Michael Cembalest
Appearances
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I've talked to Jamie and a lot of other people about this because I know they have a lot of conversations with people in Washington.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I think they have a Fabergé egg situation here that they don't appreciate, which is they're doing all of this after a period of several trillion dollars of inflows into the United States from foreign markets, where it's credit markets, real estate markets, equity markets. And if you look at something called the net international investment position, which measures this kind of thing, U.S.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
liabilities to foreigners have never been higher in absolute terms or as a share of GDP or as a share of anything you want to normalize it by. So it's a peculiar time to do something that might inadvertently result in a sell America thesis. So far, the movements have been small, but you're absolutely right.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
The average globally large money manager, sovereign wealth fund, insurance company, endowment and foundation is massively overweight United States assets versus the rest of the world. So the starting point is that elevated risk-taking in the United States.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
It's small relative to the trillions of dollars over many years that came in, right? So you can have the largest ever outflow that's only 6% of the cumulative inflows. Right. So that's why this is a very potentially imbalanced situation. And you remember...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
in the 80s when they thought the dollar was overvalued, and they tried to just nudge it down a little bit, and then they lost control of it, and then they had to have another accord later to stabilize the dollar. These things don't behave linearly. You can't just encourage a little bit of capital to leave the United States. That's hard to do.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And one of the charts that we monitor is this thing called a sell America thesis. And it's technical, but it's How many times over, let's say, any three-month period did U.S. interest rates go up, the dollar goes down 5%, equities are down, let's say, 10%, and U.S. equities underperform the rest of the world by 10%? That happened last month for the first time since 1982.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So to me, that was a bit of a warning signal. That was the same week that they started to trot out Besant as opposed to some of the other protagonists here to try to calm markets and stabilize things. But they have to be very careful with this massive amount of capital that's flowed into the United States. Yeah.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I mean, the average institutional account is substantially underweight Europe, Japan, and now China after several years of Chinese economic inequity underperformance. So the starting point is really important to think about.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Thank you, Michael. Well, you know, you had the perfect storm in favor of massive U.S. overweights. I've been, you know, I'm the one that directs our asset allocation. And... I started writing about overweights to the US against the rest of the world right after the financial crisis. And it was about 2010. So we've been writing this for a really long time.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And one of the triggers, by the way, that was interesting was for all the grief that the politicians get about the financial crisis, The stress testing that Geithner did was pretty real. And that was a signal to them that they were serious about cleaning up some of the excesses in the banking system that took place. So that was the catalyst for us to kind of get started on this U.S.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
exceptionalism theme. And then we started looking at other things, which is sector by sector by sector. The U.S., and this is still true today, has higher ROE and higher ROA than their counterparts in Japan and in Europe and in China. But some of those things are starting to erode a little bit. But the U.S. outperformance wasn't just a multiple story.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
It was actually profitability, leverage, asset turnover, and stuff like that, too.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
When I talk to our institutional clients, they're starting to do bits and pieces of this, but begrudgingly, because at the end of the day, all of the policies that you've cited about the United States still doesn't introduce labor mobility into Europe. It still doesn't address the housing overhang in China. I mean, there are some headwinds.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
If there were ever two regions that would make it difficult for you to switch from point A to point B, China and Europe give you plenty of agita. So I think the process happens slowly. The administration has a chance within the next eight to nine weeks to change the narrative on this. I have no idea if they're going to.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I don't understand many, I can't make coherent sense of some of the policies that seem to conflict with each other.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I can't speculate on that. I mean, I know Jamie likes the, you know, we need more energy, right? And we need more transmission lines. We need more pipelines. So he likes that part of their policy. But if they really want more energy for everyone everywhere, why did they pull the rug onto the Empire Wind Project in the New York Harbor, which was ready to go and already funded? Yeah.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Why are they putting taxes on not just consumer goods but capital goods, which are going to raise the cost of transformers and pipe equipment and everything else that's needed to build nuclear plants? So there are too many parts of the policies that don't necessarily jive neatly. Jamie also has talked publicly about – And this is probably the number one thing that the CEOs are hanging on to.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
