Irene:

Hi, everyone. Thank you for joining WisdomTree's exclusive event today, Fed tough talk with Professor Siegel, who will be joined by WisdomTree's Global Chief Investment Officer, Jeremy Schwartz, and WisdomTree's Head of Fixed Income Strategy, Kevin Flanagan. With that, I'll turn it over to Jeremy Schwartz for some opening remarks.

 

Jeremy Schwartz:

Well, Professor, always a pleasure to get your views. And for our listeners in, the professor has... And I've been working with him now 21 years. I don't know if I've ever seen you as fired up on CNBC as you were last Friday. Very passionate views and people haven't been paying attention. The professor has been spot-on inflation for the last two years. He was early in the pandemic. He saw it coming. And to get his latest thoughts on what's happening now, what the Fed is missing, very critical. And so we have a lot of questions. A lot of you submitted questions. We're going to try to get to as many as we can. We are going to try to cut it off at 5:00.

But, Professor, let's get a few opening comments on current markets, what you're seeing from the Fed, other central banks and what we'll come into, some comments for you.

 

Professor Siegel:

Thank you, Jeremy. Well, finally a good day. And it's interesting, I think the market is so desperate for signs that our Fed may stop aggressive tightening at the future, that even when a foreign central bank, such as the Bank of England decides to come in and buy bonds, there's a sigh of release. Well, maybe at least one central bank is not going to send interest rates through the moon and help stabilize them.

As you said, Jeremy, I was very early... In fact, six months after the pandemic, I said this, money supply is going to cause dramatic inflation. It's not temporary. I was very aggressive. I was very upset with the Powell and the Fed not reigning in the money supply and beginning to raise interest rates. With the record amount of stimulus that was provided by the government, it was absolutely more than a recipe of inflation. It was a guarantee of inflation so late. In fact, on CNBC, I called them the most dovish. It's interesting. A year ago I called them the most dovish chairman in the history of the Fed.

So, all of a sudden, when he realizes that he's been way too loose, too long, as often happens to individuals, they swing in my opinion, too far in the other direction. Yes, we need to tighten. Absolutely. I'm not saying we don't. But this open ended will continue to be aggressive until we see inflation slow down. And what is he looking at for inflation?

Well, what worries me going forward is that prices are going down, not going up. We are being very tight. Not just that the Fed has been tight, but the talk has been so tight that I have rarely seen the financial markets move as fast as they are now. Not in terms of just the stock market, but real interest rates, which I think we're going to talk about later, have soared faster than I have ever seen them before. The dollar, we all know, which is flying to the moon, a 20 year high on the dollar, the money supply which was increasing at absolutely record rates in 2020 and 2021 has ground to an absolute stop.

In fact, since March of this year, the money supply has decreased. I have never seen such a turnaround. All these are symbols of an extraordinarily tight Fed and a Fed that I think if they stay in this mode that they say through 2023, will guarantee a severe recession by the end of next year and in 2024. I'm not saying they should absolutely stop the tightening. I think what I am calling for is that Chairman Powell and the Fed say we recognize signs that inflation is cooling and they should recognize signs of inflation is cooling.As many of you saw as early as yesterday morning, the Case Shiller Price Index went down for the first time in decades, which is a home price index. The FHFA index, which is a Federal Home Loan Index, housing prices went down. Now, let me be clear, they are still way up from March 2020 when the pandemic hit, but they're no longer going up. They are going down. And what have I been maintaining over the past year is the way our CPI statistics are constructed. They are lagged in getting the CPI guarantee you that in the next two, three, four, five, six months, you will see a lot of housing inflation despite the fact that housing prices on the ground are going down. And, in fact, not only that, rental prices have stopped going up.

Now, they're still jumping from what they were, but the size of the jump is not as big. These are signs that the Fed must look at in judging how tight monetary policy should be. In my opinion, we don't need a Fed funds rate at 4.5 to 5%, which is almost what the Fed funds futures are predicting. My feeling is that we need a Fed funds rate that is more in the neighborhood of the 4% level and that the Fed should recognize this fact. If they don't, they risk a recession going forward.

