Jeremy Schwartz:

Hey everyone, this is Jeremy Schwartz, Global Chief Investment Officer at WisdomTree Asset Management. You are listening to a Q&A excerpt from a book signing event held at the New York Stock Exchange for the Sixth Edition of the Stocks for the Long Run which I co-authored with Professor Jeremy Siegel, Senior Investment Strategy Advisor to WisdomTree. Professor Siegel and I answered questions alongside WisdomTree CEO & Founder Jono Steinberg. We explored a variety of topics with the audience such as recent developments in the market, the Fed’s policy agenda and more. Without further ado, here is the 40-minute excerpt. We hope you enjoy and thank you for listening.

Bob Pisani:

I have to remind people sometimes why he's famous. Because the producers love him. Because there's the professor, leaning a little too close to his laptop into the screen, rolling his eyes, waving his hands and screaming about the Federal Reserve. And the producers just love this because it's such wonderful television. It's the perfect image of the genius, slightly batty professor screaming about some big people and famous big ideas and he's taking on everything, and the producers just love him.

And we have a morning meeting at 8:15, and I have to remind some of the younger producers, "I know you love the batty Professor Siegel, but this is not why Jeremy Siegel is famous. Jeremy Siegel is famous because long, long ago he made very important contributions to the financial literature. His scholarship helped change the way we look at financial markets." When I became the stocks correspondent in 1997 for CNBC, there were three books that I got that changed the way I looked at things. One was A Random Walk Down Wall Street by Burton Malkiel, the other was Winning the Loser’s Game by Charlie Ellis, and the third one was the first edition of that book, which had come out in 1994.

And why Jeremy Seigel is famous, initially, it was because he did groundbreaking research into 200 years of stock and bond analysis, and that was very difficult to do. And he put it in a very readable form. A lot of professors write books; very few professors can write well, and even fewer professors can come on TV and act like a batty professor. Now, that's hard to do because you not only need scholarship, ability to write, ability to think like a scholar, but to be on TV you need a third component, a verbal component, which is a very different part of your brain, which is why a lot of famous professors are terrible on television.

So you're dealing with a very unique person here, and I want to thank you, and I want everyone to make sure... And I say this at the 8:15 meeting two weeks ago, because the book came out, and he was on and he didn't even mentioned the book. I said, "What the hell? You didn't mention the book." And I had him on CNBC Pro the next day. I said, "Come on, this is why he's famous, people." And I said this at the 8:15 meeting, "You got to know this." None of them had ever read the book because they're all 30 years old.

Jeremy Schwartz:

You got to change that.

Bob Pisani:

You got to understand, it's not the batty professor.

Bob Pisani:

So thank you, Professor, you've had an enormous influence on me over the years, and I want to thank you for your scholarship and your friendship as well.

Jeremy Siegel:

Well, thank you.

Bob Pisani:

Thank you, Professor Siegel.

Jeremy Siegel:

Let me also say, Bob, you live three blocks away from me in Philly.

Bob Pisani:

Right down the street.

Jeremy Siegel:

Right down the street. We've had dinner. I mean, he's in Philly and comes up to New York while... I mean, of course, Jeremy used to come up every day to New York from Philly also, but we had-

Jeremy Schwartz:

We value place, we're value investors, Bob.

Jeremy Siegel:

Yeah, I mean, and I watch you, you did a great job every day reviewing what is going on in the markets. We've had dinners together to discuss the markets. We had dinner together... By the way, Bob is being modest. He has a new book out and the title is... Remind me?

Bob Pisani:

It's Shut up and Keep Talking.

Jeremy Siegel:

I'll tell you, you're right, a lot of professors are not good teachers. They're just into their research, and teaching is a nuisance. What motivated me when I was very young was I wanted to try to understand the world as best as I could and relate it as best as I could to others, and see that sparkle in their eye when they're understanding it, or seeing a viewpoint that they haven't seen before, or putting things together that they haven't seen before. That meant something really special to me. And I taught for 49 years in the universities, four years at the University of Chicago, 45 years at Wharton, retired from active teaching in July of last year. Over 10,000 students.

