Host:
Hello everyone. Thank you for joining Professor Siegel live on Trump's Tariffs Impact. Today you'll hear from Jeremy Siegel, WisdomTree Senior Economist, Jeremy Schwartz, our Global Chief Investment Officer, Kevin Flanagan, our Head of Fixed Income Strategy, and Sam Rines, Macro Strategist of Model Portfolios.

Jeremy Schwartz:

Well, thank you all for joining us on our second week live updates with Professor Siegel. But Professor, so much going on. We'd love to kick it off just with your views. What's your latest on all the volatility that we have this week?

Professor Siegel:

Yeah, yeah. You hear all the news broadcasts, they start out, "There's been a lot of volatility." That's like saying the sun rises in the east and sets in the west. No information there.

All right, let's talk about what's going on in the last 24 hours. Well, let's talk... Well, first of all, the market is almost up 2%. Why? Today. A couple reasons. One is that the Financial Times reported that one of the FOMC members said, "Yes, we're definitely ready to support the economy if the tariffs tank the economy." There's some comfort that's taken in that. I think a lot of shorts got kind of scared of coming into the market. After what happened Wednesday, it could happen at any time. It's like you don't want to short a meme stock, you don't want to start the market when Trump can tweet anything at any second and cause a huge rally in stocks.

Now, I think what's really important is the big, I'm not going to call it crash, or you could call it the crash of the dollar and the bond almost on that, but crash is a real strong word. I mean, it's been a fast but an orderly retreat. I think the long bond, which just two hours ago hit 4.60, which is hard to believe for a long bond that a week ago was under 4, but now it's retreated as the stock market has recovered and com has recovered down to 4.47, 13 basis point dropped just in the last two hours.

I think that there are two reasons for that. I think the main reason is really the world is beginning to question the dominance of the US as a world reserve currency and whether the US is going to be the leading economic growth engine into the future, and so some people are worrying about whether they should be holding US government bonds. Foreigners do hold one-third of our national debt, which is over $10 trillion. There's always the threat if there's further retaliation that China could unload some of its bonds or persuade others to unload some of its bonds. That's one source of the rise.

The other source of the rise in the bond yield, in my opinion, is the fact that the House passed the budget of Trump, which does really increase the deficits. That is a worry going forward, and of course the deficits will increase even more if there's a recession, so you have a double whammy on the deficits, so you have a lot of supply coming on. We are still far from, by the way, the tax cut being passed. These are all procedurals to set it up. What finally goes into that is yet to be determined. Nonetheless, that does set up for a big increase in deficits, and if there's a recession, then there'll be another 2 to $3 trillion there.

Also, the rise in the long bond sort of makes it more difficult for the Fed to lower rates. I mean, it was easier to argue to lower rates when the curve was inverted as it was for three months. The Fed funds rate is 3.33, so when it went below 3 we had an inversion. Now we don't have an inversion anymore. The long bond of 4.47, Fed fund's 3. Now, it's still pretty flat, but not an inversion. That's a little less likely the Fed will lower under those circumstances that we had. Again, news earlier today that said the Fed might ignore that rise in the long bond and cause that to lower anyways.

I mean, that is in the future. I mean, the main thing that is driving, I think, the markets, I would say the bonds and the dollar, is the sentiment surrounding whether Trump will negotiate with China or not, or to what extent on lowering tariffs that are virtually now in embargo where trade is virtually now halted. Now, there are ways around it, as you know. You can warehouse it, you can stop ships in the middle of the ocean, you can finish things in another country and try to get it in that way. I mean, I'm not going to go into all those strategies, but that is huge. A mutual embargo by both China and the US, virtually a mutual embargo between that is a huge shock to the world trading system.

Now, the inflation data has been good. That gives an excuse for the Fed to go, most certainly favorable, but as you all know, the tariffs news has again increased inflationary expectations in the latest University of Michigan survey. By the way, forward sentiment in University of Michigan survey has almost hit an all-time low. That is not good for spending. Now, we are not going to see it in the official data. There is really very little in the official data that shows the slowdown in the economic activity. Nonetheless, the sentiment indicators have rarely been as negative as they are, the reason in a lot of advanced buying ahead of the tariffs. So GDP and sales might still be good for several weeks, but it's not going to last under these circumstances. Will iPhones be available? I mean, they will be available on the secondary market maybe at 2,000, $3,000. Will Apple actually stop selling them because the tariff is so high?

