Irene:

Hi, everyone. Thank you for joining today's Office Hours on Powell Goes Full Steam Ahead, where you'll hear from WisdomTree's, Kevin Flanagan, Head of Fixed Income Strategy, Jeremy Schwartz, Global Chief Investment Officer, and Jeff Weniger, Head of Equity Strategy.

Kevin Flanagan:

Thanks Irene. Good afternoon, everybody. It is Fed day. We only have two more meetings to go in this calendar year. Unbelievable. And we were just talking in the proverbial, I guess, green room, for a lack of way of putting it. The Fed is now raised rates 200 basis points in the last four months. Very vulgar ask for those of you like myself, who do remember the Fed Chairman back in the early eighties. But I think what we also want to do is bring you into the conversation. So we've gotten a few questions that we're going to take pretty early on here, but keep them coming.

We like this to be an open dialogue with you, the audience, as we're speaking here, and as we go on, because that's what it's all about, right? To have this open communication, to talk about what is essentially the topic of the year. And if you look at the Fed you guys, it looks like they may continue to be the main topic as we go into 2023. So Irene, can you call up the first polling question? We'll get that going. And in the meantime, Jeff, what were your initial thoughts when you saw today's outcome? Any surprises or anything like that for you? Or kind of like, yeah, was well telegraphed.

Jeff Weniger:

Go ahead, Jeremy.

Jeremy Schwartz:

No surprises on 75, right? I think it was clear they were going that number. And their message has been remarkably consistent. And Rich Clarida, who was the former Vice Chair was on Bloomberg commenting his reaction. He just came off as the Vice Chair so you get his real time impact. He's been saying Powell's owning the message. You've got all these other Fed presence out there who share their views all the time. But Powell is owning the guidance and saying, we're going to raise and we're going to hold. We got to stay. We can't take the risk of inflation coming back. And so they had pushed back on the future's market, which not so long ago was pricing in cuts for next year.

And so they all started pushing back aggressively and Powell Jackson's whole speech basically helped outline this bullish stance. The question is, can you believe what they say? Will the data stay hot as long? When you see their read of this situation, it's hard to say they've had good foresight on the current dynamic. So it's, can you take them at their word today? Is a very tricky question. But you know what Powell said today, and they talk about all sorts of things, the dot plot, where it's going. And he was saying 4.6, and he made a comment that is likely, it will likely get there. 4.6 is still a lot more hiking to go, Kev, in where they are.

Kevin Flanagan:

You just do the math and you look at you're three and a quarter at the top end now. And to get to four to six where you have to go, Jeff. So, were you surprised when you saw the new dot plot? We can talk about that. Grain of salt. If you go back as recently as March, just six months ago, the Fed had fed funds at 1.9% for this year. Now there are 4.4. Jer, coming to your point, it's like, wait a minute, wait a minute. What's going on here?

Jeff Weniger:

It's very peculiar as something I was writing about earlier today is that it was spring of this year, we still had the bottom part of that fed funds range was zero. It's been just six months that this has happened. And okay, so let's say terminal fed funds is at 4.6. And so let's say that the yield curve, the entire yield curve is flat when that happens. We're inverted now on two tenths. Well, let's say that the 10 year is 4.6 when that happens ostensibly in the spring. Well, right now, 30 year mortgage rates, about 250, 260 over the tenure.

Well, if the tenure at that point in time is 4.6 and we're still at 250 or 260 over, something more normal in mortgage rates, like 150, 175 over. Let's say we're still 250, then you have a seven handle on mortgage rates in this country. Soon, at the end of winter time.

I think that's the single biggest determinant of a thesis whereby the Fed must pivot at some point. That's number one. We'll see if that comes to pass. They sure seem steadfast on this. The other one is that Jay Powell is dragging Christine Lagarde with him. It's a quizzical situation where the European Central Bank is hiking rates into inflation that is largely a function of a busted up electricity bill.

You got 10 year Italian bonds at a forehand, the last I saw, I'm assuming that there's still a four handle, which is a huge gap over German Bunds, upper ones on a German Bund, Kevin? 160, 170 on a 10 year Boone. So we have distress in the Eurozone and yet the Eurozone, on account of Jay Powell turning around into giving us 75 bibs every time, has to chase because we're down there at parody. So it's really, really an interesting market. There's some dynamics here that I think people need to be very aware of. I don't know if we want to go to poll question one.

I'm stunned that only 63% said higher than 4%, maybe some people are pricing in a little bit of a pivot, Kevin, I'm not sure.

Kevin Flanagan:

This is interesting. So for those of you, we threw it out there, if you weren't familiar with the new dot plot. 4.4% this year, 4.6 for next year. You do wonder. Powell is speaking with a lot of bravado at this stage of the game. And one of the questions we did get coming in, and I think this is a nice way to pivot, I think our conversation, was shouldn't the Fed be looking at leading indicators that monetary policy acts with a lag. And it is really, is the fed looking at things that are in the rear view mirror? That's what Allen Greenspan used to call CPI. That's what the Fed seems to be responding to. That they're focusing more on just this fight of inflation. And instead of going, skating where the puck could be going, it's like you're stuck, to use the hockey analogy, you're still stuck on the blue line.