It's been just a wonderful experience, a lot of a practice on getting the right message across and then bringing it from the classroom, because, really, the audience of CNBC is another classroom. I mean, the feedback that I get from being on there.. And as what Jono said, we recently came back from the Forbes SHOOK conference. I mean, almost everyone came up to me to thank me. The advice in the book kept them and their clients in the market during the difficult times, which is, really, by focusing on that longer run that has always come to fruition.

Jeremy Siegel:

And they say, "Just, thank you for everything." That's more meaningful than almost anything else. So thank you for giving me the platform on CNBC, thank you for giving me the platform from WisdomTree, and thank all of you for being here today.

Jono:

What were you going to say?

Jeremy Schwartz:

I think Wharton is one of, perhaps, the best business school in the country. It's one of the most practically minded, where you feel like you're actually learning about the markets. But even there, you're still a step removed from mostly learning about what you want to do on a day to day basis, like, if you're trying to be an investor, learning about the markets. But his class was so different. He started each class, the first 20 minutes, he has a Bloomberg screen on the market, and he's showing you what's happening at the start of every class. It was financial, economic, monetary... What was the actual title of the class?

Jeremy Siegel:

Well, I think it was called, Macroeconomics and Financial Markets. And they didn't want that title and Wharton, and they said, "No, we want Global Economic." And I said, "No, no, I'm going to put a title on that this class is about, macroeconomics." Because I was trained as a macroeconomist, PhD in economics, MIT. Monetary theory and policy, that was my training, to think in a macro sense.

I remember when I wrote the first edition of Stocks for the Long Run, it was really surprising, my editor back then said, "Wow, you really give a macro view. Almost everything is how to win in stocks, how to pick stocks. You really give the macro view to try to put this together." And I said, "That was my training." And I think that's the strength of the book, is to give you a big view of the most important things that are influencing the market. And what I'm really proud about, this is the most changed, the most expanded of all the editions. We have five new chapters in this edition that we didn't before. We've expanded the value and growth chapter to four chapters, including all types of factor investing, both domestic and international. There's a new chapter on interest rates and stock prices, inflation and stock prices. There's a whole added area on real estate. There's an added area on cryptocurrencies that was, of course, never there in the previous edition. And a whole chapter on COVID, the monetary and fiscal response and how it impacts the markets and the economy.

Jeremy Schwartz:

Well, since we're talking macro and you said that you have a few complaints about the Fed, we actually have Jim Bullard from the Fed on Behind the Markets tomorrow.

Jeremy Siegel:

I know.

Jeremy Schwartz:

Shout out to our podcast. We'll be talking to Bullard-

Jeremy Siegel:

Noon tomorrow. No, yes, noon tomorrow. Channel 132, is it?

Jeremy Schwartz:

On Sirius, the podcast will go out at night.

Jeremy Siegel:

SiriusXM, Behind the Markets, a whole hour. And I can't be too mean for him because he won't come back if I am.

Jeremy Schwartz:

He hasn't backed away. I was worried he was going to back away.

Jeremy Siegel:

Yeah, we were worried he was going to back away. He got a little flack in the last few days, I understand. But was this his fourth time?

Jeremy Schwartz:

It may be his fifth or sixth time.

Jeremy Siegel:

Yeah, actually, we've had many people. But Bullard, who gets the headlines, perhaps more than anyone else, I'm going to grill him in a way that's friendly but firm, shall we say.

Jeremy Schwartz:

We'll see how we convince him.

Jeremy Siegel:

We're going to try to convince him that maybe we don't have to go as far as he thinks we have to go.

