Irene:

Hi, everyone. Thank you for joining today's Post-Fed Meeting Office Hours titled We Have Liftoff where you'll hear from professor Jeremy Siegel, Senior Investment Strategy Advisor at WisdomTree and Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania, Kevin Flanagan, WisdomTree's Head of Fixed Income Strategy, and Jeff Weniger, who is WisdomTree's Head of Equity Strategy. With that, I'll turn it over to Kevin for some opening remarks.

Kevin Flanagan:

Thanks, Irene. Good afternoon, everybody. Professor, thank you for joining us again. Jeff, always a pleasure speaking with you on office hours. We thought we'd just get the ball rolling, let's get started with polling question number one. Obviously, that is why we are here today and why we have the Professor with us. And pretty straightforward answer, it would've been interesting I think, gentlemen, that if we had not had Powell give his testimony a couple of weeks ago maybe we could add some different answers here, but just curious to see what our viewers were thinking about. So, Jeff, here it is, the first polling question, and we'll get the ball off and running here.

Jeff Weniger:

I know. And it's been, Kevin, this waiting game forever. I mean, we've been sitting here talking about this day. It's like prom, senior prom, you've been waiting for it forever. It's finally arrived here. Largely in line here at the 25 basis points. But the thing I'm going to want to ask the Professor here is, the big question that I know you and I were talking about earlier, the balance sheet. It's just as important if not more important than the actual Fed policy rate these days. So let's toss it over to the Professor here. What is your take on what we got here from the Fed, Professor Siegel?

Jeremy Siegel:

By the way, what's common, we do have the results, thank you, and I think that's pretty good. 84%. It was very well telegraphed and was 50 basis points possible? I have sympathy. One thing that was never discussed, and I was listening to all of, of course, Chairman Powell's response question and answer, no one said we had the first dissent in over a year by St. Louis President Bullard, Jim Bullard, whom I mentioned we've interviewed, Jeremy Schwartz and I have interviewed, on our program Behind The Markets four times for a full hour. The last time was three weeks ago. He's the most aggressive of all the Fed Presidents and clearly even of the board members. He wanted 50. I bet there was a lot of sympathy for 50 in the room, but because Chairman Powell was for 25 and Ukraine said, "Let's go cautious at point with Ukraine being so uncertain." However, I bet without Ukraine you would've had more dissents and much more discussion of 50 basis points.

We all saw that the expectation now is 1.9, which is exactly 25 basis points per meeting until the end of the year. Let me put it this way, three months ago, it was three hikes. Tell me, what changed in three months? We have a war which makes things more uncertain. GDP is being marked down in the first quarter. Inflation has stayed a little hotter, but finally it's getting into the heads of the Fed, we are really behind the curve. Of course, two or three journalists asked, "Are you really behind the curve?" Obviously, he's not going to say, "Yes." He said, "If we know now what we knew back then clearly we would've acted earlier." Let me tell you, you know because most of you, almost all of you I imagine have been hearing me say for a year and a half that they are grossly behind the curve and they are still dramatically behind the curve.

Jeff Weniger:

Kevin, I would say that if you have 7.9 on headline CPI, we know that they look at PC, but behind the curve, when you're point 25 to point 50, then you're 700 BPS under inflation.

Kevin Flanagan:

Yeah. I mean, it was interesting, Powell seemed to keep the options open saying they could move quicker if need be, hinting, of course, at 50 basis points would be on the table. Professor, I wanted ask you, especially from an equity market perspective, if Powell and company give us say a Greenspan-esque rate hike cycle here, in other words, back in '04 and '06 when he raised rates a quarter point every meeting, can the equity market digest that? Is the equity market okay with that?

Jeremy Siegel:

It would be thrilled if it was a quarter point at every meeting. That's now in the expectations. It'd be thrilled. That's not much tightening.

Kevin Flanagan:

So if they throw a 50 basis point move in there?

Jeremy Siegel:

It should be 50 points at every meeting, if you want to ask me. So let me tell you how. Everyone knows that everything that the Fed has done in the last two years has been ridiculous. Well, year and a half, including their projections being outrageous. Look back at how bad they were as I continue to point out and how inconsistent they are. They're still a joke. Let me tell you how much of a joke they are. We're suffering the worst inflation in 40 years. The longterm policy rate, which was at 2.5% for years has now moved down to 2.4%. That's supposed to be when everything is normal. You're at full employment and you have 2% inflation. Then Fed funds is supposed to be at 2.4%. Now the projection says, "Oh, we may have to go to 2.6 or 2.8 to quell inflation. Now, think about this. Inflation, the worst in 40 years, they think by moving 40 basis points above the just normal rates they can quell inflation? Does that make any sense in any macro economic model?