 

Kevin Flanagan:

Let me just ask a quick question, Professor. I wanted to follow up with that line of thought. I remember Fed chairman, Greenspan, used to talk about CPI as looking in the rear view mirror. And exactly to your point of what you're saying that when you see Powell at these press conferences say we need to see a sustained trend of inflation coming down, isn't that something that could be happening that presently, but it's just not showing up in the data so they're essentially fighting yesterday's war?

 

Professor Siegel:

Yeah, that's absolutely right. And I like that term a rear view mirror. I used that myself. It's not only what has happened, but as known among us that have studied it in the profession, in the 1980s, the government changed the way it did the housing prices. And as a result, it's index is very, what we call smooths. Any change in prices enters in very slowly.

If you look at the housing part of the index, which is, by the way, 40% of the core rate, which is what the Fed looks at that's so important, it shows an inflation of only eight to 10% since the beginning of the pandemic. Well, the Case Shiller Index has a 40% rise in home prices since that time. Rental indices are 20 to 30% up. So not only are you looking in the rear view mirror on what is happening, but you're looking at an index that's been constructed with such legs that it's going to catch up and show inflation for many months to come.

Now, let me just mention the flip side of this. We've had much more inflation already than what the official statistics say. If they were up to date, they would show 10 to 12% inflation over the last year, not eight or 9% inflation. So understating past inflation and overstating future inflation.

 

Jeremy Schwartz:

Is there any way they can recognize what you're saying? Even the narrative, and you can see how things change quickly. The Bank of England today pivoted on a dime from we've got to sell bonds, now we're buying bonds. So you see how things can change. But given all the talk that they're giving, what's going to convince them? They're going to listen to you here.

 

Professor Siegel:

And you're right. And, by the way, there's more worry given how late they were and how they didn't see what had happened. Again, it is almost impossible to imagine, but the September meeting, which has, of course, struck so much fear into the heart of asset holders that was held two weeks ago, at the 2021 September meeting, they saw no inflation coming in, no need in this year to raise the Fed funds rate. Can you believe it? They were buying mortgage back, securities in the teeth of the biggest housing boom in history. They seemed not to see or understand what was coming up and what they were contributing for.

The fear is, well, if these people are so blind, are they going to be so blind on the other side? That is a tail risk and that I think the market worries about. I think there's loss of confidence. Instead of gaining confidence in the Fed, oh, they're finally fighting inflation. Are they over fighting the inflation going forward? The way they're talking, it looks like they are. Not that again, I'm not saying these increases in rates are inappropriate so far. The talk into 2023 is what is inappropriate.

The total flip instead of a year ago, not seeing any inflation when it was already happening and accelerate in everything and wild speculation and all asset. Here, they're not pausing and saying, we see signs of progress. And I think there's a little bit of worry. Well, are they going to be as dense on this other side as they were on the first side? And my hope is that there'll be pressures, there'll be political pressures, there's going to be, oh my God, from the housing industry, mortgage rates hitting maybe 7%, 30 year fixed, really just out of the affordability range of millions and millions of more Americans than before.

So there'll be political pressures on... Everyone's enjoying when money is being distributed, and inflation just starts and asset prices are booming. On the other side, the political pressures and just the pressures from businessmen and women are going to come to the fore right away. I hope to lend my voice. I hope others join me in voicing. Let's not have group think at the Fed, because clearly we had group think in 2020/2021, which led them to do nothing. We don't want group think on the other. We need diverse, rigorous debate in opinions at the Fed. If someone mentioned to me at one of their Fed meetings one of the Governors, one of the bank presidents, I feel I will bring a debate because I think there's been precious little, far too little, debate, and I think that's what's led them to being overly easy during the first two years of the pandemic.

 

Kevin Flanagan:

So Professor, you alluded essentially ... Let's call it the dot plot, and I've been telling people you've got to sort of take those with a grain of salt. The Fed can't even predict what they're going to do, let alone anybody else, or the markets, right? If you go back to last year, what you were saying, or even March, I think they were looking at, what, 1.9% or something for this year. Now you're at 4.4%. So what I wanted to go back and look at was 2018.

