we are, you wrote about this recently. You said, we currently estimated that the net worth of American households rose by $2.8 trillion in the third quarter to a record $157 trillion, $446,000 per head. Of course, it's not evenly distributed, but whatever. We know that. So you say from the 1950s to the mid-1980s, the ratio of the net worth of households

and nonprofit organizations to nominal GDP fluctuated, and John, we've got a chart that we've made for this, fluctuated in a relatively narrow range of between 3.2 and 3.9 times. And since then, it has risen very steadily, and we estimate hit 5.7 times in the third quarter, an all-time high. So this is just a massive sea change in household net worth.

We're not going back. Well, it means a lot because there's one chart that we sometimes superpose on that, which is the share of income received by the top 10% of Americans. Put a caper ratio on top of this. Same thing. Well, it has the same effect. But this is actually the result of something else, which is inequality. So if you look at the share of income received

by the top 10% of households, it maps this to a T. And what's happening is, as richer people get, if richer people get money, what they do is instead of spending in goods and services, they pour it into the market. I said they borrow against it. They'd love her up. Oh yeah. But, but still, if you, if you look at the math, the, the, the top 10% of households

save about 35% of their income. The bottom 90% save zero net. But as more and more income goes to this top 10% of households, they're funneling it into bonds and stocks. That's pushing up wealth rather than GDP. But it's also slowing down inflation. Because now you've got less money coming around to buy goods and services, and that's why inflation has not really taken off except for the last year or two, or when we have the pandemic issues. But generally inflation has stayed low, partly because so much money is getting diverted

to buying goods and buying stocks and bonds and not buying goods and services. And so we have simultaneously pushed up wealth and held down inflation. What do you do when you're so rich that you've bought everything? You put the money into a treasury bond ETF. You put the money into an S&P 500 ETF. Exactly. And there's no behavior that distinguishes the rich from the poor more in terms of spending than saving. I mean, rich people tend to spend more money on airline fares and private education,

but nothing is so disparate as how much they save. But that is funneling money into US bond markets and equity markets. So that's why we're talking about, okay, valuations look a little high. Scarcity of assets to invest in, higher valuations. Exactly. Because you've got all this money ending up in the hands of... So does this ever break? Well, the problem is that eventually, you know, it causes political pressures. I was going to say eventually it's riots in the streets.

Well, yeah, and then people often ask me, right now we've got an economy where the inflation rates are two point something small and the unemployment rates are four point something small. And you add those two things together, right now it's running at six five as the misery index, the sum of inflation and unemployment. You can look back over the last 50 years, that is better than it's been 89% of the time over the last 50 years. People ought to be throwing a party on the streets on the aggregate numbers, but they don't feel it because a lot of this improving the aggregate economy, a lot of it's being

felt by richer households, but a lot of people are struggling their paycheck to paycheck. They've been kind of left behind. They're not benefiting from this. And this is the rise of Trump as well. This explains a lot of why he's so popular. I think it does to some, but you could also say the rise of Bernie Sanders in 2016. It's the same thing. The populism of the left, the populism of the right. It's a horseshoe and they're almost touching. Exactly. Because definitely Trump is more popular in a

society where a huge chunk of people feel left behind Because he's selling them an easy answer But then he's doing a huge corporate tax cut when he when he gets in the office But that's this it's the same message, but for a different demographic AOC it is it's the same thing. It's a horseshoe and it almost touches Statistical discrepancies is another interesting thing that you had written about. So you call this the investment implications of a $769,900,000,000 mistake. What is going on here?

We have your chart. Yeah, well what was going on is... This is not that. No, no, what was going on is... This is not that. No, no, no, that's not that. That's something else. But what was going on is for years, the government had been mismeasuring income and output. And so they've been saying that the economy's producing

all this extra output, but we can't find the income. And the guys at the Bureau of Economic Analysis are kind of understaffed and underfunded, they just weren't able to rectify this. So we had something called a statistical discrepancy which is running at $700 billion. Oh, is that all? Well, it's, I mean, you're losing $700 billion, you got a problem. Yeah.