Are you fighting yesterday's battle by any stretch of the imagination here? And it's going to be interesting. He did acknowledge, you're starting to see some kinks in the armor for housing. Jeff, I know you'll probably want to talk a little bit about that. And you are beginning to see, I think some things in intersensitive sectors. But Jer, a week ago we were writing about this, that you had some loosening in financial conditions, and Powell's probably looking at that and just shaking his head, "What do I got to do to get the markets, to get this message that we're going to go to 4.6%?"

Jeremy Schwartz:

Yeah. And Kimber wrote in a nice question. If there was no surprises from the Fed today, why the sell off? And it's hard on Fed days, the markets were so volatile. They moved around. At first, they were up going into the print. They sold off immediately right after, the second the dot plot came out. You saw the headlines of 4.4, sold off big time. Then it rallied as you're going into the press conference, then it closed down. So there's a lot of just positioning changes that happens on a day today that it's hard to read in just to this message, but the environment is certainly not an easy one for equities. They are raising the cost of capital. They are saying they are not looking at any of the forward looking indicators that are coming down. They want to get these backward looking inflation indicators to come down.

They've asked how about the housing number, where you could see softness in real time indicators. It's not going to be surprising to us to start seeing the Shiller Housing Price indexes start to decline in the next 12 months, but the owner's equivalent rent to keep increasing in the CPI. So if they say we need to get the actual CPI down to 2%, there's this worry that they are going to keep tightening regardless of the forward looking indicators coming down. I think that is one of the big fears. Jeff, you talked about a flat curve. What happened today is it got more inverted. You had the two year rise, you got above 4%. You actually saw the 10 year go down on this exact fear, that people think they're going to tighten too much, get you into a worse recession than otherwise needs to be. And he's telling you, he wants to slow demand, he wants to create a better balance between the labor supply and demand issue. So he is trying to soften demand, increase unemployment. But it is a tricky issue that they're navigating here.

Jeff Weniger:

The 10 year at 3.51 is the number here. And so seemingly if we were to be flat at the 4.6 terminal, we've to sell that off by another 90 basis points or so.

Question over here on the right that was pre-submitted. Inflation is lagging indicator, why don't they use leading indicators?

Well, same thing with employment. Inflation and employment. Now the ISM had on the employment gauge, I want to say that that number came in at 54. It had been south of 50 on the most recent one, Jeremy, and in the most recent month was back up above it. So the labor market's still holding strong. Much as surprise of people like me. I thought it was going to fall apart a little bit. Yeah, we'd have to see what the selloff is here. And as I look across the screen, you'll get me shouting from the rooftops of yield curve control out of Japan, the only nation that refuses to play along in what we are calling the reverse currency wars. Reverse currency wars being fought by the British, the Canadians, the Americans, and certainly continental Europe.

There's a three handle up in Canada as well on overnight money from the Bank of Canada. 10 year guilt, British guilts, 10 year guilt 3.31. French tenure, 243. The German Boone we were talking about, Kevin, when I thought it was at 165 or 170, that's up now at 188, pushing 2%. So a tightening of credit across core Europe on that one.

Now Jeremy, over here on this screen, on the housing as something I wanted to point out because I always have to get this together. Jeremy's in greater Philadelphia, I'm in Chicago and then Kevin is in Connecticut. And so we have our own housing markets that we think about. None of the three of us are really, really in one of those piping markets. Though Jeremy and I are originally from south Florida.

But none of the three of us reside in Phoenix, Houston, Miami, and so forth, some of those housing markets. So I thought it was interesting as I was... Here's the deal. These realtors reports, some of them haven't printed their August stuff yet. California has given us the August numbers and down in the Sunbelt, one of the things I wanted to point out because in my state of Illinois, the July home price declines were four point something in the month of July. My guess is, judging by the fact that my wife sits here and looks at these listings every night on the couch, they were down again in August in Illinois. That's guaranteed, I could tell you that.

So I pulled up the Sunbelt because the story goes that people moved away from these cold places that the three of us live in and moved down to the Sunbelt. Completely true. But some weakness here. There's two states, Georgia and Florida, in terms of just busting it up. As the viewer knows, depending on which quote you're getting, Freddie Mac from last week at 6.02 on that mortgage. Some quotes we're seeing around here this week, guys, six and a quarter on a mortgage. And so it looked like from the Georgia realtors that the peak here in June.

Now you do get that summertime prices do go down a couple points between June and August. 359,000 and change in June. Now $345,000 and change. Let's call that a 4% retracement in home prices in seemingly one of those Sunbelt states. And of course Florida, no supply, good luck finding a place down in Pompano or Coral Springs or something like that. We have in here, Florida in August, $407,000, Florida Association Realtors. I'm assuming this was released recently. This was the August date of $407,000. The peak back in June was $420,000. So down about 3% in the state of Florida. Now certain places in California, which was probably one of the hottest markets down mid to high single digits. So we do have now the home price deflation in blue and red states and cold states and hot states. And what have you. And one of the things that Jeremy was alluding to, we've talked about it at some length, is owners' equivalent rent. It's going to be a situation, Kevin, where even as the CPI abates, which is street consensus at this point, they're not going to be at 8.3 forever. Well, it's seemingly not be.

