The economy is like the human body - let it heal

Insights from Dr. David Kelly of JPMorgan Asset Management

Friday night I was out to dinner on Long Island (try the new place that took over for Carltun on the Park, it’s called The Union - excellent) with a friend of mine who works in pharmaceuticals. We were talking about Keytruda, Merck’s cancer therapy and one of the all time biggest blockbuster drugs ever. They keep finding new indications for it for all different forms and types of oncological treatments. It’s almost miraculous, he tells me.

Keytruda is an immunotherapy. It’s one of many on the market today and at the vanguard of a huge wave of them. Clinical researchers were able to prove that harnessing the body’s own ability to fight disease and infection rather than introducing new chemical agents for these internecine battles could be highly effective. Our immune systems are highly complex and, from an evolutionary perspective, extremely effective on a day to day basis. And if the immune system can be augmented or coached in the presence of a bigger fight - a fight for the life of the person - the results can be game-changing.

Among the insidious things about cancers is that they want to spread and the disease will attempt to hide itself from detection in order to keep spreading. The body’s immune system sends T cells out on search and destroy missions when cancer is detected. But cancer cells can evade T cells by hiding via something called the PD-1 pathway. Keytruda blocks that pathway, thus enabling the body’s normal cancer-fighting response to be more effective in stopping the spread. I’m oversimplifying here, but I am not qualified to describe this stuff in any further detail.

Immunotherapies like these work with the natural response our bodies employ and help the immune system’s components do their jobs. Treatments are designed to enhance that natural response or give it an added advantage.

There’s an interesting corollary to be drawn to the economy, and its natural response to shocks. According to Dr. David Kelly, Chief Global Strategist at JPMorgan Asset Management, one of the biggest problems we seem to be unable to stop causing in our economy from one cycle to the next is forgetting how resilient the system can be without all these distortions and interventions.

To hear David tell it, there’s a school of thought where the central bank and fiscal policymakers ought to err on the side of doing less - in both directions - so that we can allow the economy to heal itself against minor scrapes and bruises. We forget sometimes that there are 325 million Americans who mostly wake up each day seeking to better their situation, ease their troubles, fill their bellies, support their family members, enjoy experiences and acquire higher status. This is hardwired into the culture, into our DNA. So when an economic shock occurs, it will temporarily impact these pursuits, but not for long. Eventually, we want the things that we want again. Someone is going to make money selling them to us. This is how the economy can stumble and then heal.

David sees this constant fumbling with the knobs and the incessant impulse toward more stimulus or less accommodation as being too much, too frequently. I broadly agree. I would like to see the Federal Reserve do less and speak publicly almost never. If left to our own devices, as agents within the economy, we’d probably be better off.

Yes, rates should rise and fall as demand strengthens or slackens and prices in the economy fluctuate, but maybe not so often and with such violence. The absolute level of overnight interest rates - and all of the commentary and gamesmanship around it - shouldn’t be the first thing any of us think of when making business or investing decisions.

And every once in a while, when something like World War II or the Pandemic of 2020 arises, there will be some cause for there to be a huge focus on monetary policy and its power to backstop the system. But then, at the earliest possible opportunity, monetary policy should exit the stage in the aftermath of these necessary interventions and go back to operating on the fringe, no longer playing a central role in the play.

The economy ought to be able to heal itself for the most part. Sometimes to the best policy a policymaker can pursue is no policy at all.

David explains this idea much more poetically than I can. The man is, after all, an Irishman from Dublin. If you’d like to hear more of Dr. David Kelly’s ideas about the economy and the stock market, I invite you to check out the newest episode of The Compound and Friends, which you can watch or listen to below:

Listen on Apple or Spotify:

The Reformed Broker signs off

I just wanted to say thank you for all the kind words and messages that have been pouring in since I announced the end of my original blog, The Reformed Broker on Wednesday, marking the end of a fifteen year era.

As I mentioned, it’s been awhile since I have been able to write to you there.

But this site represents a new beginning and, like Gandalf the White, I come back to you now at the turn of the tide.

As the world normalizes, inflation stabilizes and the economy moves on from the events of 2020-2022, I return to you here. It’s good to be back. The next adventure begins!