Jono:

So Professor, is it the grounding of really living with 200 years worth of equity data, really studying it, is that what gives you that perspective? I mean, other people can get a sense, but you really own that history. Is that what gives you the strength to get it right?

Jeremy Siegel:

Yeah. But Jono, I spent almost three years collecting that data. I had it collected on stocks, bonds, Treasury bills, gold, and the value of the dollar, and put them together in a way, and total returns, which means you add in the coupons, you add in the dividends, you subtract out inflation, to get those real graphs, which I thought was the most real increase in wealth over time. And I remember when it came off my computer finally, that graph. I don't even think there was Excel then. Lotus 123, is that what preceded Excel?

Yeah. It came off, and all the other lines were bending up and down and all the rest, and there was one line that was very wiggly, but it was straight up. 6.7% per year after inflation. And in fact, oftentimes when I'm asked, "Well, Jeremy, what do you find some of the new things in this book?" And I said, "Well, the first edition did through 1992. It was 6.7% per year." I extended it to June 30th, all right? The bear market that we in today, 6.7% per year. The last 30 years, exactly the same despite, look at we've gone through in the last 30 years. I mean the dot-com bubble, the financial crisis, the COVID crisis, you name it. Well, it has been the long-term real return on stocks, no different.

Jono:

But Professor, so before the graph came off, did you know that it was stocks for the long run?

Jeremy Siegel:

I suspected that. I mean, clearly, I had done preliminary. I remember, one time I was asked, "Oh, Dr. Siegel, this is a long book." There's how many pages, 500? "Can you summarize it in one sentence?" So I said, "You know what? I will summarize it in one sentence, and that is that stocks are the most volatile asset class in the short run, but the most stable asset class in the long run."

That's really what it was. It was absolutely amazing. In the short run, it was the most unstable with all the bear markets and bull markets. In the long run, you do that regression line on the log linear on that logarithmic scale, you cannot believe it. It deviates above and it deviates below, returns to the trend line 220 years. That was really surprising to say the least.

Jeremy Schwartz:

Now, today you say the Fed is overdoing it, they're being too tight, we're worried about them. When you were really fired up you used the word depression. I don't think you really mean depression, but you're worried that they're going to overdo it now. But you also think the market's 20% undervalued, so sort of talk through the dynamics of today.

Jeremy Siegel:

Yeah, so let me generally say, absolutely, what I told Scott Wapner, I have, for a year and a half, saying that the Fed is so far behind the curve it was unbelievable. I once said that they are so far behind the curve that they're in the bleachers and the pitcher is pitching it to the catcher. That's how far behind. I called him the most dovish Fed president in the history of the Fed. I said, "They're way behind," and I was just criticizing them on and on and on, from the middle of 2020 to onward.

Jeremy Schwartz:

You gave them a D, not an F.

Jeremy Siegel:

Yeah, and then one day I came on, it was in June, I think it was in June. And Scott Wapner, he said, "Well, Jeremy, what do you think?" And I said, "Well, boy, rates have really gone up and they're talking hawkish. I'm beginning to worry on the other side," and he did a double take. He remembered that, because I actually mentioned that. He, "Just a minute. You're the one who was born here." I said, "Yeah, but have you taken a look at what's happened to real rates? Have you taken a look at what's happened to the dollar? Have you taken a look at what has happened to the money supply?" And all those things have been happening more and more and more since June, July, August, September, now we're in October.

I said, "If you continue this very long, you're just going to go overboard on the other side and push this economy into a recession, which it needn't be done." Listen, it's like screwing up so much on one side by being so loose for so long that, "Oh, okay, yeah, I really messed up. Okay, so now there will be no question about how tight and how firm I'm going to be. I'll just keep on raising to the roof no matter what until all inflation is squeezed out." I mean, it's a psychological reaction.

Jono:

That's one of the things I've grown to truly appreciate from the professor over the last 20 years is that he's always going back to the data, refreshing his opinions based on what he's seeing in real time.