Then we've seen the home prices are down. They're down in Florida, for crying out loud. But we still have shelter components of CPI saying up six-point-something year over year. That's not accurate. We know that the rental market remains super tight. That is the ace in the hole of the housing bowl, that you can't find an apartment. So we have this situation where we're going to see housing softness in the autumn and in the winter, but that CPI's going to still be picking up shelter components that are going to put black ink on something that under normal circumstances might be some red ink.

Kevin Flanagan:

Well, that's going to be, I think, the integral thing that Powell and company are going to be looking at is core inflation. They're fully aware you're going to get fluctuation in energy, gasoline prices as we move through summer and back into the winter for heating and things along those lines.

But I also think back to the point we were talking about, leading and lagging indicators, one of the, I think, key aspects people were looking at earlier in the summer was the increase in jobless claims. That's not the case anymore. All of a sudden, jobless claims, which are one of the 10 leading economic indicators, have now dropped five weeks in a row. Once again, another thing that's probably perplexing Powell to some extent, and perhaps why he is getting on that soapbox and trying, I guess, use his bully pulpit. Everyone talks about the President of the United States having a bully pulpit. The Fed chairman does as well, trying to, I think, talk things down, but obviously it's not working.

One of the questions we got, and Irene, it dovetails perfectly with our next polling question, if you could call that up. Do you think Powell and company, are they going to make a policy mistake here? Jer, you were talking about it. Are they going to be tightening into economic weakness? I think that is a fair, fair concern to have, especially when you start talking about 4.0%, 4.5% Fed funds rates.

Jeff Weniger:

Jeremy, as you answer ... Oh, am I muted, or am I aloud here?

Jeremy Schwartz:

You're fine.

Jeff Weniger:

Okay. Jeremy, as you refer to poll question two, will you also perhaps address Timothy's question in the Q&A. I think it fits in with poll question two.

Jeremy Schwartz:

Yeah, we got a few good questions coming in here. Timothy commented, this is fascinating, that Morningstar released update expectations about the Fed funds rate. If this number is right, they say 1.75% by the end of 2023. That seems like an aggressive cutting phase. They're commenting that inflation's going to becoming deflation as supply constraints ease. Energy prices are coming down. They are down.

Question: do we foresee that environment taking place? That comes back to my very opening comments and what Kevin said. Where was the Fed in March? Where were they in September? Last September, half the Fed people thought you were going to get one hike for the entirety of 2022. There was a few people think you could get a 50 basis point hike. Again, the market sold off because you had all these people who went up to 4.4% on the rate, and that's the new dot plot. Do these dot plots mean anything? Largely, we would say no, they don't mean anything. That's just their current read of the dynamics. They've been spectacularly wrong.

Now, their message is that inflation's going to stay very stubbornly high. The question is, will the official numbers that they're tracking come in low enough that they can ... or if they actually are deflationary, if they actually start printing negative numbers, that would be a plan to reverse course.

But what you hear them also saying is that they don't want to get whipsawed. The worst thing that they'd start cutting rates, and then inflation comes back and six months later they're raising rates. At least their current narrative is that they're going to keep them high. Raise and hold is the new line. No matter what happens, that's their current stance. That stance will be subject to change.

Kevin Flanagan:

I would love to see who Morningstar was asking that polling question about Fed funds for the end of next year, to be honest with you. Just about any other gauge you look at ... Fed funds futures, you look at the January 2024 Fed funds futures contract, the reason being because it would incorporate any changes for the full calendar year next year, is right around 4.10%, 4.13% right now. That's a huge gap between 1.75% and 4.10%. I'm not quite sure where they're getting that number from, to be honest with you.

Earlier in this year, Jer, to your point, you were seeing multiple rate cuts priced in, but it never quite got below, I don't think, 2.5%, even when the market was at their most, let's call it, dovish, thinking that the Fed would make a mistake and have to cut rates. Interesting. Obviously, I think most people are in agreement with us that there is that high risk when you get Fed funds to the levels Powell was talking about today, that you're going to get a policy mistake going forward.

Here's a question. Maybe we should ask our esteemed senior advisor colleague, Jeremy Siegel, to weigh in on this at some point. Has the Fed ever engineered a soft landing? I think I know what his answer would be to that question.

Jeremy Schwartz:

To the questions, will they make a policy mistake? I was with him at a Wharton conference last Friday, and he was saying how he would rate this Federal Reserve as perhaps the third worst policy of all time. He's upgrading it to the second worst policy of all time, or he is very close to upgrading it. He says during the response to the Great Depression, they should have been providing a lot more liquidity. That was their biggest ever policy mistake through the past inflation episodes.

Now, he's saying they completely missed the boat early this time, and now they're missing the boat again. They didn't raise rates early enough, and now they're going to be too tight. They're completely missing both sides of it. He has sympathy with the Morningstar piece that Timothy shared. Very interesting. This Morningstar strategist is not toeing the line. He is out there with a very divergent view, 2% lower Fed funds than the market and most people are saying. It's nice to see people with bold calls, and that's a very bold call.

In spirit, the data is trending that direction. Well, but the question is the forward looking data versus the actual lagged inflation data that we're getting the CPI number, will it come down fast enough for that to take place? That'll be a real interesting question.

Kevin Flanagan:

Yeah. I think one of the problems for Powell was hanging onto the transitory for so long, Jeff. So he's already got a credibility issue going into this.