In December of 2018, the Fed raises the fund rate a quarter point to that two and a quarter, two and a half, and they got major pushback from the markets at that time. And the next thing you know, I think it was after the holidays where there were Pals on TV, Vice Chairmans on TV, trying to talk, and then they cut rates in July seven months later. Do you still think something like that could happen now?

Say they take us to four and a quarter or whatever by the end of this year. Do you still think that we could see Pals' colors come back again as we saw in 2019 and actually cut rates next year, not continue to raise them?

 

Professor Siegel:

I think there will be a period where they'll be steady and they'll be waiting, rather than an actual cut. A cut would be a statement that we really see prices really beginning to go down, and my feeling is, I would like to see them raised maybe another 50, 75, maybe cumulatively 100. No more. Even that might be too much. But then stop. Actually, if they do another 50 in November, I think they're going to start seeing signs that things are slowing down enough that they may pause at the December meeting.

Well again, no one knows. And let me agree with you 100%, Kevin, as I pointed out, back in September of 2021 out of the 16 FOMC members who gave their projections, eight of them said no increase was necessary this year. Five said that a quarter of a point is necessary, and the three most hawkish ones said 50 basis points. How ludicrous can you be?

And as you said, how wrong can you be? It is amazing to me that now everyone says, "Oh my God, look at this stock pile. Look at where they're going to go," and all that. Do they really know? No. Absolutely. You can see from what happened last year. So again, if they see softness and they don't have to say, "Well, I'm going to crush the economy just until I see the CPI go down to two percent," that's going to be far, far too late. And the market just is ... When you don't have an upper limit, we're just going to continue to tighten it until we see, and it doesn't tell you what he is looking at to see because he's looking at the CPI. He's going to see that rise for months and months to come because of the way it's constructed.

So is he going to just keep on saying, "We're going to keep on tightening that?" That is the sort of thing you just do not want to happen, and I think that's some of the fear in the risk markets today.

 

Jeremy Schwartz:

So Professor, one of the things that I've got in my background here, Stocks for the Long Run, edition six. News on the street here is that it's out in Amazon this week, it's brand new edition. Professor's been working on it last two years, as have I. Professor, one of the chapters is you talk about the inflation coming and the pandemic and the money supplies. That's one of the big news stories. That's what gave you confidence on, or where inflation was coming. That has come out. We've got the latest money supplies turning negative. Maybe sort of talk through the thesis on how much inflation you think has built up in this system, how long it's going to stick, what inflation will settle down to, what you think the Fed should be comfortable with inflation as they try to navigate through these higher rates and higher inflation.

 

Professor Siegel:

Well, a lot of it is in the system. You've got to let it go through the pipeline because of all the buildup. So there's no rush to get it down to two percent. That would crush the economy and cause much more havoc than it's worth. My feeling is is that they'll smoothly get it down, as they will. As I said, the money supply has not only stopped, it's started declining.

A money supply growth of 5% is consistent with a 2% inflation target, so they're way under in that. They're providing way too little liquidity right now, and they're talking as they're providing less liquidity. There's never been a post-war slow down of the money supply of this magnitude. It didn't even turn negative when Volker raised interest rates dramatically. The money supply still continued to rise. So I'm just giving you some idea about how really tight the Fed is when you look at liquidity, which is the ultimate determinate here of this inflation.

So my feeling is is that there's going to be inflation in the pipeline, it's going to get through those statistics, we're going to have housing inflation for six, nine, 12 months. I don't know. Everyone says, "Oh my God, inflation is that big." It's not that big. It was bigger before. It's actually smaller now, and it's not worth the price of crushing the economy to stop a little bit of that inflation that's in the pipeline. You're going to crush wages, cause unemployment. What would you rather have, full employment and a growing economy with 2% or 3% more inflation, or do you want to cause five million people out of work, or how many to get that final inflation down?

And what are you going to do to wages at that point? And by the way, I don't believe that wages are a major factor pushing inflation today. Wages have been lagging inflation. The real income of the worker has gone down over the last two years by a dramatic amount, and he and she are just catching up at the present time. Let them catch up. It's called cost push inflation. It's only when wages go higher than the prices and push merchants to raise even more, that's not going to be the case.

