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MR. MICHAEL CEMBALEST: Good morning and welcome to the Eye on the Market podcast. This is our last podcast for the year. This is the holiday version called War of the Worlds: Life at Home in 2019, which I’ll explain in a minute.
Just some administrative notes. Our 2020 outlook is going to come out on January 1st and we’ll talk about all the usual suspects about market investments including what’s going on with IPOs, the China slowdown, the outperformance of US equities versus the rest of the world, the death of inflation, negative interest rates in Europe, why we don’t think there’s going to be a recession next year in the US but what markets may suffer the most where there eventually is.
There was a lot of obsession about recession in 2019. Even so, it was an extraordinary year for investors. The only chink in the armor was that the rally in 2019 was based almost entirely on multiple expansion, in contrast to the prior nine or ten years when the rally was based, in the US anyway, almost exclusively by earnings growth.
In any case, I wanted to share with you what happened on a recent Tuesday evening at home. I showed my spouse some charts I had created on Hong Kong and China. From 1981 to 2011, China engineered the largest leap in living standards in modern history, and we have a chart here that shows you that China’s economic transformation in context. Their per capita GDP gain over that 30 year period was greater than any other country’s gains over any 30 year period you could pick.
That said, China was able to do this while prioritizing the needs of the state over the rights of the individual in the most pervasive way that you could possibly imagine. And we have a chart here that it shows almost all the countries in the world on a ranking that includes things like judicial system independence, due process under the law, freedom of the press, freedom of expression, religious freedoms, perception of public sector corruption, protection of individual rights, and then military involvement in the rule of law and politics. Here, both Hong Kong and Taiwan rank alongside countries in the developed world like France and Germany and Ireland and the US. China, on the other hand, is all the way at the bottom of this chart and if it weren’t for Libya and Chad, China would have the worst ranking in the world, or at least lowest ranking in the world. Let’s avoid making a value judgement at this point. The lowest ranking in the world with respect to the rights of protecting the individual versus the state.
Anyway, I thought these charts were interesting in their own right, but somehow, and this seems to happen a lot I think to a lot of people these days, my spouse made the discussion about Trump as well. I was confused since I didn’t really see a connection between Trump and what’s going on in the conflict between China and Hong Kong. Then I realized that his kind of disconnect reflects the fact that my spouse and I lived in two very different worlds of information and I decided to illustrate these two worlds that we both live in with two very different charts.
First, let me explain the chart that illustrates my world. Obviously, this Eye on the Market is best seen visually with the charts rather than through this podcast but let me try to create the illusion for you.
Here’s the chart from my world. We went back and collected data on unemployment, payroll growth, home prices, US per capita GDP versus other G10 countries, equity market returns and volatility, consumer price inflation, producer price inflation, and we went all the way back to 1896. This is what we found. Trump as an incumbent is benefitting from the strongest tailwinds on record, using these particular set of variables which go back that far. I’m using the word benefits from these tailwinds because it’s impossible to figure out which one of these tailwinds this administration is responsible for and which they’re not and are due to cyclical improvements that began under the Obama administration, easy fed policy, unsustainable fiscal deficits, you know the rest.
What’s interesting though is that with the exception of Taft in 1912, the only incumbent presidents that ever lost did so when this tailwind measure we’ve created was pretty bad. So Bush the senior, Carter, Ford, and Hoover were the incumbent presidents that lost and they did so when this measure was pretty low. To reiterate, Trump’s got the highest tailwind measure of all of the elections that we have seen dating back to 1896. Now this is not a comment on Trump’s reelection chances. He happens to trail a lot of possible candidates in early polls. It’s simply to say that if Trump ends up not getting impeached by the house and senate, and were to go ahead and run and lose the election in 2020, it could easily be described as the greatest presidential fumble of economic and market tailwinds in modern history. The point is that the chart from my world shows pretty strong tailwinds as we sit here at the end of 2019.
For contrast, here is a chart from my spouse’s world which is a very different place. To be clear, I am publishing this Eye on the Market on a day when Rachel is out of town, out of the country for a couple of days, which may work to my advantage. Anyway, using transcripts of the two most popular shows on her favorite networks, CNN, and MSNBC, my team and I went back and we kept a tally of all the topics that were covered every night, and we started on September 2018 and ended in September 2019 before the onset of the whole Ukraine political interference scandal. In other words, a year of topic counts for the following four shows: Cuomo Prime Time, Anderson Cooper 360, The Rachel Maddow Show, and The Last Word with Lawrence O’Donnell. Again, these are the four most popular shows on these two networks according to ratings.
What you see in the chart is hundreds and hundreds and hundreds of shows on the Mueller investigation, asylum and immigration, Trump administration corruption, and then a broad category that you can describe as Trump is either inept, or erratic, or mendacious, or biased, et cetera, et cetera. Then another bunch of shows that cover natural disasters and gun violence, and North Korea, and the trade war, and data privacy, and at the very bottom of the chart, there were, I think two shows on positive economic news.
Now, I understand that these shows are primarily news shows and I also agree that from an investor’s perspective, the president merits a lot of the coverage that he’s getting on these topic related to the Russian interference and a lot of the other issues related to corruption. We have a global growth and policy model and the two variables in there – There’s 128 variables and every country in the world, and the two variables that have the highest correlation to a country’s per capita GDP are rule of law, and an uncorrupt government. So I’m in agreement that these topics are very important to everybody, but also to investors.
Even so, it is kind of remarkable that in my spouse’s world, there’s so little attention paid to the positive economic news of the day, a lot of which has occurred since 2016. When you look at this tiny little bar on the chart showing how infrequently these shows report on it, it’s no small wonder that my wife and I talk past each other sometimes when we talk about these issues.
Here are some examples of the positive economic news and we’ve got some charts in here to illustrate this. Wages are now rising across all levels of income with wage growth of the lowest income workers growing the fastest. We’ve got the highest rate of job vacancies in 20 years, particularly in construction. We’ve seen the first sustained pickup in manufacturing dynamism since 2009. That’s a phrase that talks about new hires in manufacturing and people quitting voluntarily in manufacturing, which they don’t do unless they think they can get another job. Consumer confidence surveys are now back to pre-crisis levels. We have the lowest household debt service relative to income obligations in 40 years. We have the lowest misery rate since the 1960s which looks at inflation plus unemployment and we looked at that measure and it’s the lowest on record for all citizens as well as for women and for African Americans. There’s been a substantial rebound in labor force participation rates since 2016, and some similar gains in small business optimism.
It is kind of remarkable to me that so little attention is paid to it, but when you look at this chart that shows the topic count, that’s pretty much a proxy for the world that my spouse lives in. Anyway, we enjoy talking about these things with one another and I hope you do as well, and I just wanted to share that with you as we close out 2019.
I want to wish everybody a very happy holiday season and we will communicate with you again digitally on January 1st.
FEMALE VOICE: Michael Cembalest, Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios, and is a production of JP Morgan Asset and Wealth Management. Michael Cembalest is the chairman of market and investment strategy for JP Morgan Asset Management and is one of our most renowned and provocative speakers. For more information please subscribe to the Eye on the Market by contacting your JP Morgan representative. If you’d like to hear more, please explore episodes on iTunes or on our website.
This podcast is intended for informational purposes only and is a communication on behalf of JP Morgan Institutional Investments Incorporated. Views may not be suitable for all investors, and are not intended as personal investment advice or a solicitation or recommendation. Outlooks and past performance are never guarantees of future results. This is not investment research. Please read other important information which can be found at www.JPMorgan.com/disclaimer-eotm.