Irene:

Hi everyone, thank you for joining WisdomTree's Office Hours on Has it Become the Fed 'May or Will Cut Rates? where you'll hear from Professor Jeremy Siegel, WisdomTree Senior Economist, Jeremy Schwartz, our Global Chief Investment Officer, and Kevin Flanagan, our Head of Fixed Income Strategy.

Jeremy Schwartz:

We're going to try to get straight to the point. Give some quick comments on the fed from the professor. It's always great to get his response. We'll see. Talk about how we implement some of these in in model portfolios as well. But, Professor, people thought we'd be cutting by now. No cuts so far. What are you hearing from, Powell? How are you thinking about the rest of the year?

Jeremy Siegel:

Well, I think we need Powell to keep on talking, because when it when he was talking the dial went up 400 points, and when he stopped it went down 400 points. So they liked what they were listening to. I I particularly like the terminology. I don't see stag, and I don't see inflation. You know, people have been talking about that. We've had some slower growth data and pesky inflation numbers so clearly the term Stagflation kind of became a kind of a gnome de jure in the last few days.

I did think yesterday, and I think everyone was pivoting way, too bearish on, and they thought that that that that would pivot to a much more hawkish stance. He did not. There was no pivot. Really, it was just a a longer wait he was not overly pessimistic. A number of the questionnaires tried to get them.

To say, if there's a rate increase, he said, that that's unlikely, and and it said a whole bunch of indicators would have to go in directions that he implied are not going that way now. One person asked whether there was any discussion about a rate increase. And the way he answered it was. There was discussion but he didn't say that. And he said, You know, the discussion is the discussion center that we feel we are restrictive, and it just takes longer for the time to work. He didn't want anyone to entertain an idea that the fad was really even thinking about hike. Now, of course, it cannot be ruled out. You know, if situations become extreme, but they're certainly not in any reasonable scenario. He talked about the rental again. I'm finally taking hold and said it. The lower rentals he compared the rental index with on the current apartment list, Zillow. He didn't mention those names, but private, and when he did say that those were flat, it is taking time for those to get into the official index. It's getting into the official index slower than we had thought.

So he actually conceded that, you know, basically it was just a holding pattern. It was not a pivot. It was not a change in tone. Implying that if Dad gets better going forward he will lower rate. You also said, if employment gets worse. And a later question said, Well, what do you mean about employment getting work? And he sort of qualified that by saying markedly worse. I mean he sort of implied that going up from 3.8 to 4% was not enough. But other indicators started deteriorating. They would, he said. In other words, we do have a dual mandate, and that we have to watch the employment numbers as well as the inflation numbers. So I I thought it was a very excellent session or anything I didn't like was, you know, blaming the initial inflation on house on supply side constraints rather than his own excessive monetary policy. But that's in the past. Given what he is seeing now. He is absolutely taking. In my opinion, the appropriate is just again, wait and see. We're going to get 2 more reports on inflation before the June fifteenth meeting. Actually, one comes on the morning of June fifteenth, the day that he's going to make an announcement. And of course, the other one will come in the middle of May. So we're going to get an awful lot of data between now and then.

Kevin Flanagan:

So, Professor, if you were to put your forecasting hat on right now. Would you say that if they had a dot plot for today it would have stayed at 3, or do you think it would have dropped?

Jeremy Siegel:

Oh, it would have dropped I mean it definitely. I mean, you know, I was shocked at a state of 3, and I remember when it's in in March of date of 3, I think only because one person didn't mark it up a quarter point. I would say it was between one and 2 now. But take a look at the futures market. If I'm looking at the right variable right now I'm seeing the January which marks December fed at 4.98, actually was up at 5. That's just one. That's basically one cut. It's actually 3 quarters of a cut. If you take risk premiums to account, it's a half to a 3 quarter cut. So really the market has washed out the cuts. And so if we do get cut it'll be favorable, and it'll keep bond rates low so and and I do think better inflation data is coming down the road. I'm particularly encouraged by the drop of commodity. Price really had a drop of commodity prices yesterday. For the first time in a long time a big drop across the board, and of course we've got, you know, oil, also a moderating recently. So the blue…indexes have taken their first big drop. Now they're still up from their lows, of course, that they reached last October, November, but there was a big surge 2 weeks ago that has now been erased by the recent drops. That's encouraging going forward. We? Certainly don't need commodity inflation at the market level to complicate the official data.