Really, corporations are catching up because workers basically have been cheated because of this inflation out of a lot of real income, and I just hate to see them be the sacrificial lamb, if you want to say, to the inflation fight that Chairman Powell should have started fighting two years ago.

 

Kevin Flanagan:

Professor, we've gotten a bunch of macro-economic kind of questions, ramifications. So I'm going to try to combine them all together, ones that were pre-submitted and ones that are coming in here. So the first question would be, okay, recession. Are we in one? Are we going into one, shallow or deep? And then, what economic indicators should we be looking at as signs for the future?

 

Professor Siegel:

Well, the early signs are going to be jobless claims, which we haven't seen any decline now, changes in labor market and payroll, has there been payroll hoarding. I've also pointed out, Kevin Flanagan, on various broadcasts and in the news media that Powell has to address how we could have added three and a half million workers to our economy this year and had negative GDP growth.

This is a collapse of productivity that is unprecedented in the data. This is something that's not really well understood why it's happening. I think it's very important to understand it before you start raising the interest rates so high, which causes total collapse of productivity that we see.

Now by the way, we're going to get GDP revisions tomorrow, which might turn this into a slight increase in GDP the first two quarters. But still, given three and a half million workers added, we should have had a two and a half to three percent GDP, not zero or negative GDP growth. So what happened? Are people just not working and not reporting the hours? Is the market anywhere near as strong as Chairman Powell says?

It's somewhat upsetting to me. He keeps on pointing to the JOLTS data, which is Job Openings and Labor Turnover data, and about the quits and the hires and how hot it is and how strong the labor market is. Well, go back to the data. Look at it in September 2021. It was exactly as strong as it is today when you saw no inflation and no worry whatsoever about the tightness of the labor market.

Now, with no more tightness than we had a year ago, it's suddenly a terrible source of concern of inflation.

 

Kevin Flanagan:

How about on the recession side? Do you think we're headed in that direction for 2023?

 

Professor Siegel:

If Powell and, say, we see the signs it's working, we may not have to go as high as the dot plot. You will see such a huge relief in the equity market, and really, I think could avoid a recession going forward. The longer we stay in kill inflation at any mode, the lower the probability that we can avoid a recession becomes. At this time, I don't see it, but with the decline in the housing market, which is huge, and there is a big decline. The decline in confidence. People see their stock holdings decline, and the mortgage rates soar. Anyone in the housing market ... The ingredients are there for a slow down, so you have to pivot relatively early to avoid a recession.

 

Jeremy Schwartz:

It's been such a bond driven market this year. You see all the queues being driven by bonds. Kevin Flanagan, there's a bunch of questions on how to manage fixing model portfolios, what do we think about bonds. Professor, the right asset allocation. We have been working on model portfolios with you saying the 60/40 was dead, 75/25 was in, more stocks versus bonds. But coming into this year, bonds had a negative 1% real return. You were getting from -1 to positive territory on the real bond yields. Any comments on the overall bond duration yields beyond the Fed's fund rate?

 

Professor Siegel:

And that's a very good question. I have a whole new chapter in the sixth edition of Stocks for the Long Run that's behind you, on the long-term decline in real yields since the year 2000. In the year 2000, the 10-year TIPS was almost 4.5% positive. I'm not talking about the standard bond, I'm talking about the tip, which is after inflation. I think the actual nominal bond was 6 or 7%, but to have an after inflation for... Since then around the world, real yield have declined and they have declined. A lot of people think, "Oh, because central banks have been easy." No, that's a very small part of the explanation for the long term decline in real yield. The long term decline in real yields is due to the slow down in growth. In the world economies, the slow down in population growth, slow down in productivity, the use of the bond as a hedge asset to buffer short term shocks to the equity market.

As we point out in the book, the correlation was positive between stocks and bonds back in the 60s, 70s and 80s, and then it turned negative 90s and especially 2000 until this year. This year of course, we've had a very positive correlation on stocks and bonds. When the Fed is in tightening mode, that's the time you're going to have it. But that decline in correlation over long run make bonds a hedge asset. We have risk aversion of older wealth holders. All this is contributing to real yield. So going up as the TIPS rate almost hit 2% a day or two ago, I know it's come down today quite dramatically, but is to me, way above equilibrium.