But they did revise, and this is the reason I wrote this, because I knew they were going to revise as they do every year, they're going to revise the GDP numbers and they were either going to say there was less output or there's going to say more income, but they were probably going to close that gap a bit Well, it turns out they said there was actually more output but much more income. Now the reason this is important is Well last year, but over the last five years Okay, the reason it's important is what they did is it then pushed up the personal saving rate It because when they discovered all this income they didn't have the income went more than the output. That basically meant that income went up more than consumption when they did this revision. That's residual.

Yeah, exactly. The saving rate is residual. But it said that we thought the consumers are tapped out. And now looking at the new data after they've recounted the whole thing, consumers aren't that tapped out. We're actually saving at about the same pace that we're doing in the late 1990s. So again, it removes one more reason why the economy might have run into a brick wall. And that's why I think the Federal Reserve is looking at it. When Jay Powell said, you know, next few cuts might be smaller, I think he was looking at this and saying, OK, maybe this consumer isn't in that much trouble. Maybe they can keep spending here because it looks like the saving rate is kind of where

it was. Yeah. Well, they were only miscounting $700 billion worth. And then the picture looks much different when you incorporate that. John, I do want to throw up his chart. So we've got the consumer balance sheet. By the way, for those who are unfamiliar,

Dr. Kelly's team puts together a guide to the markets. And it's not just this guy TTFs and retirement and alternatives and all sorts of great stuff in there. The thing in here that stood out to me that was interesting is the bottom right. I want to ask you about flows into early delinquencies, particularly auto and credit card. The student loans, there's obviously, you know, nothing to say there right now, but auto and credit cards. Is this something to worry about? I don't think too much. I mean, first of all, if you look at the other side of the sheet, you can see, okay, we've got,

this is as of the second quarter, we had see, OK, we've got, this is as of the second quarter, we had $185 trillion in assets, $20 trillion in debt. That's good. So we have a lot more assets than debt in the household sector. But also, if you look at credit cards, credit cards revolving at 6% of debt. I mean, really, debt is mostly about the mortgages.

And we talked about the mortgages. And the thing about the mortgages, which is important, again, why this is in 2007, is because 2007, we were mortgaged up to the hilt with very little home equities. So a lot of people, when everything went belly up, people said, here's the keys to the bank. Now you're... I owe more than the house is worth, forget it.

That's not the case anymore. So you're not going to see those huge foreclosures in the housing market. You may see some increase in credit card and all the loans, but remember the autos themselves are pretty valuable these days. So the companies can reclaim that. Credit card debt, yeah. I think lower income households will always run into some trouble. That's why credit card interest rates are 20%.

And it's a competitive business. If you could bring in more people, you want to bring in more people at 18%, you do it. But I think a lot of basically people want to borrow, they don't mind paying you pretty high rates to do it, but they're not a very great credit. And so you're going to see some of that. But it's not enough to slow the economy down. I wanted to go to performance of Magnificent Seven stocks, John. So we have some interesting dynamics happening here within the Magnificent Seven stocks, John. So we have some interesting

dynamics happening here within the Magnificent Seven. They're not all they're not all trading together. So Nvidia is still trading like it's 2021. It's up 25% in the last month or something. Meta 2. Nvidia just became the second most valuable company in the world. It hit 3 trillion again. But Tesla doesn't look anything like that. Well, the losers are Tesla, Google and what else trade like crap.

Do you ever see the movie the MacGyver's in seven? Yes. The one with you. Both of them. I didn't. Didn't they? They remade it. But most of them ended up dead, right? Yeah, it didn't go well.

Maybe that's not the best. Maybe that's not the best. No, but it's. But I think it's a cautionary tale. I mean, I think that, look, we've got some, first of all, AI is for real. There's going to, you know, it is going to change the world. I don't know which parts of it are going to change the world,

but it's going to change the world. And these companies have proven to be extremely good at generating cash flow. And you know, you can't deny the growth in earnings that we've seen. But when you've got companies selling at these multiples of this size, some of them are going to disappoint and they're going to disappoint.