Jeremy Siegel:

Yeah, and I'm always the first to admit...

Jono:

And that's the case.

Jeremy Siegel:

I admit what I'm wrong right away, but this, I felt more strongly about the inflation than anyone else. I mean, they said, "Well, isn't there a chance it's temporary?" I said, "There is no chance it's temporary." And I said, "Why? Because of the 50 years of study of monetary theory and history. And whenever you have a burst of the money supply," the money supply between March of 2020 and March of 2022 went up by 40%. We had never, ever seen that in the 150 years that we have data on, 150 years that we have data on money. And as Friedman said, "Once you pump up money, 12 to 18 months later, you're going to get that inflation." And it was right there. 12 to 18 months afterwards, the inflation broke out right after that.

Listen, he was my colleague for four years. My first teaching was at the University of Chicago, and it was his last four years before he retired. I had read everything he had written beforehand, because that was my specialty. We had lunch all the time. We became close friends. I went to San Francisco often, where he retired afterwards. We talked about these things all the time. He always wanted to talk about politics. He always wanted to talk about what the Fed was doing, what the government was doing, all those things. And he impressed on me so much what was happening that I felt so strong that this was the right call.

And then, now, when I see the money supply shrinking, and I go back in the data, and I don't even remember when it shrunk, "Hey, don't go too far in the other direction." Yeah, I mean don't go too far in the other direction. No reason to. And...

Jono:

Have they?

Jeremy Siegel:

I think they already have, and they certainly will if they do two 75 basis point increases. They're very, very close to having done that. Now, I think they could save it. Really, all the market wants.... I mean, there's little hints from Brainerd, little hints here and there. They would really want Paul to say, "We see signs that it's working. We see those signs that maybe we can ease up soon." It's not even that you have to halt the increase right away, but this unending, and keeping it this high through 2023, in my sense, would be, really, a big mistake.

Jono:

So you think they'll be cutting before the end of 2023?

Jeremy Siegel:

I think they'll be cutting before the end of the year. I think they'll be cutting quite a bit before the end of the year. I think the Fed funds market has it wrong there, and I think it's mostly because of Fed talk. They don't need to keep it that high. And what I pointed out, actually I pointed that on Monday, I think, on Squawk Box, was, and now it's being taken up by others. I mentioned that, Jason Furman, being taken up by others, that the BLS statistics for housing are extremely distorted, very lagged. In other words, they keep on showing there was seven-tenths of a percent in the core, in the inflation report that we got last week, on the inflation. It's actually going down in the real data, and at 40% of the core. It understated inflation.

And so Jason Furman, who I think is a... Isn't he a contributor to CNBC, Jason? So Jason decided, "I'm going to do a graph and put in the actual rental index rather than the government's index." And guess what? It peaked in the first half of 2021 at an inflation rate, three-month annualized core inflation rate, of 18%. Wow. If the Fed hadn't done that, they would've started tightening way in 2021, not in March of 2022. And it's going way down right now. Even that, it was averaged, the way he did it, for several other reasons.

You take a look at the Case Shiller Index, it is going down. You take a look at a number of rental indexes, they're going down. They're going down, they're not going up. And yet, you will see in the consumer price index for six to 12 months into the future an increase in housing costs month over month. Oh yeah, year over year, but month over. Totally wrong. Understated before.

Just to give you an idea, let me give you these interesting statistics. Think about this. From March 2020, when the pandemic began, to March 2022, the Case Shiller House Price Index, which is the best we have, went up 40%. Oh, isn't that interesting? Exactly the same increase of the money supply. And in fact, the 40% increase in that index over that two-year period exceeded any other two-year period in our history, including the run up of the housing market that preceded the financial crisis.

Okay. Now, 40%. Guess what? The housing, owners' occupied housing or any of the housing, they're all the same, in the CPI went up over that same two-year period 11%. Is there a little lag built in there? It's catching up. It'll catch up over the next year and a half and keep on going up as the Case Shiller and other indexes go down. Now, you would think, you would hope the Fed is smart enough to recognize that, but they haven't mentioned it yet.