I mean, these are a lot of unknowns going forward. Everyone's trying to think that through, but in the meantime they're hoping that the pressure of CEOs and others calling in saying what a disaster this is, which of course, as you know, I've been calling it a disaster now for eight weeks, whether they could persuade... It was actually disturbance in the bond market that was one of the factors that prompted Trump to postpone the reciprocal tariffs, as you know Wednesday sparking a near-record stock market rally, but they're waiting for the negotiation on China. That's still there. And by the way, the 10% tariff seems pretty permanent. I mean, he's not talking about negotiating that away. There's a little question about that.

So that's sort of there, a national sales tax on the imports that is there. But all this is swirling around. You could be surprised that the... The S&P is not even in a bear market territory at all, although definitely in a correction territory at this particular juncture. But I think it's who can hold out longer. I think China can hold out a long time. I think even though their economy be hurt, if you know the Chinese psychology, I mean, they can go through austerity. Americans are not used to austerity. We really have not had real austerity since World War II. China's had austerity and many times subsequent to that and they are pretty much behind Xi at this particular point, so they can hold out on a bigger slump than we can if it comes to that.

But I think political pressure will become so strong that Trump will be forced to negotiate. Of course, he's going to roll out some agreements. There are several agreements that have already been all but signed as saying his policy is a success, but that's the off-ramp. I mean, agreements, he's making agreements. 75 supposed people have called him to make agreements. That's his off-ramp of getting out of this particular situation. But as long as the tariffs are in place at this particular level, I see no upside to the US markets, and even if they are taken off, it is hard for me to see them going back to the all-time highs that were reached in February. I mean, I think the tariffs and the way it was going about and the shocks does really hurt the brand of Made in USA, not irreparably and not so that it crashes the stock market or anything, but certainly it could be worth 5 to 10% as a very lingering longer-term impact on the economy from where it would be otherwise.

People who they're going to re-form alliances. China could become much stronger instead of weaker as a result. We will see. But the expectation of the market, otherwise it would be 15% lower than it is right now, is that Trump, as he caved into the reciprocal tariffs, will also cave in to the China tariffs. Now, he won't call it a cave in, he'll call it a mutual negotiation, and of course he'll call it a success no matter what happens, but I think the market is basically calling on that.

As far as what type of stocks to do well, I mean, you know what, they're all going down about the same. I mean, S&P is down 1.67, Nasdaq 1.84, Dow, which is a little bit more cyclical and value-oriented, is 1.57. I mean, they're all up today. They've been moving pretty much in tangent with the Nasdaq probably showing a 1.2, 1.3 beta on that and amplifying it a little bit more.

Gold has been very strong, and if you notice, Bitcoin is up 5% today, and I think I know why Bitcoin is up 5% today, and that is if the dollar loses its international status... And again, we're talking about going from 67% of the world reserves right down to 57%. It's not like it's going to go to zero. But Bitcoin has been talked about about some countries may want to replace their dollars with Bitcoin, and I think that's one reason why Bitcoin is up today. Otherwise, it trades like a Nasdaq stock, but the reason why it's 84,000 virtually today and not probably lower is some talk about maybe reserves will now be partly more likely to shift to Bitcoin as well as euros and some other thing. So I have a sense on that. I mean, oil is up to 2.5%. When the stock market's up, oil is up because if there isn't going to be a recession, oil is up. If there is going to be a recession, oil is down.

Let me talk about the inflation news. Again is good. It gives an excuse for the Fed to reduce if it wants to. That was really good news, the producer price index on the consumer. However, once you note that the good news on the consumer price index was to some extent, I saw the components, a big 4.5% drop in airline prices because airlines are feeling the impact right away. International travel is down. I mean, that's one of the first signs that we really have hard data on, and that is down. So some of those components are down because of some drop-off in demand, but nonetheless, this is good news going forward on the price front. It's going to lower the core rate of report at the end of the month. But the facts are that the tariff negotiation, number one, foremost. The second one is signs of drop in spending, and that's going to take a while in the official statistics to show up, and to what extent it shows up is critical.

And what's going on in international markets? I mean, it's 4.48 right now on the 10-year. I can't predict it on what it is. I mean, if we are going to recession, should be under four, but then with a deficit that is likely to be in the neighborhood of 3, $4 trillion looking into the future and more if there's a recession and the question of the dollar as a reserve currency, I can certainly understand why it went towards 4.60 today. In my opinion, no market... There is probably thinness in some of these markets, but none are disorderly. All the markets are functioning well. I don't see any fail auctions, which was a sort of ridiculous notion that was floated a couple days ago. We're not having any fail. It's just a question of price, on what you're going to buy it at. I mean, the markets are perfectly absorbing all of this. They absorbed the tweet on Wednesday with a rise.