But it reminds me a little bit of the CEOs felt good about this a few months ago. And now it reminds me of people sketching. When I went to college in the Boston area and it snowed, the locals would come out in the snow and hang on to the back of the truck. And they called it sketching in the road. The CEOs are sketching now. But what they're hanging on to is this deregulatory agenda.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
You know, in the banking system, for example, the banks would like to see the supplementary leverage ratio no longer have to include capital held against treasuries. There's millions of examples of like that in every industry. And that's what the CEOs would like to see. I don't know how much of it they're going to get.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I don't know how much of it is going to be based on politicking rather than kind of policymaking. But that's probably the one thing that they're hanging on to right now desperately.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
There's this range of fundamentals and valuation. Meaning the lower the valuations are, the less time I'm practically going to spend on the fundamentals. If you show me a market that's trading at a 5 PE, I don't need the fundamentals to look great. And I'm getting compensated for how bad they might be. So...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Before last fall's Chinese stimulus announcement, the country was trading at about a 9.5 PE. You were getting a lot of compensation for all the uncertainty and the mess going on there. China then rallied a bit. So if we take that frame of reference, Europe looks okay. The fundamentals maybe get a little better with more fiscal spending in Germany, but
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
You still have a lot of issues around profitability of European companies. They've now introduced a carbon border adjustment tax mechanism that makes it more expensive. Energy prices, broadly defining them, are twice as high as they are in the U.S., maybe two and a half times high. And so there are parts of the U.K. and Germany that are deindustrializing. They don't have a tech sector.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
That's one of the reasons for the U.S. outperformance versus Europe is their tech sector is minimal, and that's why they're constantly talking about service sector tariffs, Pillar 2 arrangements, and things like that, because they want to tax the U.S. big tech companies because they don't really have some of their own. So Europe's a value market, right?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Energy, banking, a little bit of health, you know, large cap pharma and stuff like that. And so there are some good companies that are 3% to 5% dividends, pretty consistent global platform companies that we own some. But they're not going to kind of take off and give you tech or biotech-like performance. Yeah. Japan is the one that's interesting to me, right?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
There aren't too many places with tons of liquidity, right? And you named the ones that we need to be talking about. There's not enough liquidity in the Bovespa and places like that to really move a lot of money. So...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Japan's interesting because for the first time in like 30 years, Japan is really focused on shareholder value, which is some crazy number, like 50 or 60% of the Japanese market trades below one times book.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
The number in the US is 4% or something. They've now said, okay, you have to do special dividends, you have to do spinoffs, and if you don't take steps to reverse that, you could be delisted. I don't think they're serious about that, but they're moving a lot of Japanese companies to do things they haven't done in a while.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
One of my really informal indicators is how many colleagues of mine have been asked to normally against their will, to relocate to Japan to work on corporate finance, you know, spinoffs and M&A activity. And that number for the first time in like 30 years is starting to go up.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So that's a sign that there are things going on in the corporate sector which are focused on shareholder value rather than the other constituencies that the Japanese equity market is usually focused on.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
It's hard because a lot of what we do as investors is look at prior cycles, prior examples, just to measure elasticities. And they're now putting in what looks like the largest tariff hike on record in a faster time than the Smoot-Hawley tariffs were applied almost 100 years ago. So we're trying to figure it out. As you've all read, the port traffic has collapsed, freight rates have collapsed.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
We're trying to figure out what happens in a world where there's a gargantuan, whether it's 50% or 100%, doesn't matter. You have a gargantuan reciprocal tariff rate on China, 10% on a lot of other countries, plus various product-specific tariffs they haven't even announced yet. Are people going to stop importing?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Are people going to route Chinese goods through other intermediaries and repackage them? Are people going to find a way to get, you know, less workable goods but from places with lower tariffs? I meet with CEOs all the time. They're in the middle of trying to figure it out. But there's... Right now, we're in one of those things that happens where the hard data still looks good, right?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