When now he's adamant the other way, to Jer, to use that phrase, the raise and hold mantra that the Fed seems to be all behind at this stage. You almost get the sense that they messed up the transitory. They're trying to overdo it on the other side, fight inflation at all costs and going the other way.

One of the questions was periods of recession lasting nine months, do they then make a move when essentially the recession, is it over with at that point?

Jeff Weniger:

Yeah. It's like you spent your high school years being the bad kid, getting into all the trouble, and now to make up for it, you've decided to become a monk and go join a monastery. It's like two extremes on something. That's essentially what has happened is they kept policy rates down there at zero, kept QE running.

What were we sitting here watching? What was the Rivian IPO? Was it like $50 billion? We had Peloton was worth more than Ford. Let's just go down the laundry list. We had these kids buying GameStop and AMC just in their formative years when they should've been saving up to buy a house and get married. This is recent memory. This is all in the last 18 months. We had the SPAC boom, hundreds and hundreds of blank check companies. It was like, oh, $500 million? It was like, we'll come up with a company, just pony up the $500 million. We'll figure it out. Then that's all busted up now. A lot of those ended up south of the $10 NAV, and then you're end up buying it just to clip something north of a money market yield. That's like the way you ended up playing SPACs after that whole thing busted up.

Now, here these guys are aggressively tightening into what's a clear economic slowdown, probably recession. It's a good question what Dawn over here ... Well, Dawn's making more of a statement here. I'm going to read this, what Dawn said. She says, "Average recessions are nine months." That's a good point, Dawn. If we are here in our ninth month of the year, and if we've been in recession the whole year, and if it's an average recession, maybe we should be coming out of it now. Did it start in the summer? Then we'll come out of it in the spring. All right, so that's thinking out loud.

Will we be out of the recession or economic softness by the time the Federal reverses course in '23 or '24? Seemingly, seemingly, Dawn, I would be with you on that. "Yes, this will be a policy mistake indeed." Not sure whether she's referring to what I just talked about with GameStop or Future Tense hiking the economic recession.

"The curve is telling us, the curve is telling us that financial conditions tighten." Now remember, financial conditions tightening. Kevin and I differ on this a little bit, Kevin. The New York Fed senior loan officer survey did have net 14% of banks tightening their overall loan book. That is the tightest reading directionally in order of magnitude since 2007. That concerns me. But then again, you're not going to have any trouble getting a Citibank Mastercard, for example, right now. I don't know how tight credit really is. It still seems to be open. We don't have big spreads in investment grade, for example. That's where I do diverge a little bit from Kevin. Kevin makes compelling arguments.

Demand slows, margins compress. Well, this is something that we've talked about a lot, margins. Certainly, Jeremy's also been talking about another thing that Dawn has not pointed out here in this question is S&P 500 earnings on the multinationals, those with the most overseas operations. Maybe just could do a whole call on this, Jeremy, being adversely affected by this super, super strong dollar. It's super strong because we're talking about 4.6% on overnight money here in US paper.

Layoffs will increase, Dawn. I'm with you, Dawn, but we haven't seen it yet on layoffs increase. Dawn's still going here, " ... exacerbating the mistake." Thank you for the comment from Dawn. Jeremy, what's your view on all of that? Dawn has basically summarized every single issue confronting this market in that question.

Jeremy Schwartz:

Well, and tying a few of these questions together and Tim's point of the Morningstar strategist, which I just flipped through the article he sent, with very interesting views. I'm going to pull up my screen for a second to show one of the dashboards we create and distribute every day. I think it's a useful dashboard. If you go to our website here, there's a page called the strategies page. Then there's a bunch of different concepts you can go to. There is this on the markets page. Here you could get different things. You could see a weekly commentary from Professor Siegel. Jeff and Kevin write this Mind on the Markets weekly. You've got some global documents. But this daily market snapshot, updated every morning first thing in the morning, basically a 15-page report with a lot of interesting data. This is one of my favorite parts and I think is one of the key questions on what's happening in the rates market.

The TIPS yield curve, it started the year in negative territory across the curve. Negative 1% for the 10-year TIPS. This was in the Powell Q&A question. One of the questions was, do you want to bring real interest rates into positive territory? You need to get the Fed funds rate above CPI was the basic question. This is where Powell was saying he was going to get to 4.6% likely and that the reasonable forward looking inflation expectation would be below 4.6%, so that you would get this hundred basis points real rate at the Fed funds level.

Right now, they do have 1% across the curve from five years out to 30 years. Even coming into this year, you had the 30 year in negative real rate territory, which is a pretty big thing happening, over 1%. The Morningstar strategist makes some very similar comments to what Professor Siegel and I talk about. Siegel, we had the updated sixth edition of Stocks for the Long Run coming out basically now. They're starting to get copies, any day.

I think they'll start to be delivered in October, but we're starting to get some of the printed copies. We talk about the same issues that the Morningstar person talked about, which is the downward pressure on real rates. Is you have slower economic growth, you have lower productivity trends, aging demographics, all things that are long term drivers of lower real rates, risk aversion from the aging of the baby boomers. Those are the four big factors driving real rates down. And so what might be the equilibrium or the longer term real rate, maybe somewhere between where we are now and this negative line. I don't think it's this negative, but you could be closer to zero as this TIPS yield curve. And so you are getting higher real rates. Kev, what do you think? Any comments on this TIPS curve, how it's structured today, where you see it could go? I'm starting to think these real rates are starting to be longer term value, but obviously a lot could happen in short run here.