Kevin Flanagan:

So on that front. We just got a question from Joe talking about his viewpoint. Wage inflation is creating price inflation. And we're going to need a recession to reverse that. Would you agree with that assessment?

Jeremy Siegel:

Well, first of all, he was careful. He did make the proper statement. Wage increases above productivity. That's the only thing that is inflationary. And he did make those words, although sometimes he just talked about wage increases in and of themselves. Productivity was not good. We're gonna get productivity next week. It looks that it's going to be 0.6% on an annualized basis, which is way below what the average has been, which was 2% last year. But if I look back last year, I think we got 0 point 6% in the first quarter. I I. We also got a disappointment in the first quarter last year with GDP. So there! There's a seasonality that seems to lead to disappointment in GDP and productivity in the first quarter with a hopeful bounce back in the second quarter. The only thing that's problematic about wages is wage increases above productivity levels. If we get a bounce back of productivity to 2,023 levels. These wage increases are not at all inflationary.

Jeremy Schwartz:

Professor, when you talk about where the tenure should be, there's a number of factors that go into it, but one of them is how stocks and bonds are trading together. Do you want to talk to people about your view on the 10 year? How it's sort of where it is versus that. And then sort of this new factor that people need to be thinking about.

Jeremy Siegel:

Yeah, I mean, you know, I've been saying that a major reason bonds are bought are hedging against risk assets, and they hedge against a lot of risks, recession risks, geopolitical risks, financial crisis risks, pandemic risks. They do not hedge against inflation, risk. So the perception of how much inflation you might have in the future. And is a negative, for bonds and bonds have to be a lot of the increase in the yield in my belief that we've seen is actually related to the fact that bonds have been are more worried about inflation risk certainly, than they were in in the 20 years that led up to the pandemic that brought bond yields down to all time lows. So, a lot of that jump is that a lot, and some of the jump is faster. Real growth, which we experience certainly in 2023, and although we had a soft GDP report by the way Pow was not worried at all about that talk to you. Beach talked several times. That actually ongoing demand was 2, 2 and a half percent. He didn't say that that started anything that looked like a a big slowdown. He brushed it off. The fed is forecast 2.1 for the year I actually think it might be higher when we finally get this year out going forward. That's another positive push on interest rates going forward.

Kevin Flanagan:

So we're always looking at the rate announcement and the press conference. And we did get announcement today. They did. They began to taper Qt. Or at least they will do it. And they made the announcement. So Bill just wrote in and asked, What are our thoughts? What are the implications behind the reduction in the Treasury roll off.

Jeremy Siegel:

Well, I think that was the first thing that the market reacted, and the 2 o'clock report they liked the reduction in the QT. On the treasuries. It was below the expectation in terms of the reduction they like that and that was that sort of said. Well, if he was really worried about inflation, they wouldn't have reduced the Qt. By more than you know expected, and I think that sort of set a kind of a bullish framework for the comments that came after when you didn't pivot the market. There was a sigh of relief. I really don't quite understand why it sold off to that level back to the level of the announcement or pre announcement still up for the day, but still afterwards, I mean, let's face it. There have been. So there has been some soft data, I mean. Expectations were certainly on the soft side. We've seen some soft manufacturing reports, but we'll learn a lot more for Friday. Just 2 days away. We get the labor market data about whether there's a slowdown. We've seen some corporate earnings, reports, talk about April looking slower. The beginning of this fourth, that's the second quarter. So there's a lot of talk about that. Although in the hospitality area and the gaming area and all that, that. Actually there was very somewhat of positive talk but on some of the other calls there was some negative talk, although the beat, the beat rate on earnings is quite decent and quite good. I I think, for the quarter one has to realize that given the beat rate, you know, which is 75, 77% in a quarter, that GDP was up one percentage point less than expected. That's a good sign. Because if GDP beats expectation, second quarter, one could expect that probably earnings will match, or exceed their expectations. For the second quarter.