If you looked at the weekly Dallas Fed Economic Index of economic conditions and stuff like that, logistics index, retail sales, all that stuff looks normal. But the forward-looking indicators are crashing. And normally, the average amount of time it takes for those two things to reconverge, either with the surveys going up or the hard data coming down, is about 60 to 90 days.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So I think they've got about 60 to 90 days to refocus the market's energy on some of their supply side strategies. But I just – I can't really tell what the priorities are right at the same time that we should have been talking about less tariffs. The president announced 100 percent movie tariff.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And even though it's a digital good and not a physical one, when there's a will, there's a way, right? You could apply 100% tariffs on the point of transaction between U.S. media companies when they're paying for that foreign content. So it's not large enough to move the needle on the whole economy, but it's a signal that they're still going in a lot of different directions at the same time.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Bits and pieces of it, yeah. You no longer have... The stagflation environment in the 1970s was aided and abetted... Sorry, let's just get a quick, quick explainer.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Weak growth and inflation happening at the same time, right? Which people until then didn't think could happen because it felt like a bird flying in two directions at once. But it split itself in half and it did. So... You know, it was exacerbated at the time by Nixon had 100 days of wage and price controls because of the OPEC oil embargo. You had a highly unionized workforce.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So every time there was an increase in prices, it turned around and got recycled at the increased wages. Some of those things don't exist. U.S. oil and gas and natural gas liquid production is at an all-time high. And so you don't have some of those same mechanisms. Right. But one of the mystifying things is the administration continues to maintain that foreign entities pay for tariffs, okay?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So two things about that. Number one, in 2018, during the first leg of all this, there were tariffs on appliances, steel, and washing machines and stuff, and furniture. In none of those cases did foreign exporters absorb the cost. Their import prices were unchanged, which means that some combination of U.S. importers through profits and margins or consumers through prices paid for them.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So far, year to date, We have this thing called a Trump tracker, which is online, and it's got all sorts of charts on growth and shipping and employment and inflation and stuff like that. On one of the first pages, we have this table, which is what's happening to the FOB prices, which are the import prices into the U.S. before any customs or tariffs or anything like that.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
If the administration's thesis is correct, those prices would be dropping because that would be foreign exporters wanting to maintain market share in the face of tariffs. They have not changed. They are unchanged. So if you put a 20% or 30% tariff on something and its FOB price doesn't change, that's an indication that the U.S.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
is going to pay for it either through margins or through consumer prices. And you kind of saw this. If this wasn't the case, the administration would not have reacted as hyperbolically as it did to this Amazon issue about them disclosing explicit tariff prices on imported goods from China.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I mean, if the underlying fundamentals were playing out the way that they thought they would, they wouldn't need to get so upset about that.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I think after 100—I mean, it's only 100 days we're talking about. Anything is possible, right? The United States has a services surplus. And again, this is something Jamie's talked about publicly. One of the risks of all the tariff stuff is that other countries— retaliate against US services surplus because there's not that much non-agricultural goods exports that they can retaliate against.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So, um, yeah, I mean, people that provide insurance, money management, you know, um, but, you know, look, to the administration's point, the deck is already kind of stacked against US banks operating in other markets. That is a real issue. Um, there are real tariff and non-tariff barriers that exist in other countries. Um,
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So the preconditions that the administration is reacting to were definitely up for debate and discussion. The question is, you know, is a grenade the right way to address them?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
There are a few, and I'm not a technician, but there's a few technical things, breakpoints that you have to keep in mind. One of which is, and I mentioned this before about the trade-off between valuations and fundamentals. At one point, the equity market was down 20% in the United States. It was a brief moment earlier this year, but it was down 20%.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