Jeff Weniger:

Professor, that was also before the invasion. So do you expect that we're going to even have an exacerbation of that inflation?

Jeremy Siegel:

Of course. Yes, in the short run we're going to have worse, but we were going at 7.5 even before Ukraine. Yes, Ukraine is going to give us a blip and now we even see oil down. So there's going to be a huge increase in overall inflation probably in April reporting for March. If there is some resolution here in Ukraine, we can talk about that. Then you will see that come down. But Ukraine is a blip on a worsening trend that is well before Ukraine. Ukraine makes the inflation absolutely worse, there's no question about that.

Kevin Flanagan:

We're getting some questions in so I thought, since we have you, Professor, why not almost make this a Q&A Office Hours?

Jeremy Siegel:

I would love it.

Kevin Flanagan:

You're coming in fast and furious.

Jeremy Siegel:

Q&A, that's what I do.

Kevin Flanagan:

So the first one was, and I'll dovetail it two questions, the first one was, the person came from the Volcker era.

Jeremy Siegel:

Yes. There's two questions on the Volcker era, actually. I think there were, yes.

Kevin Flanagan:

Why not a 75 basis point rate hike? What do you think about that?

Jeremy Siegel:

Absolutely. Well, the thing is, 50 would've been a shock. 75, I mean, I think 75 or 100 is needed, but given that the Fed doesn't want to super shock the market, they could have done 50. "We're really serious." As I said, I think if it weren't for Ukraine at that meeting, because I know what these guys are thinking, and girls are thinking, and women are thinking, and all of them, if it weren't for Ukraine, it would be split on the committee right now to go 50. Ukraine convinced them to go 25, because of the caution. If it suddenly worsens in Ukraine, there could be disturbances in the market. It's a small probability, but they didn't want to do that in a war situation.

But my feeling is that, I mean, I think Chris Waller, who's very allied with Bullard, wanted 50. He's a new Governor. You don't dissent as a new Governor right away, especially when you're Governor. Don't forget, Bullard is a Fed President and they're more independent, but I'm sure he wanted 50. He's going to go along with the Chairman on the first time. But Bullard said, he said, "We've got to hit at least 1% by July."

Jeff Weniger:

That's right.

Jeremy Siegel:

And then I would look around and see how much more we have to go.

Jeff Weniger:

And July quickly approaching. Oh, here comes the questions flying in. Let me put a plot twist on one of the questions, which was, how does the supply chain fit in on all this? There is some word around town that a critical mass of the people that operate, crew members on the ships are guys that are Russian guys and Ukrainian guys. And guess what? They're not able to get on the ships. So in this inflation quagmire we're in, how much of it is the supply chain? How much of it is money supply? What are the drivers here?

Jeremy Siegel:

Now, I've argued this is a demand, too much money, too much stimulus inflation. Now I'm notching back. The COVID supply was 10% to 20%, the too much money and too much stimulus was 80% to 90% of our inflation problems.

Jeff Weniger:

Okay.

Jeremy Siegel:

Now, with the war, supply could get worse there adding on top of everything else very clearly. I mean, the obvious thing is why oil for a few seconds hit 130, 140 and why grains suddenly and what was happening with nickel, all that, it's a supply problem clearly. That's from the source and sanctions and all the rest. Now, you're bringing up other supply signs in terms of the production process.

Jeff Weniger:

Right.

Jeremy Siegel:

If Russians that are operating the tankers or something like that walk off, and I am not privy to that, I did read one little headline, I don't know if that's true or not, if that's really significant on that, but I do expect some more supply problems. But the big story, this is still too much money chasing too few goods with what I see. Now, we get this once a month and we will get it next Tuesday, because that is I believe the fourth Tuesday of the month, is when the money supply comes out. But as of last month, there was no slowdown in the growth of money until there's a slow down in the growth. And that is why, and we're going to talk about it, the tapering, and I'm ready to talk about that when you are because it's a big issue. Not the taper, more than the tapering, the quantitative tightening, the actual...

Jeff Weniger:

Hit it right now. Talk about it right now.

Jeremy Siegel:

All right. Let's talk about it right now. So he said a lot of progress was made, but he implied they weren't ready for a statement, but a lot of progress was made on the quantitative tightening. He also said something which I don't know if he meant to say that or not, he said, "You will find out about that in the minutes of the meeting." Kevin, Jeff, were you listening?

Kevin Flanagan:

Oh yes.

Jeremy Siegel:

Well, first of all, let me say two things. He said that. I went back. And first of all, the minutes of the meeting come out three weeks after the meeting. Okay. Two, there has never been policy ever put in the minutes of the meeting. Now, is there going to be another statement at the time that he really meant that there was a lot of discussion? Are they going to talk about how much? So he did imply, whether it's at the minutes of the meeting or not, that there's going to be a statement. And he said something else, it's going to be far faster than it was before. How many heard that? Although I was watching the Dow and I was in the treasuries, I didn't see a tick on that.