Jeremy Schwartz:

We're seeing a number of people write in on the debt and the deficits, and what's sustainable, and what? And a few people have related that to the dollar, I mean, that's sort of Kai ties into that diversification question I was talking, but I I talk a lot about how the dollars become negatively correlated to the S&P. With earnings in terms of you know, more of our earnings are coming from abroad, and you look at the rising bond yields is feeding into this rising dollar relationship. But what's your in? And so we could talk more for people who want to talk more about that in sort of world international. We're happy to talk a lot about that topic. But, Professor, for you on the debt, the deficits sustainable. What that means for rates. How are you looking at all of that?

Jeremy Siegel:

I do not see a debt capacity problem in the markets over the next several years. I think the deficits. Not that I'm happy with them. But at a trillion and a half into a global economy that's, you know, 80 to 100 trillion dollars on flow is nothing that I think cannot be absorbed. Certainly we have trouble on debt to GDP. It starts really in the mid 2030s I'm not saying there, you know, there couldn't be some sort of crisis one way or the other. I just don't see any crisis with the bonds and the deficit at the current time and as I like to emphasize for all you that are worried about inflation because of the deficit and monetizing the deficit you want to be in. Real assets and stocks are ideally positioned for that eventuality.

Kevin Flanagan:

I know, Professor, when we've talked about the 10 Year Treasury deal before you like to look at 10 year. Real yields or 10 year tip yields. So any thoughts on that increase that we've seen of late. I think we're around 2 and a quarter somewhere around that.

Jeremy Siegel:

Yeah, we're exactly 2 and a quarter, having been moved up recently. Well, it got up. I guess it almost got up to 250 during that surge. I guess, you know, late last year and then went all the way down to 1, 71, 80. I think we're basically at a, you know, I think we're probably at a 2% TIPS long run. So it's very near that level right now. That's a that, you know, in the long run. Average, that's average. of course, compared to last 10 years. It's really high.

But, you know, I remind people that when tips came out 90, 97, there was selling at northward of 3 and a half percent real, and continue to rise beyond 4. So it's certainly higher than recent history, but not at all high in total history.

Kevin Flanagan:

So, the follow up to that would be there. There was a lot of discussion on this. I think there was an article in the Wall Street Journal over the weekend, talking about the neutral rate. And if you could give us our thoughts here, do you? Do you agree with the Feds current neutral rate? Or do you think it's higher.

Jeremy Siegel:

So it's way too low. The current Fed neutral rate, which is the real rate of interest consisting with balanced demand. They just raised it in the last meeting with the dot plot from 0 point 5 to 0 point 6%. I think it's, you know, probably one and a half to 2 and then if you add the 2% inflation, you get 3 and a half, you know, basically 3 and a half to 4 is the Fed Funds rate equilibrium, not the 2, 6 that they talk about. So you know. I mean, you know, it's below the current 5.3%, certainly by about 150 basis points, but not 300 basis points above it. The way the current dot plot shows.

Jeremy Schwartz:

Mike wrote in a question about the unemployment rate and some data on the State level versus the national level. And so you see, some of the data and reports, I think, from the Philly Fed has talked about how state unemployment rates are moving up a little bit more than the national one, and then you got your favorite weekly indicator. The job was claimed which has been not budging at all. Sort of remarkable consistency despite all the headlines and –

Jeremy Siegel:

It has been remarkable, because although it did tick down about 10,000 last week. It's really been about 2 2221, 2 22 remarkable consistency. I don't know. There's no reason. I've seen reports that that's a data problem and not just chance. I don't know this issue about whether State rates or higher. Obviously, the national rate has to be some sort of average of all the States. I have not actually analyzed any of that State data.