When the markets are down 20%, there's a dynamic that takes place, which is all of a sudden there's this metaphorical crypt that opens up and the financial media all of a sudden, you know, Nouriel Roubini and Albert Edwards and Soros and all kinds of negative market voices tend to reappear like ghosts whenever the market's down to tell you how it's going to get so much worse.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And I've published this thing over the years called the Armageddonists where every time there's a correction, then they come out and tell you how much worse it's going to get. And I plot how much money you make if you take the other side of the hat. Yeah.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Since World War II, when the equity markets have been down 20%, if you invest at that point, 85% of the time a year from then, you've made some money, usually double-digit returns. I can't explain why because, you know, the reasons why we're different every time.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
But a rapid 20% correction over a short period of time tends to flush out a lot of the weak hands and reset the market for better fundamentals. And, you know, I still don't know if that's going to happen this time. I think the market rally has been too fast here and is underappreciating the hard data decline that's going to be taking place when it rolls through in May and June. But...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
If volatility is going to be as high as we think it's going to be, as a personal investor, you kind of have to take advantage of some of those moments to average into your long term goals. That's number one. Number two, something that other countries have figured out better is that 3% contributions to qualified savings plans is too small a number, right?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
The average company in the United States only sequesters 3% of your pre-tax income to go into savings plans. In other countries, it's six to eight. And so I always tell, I don't speak to young people a lot, but when I do, I tell them that they should be substantially increasing their annual contributions to pre-tax plans because the equity returns of the future may not match the ones of the past.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And despite 15 years of US equity outperformance, at this point, you're being compensated to not have just a US only portfolio for the reasons that we discussed earlier.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
We anticipated some of this. I had an outlook for this year that was called the alchemists of a guy that was doing all sorts of weird experiments. And I actually said, prepare for a 10% to 15% decline. I think they're going to break something. And so then when it happened, we were prepared to kind of take advantage of some of those dislocations. But yes, coming into this year,
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
we were running at close to maximum US weights versus the rest of the world. I wouldn't say that our end game is a portfolio that is regionally weighted according to some kind of normal global weighting, right? I think we'll still end up overweight the U.S. versus the rest of the markets, but not nearly as much as we had been.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I mean, the fundamentals of what's going on in machine learning and artificial intelligence are still pretty powerful trends. Microsoft's earnings reports kind of blew the door off companies What they're doing with AI, the other companies don't break it out, unfortunately, as much as we would like. But there are still some powerful drivers of profitability there.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
But, yeah, you're no longer, for the reasons that Scott mentioned, you're no longer compensated to set it and forget it in a U.S.-only portfolio.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
On paper, yes. First, China has been gradually and slowly dialing down their exposure to both treasury and agency paper and as a percentage of outstanding debt are at a much lower rate than they used to be. As it relates to Japan specifically, they are still very much under the U.S. military and nuclear umbrella. And this is just my own personal opinion.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
They would be very reluctant to jeopardize that. by participating in some kind of capital war against the United States. They still live in a pretty dangerous part of the world. And while the U.S. is clearly signaling a period of isolationism, at least over the next three and a half years, my view is that the ties between the U.S. and Japan are too deep for that kind of thing right now.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
One thing that didn't change it was Doge. Instead of $2 trillion and $1 trillion. I had this top 10 list that I put together at the start of the year of things that I thought might happen. And one of them was $150 billion in Doge savings in 2026, which almost looks spot on their claimed amount. And...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Plenty of right-wing people from the Cato Institute to the Manhattan Institute are saying those numbers are going to be very difficult to actually hit. And there's lots of double counting and nonsense in there. Oh, wow. So it won't be Doge's issue. The big issue for investors is this. By the early 2030s, 100% of U.S.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
tax revenue, as it's now collected, will be needed to pay interest on the debt and entitlements. So it's like a household that makes money but only enough for rent and food but nothing for kind of clothes, transportation, or other things that you need. That's obviously an unsustainable environment. A country can't survive if 100% of revenues are dedicated to just interest entitlements.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Something will have to happen before then. You know, and there's any number of things that could happen. But that's the big picture issue. There's not enough non-defense discretionary spending to cut. In fairness to Doge, there wasn't enough for them to cut in the places they were cutting. You're right.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And we already had the Budget Control Act of 2011, which cut non-defense discretionary spending. So, you know, if... As this crossover point that I'm mentioning gets closer in the early 2030s, the United States is going to have some very difficult decisions to make about taxation, entitlement spending.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And I mean, if you want, I can give you three or four things that will probably have to happen between now and then from a policy perspective that some people would find jolting. The first one of which is they're going to have to test the means test Medicare. So wealthy people are just not going to get the same Medicare benefits despite the fact they paid into the system.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