So, I mean, markets are absolutely functioning. There's no failure of the markets. It's just a constant reassessment for equities, the profits going forward, the potential depth of the recession and what that means for margins going forward, and for bonds, they now have not only the business cycle to worry about but the status of the dollar. And then the international reserve system is also a factor as well as what's going to happen to the dollar.

Now, by the way, I'm going to end with a talk on dollar, unless Kevin, or Sam, Jeremy want to speak any more. The drop in the dollar increases in the inflation that Americans will see on top of the tariffs that Trump has put in place, it is good for our exporters, it's good for profits. I mean, a drop 2, 3, 4% will increase the dollar value of the 41% of the revenues that are brought abroad or earnings that are brought from abroad. That's a big positive.

And by the way, why I don't want to call about the dollar collapsing is that we had a big rise in the dollar after Trump was elected. So, yes, it's given that back and maybe a little bit more, but it is not out of line with the range of the dollar over the last five years. It's not like, oh my God, we're at a twenty-year low in the dollar, anything like that. So, yeah, people like to talk about, oh, collapse of the dollar, no confidence. Well, dollar is not... I mean, it was down 1% earlier, and today the Dixie is down two-thirds of a percent now, so it's back to where it was last year. Basically all the Trump excitement that sent the dollar higher has disappeared.

So I've covered all the markets, I think, or many of them, and I'm awaiting any further questions that you guys might have.

Jeremy Schwartz:

Sam, all this geopolitical stuff, you're managing some models that tries to take into this sense of what's happening. Any comments from what you heard from the professor, how you're looking at the world today?

Sam Rines:

Yeah, I think it's a pretty interesting time to be in markets. One of the things that we did earlier this week was we put on a trade for the geopolitically risk-aware portfolios where we began to buy some of the emerging markets across the board and using some commodity exposure to do so, not necessarily because we didn't like the commodity exposure longer term, but simply because near-term the emerging markets appeared to have a much better outlook, particularly when you account for the dollar, the potential for negotiations to go particularly well, particularly when it comes to allies for the United States in Asia and elsewhere on the emerging market front and even the developed market front to a certain degree.

But generally, I would say markets have behaved relatively well. When you look at the way some of the currencies have traded, some of the bonds have traded, equities have traded, et cetera, actually, it's been fairly orderly. We would expect that you're going to see a comedown on the China front at some point, but that's going to take some time. It's not as easy as just answering the phone and then moving on from there. It's likely to be several phone calls. But from here it's hard to see exactly how you get it much worse. China has said, "We're not going to bother increasing our tariffs against the US because it's 'a joke' at this point."

So it's hard to see a lot of the news becoming any more negative from here. You're likely to continue to see bleed out of some positivity, et cetera, and you have a lot of stimulus outside of the US, right? The US is running a decent deficit. China's beginning to stimulate, Europe has certainly stimulated particularly on the defense and infrastructure front, so there's a number of things that could be positive. Even India is beginning to stimulate, which is also interesting. So some of the largest economies in the world beginning to stimulate even prior to the tariffs. So on the margin it could be an interesting time to begin to nibble particularly at some of those places that maybe are significantly underweight and worthless at the moment.

Kevin Flanagan:

I think for me, the key takeaway from the Professor's remarks was the functioning of the markets, from my vantage point the money and bond markets, the funding markets, and looking at the various measures there. And there's been some modest tightening in some of the funding markets, but it's nowhere near pointing towards anything worrisome at this stage of the game. If you look at commercial paper, financial, non-financial commercial paper, spreads versus T-bills, they're still relatively on the low side and so far below anything that we've seen in any of the related crises over the last 10 or 15 years, and even if the bond market, as you're supporting some of the notions there, what caused the sell-off. Remember, the sell-off didn't occur in the entire bond market. It was more centered intermediate, longer-dated maturities. Up until today's trading, the front end of the Treasury market was actually in the green for the most part, and you got a significant, actually, steepening of the curve between twos and tens.