I mean, that is too high and too high a hurdle for a thriving economy, given the low growth rates that we have currently and prospectively. So they don't have to tighten as much as they used to. Their idea that they have to get 2, 3, 4% above inflation is way too tight. That might have been necessary back in the 70s and 80s when inflation expectations were very high, it is absolutely not the case here. Inflationary expectations are well anchored. Even Chairman Powell noted that in the data and in the surveys.

 

Jeremy Schwartz:

And for the equity premium, as you think about, so one and a half percent is still not a... And it's better than, it's been, better than maybe your long term view, when you think about where equities are today, how do you think equities versus bonds?

 

Professor Siegel:

I'm really glad you brought up. I'm hearing people on CNBC and news, they say, "Oh wow, I can get 4% on two year notes. Oh, I can only get one and a half percent on the S&P 500." That's comparing apples and oranges. First of all, only a small part of your return is the dividend yield. There's buybacks, there's reinvestment of earnings, and the biggest apple to orange is you're comparing a dollar return with no adjustment for inflation, which as we point out in the stocks, are long run. The long run real return on stocks over the last 220 years, over the last 150 years since World War II and over the last 30 years since the first edition of stocks to the long run was published is 6.7% per year after inflation. After inflation. Tell me how a 4% before inflation return compares with that. Not well. So those people say, "Yeah, oh yeah, I'm going into the bond." The bonds again, four versus one and a half are not making right comparisons and they are going to be losers in the long run.

 

Jeremy Schwartz:

Kev, how are you thinking about the fixed income side when people say adding to duration, Professor thinks the TIPS yields are a little bit above equilibrium, but the lot of momentum in the short run on these rates, what do you think?

 

Kevin Flanagan:

Yeah, I mean our high conviction trade, and we've talked about this before, Professor, for this year were the treasury floating rate notes and that's done very, very well this year. Whether it's intermediate long duration TIPS, short duration, fixed coupons, there was no place to hide in the fixed income market this year. But I think to the point about duration is interesting and Professor, what you're talking about with real yields of where we got to and where we still kind of are, right? I mean we're still, if I'm looking in here right around 140 on my screen that I think from an asset allocation standpoint, we would still want to be short duration versus the benchmark, but could you start to bring in that short duration a little bit and start to make some methodical moves in that vein? I think that's a reasonable case scenario at this stage of the game, especially based upon what the Professor said. And Professor, I have to ask this question before I remember. I saw it come through. They asked, "Why can't you run the Fed?"

 

Professor Siegel:

Oh boy, I have had a number of emails about that. I would not mind I being at the Fed, but if I can lend my voice as an outside critic, I have a lot of freedom to do that. And if I can influence that way, I'm also satisfied. I am very distressed at the mistakes the Fed has made. I called on CNBC for Chairman Powell to apologize to American public for not seeing any of these signs, which I saw absolutely were going to be causing inflation. And some people said, "Well, Dr. Siegel, what are you going to do when the Federal Government has these massive stimulus, they put the money in?" The Fed did not have to hand them all the money for all the physical programs. In fact, that's one reason that we established an independent central bank. If we had forced our government to fund its expansion programs by floating bonds in the market, in late 2020 and 2021 interest rates would've risen, then we would not have the inflation we have today.

And instead, the Fed printed the money, handed it all to the government, saying, "Whatever you need here, it all is." Now, by the way, that might have been appropriate in March and April of 2020 and that's one thing. But then it continued on through the rest of 2020 and all through 2021 until March of this year. That was what I was objecting to. Fine, yes, we had a crisis. COVID was a crisis. Yes, our government did go come through on that first few months with the programs, but after that there was no reason to continue to hand out the money to them, tell them to go to the market. Maybe if they would've seen how much interest rates have gone up, they may have been a little thriftier on how much they spent during that period. And I'm not just trying to say the Biden administration, even the second Trump stimulus package was bordering on the excessive and Chairman Powell printed all the money necessary.