It's going to have to get means tested just like Social Security does. They're probably going to have to do something funny to the payroll tax. Right now, the payroll tax only applies up to, what is it, $125,000, $130,000. They would probably have an exemption. They call it a donut hole until, let's say, $300,000 or $400,000 in adjusted gross income.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
But then from then to affinity, reapply the payroll tax, right? They'll probably have to be a federal tax on municipal bonds based on your income. Right. So these are all things that have shown up in. Simpson-Bowles proposals, the committee, there's something called the Committee for Responsible Federal Budget. They constantly put these things out. So all of the widgets that will have to happen.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
are kind of known, but they're politically unpopular. Grover Norquist is going to throw a fit. But those are some of the things that are going to have to happen in order to avoid that crossover point from hitting. And it will probably be catalyzed by, Scott, as you mentioned, a continued decline in Abu Dhabi and Japan, like continued decline, gradual, in foreign ownership.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
of treasuries and agency bonds combined with, at some point, the rating agencies downgrading the United States and saying, we're going to give the country a year or two to right the ship, otherwise we'll downgrade it. For reasons I don't think I have to go into, I don't think the rating agencies would take that decision under the current administration.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
It concerns me for a number of reasons. First of all, it's terrible for society. It's led to massive increased political polarization to the point where the country can't get things done. The percentage of moderates in the House and the Senate are at the lowest levels in over 100 years. And for that reason, some of the stuff that you talked about The CHIPS bill was supposed to help.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
The infrastructure bill was supposed to help. The energy bill was supposed to help. And now the administration, despite saying they want to do things to help people that have been left behind, are talking about gutting the programs that were passed to help them. So, yeah, I'm concerned about that.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And again, some of the priors that have led the administration to pursue certain policies are very clear. When China was allowed into the World Trades Organization in 2001 – it was a fantastic boon for profits, a boon for consumers in terms of low prices, but a disaster for manufacturing communities. Industrial production has basically flatlined since that date.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So there are important discussions that have to be had about everything from tariffs to domestic investment, to subsidies, to marginal tax rates. I just, I think the administration's policies aren't necessarily, like if you believe that 30 years of globalization is, left too many people behind.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
You'd need the kind of superstar A-team of policymakers to figure out how to unwind parts of it with a scalpel, focus the benefits on the people who need them while not wrecking the capital markets in the process. And the jury's out whether or not this administration is comprised of people with those kinds of skills and vision and competence.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
But I'm very concerned about some of those wealth inequality issues. And, you know, the dam will break at some point and we will have a wealth tax in the United States. It's just a question of the level that it will be set at.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I didn't really have a linear plan. I went with the wind. The opportunities opened up. I took advantage of them. I joined J.P. Morgan in 1987. As you mentioned, the bank didn't even have underwriting powers then, and I was in some back office financial position for many years. I will say that the world has gotten more jargonified since 1987.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
In every position, you know, whether it's medicine or science or sports investing or whatever it is, it's gotten super jargonified. So for young people, you have to be prepared to converse in the language of the day. And I remember I used to read Barron's, and when I started, I didn't understand 80% of it. But...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
I took a highlighter, I highlighted all the stuff I didn't understand, I put it in a folder, and I waited until I had a chance to ask somebody that would explain it to me. And you have to have the discipline to do that. You can't be... You can't want to go into a field and not understand what people are saying or let things kind of pass over your head and you'll get to it later.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