And if you look at Treasury floating rate notes, something that we've talked about as a high conviction trade, they're doing exactly what they've been designed to do. They're just moving in a nice flat fashion, stable as she goes going forward here. So people asking a lot of questions on this. What was some of the results? You could come up with many. We're probably not going to know. This is going to be something we're going to probably find out after the fact. What was really behind this kind of violent move? If you think about it, Professor, you mentioned it, you went from 3.86 Monday morning while we were all sleeping to about 4.60 today, right? So something's going on there. Were we unwinding trades, the unwinding of the basis trade everyone likes to talk about? Were people looking at perhaps selling to raise cash, maybe moving money into their home markets? You've seen the German Bund market actually outperforming treasuries here.

But I think it's premature to suggest that treasuries are going to go away and then all of a sudden people are going to look to where. To where. What's going to be the alternative? The EU? The German bond market? The Japanese bond market? I think you need to get some perspective when we're talking about this. And with respect to the Fed, we've been down these roads before. We have their balance sheet. The facilities that they've used in the financial crisis during COVID in 2019, when there were hiccups in the funding market. Remember, they're still doing quantitative tightening right now. They reduced the pace for treasuries, but they're still unwinding on the mortgage backside and a little bit on the Treasury side. They could stop that altogether. They could come back and give you QE like they did in 2019, which was not economic or dual mandate-related. It was funding market-related.

So the Fed has a lot of tools at their disposal, and I think cooler heads will eventually prevail. We've been down these roads before, and the one difference with all of this is that we are speaking about tariffs and seeing tariffs like we have not witnessed in our lifetime, for the most part, right? And I think that's what's got people kind of up in arms right now, but this volatility, to begin as you opened, Professor, the understatement of the decade, of the millennium, you know? The uncertainty quotients, where we are right now, this has to play out. It's going to be a fluid event. Our advice is don't get caught up in all the headlines, the social media, the tweets that are flying out there. Just try to sit back, look at things from a broader perspective, from a more strategic kind of investment backdrop. I mean, Jer and Jer, Professor and Jeremy Schwartz, what's the title of your book called? I think people, we need to start thinking about things from that perspective.

Jeremy Schwartz:

And Professor, I guess the question comes... Sorry, we say stocks for the long run. There's this question of which stocks for the long run. You talked a little bit about the US exceptionalism narrative cracking. How are you thinking about your long-term returns from the US versus foreign markets today?

Professor Siegel:

Well, I think foreign markets are looking more attractive right now. I mean, we're still what, we're 13, 14, 15 P/E in Europe, rest of the world? I mean, we were up here in the low twenties, and of course the Mag 7 were in the thirties. So the valuation, remember the valuation of long run is more important than the earnings growth, and it looks to me good. I mean, a 15 P/E stock, even with very little growth, is giving you a 6 to 7% real rate of return, which is pretty good. And what's the US P/E ratio? Of course, if there's a recession, the earnings could go down dramatically, but we have to look at long-term and above that. And so what, we've gone down to 20, 21, 22 on last year. I mean, if it goes up to 250, we're at 5,000, we're 5,300 right now in the S&P, so that's if there's very little growth, and if there's a recession, not only will there be very low growth, there'll be a decline in earnings.

However, remember what I said, I said this last week and the week before, a lot of people say, "Oh, put 16 on a decline in earnings. That's always crazy." Really, you should bring 22 to 24 on a recession level earnings. There is also no question in my mind, and I'll just repeat what I said for three consecutive weeks, if there's a recession and there will be one if these tariffs continue, then lower stock prices are in almost certainty, period. I mean, the average recession stock prices drop by 25% and we're only 15 down. I'm not betting my life on it. There's all sorts of things that can happen. Decline in the dollar makes the foreign earnings look better. There's a lot of things going on. If the Fed starts lowering rates, that will, of course, have some boost too, but nonetheless, if we're going to.

Now, Trump changes and turns everything around and it is with China. The 10% tariff in and of itself, I don't think that alone could cause a recession. Theirs were sentiment plays, most importantly, how shocked are people into saving as a result of the higher prices and the economic uncertainty, and we don't know the answer to that because it was advanced buying. These very people that may have goosed the economy upward over the last four weeks are going to be the ones that are going to be the big savers in the next four months, and that is not good for consumption and not good for corporate profits.