Then when Biden came in, all the money for all those programs, I mean it just continued. I'm not pointing fingers at one administration versus the other. I'm saying the Fed was designed to say, as the old expression goes, take the punch bowl away when the party is start getting really good. Well, they spiked the punch bowl, continuously and we know what kind of party we had a year ago because we were in the grips of one of the biggest speculated booms since the .com mean and some take cases even greater than the.com mean and Chairman Powell did not do anything to stop it until the signs were just so obvious and then in a lagged way, oh, we're not really, didn't start... Pivoted in November and they didn't start tightening until March. Baby steps. Even that was lagged, just not good monetary powers.

 

Jeremy Schwartz:

Now these global central bankers are all struggling, and you've got interventions, you haven't seen interventions like this. You've got the Bank of Japan trying to, well actually was it the government, the Finance Ministry buying Yen after the currency's been in free fall, but they haven't changed their policy. You got the Bank of England saying they're going to buy bonds, delay their... Selling a bunch. Can these interventions work? How do you think they get out of these? So I think some of the moves, there were some questions on gold, some people were saying the move by Baker England gets them very bullish gold because it's sort of just monetizing that they're never going to be ever get out of this stuff. What's your sense of it?

 

Professor Siegel:

Listen, we're inflating our way out of the debt. I mean that's the classic way that we are inflating, I mean. The downside of having a 10% inflation, I mean we have 10%, which is bad for the consumer, but the upside is in real terms, you eliminate 10% of the debt, right? I mean, its burden becomes less because you're inflating away the liability. That is classically how fiat money, which is paper money economies have done it. Now, really irresponsible governments hyper-inflated away, you get Venezuela, you get Zimbabwe, you can go on and on. But inflation is the default tax. If you're not going to float bonds and you're not going to attack public and you're going to spend money, there ain't no free lunch. You're going to have inflation. You pay for it one way or the other. You're going to pay for it one way or the other. What's that happening? Depreciating currency. Now the Yen is... As soon as the government said, "We're not going to let their 10 year go above 25 basis point," that started a rapid depreciation of the Yen.

That was really the sell, oh my God, they're going to have the... If they're not going to let that rate go up, we're going to have depreciation of the Yen. That sort of was the reminiscent Abenomics of the former Prime Minister who wanted to depreciate the Yen to stimulate the Japanese economy. But that really, really started at that particular juncture. Now let me say something else. People often say to me that, "Dr. Siegel, there's inflation all with the word." I mean the Fed, there's a big difference. Europe is... It's inflation is primarily supply side inflation. Its inflation is really caused by the restrictions on energy. We are energy independent. In other words, we produce as much as we consume. We are much less... We don't have that excuse. We don't have that excuse. In other words, every extra dower that energy costs, someone else in the United States gets it, not in Saudi Arabia or some other country, and that's a huge difference. In these other countries that import most of their energy, they're suffering supply side. We have much worse inflation than we should have had. If you look at the money, and I have looked at the money, monetary expansion in other countries in the world, they did have a little bit of a blip, but nothing like the US, and they're suffering supply side inflation. Our inflation is 90% demand size, printing too much money. Listen, oil is lower than it was before Russia invaded the Ukraine. Don't start blaming the current inflation we have on Russia.

A lot of things to blame Russia for. The naked aggression is certainly terrible. I'm saying for the United States it's not a major cause of this latest inflationary push. It's the money that was printed by the government. Let it go through the system, don't slam on the brakes. You were going 120 miles an hour in a 50 mile zone and now you slam on the brakes. Didn't want to send people through the windshield at this particular juncture. Let's accept the inflation that's in the pipeline statistically and elsewhere without crushing labor supply. Get the money supply growth back to the 5% range that is long run consistent with the 2% inflation goal, often explicitly stated by the Federal Reserve as their goal. That would be my monetary policy recommendation.