So this is what I wanted to ask you. It appears that that period, the disappointment period is now upon us. So leaving aside Tesla, which has a big event tonight, and we all know it's in a big drawdown, Alphabet is acting terribly. Not the end of the world terribly, but relative to what it was. They seem to be losing a lot of court cases.

They lost a big court case over the summer. We just heard from the Justice Department what the proposed remedy is. It's a full-scale breakup of alphabet. It's a 32-page document outlining why the remedy to the search monopoly is just break the whole company up. Now, of course, that's not going to happen tomorrow and this could go on for years, but like the cracks seem to be starting to appear in each of these stories and a lot of it has to do with them losing court cases either in Europe or here. Is that the way the story ends with a whimper rather than a bang and sort of like

a Roman Empire-esque death from a thousand cuts? Is that like how you would envision it ending while the rest of the S&P 500 gains? Which has been the story all summer. I mean I'm not going to talk about individual companies. Of course. Conceptually. But yeah, but absolutely. The problem is you get this big, now there's a target in your back. And somebody hates you.

And a lot of people also see that you're making a lot of money. They want some of it. Can you build a, you know, can you try to build barriers to maintain your cash flow or to maintain your monopoly? Well, maybe you can. But then the Justice Department says, well, that's not a good thing to do. So there is a bit of a target on your back and I just think from an investor perspective, just spread your bets.

You don't need to just do this. I mean, again, the way I think about it is, you know that wealth surge I'm talking about? A lot of people five years ago, they think about retirement. Most of people, most individual people who are putting money in the stock market, they think about retirement. And you didn't have enough money five years ago, and now if you actually sit down, honestly, maybe I do. Well, if you do, should you be having more risk in your portfolio today or less than five years ago? Will you go more risk in your portfolio because you're way over concentrated in index that's way over concentrated in the US market that's got an over too high a share of the global

market so spread it around a bit yeah i mean you don't want to be writing checks to uncle sam for capital gains if you can avoid it but but try to find ways of just taking a few chips off the table and spreading them around let's throw up this chart so it appears that what you're saying has started to demonstrably work. This is the top is the S&P 500 total return versus the Magnificent 7 contribution. So the top is the S&P, the bottom is just the Mag 7 contribution to that. And you can see that that is now falling as the market continues to rally.

So like, spread your bets is not hurting people the way that it was in the first half of the year. Yeah, and we deal with a lot of long-term investors and it's just not, this is not a quarter-to-quarter game. It's just, how do you want to position yourself so that if something bad happens? Because I'm not that concerned about how this concentration gets worse or gets better in the short run in a soft-lining economy.

It's when some shock hits and then suddenly people say, what is it that I own? What's got value here? And the things that are most highly priced are the most vulnerable there. I mean, I'd like to think that the bottom of the market catches up to the Mag-7. History suggests it's the other way around. Something big happens and... And catch down. Yeah, it's like Nasdaq 5000 back in the year 2000. There's a hedge fund manager named Ricky Sandler who tweeted this. I want to hear

if you think this is the right way to think about investing right now or not necessarily. It's been a while since I contributed some thoughts on equity markets and stocks. One, the market at the index on equity markets and stocks. 1. The market at the index level is expensive and consensus. The biggest tech companies have a blend of overlapping competition and rising capex and outside of Amazon feel uninteresting to me. 2. The macro backdrop is quite favorable with a resilient economy and the Fed on your side.

3. The combination of 1 and two means you can and should play offense in the vast array of below mega cap companies that have interesting equity stories. I am neutral SPX, but believe the mid large world, two billion to 50 billion and quality companies outside the US could materially outperform the SPX

over the next one to three years. Market structure changes make companies in the $2 to $50 billion cap range some of the most inefficiently priced when viewed through the lens of a mid to long term button up investor. What are your thoughts on that? That's Ricky Sandler. I completely agree with that. I think usually when you've got the market this high, if everything went up at the same rate you'd say, what do I buy?