Okay. I thought, oh, okay. How fast? All right, so let's talk about this tightening on this quantitative. On this quantitative tighten. The Fed's balance sheet is nearly $9 trillion, of which $5 trillion has been added in the last two years. The Fed, before COVID, thought that $4 trillion was too much, because that's when they started engaging in quantity of tightening. That was too much. So you want to go at least down to four trillion. Now, think about this. You're at nine and you're at four, that means you're going to be dumping $5 trillion, first of mortgage backed securities, and then of treasuries onto the market. Ooh, I think that's significant. But how fast are you going to do that? He said, "Faster than before." I had a memory that it was $50 billion a month.

I wanted to try to check that, but our time period between this conference and this was a little too short for me to confirm. I don't know if either of you have a memory of how much that was when Powell did engage in 2018 in quantitative tightening. But suppose he doubles that rate to 100. Well, or it goes to 120, which was how much the tapering was, right? I mean, at 120. So suppose he goes to $120 billion a month. How long does it take you to reduce the balance sheet back to pre-COVID levels? Four years. Oh, okay. Is that a little slow? Even though you're going twice as fast as what you did before. Okay. Maybe it have to go 200 billion a month. Oh, that's $2.5 trillion. By the way, what is that? Just to give you an idea, that's like the budget deficit suddenly going up by 2.5 trillion. What do we mean by quantitative tightening? We mean, the sale of bonds into the market, that's what the deficit spending is.

Jeff Weniger:

Oh, Professor Siegel, let me tie this in with a question from Peter. This is a perfect setup for this guy's question. Here's what he says. "If the Fed is doing such a poor job and inflation's going to continue to run wild, why is the 10 year still in the low 2% range?" I think we had a 2.19, Kevin, something like that.

Jeremy Siegel:

No, it actually jumped to 2.25 today. And then -

Jeff Weniger:

2.25. And then the follow-up to that question was, why shouldn't the 10 year T-note be materially higher than two and a quarter, Professor?

Jeremy Siegel:

This is a very excellent question, and let's go to that. First of all, it's 10 years. Inflation is going to be bad for a year or two or three, but a 10 year note is a 10 year note. If he does, in three years or four years, get it down to two, then you got to average all those years in. Right? Suppose we have three years of seven, and then goes back down to two. Let's just say. How much does that add? Well, that adds 21% to the inflation rate, divided by 10 years, the accumulative is a 2% added inflation. If we're going to get 7% going forward. Now, we've already had 7% back. More than that. Actually, that's a 30% cumulative rate of inflation. I'm just going to try to give you a little bit of these numbers here, so you can see the relationship on a big picture basis over here.

Okay. So that is number one. Number two, something that I have been saying for 10 years. We're going to see an inverted turn structure, downward sloping. We need to see the short-term rate of five or six. The long rate will go to 2.5 to three. The long-term bond is still the hedge asset of choice by investors for short-term fluctuations in the risk markets. It has a negative beta, and negative beta assets are golden. There's huge demand for them.

Okay? Two answers to the question. First, we're going to have inflation bad for two or three years. Not saying for 10. That's why it's not at eight or 9%. Okay. But very importantly, this is something that has developed in the last 10 years and gets stronger and stronger. The hedge demand for treasuries is a short run, negative beta asset against the risk markets is a huge factor in depressing the yields of long-term. I've also made this statement, and I'll make it again. In our future, we will see flat and inverted turn structure far more than we've ever seen in the past 50 years because of the hedge asset demand.

Kevin Flanagan:

So Irene , let's go to the next polling question. Because I wanted to ask the Professor something to tie in here. How many more rate hikes do you, the audience, expect in 2022? Now, how many more? Remember -

Jeremy Siegel:

Well, my choice is, and I think everyone else's, is above any of those. You should say seven or more.

Kevin Flanagan:

What I wanted to ask you, Professor, was that the chairman said that reducing the balance sheet is like a rate hike. Do you think there's any chance they would forgo rate hikes, say after July or something like that? Take a minute, use their balance sheet, and then maybe come back. Do you think there is any chance of that?

Jeremy Siegel:

No. No, there is no chance.

Kevin Flanagan:

So they'll do both at the same time.

Jeremy Siegel:

In my opinion, there is virtually no chance. The only way they stop the rate hike, in my sense, is if something drastic happens in Ukraine. Or, yes, if a terrible variant of COVID-19 comes back or something drastic happens in the Ukraine, those are the only two situations where they'll stop the hikes.