Kevin Flanagan:

Well, I mean, that goes to the question that we get all the time and we have our own internal debates with our investment committee about duration. Everyone was looking and certainly some were we're looking at to go long duration around the 285 level, and that has not worked out. And that our premise has been late to the party, don't be early. Don't chase duration here due to the volatility and potential impacts if you're wrong are a lot worse than if you're right early. So I think for the most part, that probably is in argument that still holds, but we're getting closer to your point to looking at this.

The 117 level was the prior high watermark in 2018 for 10 year TIPS, 10 year real yields. And we blew through that yesterday and today post Fed meeting to about 120 or so. But if you do go back, we had 137 in 2011, and I think 168, 169 in 2010, those are not unreasonable levels if you do an overshoot to go. Considering this one for one relationship we've seen with the 10 year nominal treasury and the 10 year TIP, you ask yourself the question, because this was something, Jeff, I remember you and I talking about this on other office hours that we were looking at real yields at say 70, 80, 90 basis points and yet had a 10 year treasury around three. And we were saying, hey, if we go back and revisit that 2018 high, we're going to revisit 3.5%, and sure enough, that was the case.

That's what still gives me pause that if you were to get to that 137, 165, 170 kind of area, that's still 30, 40 basis points from where we are right now. Do the math. That puts the 10 year, somewhere around 390. Now I'm not saying that's our call for 390, but if you look 375, 380, could we overshoot to those kind of areas? I don't think that's unreasonable to think about at this stage. In a knee jerk response to the meeting today, we got over 360 on the 10 year, and I think it was kind of like people taking a deep breath and clearing out some positions and getting us back to about 351. But we'll need to see how does this TIP, how do real yields perform in this environment as we go forward before you can start ringing that dinner bell to go into duration and say, okay, now's the time you should be looking at doing it.

So, if you're looking for clues, other than the usual economic numbers, if you're looking for trends out there, go to that TIPS market, go to the real yields market, go to our dashboard, which Jer just showed you right there, to look at updates at what's happening because it's been very instructive what's occurred, the relationship. This is not something that just happened in 2022, you can go back in time and you can see how tight of a correlation the two measures are between the nominal and the real yield.

So, that's the way I'm looking at it. I'm looking at it right now that this is the highest Fed funds rate since 2008. It's the first time the two year went over 4% since 2007. It's the highest 10 year treasury since 2011, highest TIP yield, basically since 2000. We're in unchartered waters right now. Think about it. We're going back 10 years or so now. And I don't know if there's any technical analysis that can kind of help you at this stage of the game. So that's where this volatility comes into play, that the markets are going to be having this big tug of war back and forth, and it's going to come back ultimately to that policy mistake.

So we were talking about an inverted curve the three month T bill, 10 year treasury curve is still not inverted. It's actually in the plus side by about 30 basis points or so. However, if the Fed's taking us to 4%, let alone 460, I don't envision the tenure going anywhere near that 450, 460 kind of level. Say the dot plot's right, and we get to 4,4 on Fed funds, by the end of this year, you ask yourself the question, essentially, that's going to be where the three month T bill is. Which by the way, which essentially are going to be treasury floating rate notes. We'll get to that conversation in a second as well. Do you think the 10 year's going to arise to four and a quarter, 440? I think most people would probably say no and I would tend to agree with you. So ultimately that curve is going to go inverted.

To me, that's the signal. That could be like the straw that once that curve really goes into meaningful inverted territory where you're starting to think, okay, the Fed, I think, is really taking this a bit too far. And I think it was Reed, you asked a question, what about QT? QT? No one talks about it, right? I mean, it's fascinating. Powell did get a question today about mortgaged back sales and said it wasn't something they were talking about quite yet. But that's on the radar as well. So if you were to say, how can we overshoot here? Something we're not thinking about with respect to treasury yields on the 10 year, watch out for QT. That adds to the volatility quotion as well. And right now that's kind of on the back burner, kind of stealth like, no one's paying attention. Just like the Fed wants it. Because if that starts getting headlined, you know we got bigger problems that we're talking about here. But that's part of this two-pronged tightening approach as well that you can't lose sight of.

Jeremy Schwartz:

Well, let's talk about, so one of the key issues I pulled up that real race chart show you're getting back into over 100 basis points. It's consistent with the theme we've been talking about for a long time the narrative was there's no alternative. And so you had to be in stocks because there was no real income. Now you're actually getting real positive, real yield. What about nominal yields in terms of the, you mentioned preliminary treasuries, we could talk about high yield investment grade, the yields you're inverted on the treasury curve, you're not inverted on the corporate curve, so we can talk a little bit about that. You're getting over 5% in investment grade, fixed income. High yield income you're getting closer to 8%. How do you think about those types of opportunities today?

Kevin Flanagan:

I'm a bond guy. There's income back in fixed income, yahoo. I'm happy about it.

Jeremy Schwartz:

First time in 15 years.