I mean everything's expensive. Everything is demonstrably not expensive right now. Outside of the mega cap stocks, the S&P 500 is not particularly expensive. International stocks are cheap. I mean I know everybody hates them, but they're cheap. There are, you know, bonds are fair value. Small caps don't look particularly expensive. There are lots of things in alternatives where you can find some bargains.

So precisely because the market is so unbalanced, you're left in a situation where even though as an index level, it looks kind of, it does look expensive and is expensive, there are actually opportunities I could find 20 billion enough to be I could find 20 billion dollar stocks all day long Selling at 18 times earnings 16 times earnings like there are so many of them Yeah, and the puck hasn't really gotten there yet. They're starting to rally and if and you know I think that there's a lot of justification for you know 15 to 20 pe's because you know Some sometimes people say that's too high.

But if I'm right that inflation is basically a 2% phenomenon in this country, and the Federal Reserve feels like they have to keep rates low to try and stimulate the economy in the long run, you end up with a relatively low rate environment, and that does support a relatively high PE environment. So there's a reason why PE ratios have been going up in a secular way and I think most of it's correct. It's just this last bit of froth in the overall index level and particularly in those mega caps, probably not justified. Can we end with something fun? Sure, absolutely.

Okay, have we ever done this before? A throwback Thursday? I don't think so. All right. This is you, you Dr. Kelly, commenting on the Fed in October 2006. John, on screen please. Hey, my friend Paul Lamonica wrote this article. Remember talking to him for this? It was only 18 years ago. Are you sure?

All right. This is him quoting you. David Kelly, an economic advisor at Putnam Investments in Boston, said the changes to the statement show the Fed is fairly satisfied with the prospects for economic growth next year as well as the inflation picture. Quote, this statement is an expression of increased confidence in the economic outlook, Kelly said.

As such, Kelly said he thinks the Fed will probably start cutting rates sometime in 2007. So this was October of 2006, it was a Fed meeting where the Fed kept rates unchanged at five and a quarter. So we've been at five and a quarter for a lot of this year and they finally just cut. So you were right, they did not start cutting until 2007. They started in September 2007, probably a year later than they should have. What do you remember about that time? Well, two things. One, I did think that when Ben Bernanke became Fed chair, he had to prove or he felt he had

to prove that he was tougher than people thought. No cuts. No cuts. But he also put a sort of gratuitous extra rate hike in when he off us, which they really didn't need. The rates were high enough. That was the first thing. A second thing is we had a huge spike in oil prices before the great financial crisis. I don't think people realized at the time that was a real drag on American consumers.

It basically was a sucker punch to American consumers before the financial crisis, which made the economy weaker. But the third thing is we didn't have enough visibility on the potential problems that derivatives were going to cause to the macro economy. I spent too much time looking at the macro economy and okay this is what housing is doing this way and that houses like five percent of the economy. I mean how much could a slowdown in home building really kill us? But it wasn't the slowdown in home building that killed us it was it was all the derivative bets built on top of it. So it made, you know, I think economists have got lots of recent humility over the years and it certainly made me humble afterwards to realize that there was nothing I could have seen in the economic models in 2006,

2007, which would have said mega recession. They could, they did say we're going to have a problem in housing. They didn't say, great financial crisis and so you just have to always be humble about that and realize Again, the thing that's gonna get you is not the thing that you can see ahead of you It's the thing that hits around the corner by definition. You can answer this question, but what's our biggest blind spot right now? What's well, but you know we can't say well, no, but you're right No, you're right, and it is none of the above but is none of the above. But the things that I do worry about, I worry about a tariff war. I worry about geopolitics.

And if something happens between the US and Iran, which has an impact on oil prices, I worry about this. I wonder if I worry about cyber attacks. I remember a month or two ago, there was a problem with a piece of software with Microsoft. And suddenly, the airline system shuts down. I mean, there's lots of potential things.