 

Kevin Flanagan:

I just wanted to continue this line of questioning Jer because we've had a couple of questions pop up on this with what the Bank of England announced today. We haven't really talked professor at all about QT, quantitative tightening here and the Fed Zone balance sheet. People are wondering, could the Fed follow the Bank of England's plan today? Is that something that if we see things start to really fall out of bed instead of say cutting rates, could they go to their balance sheet first before moving into rate cut territory?

 

Professor Siegel:

Yeah, well, quantitative tightening is really more psychological than anything. The banks have so much excess reserves. As a result, they're just really absorbing some of the excess reserves that are in that system more than anything else. Those excess reserves are not being turned into loans. Deposits are way down, by the way, at commercial banks. We're really seeing a sharp decline there. People are taking their money out because the banks are not raising their rates anywhere near what they can get in treasuries, and putting in money funds, et cetera, and so on. People are taking the money out of that. That's going to add to the tightening for people getting loans from the banks to say the least.

Let me go to your question. Yes. One thing they could say is we've decided to slow up on our quantitative tightening. That would have a huge psychological effect more than it would have an actual real effect. Anything that indicates that they do see that forward looking inflation is far less of a problem than the backward inflation. It's not worth it to crush the economy for a couple percent rate of inflation. That trade off is just not the right trade off for the current central bank.

 

Jeremy Schwartz:

Kevin, it's definitely been the year of fixed income. Even here we dominated questions on race driving everything. Professor, the stocks are long run. We've got to talk about stocks a little bit more. A few people ask questions and you do view it on the long run. We talked a little bit about the long run returns. How are you thinking about today? People ask is it too early to buy until you see the pivot? Also people ask some questions about factors, and that's one thing you do talked about in the book is the questions on value, small cash. It has been the year where dividends have worked incredibly well as a factor versus growth. It's been the first year in 15 years where high dividends have really provided a lot of cushion. Is that something that continues? Maybe some high level comments and then some of the factors.

 

Professor Siegel:

Yeah, and Jeremy, one of the things in this sixth edition, I expanded the discussion of value growth, from one chapter to four chapters actually, and expanded to not just value growth size, large, small, but all those other factors. Momentum as a factor, profitability, quality, you go on. What we found, which has been very little reported, is that since 2006, which is basically on the eve of the financial crisis, factor investing has not worked for anything. Even the famous momentum factor, which is the strongest overall factor by far in the market and internationally in every country, except in Japan by the way, but it stopped working. What are all the reasons we don't go into. We don't understand all the reasons, but factor investing has not worked very well since then. Value investing, what I like about it, it has an inherent logic and that is that stocks get battered around up and down.

If you keep on sifting to those that are relatively cheap relative to their earnings and relative to their dividends, in the long run, it will pay you with superior risk returns over a regular portfolio. Has that done so? No, because since 2006 we've seen, you could call them the fang, they're not really all that FAAGN-y anymore because first of all, names have changed. The Netflixes dropped out. The tech companies, the mega tech just hijacked the entire market. If you weren't in them, there was no way to match the averages. Did they get overpriced? The poor quality ones, most certainly. We know that. As you go toward more and more quality, maybe the last one to fall was Apple. Today it's probably the only stock that's down today because of their warning about sales not being quite what they thought on their iPhone 14.

Nonetheless, they were the ones that really changed the system. No one stays top dog forever. There's a whole chapter on top dogs of the S & P 500. What happened to them? How long do they stay on top and what kind of returns can you say? You really see the rotation of industry groups and the rotation of individual stocks and the importance of diversification going forward.

 

Jeremy Schwartz:

Well, I know we wanted to cut off exactly at five. We had a very broad call today. There's so many places you get comments from the professor. We do a weekly show behind the market. Sirius XM, we have a podcast. There's commentary we put out on Mondays from that if you want to do it in reading form instead of listening for him. Kevin writes a weekly note. We've got a great blog. It's been a pleasure, Professor. Keep spot on. Thanks again for staying with us. If you have any more questions on WisdomTree, please reach out. We'll be glad to help you give some recommendations on how you can navigate these markets with some of our ETFs. Thanks for dialing in. Thanks professor.

 

Kevin Flanagan:

Thanks Professor.

 

Professor Siegel:

Thank you Jeremy. Thank you Kevin.