Jeremy Schwartz:

So they keep saying they're looking at this data, and so your view is that they're going to recognize it, but they're saying they're going to keep rates high throughout it because they think inflation's going to keep rising. So what's the moment that they decide that the real data is what it is versus the data …

Jeremy Siegel:

Well, a paper came out by the Federal Reserve Bank of Cleveland, which is Loretta Mester's bank, that actually pointed out the tremendous lags that are there. So maybe they're looking at it, maybe they should look at it now. They didn't come to a conclusion it was overstated, understated. Then there's this discussion about what should be measured? I mean, in my opinion, there should be no question about what should be measured.

So they said, "Well, we'll only measure an increase in rent when someone gets a bump in the rent." I said, "Even though new renters are high?" I mean, that's crazy. That's like saying you will only increase car prices when someone buys a new car. Like, "Oh, I bought a car 10 years ago for $20,000. Now, it's costing me $40." That's a 100% increase now in that month for cars. That makes no sense. That's what they're doing. I don't know. I mean...

Jeremy Schwartz:

He's fired up, he's fired up.

Jeremy Siegel:

I'm fired up. I-

Jono:

Well, one, you can see the professor's passion.

Jeremy Siegel:

I mean, this is what I taught. Of course, I taught macroeconomics, monetary models, macro models, GDP statistics, how they're computed, how to interpret them. I mean, this has been my life. So I do get upset when it appears that the Fed is ignoring some very important factors here.

Jono:

Do you have a question, sir?

Audience member:

I do. Thank you. Professor Siegel, thanks again for being a host here, all of you. I tell my clients that I don't think J. Powell and the Fed is that ignorant to what's going on. I think you're brilliant, and I think they know what you know, so my suspicion is maybe there's another reason, right? And I think about it. So what could be the other reason that they're raising rates consistently at the pace and level they're doing it knowing that this is not demand-pull inflation, right?

Their own report in June said that 50% of this is due to supply issues, call it supply chain or whatever, 30% of the demand pulling 20% other. So my theory, and I want to know your opinion on this, is that the role of the Federal Reserve is to be the guardian of the US financial system, if not the global, and they're out of bullets, which is rates. And so if they don't get rates up to a level where they have more bullets for the next crisis, they're guarding a system without any weapons. So that's my view.

Jeremy Siegel:

Yeah, I think part of this is the psychology that I brought up earlier. It's psychology that when you make a bad mistake in one... And I, by the way, haven't heard the Fed really apologize. Because I believe they're responsible for 90% of the inflation that we've had. And they should have been raising rates really early and we would not have had as bad of inflation. And I could talk about that if you want to.

No. Putin? Putin is Europe. And we actually had, if you measure it correctly, more inflation than Europe. And Europe should have had 10 to 12% more inflation than the US, because they didn't increase the money supply anywhere near as much, basically, as we increased the money supply if you take a look at their data, going back. You see, we're basically energy independent, so a rise in the energy prices doesn't affect us anywhere near as much. Someone's getting that income. When we used to import all of it back in the '60s and '70s, the Saudis were getting all that income. And as a result, the dollar would fall. Look at, the dollar's risen 10% to 12%, 15%. We should have deflation given how strong the dollar is and what we're importing.

That's another sign of how tight we are, what's happening with the dollar, what's happening with real rates, what's happening with spreads, what's happening with the money supply. I can go on and on on the financial conditions that indicate. And they keep on comparing it to the 90's, it's nothing like the '60s. And, "Oh, we have to maintain our credibility because we eased once there and inflation built up." Take a look at the money supply, none of those things were happening. The dollar was going up and the money supply was going down, and all those other type things that were happening.