Jeff Weniger:

We had two questions in a row came in about this massive debt burden. Right? Which was only exacerbated during COVID. And this has been an issue since before I was even born, Professor. Social security and Medicare, for example, just there's asymptotic shorts. What is the end game here on the federal government's Italian or Japanese debt to GDP ratio?

Jeremy Siegel:

The debt to GDP ratio is much higher than many economists had expected. Although, for me, I wasn't in the Reinhart Group that thought that 80 to 90%, since we've now hit 100. Oh, we've actually hit more than 100, If you consider the debt that the Fed and other government agencies who had 130 and 40. And he's, "Oh, once you get to 80 or nine you're in trouble." Well, Japan has been a 300 for a long time. Again, hedge assets. Hedge assets. The Japanese aging society, tremendous demand for bonds. The capacity is much greater. It's not infinite, but it is much greater.

We're still producing a lot of debt. What I have been saying over the last two years is, how much of this debt has been moving into money? And that is the most liquid. Government bonds are one thing, but when it moves to people's savings accounts and checking accounts, and now accounts, it's something completely different. For many people, it's money that burns a hole in their pocket. I mean, that's it. I mean, hey, I got money to do this and I'm going to do it. And that's why they're spending so much. And that, combined with the fact that the labor participation rate going down, and all the rest that's happening, it produce a tremendous over demand for goods and services... It will be services. If in fact, as I hope, and as I expect this Omicron is the last. Oh, actually,

I'm surprised at this poll result. I mean, people think it's not going to go as fast as in the meeting, even though they say it is. Wow. So you think it won't, okay. I mean, if something bad happens, it won't. But right now, if nothing bad happens they're going to have to do more than this, so then it's 10 or 12. If we are assuming a rate hike... Now, when we say rate hike, we're implying 25 basis points. Right. I mean, obviously a 50 basis counts as two rate hikes. We could word this question a little bit better. Anyways, my expectation is we're going to be above two by the end of the year, will probably be three to four. And it could be ...

Kevin Flanagan:

Well, the question-

Jeremy Siegel:

... and depending on what we see. Barring the two events of COVID, and barring the event of the war spinning out control in the Ukraine, both of which are not zero probability, but low probability events.

Kevin Flanagan:

So the follow-up would be, and we've had a couple of questions on this in the narrative. Does the Fed make a policy mistake? Do they push us into stagflation? What are your thoughts about that?

Jeremy Siegel:

Well, they made a policy mistake over the last two years, now they're slowly using baby steps to slightly correct it. I mean, you made the policy mistake. I mean, that's what some of the questions were, are you behind the curve? Well, I'm not going to say that. Oh, if we knew what we knew back then, again. Again, as every single time nobody has mentioned the money supply. Well, I think actually, maybe one person indirectly mentioned it, the reporter from Financial Times. I didn't copy everyone down, mention money supply indirectly. But neither Powell nor anyone else is looking at what I said was the classic ingredients that could not be contained. And all your people that have been on my Wisdom Tree events, such as we have here over the last two years, have heard me say exactly that.

Jeff Weniger:

Now remember, every Friday at lunchtime, I believe it's at 1:00 PM Eastern, Sirius XM 132 is where you can get more Professor -

Jeremy Siegel:

It's actually noon, Jeff. It moved.

Jeff Weniger:

I always mess up the times. On Sirius-132

Jeremy Siegel:

That's okay. We just moved to daylight savings, but it's noon. It's noon on Fridays. And I think it's Sirius XM 132, is the number. Basically, it's Jeremy Schwartz and I, I start out with a market commentary. Jeremy Schwartz then interviews people. I do interviews if it's a particular person connected with the Fed or someone else that everyone wants to listen. Jeffrey Dunlap would be on our program and it would talk half an hour, an hour, I would be with him. Anyone, Jeremy Grantham, I'd be with him. I'd be with the people that are on CNBC. Mohammed El-Erian, I'd be with him. And I've had other Fed officials and I hope they have some more, I've had Loretta Mester on, president of the Cleveland Fed. I hope to have to have Loretta on again. Loretta was a colleague of mine at the University of Pennsylvania until she became president of the Federal Bank of Cleveland. And I've talked to her about these issues. We need to know. There's going to be more dissension in the Fed than ever before, this year. Well, not ever in all of history, but certainly in recent history, than what we have seen.

Jeff Weniger:

If the Fed ends up going so hawkish here professor. They want to know what the stocks for the long run guy has to say about that.

Jeremy Siegel:

Okay. So this is what I say. Actually, as I'm finishing up the sixth edition stocks for long run, this is my conclusion. One of the conclusions is what about inflation and the stock market? This is what we can say. In the long run, inflation has absolutely no negative impact on the real return from equities. So it's return takes care of all that inflation. And it's absolutely definitive. All the inflation we have had in our country in 200 years plus has come since World War II. And the real return on stocks is the same after World War II, in fact, slightly higher than it was in the 150 years before World War II.