Kevin Flanagan:

Jer, we got a question from Roger. I just wanted to address this because I think it's important. There is a lot of noise out there right now. The question was, do we agree with Boston Fed president Collins that there's no liquidity issue in the Treasury market? And yes, we do agree with that. It gets back to what I was saying before, looking at some of the measures, SOFR, looking at the repo markets, functioning very, very well here. As I said, are spreads moving a little bit? Yeah, they are. It's to be expected, I think, when you see this kind of movement and volatility in the market.

But there's no liquidity issues at this stage of the game. You have off-the-run and on-the-run treasuries. Just to go a little bit into the weeds here, the on-the-runs are what was just recently auctioned, okay? Just like this week, perfect example, we had a disappointing three-year note auction. Everyone was concerned what was going to happen to the 10-year and the 30-year reopening. They were met with pretty good demand, right? So that's another, I think, important aspect. Listen to what people do, not what they say. What do they do? They came in and they bid for the 10-year, they bid for the 30-year, and it wasn't just primary dealer driven. And I think the other aspect to this as well is that off-the-runs, those were the issues that were auctioned a couple of years ago. So it's an old 10-year note. It's an old 5-year note. Those are always going to have a little bit less of a spark to them than an on-the-run issue. But overall, yes, we would agree that the markets are functioning properly.

Jeremy Schwartz:

Professor, sorry. Do you want to add onto that?

Professor Siegel:

Yeah, I was going to say I agree a hundred percent with Kevin. They're functioning very well.

Jeremy Schwartz:

There was a question from Alyssa that came in, and this somewhat ties into the moves in the dollar, the move in the bond market. There's been a lot of questions. Is China selling bonds? And then what are they buying? That's one related question, but that also on the foreign ownership of our assets, comment on foreign ownership of equities rotating around the world. Is that something that you think is happening because of that US loss of exceptionalism comment that you made?

Professor Siegel:

Yeah. I mean, whether the US is not the rational economic decision-maker anymore, not going to be the linchpin of world trade, if there's a shift in that, you're going to see a decline in the dollar and you're going to see a decline in bond prices. Is China... We don't know. I have no information about whether China has all these subsidiaries, whether it has been selling or not, but just the fear that China will sell in the future will drive the prices down. I mean, even a primary dealer will say, "Oh my goodness, I think China might be selling in the future," the price goes down. All asset prices are anticipatory. So we don't have to see them sell, and it's a threat that they'll sell, and maybe that's the next step of a trade war, is, "You do this, we'll sell the treasuries."

I mean, Trump keeps on referring to who has the most cards when he negotiated with Zelenskyy, "You don't have any cards." I think that China has some cards, so does Trump, but China has some good cards, and if they want to play them, they could. There's a lot that is held in reserve. And so we'll see how long that game goes on.

Jeremy Schwartz:

Sam, there was a related question on moving away from the US but the Mag 7 and valuations, and I know in your models you have some heavy tilts towards high dividends. There has been, when we look at within recently, maybe things are going down together, but year to date, high dividend stocks are down about 5%, growth stocks are down 15. So there's definitely been a dividend outperformance, and maybe Sam, Professor, you could both comment on that, like if you expect some of that to continue with the volatility.

Sam Rines:

I-

Professor Siegel:

Yeah, I expect it. Well, I'll go first, Sam. I expect that to continue. And with the trend line on... I mean, the news on tech... Who was it? Dan Ives, a big tech guy? He was on CNBC a couple of days ago at about 5:30 in the morning. I was listening to him. He's usually extremely bullish, and he said, "Listen, tech goes through China." He's not talking only about tech innovation, talking about tech production, a lot of other stuff. He said, "You disrupt the China trade, you disrupt that, and you also spur on China to be the AI leader." "Okay, if this is a war, we're going to put all resources in AI. We're going to win this war."

Intellectual. I mean, better an intellectual war than a shooting war to say the least, but the resources are going there, and who knows? "Okay, iPhone's not produced. We'll make sure Samsung..." That's not their country. Huawei, maybe that is. "We'll flood the market with those. We'll sell to Europe. I mean, we'll get everything up. We can dump... Who knows? Europe might want to buy our chips, our data centers and all that." There's always that threat there. "And then we'll develop AI at a price that's 10% the price that Nvidia and the others are producing, and your lead will dissipate and disappear."

I'm not saying that's going to happen. I'm just saying all these scenarios have got to be in the back of your mind when you hold those stocks, and that's why those stocks have gone down more. And that question, I think, is heightened as a result of the trade war, not lessened as a result.

Sam, do you want to-

Sam Rines:

Sure, I'll-

Professor Siegel:

... chime in on this?