Kevin Flanagan:

You know how long I've had to listen Jer to you and Jeff saying to me, oh, all the yield's on the equity side, heck with you bond guys. It's actually nice to actually seeing something like high yield moving back into more of its traditional role. For sure. And I think it's important. I actually did an interview with the media just yesterday asking me about high yield. And it's like, okay, there's some concerns about the Fed making a policy mistake, but why are flows moving into high yield? And I think that has a lot to do with it, income back in fixed income. To your point, Jer, you're clipping 8% or greater now in the high yield arena. And I think the high yield market has discounted a sluggish economy, even perhaps a shallow recession at this stage of the game. And remember for fixed income, when you're looking at total return, it's a price yield, it's a price coupon kind of scenario, so that if you're getting 8,8.5%, that's an offset to any potential say price depreciation you could have as well.

Kevin Flanagan:

So in the meantime, you're garnering income and you're looking at this and saying, hey, okay, we'll see how the economy holds. But if you are concerned about where the economy's going, could default risk move higher as well? We would focus on our WFHY, our high yield fundamental fund, where we screen for quality and we try to mitigate on that default risk. I wrote a blog about this, and I believe it's going to be included in some of the attachments with this office hours, where since inception going back to 2016, the market cap approach or index default risk or default rate was over 13%, we were only 2%. So in sense, you're like tilting for income and you've got a quality screen in high yield. That could be an area that investors I think could continue to focus on moving forward.

One last thing since you brought it up and I threw it out there, USFR, our floating rate no treasury index, it resets with the weekly three month T-bill. So you're playing with the Fed. If the Fed's going to 4%, 4.25, 4.50, odds favor that's where you're going to be headed. Jer you know, we saw this, I think in 2019, that was the question, what is the highest yielding treasury security? And at one point it was treasury floating rate notes, something that has only one week duration.

Back to the point about being late to the party, not chasing it here and focusing on take what the Fed's given you. It's not often when you have a fed chair talking about 4, 4.5% on the funds rate, you can actually take that and use it to your advantage and that's just exactly what treasury floating rate notes do.

Jeff Weniger:

Jeremy just had a mosquito flying around his face. It's the ghost of J. Powell. Jeremy before you screen share, will you do me a favor? Will you pull up the minds on the markets? And what I'm going to do is I'm going to get to this question from Yusif and tie it in with the minds in the markets. Meantime, I just wanted to briefly address this. I love it when we get pre-submitted questions because then we know the answer before the call. Somebody asked about going red or going blue on the House and Senate. So really quickly, what I did was I pulled up on PredictIt. PredictIt is like a website that you or I might go on to gamble on who's going to be the 2024 president, I think it's going to be this person. And then there's a pricing mechanism based on futures contracts, it can be illiquid and who knows whether or not these numbers are right on. But generally speaking, it's usually pretty close.

When I give you these percentages, they don't sum to 100, they always go over 100. So for example, probabilities right now on PredictIt, if you wanted to place a wager on the Republicans taking the House, it's pricing 76% chance of Republicans. Again, Democrats plus Republicans will go over 100% because there's bid spreads. Democrat probability on House, 27%. Senate, Democrats 62, GOP 40%. And then of course we have the probabilities on the combos, Republican House and Senate, Democrat House and Senate. So Republican House, Democratic Senate, 43% being most probable. Again, these will go considerably over 100%. Republican House, Republican Senate, 40. Democratic House, Democratic Senate, 25. And then the oddball one that won't happen in all likelihood Democratic House, Republican Senate at 2%.

Now, I think Yusif in this question, I will read this question and I think it ties exactly into what Kevin and I were thinking on supply chain stuff when we wrote this weekend and published on Monday, this is what Yusif said. How effective are rate hikes in terms of the slowdown mechanism relative to previous periods? IE is structurally tight under supplied housing, corporations who pushed out durations during COVID, I'm assuming that means on their corporate debt, and structurally tight labor force, for example, people retired during COVID, they're not coming back, lack of childcare. Thoughts? So Yusif has hit on these structural rigidities that maybe we weren't confronting as a society and then COVID came along and was like uh-oh. We've hypothesized for some time that there was a lot of people, 62, 63 years old that opened up their 401K, made a ton of money in 2020 and 2021 and said, you know what? I'm not waiting till I'm 65, I'm out of here. And that's part of the labor force problem.

The issue in childcare where we've all read these, I have young children in this household, Jeremy does as well. It's the same cost as basically sending a kid off to state U room and board. It's really, really expensive for childcare. And that type of inflation, when I looked at these numbers in length, it's oftentimes 7%, 8%, 9% inflation, long before COVID, on childcare. That is the untold crisis next to healthcare insurance and college tuition. That one has been a major issue. And Yusuf, the reason I had Jeremy bring this up, to this page is because we were talking about something just like this. I think your question ties in perfectly to it. We have labor action in the rails, in trucking, and in air freight. So go ahead and read this. It's called the minds on the markets. It's what we wrote this weekend.

We just had the rail workers, Jeremy, just got a 24% wage hike retroactive to 2020, paid each one of them $11,000 right then and there. If not, we would have had 125,000 workers walk off. That came to a resolution in the last 72 hours. It was going to be a major, major issue at the Port of Long Beach. We were finally going to get them to unload the cargo, but then it wasn't going to be able to get onto a train. And then of course, the massive trucker shortage that has fallen out of the market's psyche, but has not gone away. The American Truckers Association saying nobody's coming into trucking.