Kevin Flanagan:

So a few more questions, I think, coming in here. One of them was on the inverted yield curve. Was it the biggest head fake ever this time around?

Jeremy Siegel:

It's you have the first inverted yield curve in 60 years not to produce a recession afterwards. Well, we've been talking about that for over the last year or 2.

Kevin Flanagan:

Right.

Jeremy Siegel:

And a lot of it has to do with, you know, you know, he said. Well, you know, he said, you know, it came out much better than we thought. We thought we were gonna have much more unemployment. And he then that I'm talking about. He, of course, J. Powell said it's because of the supply side going up, but I think it has to do with inflation or expectations not going up when this ran up because people thought it was supply side. And so it's gonna come back down. And when you don't have inflation expectations go up, you don't build it into contracts and wages and that really helps you on the other side. You know, going to, you know Austin Goalsby, who's now, of course. President of Federal Reserve Bank of Chicago, has actually concurred with that theory. He thinks that's the reason why we have not had a recession that follows it because inflation. Our expectations did not go up with that in with the inflation. And we could talk about why. I mean, but it didn't. And that is really helping us on the other way down, because it's reducing inflation expectations that's so important because inflation expectations get built into contracts and to crush those you have to crush the economy. But if they're not elevated, you don't have to crush the economy because they're already down at rates that are reasonable. And yeah, Powell mentions all the time that every meeting over the last 3 years inflationary expectations are well anchored as measured by survey data and financial markets. Of course, when he's talking about financial markets, he's talking about the difference between TIP shields and the 10-year. So TIP shields are 2 and a quarter. The 10 year is 4, 6. So that's what 2 2.4% inflation. And there are risk premiums also in that. But that's under 2 and a half percent as a premium so there's there's no – they monitor that difference. And they monitor the survey data. He mentioned the survey data, he said. Although the we did have a jump in the one year inflation Rate University of Michigan, we did not have a jump in long term, and then that one year tends to be a volatile number. So yeah, I mean, it was. Yeah. As I said it was a it was a very good reasonable, did not panic, you know, saying, Oh, my God, yes, this is a start or something. And I'm not panicking now that I see. Come, my prices come down. Certainly this week is probably going to be the biggest decline. Come my prices in 6 months and that's something...around here.

We are seeing the softest that we need to stabilize that part, so that when the rent index and the insurance rates and all those really lagged inflation indicators start showing up into the official data, we'll get that impact to move it down to the low twos.

Jeremy Schwartz:

We got a few people writing, and this ties back to Professor. Your view on that real rate, the neutral rate about. And you. You comment a little bit, but it's connecting the productivity story to AI about like, how soon do you think AI is real? How much does that factor into productivity. And that real rate question.

Jeremy Siegel:

Well, I I think, if I remember the Goldman Sachs report which was the most optimistic which they said could raise 10 year rates from growth rates from one to one. A half percent said, it's not kicking in until 2025, I believe maybe late, 2024, but 2025. I do not have a strong feel on it. It's only been formally implemented in firms 5 to 10% of the firms. At this point. But, and how much isn't? It's boosting. It's boosting. From what I remember the firms that have implemented it have boosted productivity quite substantially as a result of it. So, we will see how that finally plays out.

Jeremy Schwartz

Kevin, here's a question. Maybe you could also chime in on somebody wrote in. They're watching Dubmock always on CNBC right after talking about high yield bonds? 7 to 8%. How are you thinking about high yield bonds versus other bonds today? How do you think about the opportunities in the bond market.