No, you just eased up a little bit, let the money supply continue to rise, and then found out you had inflation later on. So I don't know. I think he's not comparing to the right... Listen, one of the first Federal... I can't say I know all the Federal Reserve chairmans going all the way back, but he’s the first one that we have that really doesn't come from a monetary background, and I'm not saying you have to, he comes from a private equity background and he relies on the staff. And the staff is... I sometimes feel that, I'm not going to call it monetarism, but looking at the money supply is like, "Oh, that's dated stuff. No one does that anymore."

Okay, so Chairman Powell has been asked a number of times, first in Congressional testimony in February of 2021 under oath. I forget. Maybe it was Cotton who was... I forgot who was questioning him. "Well, the money supply has exploded. Don't you think that's part of the reason why we might have inflation?" And he said, "Oh, our study showed that the money supply isn't important." And he's repeated that recently before the Cato Institute two months ago. And Loretta Mester has mentioned it on CNBC, "And the money supply isn't important."

Well, let me just ask you this. Inflation is defined as the price of money. It's the rate of change of the price of money. The CPI index is the price of money by definition. There's no arguing with that. And the rate of change of that price of money is called inflation. So if the price index is the price of money, are you telling me that the supply of money has no impact on the price level? Now, where in economics, that when the supply of any good or service goes up, does its price not go down? I thought that was week two of Econ 101. I mean, this is logic.

I mean, I can go through the whole history of debunking. I'm not throwing the quantity theory of money. I mean, there's a whole history. I teach it, a whole history. It goes down, Caines didn't believe it. He didn't believe in getting in a liquidity trap. And he's right to a certain extent. That's one reason why Bernanke's...And that's another thing, quantitative easing didn't cause inflation. Why did Bernanke's quantitative easing not cause inflation? Because they didn't get into the money supply. Got into excess reserves, interest rate was zero. I pointed that out. Well, I pointed that out when Steve Liesman, I pushed back on Steve. I don't know if you saw that, Bob. I pushed back. Steve said, "Well, the Fed says it doesn't and Greenspan agrees and all the rest." I said, "Well, I take exception to that. I take strong exception to saying that the money supply does..." It is not year for year. It's not month for month. It's a loose relationship. Milton Friedman said a "long and variable lags between the increase in money, but it's going to happen." And when you have a 40% increase in a two-year period that exceeds any other two-year period in our history, including World War I and World War II and every other period examined, you're going to have a burst of inflation. You are not going to avoid it. Has that history been totally lost? I mean, there's a long history there.

And let me tell you something else that really does bother me a lot about the Fed. There's in full complement, there is supposed to be 19 FOMC members. We have one that's not chosen on the Fed board, so there's 18. 18 Federal Open Market Committee members, of which 12 voted any one period of time. But we have 18. They all voice their opinion. I would've thought that there would at least be one, two, three, four of those members that might have shared some of the ideas that I'm telling you today, but no. Did we get any real dissents? No.

I'm bored with a little bit on the border back that I remember interviewing, I was shocked. When I interviewed, when the money supply, and I said, "Jim [Bullard], come on. You see it going up." He said, "Yeah, but I'm getting some arguments on the other side. I'm not 100% sure," didn't dissent. And I said, "Well, where's the diversity of opinion? That's what the Fed is for. Why weren't there some voices there?" They may have been voted down, but why weren't there some voices there saying, "We have to tighten," back in early 2021? Not in early 2022, when you've already pushed 40% money into the system.

It's group think. Group think at the Fed is very dangerous. You get any sort of group where the independent thought is looked down on or not accepted or they're not deep enough to be prepared to challenge it, you get a result like, in my opinion, what we've had.

Jeremy Schwartz:

Professor, let me take some of this and tie it back to what people should do, because there's a few different ideas in the book that tie into all this conversation of what's going on. One is, on the expected return from bonds... So you talk a lot about stocks rolling around the 6% real return. Bonds have had a terrible year, but part of that is they used to be a good hedge for stocks.