And what we've put forth, and what we hypothesize is, think about it. If you're 20 or 25 years old, do you want to get into trucking, only to find 10 years from now that maybe it's going to be driverless vehicles making you unemployed? Or do you pursue one of the other trades instead? I know what I would do. I would not get into trucking. I would get into welding or electrical work or plumbing or something in the trades, where I know I will still have a job 10 years from now. Major, major structural inflationary issues on that front. Yusuf, I think that you will like the piece. Let me pass to one of you guys.

Jeremy Schwartz:

So I wanted to do... Kevin talked a little bit about the spreads and where there’s income in fixed income. We talked a little bit about the initial market reaction and why the selloffs and there's a lot of trading that happens on days like today. And so it's hard to take a real long term view of just one day's market reaction. One of the things I'm seeing a lot more people talk about is the '66 to '81 period where the markets essentially didn't do much on a price basis, and a lot of the market return came from dividends and income. There's still some fears about valuations in the market today.

So I wanted to talk about one of the things that we're talking about in equities. This is a 20 year P/E chart using forward P/E numbers. You're right at 17 P/Es approximately using forward P/E. Now, there's this question on, will earnings come in as strong as they can? Jeff talked about the dollar as I think one of the key headwinds. Morgan Stanley's been seeing an 8% earnings headwind from the strong dollar. I think next quarter, it could be worse than it was last quarter. So I think that's one of the issues – that Powell fly is nagging me here…

One of the places where valuations are still high is really the top 10 largest stocks in the market. So the big tech stocks still are called 30% above their normal valuation, if you go back to a similar period as this, but you can get very broad baskets at multiples that are not so expensive. This is WisdomTree's family of equity ETFs, this is updated again daily in that daily dashboard. DTD is your total market by dividend. So weighting by dividend, rebalancing annually every December back to dividends. On a forward P/E basis, it's at 13 times. If you say, "I don't trust the estimates, I just want to look at trailing," you're at 14 times. And so you go back to the S&P, and even you go back 150 years, the average was 15 to 16. You're below the way long term average.

Now the people who went nowhere from that '66 to '81 period, what happened was, you had interest rates that were... In the latter half of that '66 to '81 period, you had 7% to 8% interest rates. It closed with a peak Fed funds rate above 10%. You had double digit rates. And so you understand why you had single digit P/Es. You actually still have sub-segments at single digit P/Es today. You go down to mid and small caps, you can get below 10 times forward earnings. That's a 10% earnings yield. That is a really depressed multiple. So we're writing some pieces about why we've been adding to small caps in a number of our model portfolios. It's largely because the discounts to large caps are as wide as we've seen them in a very long time. They don't have that dollar issue of some of the multinationals that we talked about. They're much more U.S. revenue centric, not as reliant on the global business cycle. So 10 times earnings for those companies is quite interesting given the 1% real yield, you're still getting a 9% equity premium versus the TIPS yields.

But in the large cap space, DHS is one of our lowest baskets. It's high dividend stocks. While the markets are down on the year, this is positive on the year. High dividend stocks are positive. This is one of the places where you've held out pretty well with all the volatility, but it's still not an expensive basket. Even today, 11 times earnings is a 9% earnings yield. And they're returning 30%, 40% or more of those earnings as dividends. So you're getting current cash flows, lower duration equities, is one of the big themes. And so I think the concerns... you could say, on valuations are there for some pockets of stocks, but for fundamentally weighted stocks, you can get very reasonable multiples. Jeff, anything you would highlight on this sort of, multiple place that I didn't?

Jeff Weniger:

Well, thinking out loud about TINA and the joke that you made with me and Kevin as we got on the call, that somebody on the street... We didn't come up with it, but somebody said TINA is now TIAA. TINA was, there is no alternative to buying up stocks when bonds are yielding nothing. And then this guy... Who said it, Jeremy? TIAA.

Jeremy Schwartz:

Rosenberg from BlackRock on Bloomberg was saying, there is an alternative, TIAA.

Jeff Weniger:

Now there is an alternative, and you start to say to yourself, all right, do I want to have the S&P... Or what would be the closest proxy S&P on this page? We got it up here. But do I want the S&P at 16.9 times forward earnings? I can get four on a one year T-note. Is that suddenly TINA turning into TIAA? And what I've been pointing out is there's only one TINA nation left, as long as we're basically excluding Switzerland, because nobody's really thinking too much about Switzerland, and it's Japan. DXJ... You know me like a book. DXJ over here at 9, 10 times earnings, whether you're looking at trailing or forward earnings. Bank of Japan doing the proverbial, hold my beer. Everybody's doing something, hold my beer. Bank of Japan is at negative 0.1 on the short, on overnight money. And so you're call it 1,000 basis points over for an earnings yield relative to the sovereign. All I ever heard for a dozen years was, there is no alternative, therefore let's bid up stocks. And now that's gone away, everywhere, except for one place. 

The other thing I'd point out is, Jeremy, you've seen the chart a million times. When I say this, I had the spreadsheet, I had to keep rechecking the spreadsheet so that when I tweet it, I don't look like a total idiot getting my math wrong, because that's how egregious it has become. The thing that is egregious is the wage disparity. The average wage in this country is 75,000 U.S. dollars. The average wage in Japan hasn't moved anywhere in ten years, but when you put it in U.S. dollars it certainly has because ten years ago, the yen was at 78 to the dollar. Now it's at 142 or 143. I don't know, maybe after the meeting, maybe it's at 144, and it's coming out to $27,000 U.S. dollars for the average wage.