Sam Rines:

Sure. So I think one of the main reasons why you've seen particularly US high dividend and dividend-paying stocks have performed broadly is they're simply not exposed to tariffs in a meaningful way relative to the rest of the market, whether it's the S&P 500, the Qs, and it just doesn't matter, right? They're far less exposed. They tend to be much more domestic, oriented, both in their production and their sales structures, and/or just not that exposed to China in particular, right? They may be exposed to global revenues, but it's certainly not China and not to a significant extent call it the supply chain out of China.

A lot of those dividend payers have in particular spent a lot of the last few years making sure that their supply chains were rather resilient. I mean, there was an interesting conference call earlier this week with Lovesac, which makes interesting couches, et cetera, and while they were doing their earnings conference call, the CEO was in China moving the supply chain out of China. They had 10% exposure to China, they had significantly reduced over the last few years, and he was there to make sure that by the end of the year they were pretty much out of there.

So I do think that the US businesses across the board that were paying attention during the first Trump administration, then during COVID, then during the supply chain disruption in Ukraine and Russia have done a very good job of mitigating a lot of the issues that call it six, seven, eight years ago would've been far, far more punishing. And if they haven't, they kind of deserve what they're getting at this point. I mean, you had a lot of warning that this type of global break was probably in the cards, so the companies that have done it are being rewarded and the companies that haven't are getting punished. I think that Apple and some of the other tech companies, broadly speaking, are probably the best examples of that.

Jeremy Schwartz:

Kevin, there's a few questions on the bond side. One was on munis. Somebody asked about munis trading badly. And then a second was on corporate bankruptcies on the credit side or just more issues in credit. Do you want to comment on either of those and how we might think about those?

Kevin Flanagan:

Yeah, first on the muni side, and somewhat lost in the shuffle, WisdomTree, we actually launched two brand-new laddered muni funds last week, so if you get a chance, check them out. Yeah, munis have been, obviously, they do follow trends in the Treasury market, not necessarily one for one, but considering to be more of an interest rather than credit-sensitive type of interest, unless, of course, there's some headlines on the state or local basis upon which the bonds were issued and/or essential services.

But I think overall, what you saw in munis up until, say, the tariff announcement was kind of traditional. We were seeing more supply. Heading into tax season, you tend to get a lot of muni buyers liquidating munis to raise cash. So in our opinion, I think any cheapening in munis here, you look at a relative value to treasuries. We were actually joking about this before we came on. I think represents a buying opportunity. Always remember that you can talk about this from at least a minimum a federal tax equivalent type of level of what you may be getting overall on an absolute basis, then adjust it for your federal income tax, if not your state income tax. And oftentimes you're above treasuries. You may be in investment corporate land.

With respect to corporates, we have seen spreads widen out here. To me, I think it's actually a healthy development. I think spreads were too narrow. We were at really the fringes on a historical basis for both investment grade and high-yield spreads. So I think it's a healthy development when you get this kind of correction. Obviously you don't want to see it in just three or four trading sessions, but I think overall, have default rate expectations risen? Maybe very, very modestly, but not to the point where you're talking about upper single digits, lower double digits, nothing along those lines. Senior loans would be an area, I think, I'd be more wary of, so if you were to ask me to kind of rate where I would be in credit, senior loans would probably be at the bottom of the list of what I just mentioned.

Professor Siegel:

I also want to mention, as many of you know, one proposal in the Trump tax plan is to raise back the upper tax rate from his lowering 36% in the 2017 tax plan back to the old Obama rate of I think 39.6, which would make munis more attractive.

Kevin Flanagan:

Absolutely.

Jeremy Schwartz:

Professor, a few people, one, an institutional investor who's thinking very long-term, and there's other people saying, "How are you thinking about the long-term nature? What do you do from this from a long-term perspective?" How are you thinking through that?

Professor Siegel:

So Trump will be president for three and a half more years and then we'll have a new president. It's not forever, nor is any of... We know that since tariffs can be implemented by executive order, they could be taken off on day one of a new president by executive order, although I think they'll be taken off in large part much, much before that. This is something that I said I remember I think last week, but I will repeat. At 20 price-earnings ratio, only 10% of the value of a stock comes from its earnings in the next two years. That's very important. If you wipe out the earnings of a company for two years and then get it back on track after that, the stock theoretically should go down only 10%, no more. If you wipe out earnings by 50% for four years, and that would be the remaining part of the Trump presidency, 50%. No one's predicting that sort of decline in most. It also will only go down by 10%.

