A goodly number of investors and let out a huge sigh of relief when the Federal Reserve didn't start the QE taper as warned.
, J.P. Morgan's
chief global strategist and head of the global market insights strategy.
He thinks the Fed's decision to not taper was a mistake.
"The Fed doesn't want to upset markets, but it needs to do something," he said during a morning session, titled Rising Rates: Investing in a More Balanced Global Economy
, of the 2013 MMI Fall Solutions Conference
hosted by the Money Management Institute
at the Grand Hyatt New York.
Kelly likened the situation the Fed is in to the Titanic, closing in on an iceberg some three miles away. This Titanic, he argued, turns very slowly, and the iceberg is very big.
"The situation is so far from normal, that if the Fed tries to back slowly, it won't change in time," he said.
The presentation included a flurry of slides from a J.P. Morgan investment guidebook, peppered with plenty of common sense.
He counseled audience members to avoid getting too emotional over what is happening in Washington now, and instead focus on the economic factors that were in effect before the shutdown.
For example, year-over-year, the economy has grown at a moderate pace, nearly 2 percent. This growth, albeit tepid, has hit its fifth year, he said.
Moreover, Kelly argued, investors should look upon this economy not so much as a disappointment, but a triumph.
While people continue to complain about the lack of action in Washington, Kelly reminded audience members that government debt, as a percentage of GDP, lunged this year. At its peak soon after the 2008 crisis, the debt was 9.2 percent of GDP. Last year, it was 6.8 percent. This year, it appears to be around 3.9 percent. Kelly explained that the government shutdown made it a little hard to get hard and fast figures.
"People say that the government kicked the can down the road. It wasn't just one can. It was a six pack. The government chugged two cans and kicked the other four," he said.
Moreover, the budget deficit has seen its biggest decline in 44 years, translating into less fiscal drag on the economy in the year ahead.
Nonetheless, Kelly said that there are still a number of issues that Washington needs to address sooner rather than later, like entitlement, taxes and retirement.
He argued that the Fed's decision to go with the QE for now is just enabling Washington brinkmanship by giving it a lifeline of sorts.
Tapering will happen, it's only a mater of time, he said. And when it does, Kelly said the Fed will have to figure out what to do with the roughly $4 trillion in assets it is now holding. When rates reach 1 percent, the government will have to pay $25 billion annually to service this debt. When rats hit 4 percent, the government will have to pay $100 billion, and so on.
Holding on to these assets will bleed the government money, but selling en masse will just disrupt the markets. The Fed needs a strategy.
Kelly expected the economy to continue to grow in part due to pent up housing demand driving up prices as well as increases in stock valuations He stressed though that he and his colleagues "like" but not "love" stocks. The markets will continue to grow, but not everywhere as they had in the past few years. Investors will need to be more strategic.
However, Kelly warned against investors chickening out and parking all their money in cash.
The economist said that a "blindfolded monkey" throwing darts at a stock styles chart could do better than cash.
"Cash is the mother's basement of investing. It's really safe and it gets you nowhere," he said.
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