So if you take a look at it, you wouldn't even say, oh my God, look at all the inflation we've had in that period. Okay. Now let's talk about the shorter run. In the shorter run, this type of inflation in particular, which is what I call stimulus inflation, it first goes into the stock market and pushes it higher than it's historical. Then when the Fed gets serious, the return is lower than average. So now they're not that serious yet.

Okay. But when they start getting serious, it's lower than average. And then once they bring it down. Now can they do it without a recession? That is a real difficult question. Maybe we'll have a recession. Maybe we will. Maybe it won't be so bad. We'll see. As Powell actually said, he said, there's so much demand, 1.9 jobs for every person that's out there. We want to cut demand so it's one for one. Well that still is full employment then. There'll be a job for every person. That's what he's hoping for. He's hoping to squeeze demand enough so that we'll still have a job for every person that wants it. And hence we won't see unemployment rise. That's the goal. Can he do it? I doubt he can do it without some slow down. But then let me finish the scenario. So at first surge is higher than inflation. As the Fed is serious timing, lower than inflation. I said this year was going to be choppy and that's exactly... Well, it's down on NASDAQ. I mean value stocks as we know, are what? Down five percent.

Jeff Weniger:

Mm-hmm.

Jeremy Siegel:

From their all-time high. The S&P is in a correction. That's all. NASDAQ of course is in a bear market. The non tech section of S&P is not even in correction territory, not even in correction territory. And God, how many hundreds of corrections have we had in the history of the stock market? By the way, a pull back is the most minor one of which we've had, what, 600, in the last 60 years, and it's five percent or more. We are in a pull back, we're in a pull back. Non tech S&P is in a pull back, which is something that's so minor that it's almost ignored in terms of what we're seeing right now. Now it's going to probably get more severe. I said that I thought S&P could be down between 15 and 20.

I said six months ago I didn't think there was going to be a bear market. I still don't think there's going to be a bear market because I think our needs are going to come in because this type of inflation is good for earns. The firms are borrowing at cheap rates until labor starts demanding a little bit more to catch up. I have heard no firm say... So think about this. Think about all the analyst calls, the conference calls to file the earnings reports. This is the standard line. We are seeing our costs rise. However, we are not seeing resistance, meaningful resistance, from consumers at raising prices. By the way, I said this six months ago and seven months ago, this is very different than, so let's contrast, this is very different than the inflation in the seventies.

That was caused by OPEC's embargoes, OPEC's restriction. We were importing 50 percent of our oil. So we were handing dollars to OPEC and the US economy was four times as much of an energy user than it is today. So you really impoverished people by, they couldn't raise the prices enough to cover it. Especially if you were in energy intensive areas. Today with too much money causing the inflation. Now we do have Ukraine, which is causing a real rise in those prices, but we're basically energy independent, so basically the dollars are filtering back to other Americans.

Jeff Weniger:

Let me ask Kevin a quick question because professor, we had a question come in about the AG is just falling out of bed, right? It's just been ugly, Kevin and I think from the tenor of all of these questions here I'm getting is we also have a credit situation here at Russia and whether or not there's some EM contagion. So what are you seeing on the fixed income side, Kevin, with respect to what's happening here?

Kevin Flanagan:

That's a great question. And Irene, it's a nice segue for our last polling question as well.

Jeff Weniger:

Let's see that. Oh, okay.

Jeremy Siegel:

Yeah, this is it.

Kevin Flanagan:

So I mean, before we get to the rate hedging aspect to this, I mean so far what you've seen, I think, is a lack of a contagion, right? I mean, this isn't your Asian contagion that we've seen in the past. Are there some concerns? Yeah. I mean, credit spreads have moved out, EM, local, as well as US dollar investment grade high yield all in negative territory so far this year. But it doesn't have that same feel professor. Do you agree? It doesn't have that same Asian contagion.

Jeremy Siegel:

A hundred percent. A hundred percent. Yeah, absolutely. A hundred percent. So basically, let's abstract from Ukraine for some. The inflation itself is really not going to cause any problem because firms are just paying off the depreciated dollars. Oh yeah. I borrowed at two percent. This is so different. This is diametrically opposite the financial crisis. You want to be in debt, you want to be tremendously in debt, right? Because you're getting money at negative interest rates. You buy inventory that's going up seven, eight, nine percent a year and you’re paying, what, two, three, four percent tax deductible. Why do you think homes are doing so well? I mean, yeah, and by the way, will continue to rise. Don't think that's a bubble. That's not a bubble.