You have to have the discipline to understand what that person is saying. And the interesting part is a bunch of the times, once you learn about it, you'll realize that guy was wrong and he was saying something that didn't make any sense. But if I could make just one more observation. Because, Scott, I've listened to lots of your podcasts and TED Talks and different things.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
By the way, my wife is a huge groupie of yours.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Something happened to the psyche of investors because I've been doing this long enough to have seen it. The Great Depression was this kind of distant thing like the Civil War or, you know, the fall of the Roman Empire. And then all of a sudden, within one 10-year period, we had two 40% declines in the equity market, something that hadn't happened since the Great Depression.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
The first one, 2001, 2002, and then 2009 when we hit like 666, the mark of the devil, in March of 2009. Because that happened and because so many of the fundamental drivers, particularly of the second one, were obscured and not understood until after the fact, investors ever since have lived with this sense of, is the next one the big one? I live on a seismic fault.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And I think that's one of the mistakes that some of the Armageddonists make is having lived through that experience, they can't shed that. the notion that I have to prepare for another 40% decline in the equity market. Whereas the kind of standard recession is more kind of a 12 to 20% decline, both in equity markets and in earnings. So that's part of what happened, I think, to the...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
to the fundamental psyche of the country after experiencing that. And as the person in charge of our investment strategy in a three and a half to $4 trillion business, I have to make sure that we don't let that kind of psyche affect us as we're going through these different business cycles. And one of the most important charts that I show everybody is in almost every single business cycle,
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Equity markets bottom first, then GDP, then industrial production, then payrolls, then high-yield delinquencies, then the housing markets. And so almost by definition, we have to be taking risk at times when everything else looks terrible. But that's because all of those other things tend to bottom after the equity markets do.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So that's just another fundamental axiom of investing that I think it's important for people to understand.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Yes, on both. I remember in around 2016, I added up all of the money spent on the Iraq war. And it was about $2.5 trillion. And I made all these charts of the things that you could have done with $2.5 trillion instead. You know, pre-K, universal pre-K, free college tuition, all that kind of stuff.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Yes, high-speed rail. And you could have wasted a bunch of it, too. So, yes, absolutely. The world's a pretty resilient place. And so I guess I'm a little more optimistic than you that if this administration is forced by economic and market conditions to modify course, that eventually the way the global economy and markets function, there'll be some normalization. So...
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And also, remember, there's some subset of people that are elated about what's going on. And so when I talk to some of our clients, I'll say, whether you're elated or despondent about what's going on, let me give you a couple of things. In 1954, Eisenhower deported a million people on a much smaller population, a million people.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And it turned out to be a disaster, contributed to a terrible recession in 56, 57. And two years later, the deportations were 80,000. So the public support and congressional support for the program evaporated. In the late 1800s, Trump talks about McKinley a lot, loves McKinley. The McKinley tariffs were put in place.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
The next midterm elections, the Republicans lost 100 seats in the House because the economic consequences were bad and people reacted to them. So If a lot of what you and I are talking about doesn't go right, there are, you know, the electoral process has ways of correcting some of these things.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And my discussions with European policymakers, you know, behind closed doors and just other people that are kind of watching this, CEOs from other parts of the world, they're not ready to throw in the towel. They've definitely picked it up and they're watching.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
But they're going to wait to see how some of these things play out before making some irrevocable decisions that they wouldn't be able to reverse. The administration on April 11th added hundreds of codes to this exclusion list because it realized that the United States doesn't have any domestic production of certain things and tariffing them would just make them more expensive.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
So they're reacting – in certain ways to certain things at certain times. And, and my belief is that before this is all done, they will have to make substantial modifications as to the long-term damage. Um, I'm worried about it.
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
Um, look, I, I gave a webcast a couple of weeks ago and I don't know if you guys saw this, but I ended the webcast by saying, I've talked about most of the things I wanted to say, but not everything. Um, because we don't live in the kind of environment where people can necessarily say all the things they think anymore. That's going to have to change, right?
Prof G Markets
The Sell America Thesis — ft. JPMorgan’s Michael Cembalest
And if that doesn't change, then I would buy more into your thesis about the permanence of some of these things.