Jeremy Siegel:

Right. Let me talk a little bit about that. So I know it's something also that's very important. And by the way, a whole new chapter in the book. What, if you had asked me, maybe the biggest surprise over the last 20, 25 years? I would say the precipitous drop of real interest rates.

Now, nominal interest rates, I understand drops because inflation dropped. There was no question about that. I'm talking about up till a year ago. But we've had a precipitous drop in real interest rates. There are three reasons for that. And by the way, it's a worldwide phenomenon. I often bring that up. How many people here know what 10-year TIPS were yielding in the Spring of 2000?

Jono:

Who knows?

Jeremy Schwartz:

I know.

Jeremy Siegel:

What is it? Anyone else? Anyone else want to give a guess? Now, that's an important…

Jono:

Do you have a guess?

Jeremy Siegel:

10-year TIPS.

Jeremy Schwartz:

2000, 2000.

Jeremy Siegel:

2000.

Jeremy Schwartz:

Not in 2021.

Jeremy Siegel:

It was a negative number at the beginning of this year, yes, but it was... What was your guaranteed tenure after inflation rate of return the government was offering you on marketable TIPS?

Jeremy Schwartz:

My team in the back, somebody's got to know.

Jono:

Answer it. Make us look good.

Jeremy Schwartz:

Oh, we got an answer. We got an answer right here.

Audience member:

Four?

Jeremy Schwartz:

Four.

Jeremy Siegel:

Four and a half almost. Four and a half. Wow. And then down to four, three and a half, three, two and a half, two, one and a half, one, one-half, zero, minus one-half, minus one. I think it got down minus one and a half, didn't it?

Jeremy Schwartz:

Close.

Jeremy Siegel:

In other parts of the world. And by the way, take a look at the TIPS, because almost every country has TIPS. Take a look at the TIPS around the world. They all went down, all of them together. So everyone thinks, "Oh, it's the Fed's policy [inaudible 00:50:10]." No.

So what are the three most important factors influencing those interest rates? One is economic growth, and it's slowing down around the world. Productivity and population particularly, around the world. Economic growth is a very major factor on the aging of the population. More risk aversion pushes you towards bonds. But another important factor is the correlation between bonds and stocks. And that was positive in the '60s, '70s, and '80s. It began to change in the '90s down to zero. And then the correlation started getting negative and negative and negative. In other words, stocks were hedge assets. They were negative beta assets. What is a return on negative beta assets? Beginning finance, very low.

Jeremy Schwartz:

Insurance.

Jeremy Siegel:

It's insurance. So it could be negative and you'll hold them. If you have a negative beta asset, wow. Treasuries became the negative beta asset. I don't care. It's insurance. When the DOW's down 2000 points, Treasury's up four points. That cushions my portfolio, I'll hold him. That's the source of demand. Whoa.

Jeremy Schwartz:

Not this year.

Jeremy Siegel:

What?

Jeremy Schwartz:

Not this year though.

Jeremy Siegel:

Well, we're going to talk about this year. But let me mention to you, Richard Clarida, Vice Chair of the Fed. Now, he was a professor at Columbia. He gave a talk in Zurich at one of the international meetings. I introduced him to my class just a few years ago, about three or four years ago. And he cited work by John Campbell and Jose Visera and others, and he said, "Do you know that almost 3% of the decline in the term premium could just become from turning from a positive beta asset to a negative beta asset on those Treasury bonds?" Nothing to do with the Fed, just becoming a negative beta asset.

Now, we got this year. Have they been a negative beta asset this year? Whoa, what does this mean? Are they permanently turning to be a positive beta asset or is this just a result of the tightening of the Fed? I think the jury is out on that issue. I think, when you go back, it's when the Fed is tightening and then finally loosening that it becomes a positive beta asset, and every other time it's negative beta.