I mean, if you want to keep on going, that's the type of debt I love. I mean, if I'm a corporation, just keep on going into that debt. Now, now with the Ukrainian situation and potential default on Russian bonds. It works in strange ways because I understand that, I read that 50 percent of Aeroflot planes are actually owned not by Aeroflot and by western creditors. Now, in that case, they're not going to be paid. So, I mean, in strange ways, those in debt in this will start filtering down.

Is it big? For a few. There might be a few banks out there, not big ones. I think they all were going to be hedged because honestly if they didn't... This thing was threatening for a long time and if they didn't wind down the rest. But there will be a few places that bet wrong on this and their credits going to be bad. You know, if this is over and negotiated into a truce of some sort, maybe the embargo will be taken off. And then everything is on backside, back to normal, again, with all the inflation in the US caused by the monetary expansion. Our troubles will not disappear if there's a truce, by any means. The acute part will ease back to where we were before the invasion, which was still serious inflation.

Jeff Weniger:

We have so many questions, so I'm just trying to... Okay, let's do this and then we'll do the questions. Go ahead.

Jeremy Siegel:

Yeah. So they're saying short, you like floating rate notes, bank loans. Well, with the Fed, everyone's primary rate is going to go up within 24 hours of what happened today. And we love that, increase the equity allocations, which we think is right, combination of all the above because they're basically all right. I would go with credit, I'd go floating, I'd go short and I'd go equities.

Jeff Weniger:

As the clock winds here at 40 minutes past the hour, we usually go a little bit more than 50. I'm going to give you an open ended three topics, because I'm amalgamating dozens of questions here, Professor C.

Jeremy Siegel:

Okay.

Jeff Weniger:

Several questions on dollar hegemony. That's one choice of a direction you can go here. Concepts along the lines of velocity of money. You could go there. And then also a few people talking about the gap between yields and fives versus tens as opposed to overnight money versus tens. So any of those three pathways, where do you want to go?

Jeremy Siegel:

I mean, actually when I used to do it, I used to do Fed funds in tens.

Jeff Weniger:

Right.

Jeremy Siegel:

Now it's often two year and 10, the ten and two. They basically tell the same story. Obviously, the further you go out or you do five and tens though first, then two and tens and one and tens. And then Fed funds and tens. You're basically telling the same story there. I mean dollar hegemony, I mean the dollar, has become stronger. First of all, the Fed is hiking. Obviously Europe can't at this moment, they are so vulnerable right now, but they will have to hike. I mean, ECB is, if you want to know the truth, if it weren't for Ukraine, ECB is more serious about inflation than Chairman Powell in my opinion.

Jeff Weniger:

Okay.

Jeremy Siegel:

And if you take a look at inflation, you can see it's been lowered. So they're actually more serious about it on the Euro. But the dollar, obviously it's the risk assets of choice, against the Euro, particularly. So you see the strength of the dollar, you see the Fed tightening here. So I would imagine the dollar is going to remain strong, stronger. Will it get stronger? Well we have huge trade deficits, we're pumping almost probably a trillion dollars or more a year in dollars just flowing abroad. It could be probably closer to 2 trillion right now, which will help the Fed because if the Fed is going to get rid of $2 trillion, but someone's got to absorb them out there. And so this is a big thing about that.

The quantitative tightening. When and what pace? He said, it's one Fed funds hike. At the beginning, it would be because the banks have so much excess reserves and it's almost like you bought pants that are 50 sizes too large, and you're taking them in one size at a time. Well, when does it really start to... At two or three sizes too large, you begin to feel it and then you begin to feel it. And so at the beginning it's like a balloon that's just going to be... I don't see how at the beginning this is all ... I asked this board and he said, "Well, it's the idea that we are tight," and there is a psychology there, but in terms of actual numbers, given how much reserves are there, how long are they going? That's why I'm so anxious to see what kind of number they're talking about.

Jeff Weniger:

Yeah. Kevin, the question, another one who said, "How can we have US interest rates so much higher than the rest of the developed world?" That's a really good question.

Kevin Flanagan:

It is a good question. And what's interesting is to see what some of the rest of the world is doing. 10 year German boons, negative not too long ago, are now moving up to close to 40 basis points here, so.

Jeremy Siegel:

And by the way, Kevin, let me just say, and I don't want to interrupt you, but that's such an important observation. In spite of Ukraine, which affects Europe 10 times as much as the United States, if not 50 times as much, normally you would go to the boons. That would be the safe, fastest, and get there at 40 basis points. Continue.

Kevin Flanagan:

Yeah. No, no, excellent point. And for us, it gets back to, I saw other questions, what do you do about bonds? We asked the question about rate hedging and, Professor, we've spoken before about treasury floating rate notes. It doesn't seem to be many places is to hide in this environment, but with treasury floating rate notes, you get to play the Fed as they move higher, since they're tied to the three month T-bill.