Kevin Flanagan

Well, you know, our conviction or a high conviction. Trade still remains, especially given where we're at with the fed and the inverted yield curve treasury floating rate notes that strategy in and of itself. And we've been 'barbelling' that with our yield enhanced kind of aggregate core fund. But I think you can layer in on the plus side high yield. You know the one, I think interesting thing about having 7, 8% high yield. And I know our research and Investment Committee team has done a lot of work on this showing horizon analysis that even though spreads are at tights here that even if you were to get a hundred basis point, increase in spreads and or yields, you can still actually eke out a positive return. So I think it's interesting, because it's really part of the whole premise of this new rate regime of where rates are, where fixing can fix income yields currently reside at a lot different story than where we were. Say, after the financial crisis, when you were looking at 4% high yield so certainly something to focus on there. I wanted to get both of your kind of opinion on this next question that I saw come in. Why are digital assets falling in an atmosphere of continuing inflation. You know, I mean, digital assets. Obviously in the news a lot. So I thought that would be a timely question. Ask both of you, gentlemen.

Jeremy Siegel

Let me answer. I mean, you know what moves Bitcoin is. You know, like what moves the weather? I would say the following: you know the halving.Everyone was buying, and it was a crazy story. In my opinion the halving was the rate at which the Bitcoins, which are already what over 90, 95% or so supplied, is going to be added every year that, compared to the stock of Bitcoins, the having was trivial and yet people were bidding it up like. Suddenly there was going to be a shortage of bitcoins, and it was going to go up. Well, the having occurred. And hey, where's the demand? And I think it's a disappointment from that? And when yields go up that's not good for Bitcoin either, as is a one reason gold has actually been soft recently. So I think a combination of the I think the miss story about what the effect of having was going to do, and then, combined with the higher yields. I can certainly understand why Bitcoin broke downward in recent days.

Jeremy Schwartz

Well, there's a few questions on valuations in in equities. One was asking. You got Warren Buffett's meeting this weekend. Yeah. His question was asking about the buffet indicator for valuing the market, and somebody else wrote in asking about the Shiller K ratio and some of the issues with margins, and how margins might change over time tied to that. But you maybe give your view on a few of those topics, and where valuations are today what that means for your your outlook for the market.

Jeremy Siegel

Well, I I'm glad you asked that, because it's a good time to recommend our book. Jeremy stops for a long run. Sixth edition, because we extensively talk about the buffet indicator, and we extensively talk about the show or Cape Ratio. On the buffet indicator. You know, I've been saying for a long time that it's not right to take the value US Stocks relative the US GDP when more and more stocks over time get their profits abroad. That's why the trend is upward. As far as the PE ratios concerned. I've often voiced that 20 PE is an equilibrium. PE. That's what we have exactly going forward right now on the market. Of course, you have the tech stocks selling 25 to 30 or more or more, much more. Well, tech itself is probably 25 s. And P. And probably about 30, 35 on the Meg. 7, 35 on a Meg. 7, and then you go away from that, and you get 1516, 17 or lower and you get much lower PE ratios on that, of course, these growth stocks have performed and that's why there's they sell it different yields. But people sometimes underestimate how much extra growth. You need to justify really high pes and they also you know, underestimate how little growth is required on low PE stocks to give them an extremely good deal.

Jeremy Schwartz:

I think we've hit the big picture. So you know, we do these calls post fed. We also then help people. There's a lot of questions. How do you think about managing? Put these in portfolios? We have some Professor Siegel branded model portfolios on different platforms. So if you're looking for our suggestions how to take the best from the macro and put it into portfolios. Please reach out about how you know we might be able to work with your platforms. And it's been a a fun conversation, Professor. Thanks for always sharing your insights on the fed, and Kevin always be great to be on with you.

Kevin Flanagan:

Thanks. Same here, looking forward to June. Onward and outward.

Jeremy Siegel:

Thank you. We'll see you.