What do I mean by negative beta? What happened when COVID hit? What happened to Treasury bonds? It went up. You cushioned your portfolio. What happened when the financial crisis hit? What happened to Treasury bonds? They went up. What was the best performing asset in the worst financial markets in our history from 1929 to 1932? Treasury bonds. Nothing compared. Nothing. Gold or anything else, nothing compared to Treasury bonds. That's your negative beta asset. I'll hold it.

Think about it now. What I've been thinking of more recently is the fact that this year we have had a positive correlation between those yields, between the returns on stocks and bonds, and to become a positive. Is that going to start, you think, "Oh God, I'm not going to get the hedge anymore"? I'm not going to hold them. I don't want them then. I mean, they were good as a hedge. If they're not a hedge, I'm not going to hold them. Better hold something else, maybe stocks.

Of course, the real rate going up does pinch the stocks. Don't forget, asset prices are always discounted at real rates, which has gone from minus 1% to 1.5%, 2.5%. It's one of the sharpest increases we've had in real rates in history. Do you know that you could explain the entire market decline just by the increase in real rates? Forget about earnings. Earnings the same, just discounted at a different rate. Wow. So you got to think about that.

So it's an interesting thought. And the final chapter has a [inaudible], get inflation under control, go back to a negative beta asset. We got the real rates sinking down to negative again.

Jono:

Cat, is there another question? Did you see? Is there any other questions that we'd... Here's one. Yes, sir?

Audience member:

Hey, Professor, I'm honored to have you here.

Jeremy Siegel:

Thank you.

Host:

So my question is, recently we've seen certain states, like California, handing out what they call inflation checks and things like that. And we've seen that other states follow suit. We've seen contrary fiscal policy in the UK to prop up their assets. Do you think that's contradictory to the monetary policies we've seen these banks enacting? Is that what you want to see? Do you want to see fiscal policy contradictory to monetary policy, or do you think this is purely a monetary problem and that's the way to fix it?

Jeremy Siegel:

Well, basically, what happened... So this is what should have happened. When COVID hit in March and we had CARES Act One, or whatever it was called, yes, we needed Fed support. No, I'm not arguing about that. Once we got to the CARES Act Two, which still under Trump administration, we didn't need 90% of that. And then when the Biden Act came after that, we didn't need that.

What Powell should have done is gone to Congress at that time and said, "Okay, I helped you there. We expanded the money supply somewhat, but I cannot keep on doing this and buying your bonds and printing the money for you. You're going to have to go to the bond market." You pass it, go to the bond market and we would've had interest rates rise right away, and that would've stopped the inflation. "Yeah, but it was free money." Friedman: There ain't no such thing as a free lunch. Did you think everyone was getting that free? Did you think it was just money from Heaven that would have no consequences? Yeah.

Yeah, Friedman said, "Well, you're going to get it some way." You're either going to tax the people more or you're going to inflate it away. I mean, when you have a fiat money standard, that's the favorite way to get rid of a debt burden, is inflating it away. We're inflating it away. Actually, we have a tighten mode. Actually, the debt ratio is going down. Do you know that? Do you know the debt GDP ratio is going down right now for one of the first times since the Clinton administration? I haven't even checked it. It could be going down more than when Clinton almost had a surplus and Greenspan was crazily worried about the... Can you believe that?... The national debt disappearing. Remember that? That was 20, 25 years ago. That was crazy. But listen, nonetheless, debt to GDP is going down. Debt to GDP is going down now at one of the most rapid rates in history. "Thanks", with quotation marks, to inflation, the classic way of paying off debt.

Jono:

So you can see how fortunate WisdomTree is to have Professor Siegel. I mean, our partnership, our relationship has never been tighter. He's on our investment committee, which powers our model business and the recommendations that we make. And we're just so fortunate to have him and Jeremy and really everybody at WisdomTree. So I just want to thank you guys for what you've just done.

This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such.