Jeremy Siegel:

Yeah, well, absolutely. And I've talked about that a long time. When I think back, when was it, a year and a half ago, year and three quarters ago when the 10 year hit 50 base points, and I said, "I don't think anyone alive on this call," on one of the calls we had, "will ever see that type of rate again. And you've got a hedge against those rising rates." Then people, when it went up to 175 and then came down to 115 or 20 again, and people were beginning to say, "Oh, it's not going up there." And then it went to 150, and it stayed at 150. And I said the following, I said, "Okay, so it's not quite two yet." Now it is.

And now it hit two and a quarter this afternoon, but is 150 a good rate, when inflation's 7%? Let's assume the treasury doesn't go. It's 220 now. Let's assume for the rest of the year, treasuries don't go above 220. What is your real return going to be on treasury with inflation at 7%? If it stays there, I think it's going to get worse, but if it stays there, you have a minus 5% real return. So are you happy with that? Some people talk about, "Oh, if rates don't go up, I'm golden." Your golden for your short term hedge. You've got a terrible investment for the purchasing power of your clients.

Jeff Weniger:

Yeah. Now, listen, if you want to hear WisdomTree people, I know we're in the waning minutes, remember Fridays around lunchtime, Sirius XM 132 for the two Jeremys. Kevin and I write the Minds on the Marketsweekly. I've got a white paper on value. There's a daily blog on WisdomTree. That's various ways that you can hear the oral word and the written word from WisdomTree people. Now, Professor Siegel, how about another question that came across? I don't know if you have a strong opinion on precious metals, but there's some frustration out there that everything else is up.

Jeremy Siegel:

So, I said early on, maybe it was my age, I said, "It's going to be inflation got by gold." And gold did rally, as we know, at the beginning of this inflationary cycle, and then it petered out. And what I saw, and I said a year and a half ago, I said, "For the millennials, a new generation, gold doesn't do it. It's Bitcoin." Now, Bitcoin now has its own problems and volatility through the roof. But precious metals, I still think, I remember saying on this, if you're on a desert island somewhere that you're been marooned, would you rather have a gold coin or would you rather have a Bitcoin because you're not even going to get through to the internet?

Jeff Weniger:

How about this one, which is right at my wheelhouse? This person is asking for deep value EM thoughts.

Jeremy Siegel:

Well, oh my God, what is it, 11 times earnings now, 12?

Jeff Weniger:

Well, we have undividend weighted stuff. It's single digit P/E notables.

Jeremy Siegel:

Oh, my God.

Jeff Weniger:

But the theory goes in EM Value that you're getting a lot of Latin American commodity super cycle stuff at the expense of China tech.

Jeremy Siegel:

Yeah.

Jeff Weniger:

So, we're in EM as an asset class and value versus growth therein.

Jeremy Siegel:

Yeah, absolutely. I mean, we have the S & P at 19 times earning. We have S & P X tech at 1716, which is very reasonable even. Listen, and tech does deserve more, so I don't consider it crazy even at 19 on the other. And then you go to Europe and you're at 13 and 14, and then you go to the EM and you're at 11 and 10. I mean, think about these. The earnings yields are proxies for real returns going forward in a world where fixed income, everyone admits, is negative real. I mean, this is really an opportunity. I know when you get down there, you've suffered that capital loss, but looking forward... Look, in EM, if that price doesn't change, what's the dividend yield, Jeff?

Jeff Weniger:

On our EM value stuff, it's high single digits because it's just so washed out.

Jeremy Siegel:

You're at high single digits. You're going to beat inflation. And that's if there's no appreciation, and a lot of them hold commodities. I mean, again, this is the type of thing you get. Listen, I own IBM and I look at it, "Oh, my God. It goes down every day." I'm not happy about it, of course not. But, I think, if you look ahead, 2, 3, 4 years, you'll be rewarded.

Jeff Weniger:

And I want to come back to China. Kevin, at least one out of three, these questions are, what the heck should I be doing in fixed income? Give us that view here in these final minutes.

Kevin Flanagan:

Yeah. I mean, I can do a very cool quick one on that. We were talking about it a minute ago, treasury floating rate notes. I mean, you're reset with the weekly three month T-bill auction, so in a sense, you have one week duration. You're going to be moving with the Fed, if not actually a little bit before the Fed. I mean, before this move today by Powell and Company, a three month T-bill was 45 basis points. So it'd already begun to factor it in. So in our opinion, that would be our high conviction trade for fixed income right now. It's a tough environment.