And we don't know which would. And it really is. I think we have to distinguish between the difference between hedging and diversification. Hedging is you look at a particular risk. So you hedge your stock exposure with your bond exposure. But diversification means you're basically hedging against an unknown risk.

And so you have to have a very broad diversified portfolio. So no matter which way the wind hits you from, and you don't know which way it's going to hit you from, you sort of bounce back. And that's why I really think that people should find balance by broadening. It doesn't mean hiding in cash. It just means broadening the set of long-term assets they own, not just the magnificent seven or the top 10 stocks or US mega cap stocks.

So as a coda to that story, they finally cut rates in September 07. I don't have another quote from you. Don't worry. This is the New York Times that day. And tell me you couldn't picture this exact thing having me be written right now. Stocks immediately soared. The Dow Jones registered its biggest one day gain in almost five years, closing at 13,739 or up 2.5%.

The S&P 500 rose 3%. For consumers, the Fed's move could mean lower borrowing costs for mortgages and automobile loans. But the impact may be muted because investors remain deeply anxious about the credit quality of mortgages and other long-term loans. The main problem in the past month has not been high rates so much as the availability of capital to complete deals." So that article comes out two weeks before the actual top in October, and that ends up

being a seven, six year top. 2013. Yeah. So anyway, we don't know what we don't know. Dr. Kelly, I have to tell you, I always get smarter when I read you. I'm going to hang out with you and we appreciate you so much. Did you have a lot of fun? Absolutely.

Dr. Kelly asked if we could extend this another hour. No? All right. Hey, we're going to end the show with favorites. We're going to let you get out of here. Reading any good books lately? Any good runs this summer? What do you have for us?

You know, I knew you were going to ask me this question. I was sort of searching my brain and admittedly I read a lot of 19th century literature, which would bore everybody else. But the truth is, I don't want to give somebody... It's kind of like, how would you kill half an hour? I wouldn't kill half an hour. I would take, when I run, I don't listen to iPods, or don't bring a phone around with me.

Just listen to the sound of your own breathing like a psychopath? Well, no, you just watch the world. I mean, this is a very noisy world. And I kind of like it when there's nothing. It's just you and nature. So silence is a favorite. Silence, exactly.

Oh, it's the first time. Don't absorb any, spend half an hour not absorbing information. I kind of like it. I love the noise, but I respect that. Starting Five on Netflix, they follow five NBA players. And I love the behind the scenes stuff. I think it's super cool so start with that.

Is it like the quarterback show? It's exactly like that. Except they have like good players. Who are the players? It's Tatum, Ant, Sabonis, LeBron and Jimmy Butler. Oh that's cool. How many episodes is it? There's 10 I believe. Alright very cool. So I'm going to say the obvious thing. The Menendez Brothers show on Netflix has taken America by storm.

And rightfully so. It is really entertaining. I'm old enough to know when that was actually a news story. It's dark, like obviously, but it's a nine episodes thing and they make it about more than just murder. It's like social commentary. And it's, I'm telling you, if you ever want a little bit of noise, it's good. more than just murder. It's like social commentary. I'm telling you, if you ever want a little bit of noise, it's good noise. When I'm done with my science retreat, I'll check it out.

Our special thanks to Dr. David Kelly. What's the best place, I know you're on LinkedIn, you're linkedin.com slash Dr. David Kelly. How can people get more from JP Morgan Asset Management? Well, I also have a podcast called Notes of the Week Ahead that's available on Apple Play and Spotify. And then also our Guide to the Markets, get more from JP Morgan Asset Management? We devour it when it comes out. All right. Thank you so much, Dr. Kelly. Thanks to the whole squad. You guys did a great job all week. Shout out to the listeners. Shout out to everybody who chat-toons in on YouTube. We'll see you next week.

Thank you. Thank you. Thank you. That was so much fun. Thank you. Yeah, we got to a lot. Yeah, it was great. It was good.

It was good. Thank you. Thank you. Thank you. Thank you. Thank you. All right. All right. Thank you. Wow. Thank you.