David Kelly bound onto the stage Sunday afternoon at the opening session of the American Bankers Association Wealth Management and Trust Conference in Miami Beach as U2’s “One” filled the room and the audience giggled.
“Is it getting better? Or do you feel the same” Bono sang.
Kelly’s answers were yes and yes.
Yes, the economy is getting better. And, yes, Americans feel the same.
“We have now been in recovery longer than we were in a recession,” Kelly said. “We are moving from recovery to expansion and the numbers are telling us that the economy and the stock market are getting better.”
Yet as of last week 66% of Americans still feel the country is in a recession.
Some may feel it doesn’t matter if over half of America thinks the country is in a recession even if it is not. But it does matter, Kelly said. It matters because not enough people are investing in the stock market. And too many people are keeping their funds in cash.
“So many investors have missed out on recovering money in the last two years because they sat on the sidelines,” Kelly explained. “By the time Brian Williams waves the white flag and says get back in that’s the market top.”
The economy, Kelly says, is expanding, but the recovery has been disappointing. Usually the economy grows at 5%-6% following a recession, but the economy is only expected to grow 3% this year. Another difference in this recovery is that most Americans don’t believe the country is in a recovery period so they are not buying cars and houses like they usually would after a recession. So, what does this mean? There is a lot of pent up demand. Businesses have a lot of cash on their balance sheets to spend on equipment and consumers will have to start buying cars and houses again. “American consumers are in a better financial position today than they used to be,” said Kelly. “I’m not saying people’s net worth is back to where it was. But they are spending less of their income so they have more savings and less debt.”
At the same time businesses’ profits are rising despite disappointing a recovery. During a mild expansion, says Kelly, companies are able to hold down costs. They are also able to hold down tax expenses because the government gives firms a tax break. Costs for employees have been held down during the downturn because employees are easily replaceable so salaries have remained stagnant, he says.
Meanwhile, the country’s debt is a big problem, said Kelly. In 2011 and 2012, he believes we need to run a deficit to spur faster economic growth. But then in 2012 the country will need an election campaign to reduce the deficit.
Although Kelly is optimistic, he sees the potential for trouble if things go wrong with oil. The U.S. is already at $100 per barrel for oil. “We are just one bad mistake away from $120, $130, or even $140 oil,” Kelly said. “Oil is hanging over our head. We need to watch Libya and Saudi Arabia.”
Another thing that Americans should be afraid of, said Kelly: sovereign debt. Japan has a huge debt as does the U.S.
Yet if this is a typical bull market, there is still room to run, explained Kelly. “This bull market has run for 24 months. The average bull market runs for 68 months with a growth of 176%. The growth in this bull market has been about 90%.”