So we have gone from in 2012, which is by the way, yesterday is 10 years ago, we were making as a society the exact same wage as the typical Japanese. And now it's $75,000 versus $27,000. It's a massive wage arbitrage, akin to something that you would get by going from let's say Germany to Romania. Nobody wants to talk about it, because they've all been burned on Japan for so many years, but there's Japan. Hyper-competitive at a 9 multiple, but still nobody will talk about it, Jeremy, so we'll be the only two Japan longs on planet Earth.

Kevin Flanagan:

So we're a little bit more than 50 minutes in. Irene, why don't you give us that last polling question? It's a nice way to kind of wrap up here, talking about the Fed. We're mentioning some opportunities or solutions on the stock and the bond side. Is this impacting your portfolio decisions for next year? So here we are in September, thinking about 2023. If in fact the Fed is going to go to 4.6%, does that surprise you? Is that going to make a difference on how you begin to position your portfolio, or no? And I'm curious to see, guys, what the answer is going to be, especially given the outcome or the results of the dot plot. Remember we all said, take it with a grain of salt, but you have to think about, what if they do go there? I mean 4%, once again to use the term, seems reasonable at this stage. You were already at three and a quarter, another 75 does not seem out of the question, or another 100. There's two meetings left. Say they dialed it back and just do 50/50 while you're at four and a quarter by the end of this year.

So it's not too far pie in the sky out there thinking about 4% or slightly north of 4% on the Fed funds rate, which if I go back to I think the second polling question, if I'm not mistaken, we had the biggest percentage was looking for 4% or higher. So I'm very curious to see the results here of this polling question.

Jeremy Schwartz:

So a lot of change. A third wants to revisit current allocations. About 50% only minor tweaks needed, but still a change. And then 20%, I was expecting a hawkish Fed, no change. But a third wanting to revisit current allocation. So that is interesting. We'll see how people evolve over the next year.

Kevin Flanagan:

Yeah. Well Jer, if you take the first two yeses together, which require some kind of an adjustment, that's better than 75% or something like that. Jeff, any last thoughts as we wrap up here?

Jeff Weniger:

There were some pre-submitted questions, but I felt that some of those were already addressed, questions about interest rate directionality with Fed going too far, too short, flagging indicators, the Congress going red. So I think we addressed most of it. If you felt that you had some more stuff you wanted to hear from us, we do these office hours two or three days a week. It's various topics. Sometimes it's the three of us, sometimes it's other WisdomTree people. You could also catch us... Jeremy and I do a lot of these Twitter Spaces. You got the podcast that Kevin does.

You got the book. The book is coming out. Stocks For The Long Run, the sixth edition from Jeremy. You got the SiriusXM 132 show that Jeremy does with Jeremy Siegel. You got the Liqian podcast, blogs, the thing that we were talking about earlier, the Minds on the Markets that Kevin and I, the truckers and the railroad strike, that type of thing. That's weekly for me and Kevin. There's no shortage of material from WisdomTree.

I will end it right there without letting these other two guys get a word and edgewise at 56 minutes past the hour. Thank you Irene Webb, Jeremy Schwartz, Kevin Flanagan. I'm Jeff Weniger. Have a nice evening.

Important Information

Before investing carefully consider the fund's investment objectives, risks, charges and expenses contained in the prospectus available at WisdomTree.com. Read it carefully.

There are risks associated with investing, including possible loss of principal.

WisdomTree U.S. High Yield Corporate Bond Fund (WFHY): Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. While the Fund attempts to limit credit and counterparty exposure, the value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.


WisdomTree U.S. Total Dividend Fund (DTD): Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

WisdomTree U.S. High Dividend Fund (DHS): Funds focusing their investments on certain sectors increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. 


WisdomTree Japan Hedged Equity Fund (DXJ): Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. The Fund focuses its investments in Japan, thereby increasing the impact of events and developments in Japan that can adversely affect performance. Investments in currency involve additional special risks, such as credit risk, interest rate fluctuations, derivative investments which can be volatile and may be less liquid than other securities, and more sensitive to the effect of varied economic conditions. As this Fund can have a high concentration in some issuers, the Fund can be adversely impacted by changes affecting those issuers. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile. 

WisdomTree Funds are distributed by Foreside Fund Services, LLC.

Jeremy Siegel serves as Senior Investment Strategy Advisor to WisdomTree Investments, Inc., and its subsidiary, WisdomTree Asset Management, Inc. (“WTAM” or “WisdomTree”). He serves on the Model Portfolio Investment Committee for the Siegel WisdomTree Model Portfolios of WisdomTree, which develops and rebalances WisdomTree's Model Portfolios. In serving as an advisor to WisdomTree in such roles, Mr. Siegel is not attempting to meet the objectives of any person, does not express opinions as to the investment merits of any particular securities and is not undertaking to provide and does not provide any individualized or personalized advice attuned or tailored to the concerns of any person.

This material contains the opinions of the speakers, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular tradingstrategy, or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise, the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.