Market Overview

Michael Cembalest Nervous About Situation in US and Europe


J.P. Morgan hosted a conference call on Monday morning, during which Chief Investment Officer Michael Cembalest said that he is still very nervous about the economic situation in both the US and Europe.

Speaking frankly about the current debt crisis, Cembalest said that, “there used to be a fairly close relation between the economy and corporate profits but the profits boom has put it up by 12.5 times the economy.”

The CIO explained why J.P. Morgan is still erring on the side of caution. “We're nervous about the foundation upon which the recovery was being built earlier in the year,” said Cembalest. “The index of global imbalances has been a concern, and the biggest imbalance of all is the US and European debt ratio.”

On the subject of raising the debt ceiling, Cembalest said that, “I've heard people say that people who didn't want the debt ceiling raised are irresponsible, and that even Ronald Reagan raised the debt ceiling and scolded those who didn't want it raised. But let's have some context – when Reagan raised the debt ceiling the levels were only 50 percent of the GDP, half of what they are now. Of course they needed to be raised.”

Cembalest stated that it is J.P. Morgan's job to react to political decisions rather than to decide policy, while also noting that military spending would drop below three percent of the GDP, the lowest since 1940, if the Budget Control Act were to come into effect, something that he finds unlikely.

On the subject of a potential recession, he said that Martin Feldstein has put the chances at fifty-fifty. “Our model looks at variables and we're getting close to the fault line. When we have hit the fault line in the past, it was right eight times and wrong four times, so it is not absolutely certain. If the Obama / Boehner agreement could get passed in some form, that would help.”

Referring to Europe, Cembalest said that it is priced cheaply and will probably get cheaper. “In February 2010, we said that the crisis would probably extend outside of Greece,” he said. “There's no precedence for what Europe is trying. There are a bucket-load of reasons why Germany wouldn't want to go for a federalist solution and become the United States of Europe.”

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