I was looking at the recent statistics of the Agg. If my numbers were correct and my eyes were correct, and didn't deceive me, as of right now, we are experiencing the third worst performance ever for the Agg, which is not all that surprising, if you think about how the duration of the Agg has expanded over the last 5, 6, 7 years, where it's almost a seven year duration instrument now, that a lot of people are not aware of. So for us, [WisdomTree Floating Rate Treasury Fund] USFR, that's our treasury floating rate note strategy is where I'd be focusing on.

Jeff Weniger:

Yeah. And, Professor, I mean, we have had no trouble having that conversation with end clients. We've had no trouble having the value dividend conversation in this market. It's the only stuff holding up. But a pain point has been China. I wanted to get to that. I had a guy yesterday, he asked the right question. Is China investible? And I don't know that I have the answer.

Jeremy Siegel:

It's better this morning. I mean, I've all of a sudden think it's half brightened in 24 hours.

In fact, I think there was a statement by President Xi that somewhat supportive of the equity markets and, yeah, I mean, what? This is one of the biggest rallies in the history of the equity markets in China today. So yes, it's clearly investible, although...

Jeff Weniger:

Is it cheap?

Jeremy Siegel:

I think it's cheap. I mean, I think it's discounted a lot of things.

Jeff Weniger:

Yeah.

Jeremy Siegel:

I mean the way the West came together for Ukraine, I think it's got to be something that president Xi is thinking about, in terms of, does he really want to move on Taiwan because he's not selling oil and gas where people will freeze to death like Russia is. His whole economy is on the type of consumer goods that if it's shut out, he goes into a depression of unknown magnitudes, if there's sanctions anywhere near what it is on Russia. I mean, it's just...

Jeff Weniger:

Let me ask you about a topic that was a theme in some of these questions. The European banks, there's some concern out there. We didn't really talk much beyond the ECB. There's some exposure to Russia there. What are your thoughts on that matter?

Jeremy Siegel:

I have to basically admit ignorance on that. European bank exposure is. I'm sure it varies a lot between the banks, but I'm not prepared to answer that question.

Jeff Weniger:

All right. Well, you don't know is always the best answer at the these. Kevin, I think...

Jeremy Siegel:

I'm always honest. I talk about what I know.

Jeff Weniger:

I've learned that as a strategist too. I don't know. That's what I said about China today.

Jeremy Siegel:

Don't try to fake an answer. I don't know. Obviously, yeah, I mean, I don't know if there's loans on the yachts of the oligarchs that are going to be seized. I don't know who has those loans out there. Clearly, much more exposure in Europe than it would be for Americans. And then we could talk about if there's the truce, if that whole situation alleviates. I mean, obviously, you can see when things are really severe in Europe, you were getting 5%, 6%, 7% daily declines in European stocks. I mean, that's extreme. We didn't have one decline, I think, of more than 2% or 3% on Ukraine.

Jeff Weniger:

Okay. And then the final concept I would ask you, it's 2022, a time horizon from 2022 to 2032, stocks for the long run, should we be in stocks for the long run?

Jeremy Siegel:

Well, my new addition, coming out in the fall guys, Sixth Edition, Stocks for the Long Run, I'm predicting 5% real return on stocks, a little bit below its historical average. It's something that you just really can't get anywhere. Now, if you can do better, as we believe by our tilts, particularly with value now, value could be 6, 7, 8, if it comes back to its normal. But for the whole market going there actually with the P/E today of 19, it's 5 1/2% looking forward. Like I said, for P/E of 20 it's 5%, P/E of 19, it's about 5 1/2% looking forward. So I would say between 5%e and 6%, the historical 6% to 7%. So we're going to be a point or so below, but that's still a really great return for long term investors. Remember that is after inflation.

Jeff Weniger:

Very cool. Kevin, do you want to wrap it up?

Kevin Flanagan:

Sure. I think the best way to look at this is, Professor, our applause.

Jeremy Siegel:

Oh, wow.

Kevin Flanagan:

You came out a long time ago and said the Fed's going to raise rates pretty much every meeting this year, and it looks like they're finally on board with you. So, congratulations on that call, wonderful call. Let's see if they actually follow through on it now. Right?

Jeremy Siegel:

Yeah.

Kevin Flanagan:

Because like you say...

Jeremy Siegel:

Well, I mean, I think they're going to have to follow through with some fifties. That's what I'm thinking of.

Kevin Flanagan:

So 50s, Feds on autopilot, watch out for quantitative tightening, that would be our takeaway, right?

Jeremy Siegel:

That's it.

Kevin Flanagan:

Well, Professor, thanks so much for being on with us. We really appreciate it always. Jeff, great talking to you again. Take care, everybody. Be well out there.

Jeremy Siegel:

Yeah. Thanks.