So are stocks still good for the long run? Absolutely, in my opinion. In my opinion, the longer-term returns, not necessarily the shorter term, but the longer-term returns are more attractive now than they were on February 9th, when the stock market was at its all-time high.

Kevin Flanagan:

Jer, I thought of an interesting question. I'm going to pose one to you. You haven't gotten one in a while here. Question came in. What do we think about the traditional 60/40? There's somebody out there, I'll keep them nameless for now, is suggesting 50/50/20 with 20 being allocated in alternative investments. So what are our thoughts about that?

Jeremy Schwartz:

Yeah, you see, well, sure there's a lot of indexing to these alternatives because there's not as much volatility or at least perceived volatility. They don't get marked on a daily basis. So we know a lot of RAs who are using a lot of alternatives just to help for clients who don't like to see the daily statements. There's some value to that. Some people call it volatility laundering because there really is volatility underlying it, but you don't see it.

So there's definitely more use of that, and there's definitely some higher returns in some of those segments, in some of those... There's going to be a lot of money going into private credit and other places. But we do see the motivation. I mean, the bond yields have risen, but still, somebody just asked about the equity risk premium, you're getting towards 3% again. We got down as low as 2%, but the 10-year TIPS versus the earnings yield, you're getting closer to three, but still it's only a little bit above two on the 10-year TIP, so it's not a huge, huge return from traditional bonds, and so people are looking at other forms of lending to try to increase the yields you get in traditional income. Companies are staying private for longer, so they're trying to do other versions of private equity or late-stage venture, all these things to try to increase the return profile.

We've done a lot of things with what we call capital-fishing core families that puts like a 90/60 framework for stocks and bonds that creates more room for alternatives. And we also done something with gold. The professor talks about gold not having very strong long-term real returns, but certainly in this environment they've gone up a lot. I think the big question is from the Siegel worldview of only sub-one percent real return is where do you fund it from given that it's get this low long-term return with our capital-efficient core where you add gold on top of equities, you don't have to sell equities to do that. So I think that's one of things that we see. How do you get more alternatives in without sacrificing your core allocation? That's something we're trying to do a lot more with, but you also understand why people are saying low returns and bonds gives you more opportunities in some of these other private markets.

Professor Siegel:

Yeah, let me follow up, and I agree with Jeremy. I mean, so right at this instance, you get 4.49% on the 10-year. Do you think that's attractive with the amount of deficits, with the tariffs bringing inflation up? This is the nominal. I'm not looking at TIPS, I'm just looking at the nominal bond because that's 90% of the government debt, is not inflation-protected more than that. So you can lock your money up for 4.48. You can buy a stock at 15 or 20 P/E, which is a 5% return on inflation-protected capital.

And the only thing that's similar, as Jeremy mentioned, the TIPS rate, yes, it has gone up and now it's 2.28. A 20 P/E stock is a 5, so that's almost a 3% premium. I mean, 2.28 to 5, it's a little bit lower than 3 right now at 20, but that's still very healthy, right, for someone who's long-term? 3% a year difference in two asset classes over 30 years is a big, big difference.

So again, and I'll tell you, the behavior of the long bond over the last three or four days, how good a hedge is it? I mean, it is shocking that... I mean, normally it's a fantastic short-term hedge. Day by day, stock market's tanking a thousand points, your treasuries are up. If that doesn't happen, a lot of people say, "Hey, I don't want it. I want that cushion." That's a strike against the bond in terms of that segment of the investing population that loves the short-term volatility hedge. And as we've all said, bonds are a terrible long-term volatility hedge against any inflation, which I do think is the big question mark going forward.

Jeremy Schwartz:

With that, Professor, I think we-

Professor Siegel:

Yes, we're past.

Jeremy Schwartz:

We're running out of time, but I think for sure with all this volatility, you can expect us to do more of these calls with the Professor. You could always hear them on Behind the Markets like people are listening today. We'll get it on Behind the Markets as well. But I could see us doing more of these calls on a regular basis with all the moves that we're getting in the market. So, Professor, thanks for doing this with us. Thanks everybody for tuning in. Kevin and Sam, always a pleasure to be with you. Thanks for joining us, and we'll talk to you again pretty soon.

Professor Siegel:

Have a good weekend, guys.

Sam Rines:

Have a great one.

Kevin Flanagan:

Take care.