Irene:

Hi everyone. Thank you for joining today's Timely Office Hours with WisdomTree titled Nifty Fifty: The Fed Raises Rates Again, where you'll hear from Jeremy Siegel, Senior Investment Strategy Advisor to WisdomTree, and Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania. Kevin Flanagan, WisdomTree's Head of Fixed Income Strategy. And Jeremy Schwartz, WisdomTree's Global Chief Investment Officer.

Kevin Flanagan:

Thanks Irene, Professor, Mr. Schwartz, always a pleasure, especially on Fed Day. The first half point rate hike in 22 years, certainly a groundbreaking day. So let's get this thing started. We'll go with the first polling question. We'll have the professor give us his remarks and we have a ton of pre-submitted questions we want to get to, so let's get the ball rolling. I mean, did the size of today's Fed rate hike surprise you? Professor, I know that the answer is going to be probably no, but we were talking before we went on. You think there's a couple of surprises perhaps in here other than the rate hike that we should talk about.

Jeremy Siegel:

Yeah, absolutely. No, but I was hoping for a 75. That's an interesting question. No, but I think the Fed needs to be data dependent. So let's talk about what happened today and why did the Dow rally 900 points, pretty much because the 10-year dropped of almost 10 basis points. All right, so we could say nifty 50 and not 75. The key turnaround, because I was watching every market as he talked, as he talked was when Steve Liesman from CNBC asked about 75 and he said 75 is not on the table. Now that combined with, now, this is important, I did think that James Bullard was going to dissent in favor of 75, as you know, he dissented in favor of 50 basis point at the last meeting, which was the first dissent in more than a year.

Why did he not dissent even though he made a statement that he preferred 75? As the Powell's talk continued on, I came to the conclusion that Powell basically promised Bullard two more 50 point increases. He said, "Listen, I'm going to be supporting two 50 point increases at the next two meetings. I'd like you to be unanimous, you don't have to be." And I think James decided to go along with it as a result. So never before has I ever remember? It's probably the first time in history where two, now he did leave the door open by saying a couple, but it's basically two 50 point increases.

And then we go back to probably 25, and it is always data dependent, I mean, always. Take a look at one of the questions was, we go back to margin, you said 25, 25, 25. Now you think 50, 50 because things got worse. Could things get worse? Yeah. I think things are not over. I mean, I take a look right now at oil up 5.5% today to 108. I mean, we're almost not quite to the high, I mean, it sparked to 130 on the Russian invasion, but it's going up again. I look, and this is even more disturbing for me. And probably many Americans, natural gas hit 8.43 up 6% today. Most Americans do heat with natural gas. That is at, I think another four or five year high. This inflation is not going away. Even with supply, there is some evidence of supply lines becoming little bit looser right now. This is not going away. The demand for labor is extraordinary. And Powell mentioned that so many times.

What is the logic of 50-50 instead of 100-0-0? Why don't you go where you want to go? There is no logic. It's something that Greenspan started. I personally think that the Fed chairman is way too gradualism versus telegraph, everything to the market. Well, I think he goes too far in that direction. And that in fact is my opinion, why the Fed is so late and you know, many of you have been listening for two years saying they're way too late and they're still way too late because they're so deliberate that they first have to announce it and then think about it and then tell you, and then hint it, and all that. And by then the inflation's already gotten five times worse than you want it to be. But listen, we got what we got. The market is happy. There's not going to be a big boost. He basically took 75 off the table.

Obviously, if you've got some really bad inflation, Bullard might still dissent later on, but he said, "Let's wait and see, we're doing 150 basis points over the next three or four months." That's a pretty big increase. Let's not go further. Let's stand around and look. They may then have to decide on the next meeting to go 50. I wouldn't be surprised because I don't think inflation is going to slow down that much, but listen, we'll have to wait. Now in terms of the market, they're really happy, 50 instead of 75, deliberate, predictable Fed. Now it's in the rates. In fact, we have December Fed funds. I'm looking right now, it's actually down about a few basis points. It's 267.50. And now we do mention that is a slight underestimate because of the hedging qualities of Fed funds against the bad economic events.

So it's kind of a VIX hedge in some way, you see all the markets that are dependent on, Bitcoins up 5.5% today. Also, you see the commodities are way, way up. And gold is up only 1%. The Bloomberg Commodity Index, I'm looking up 2.2% today. And of course you have a rally across the board. I mean, it's a real strong rally, just a relief rally plus no 75 plus predictability over the next three, four months on going on. And listen, and then you basically, listen, pretty easy money and inflationary, look at the earnings are not bad. The earnings are great. The firms can lift their earnings. They can lift their prices. I did think if you looked at the market, when he started out saying, I want to tell the American people we're on this case, it almost wasn't apology.

In fact, I figure one reporter actually asked, I forget which one it was about whether this was an apology or not for starting so late. Well, in my opinion, the Fed should apologize for starting so late. They were really off the ball and looking at all the wrong balls in 2021 in terms of their policy. Did lay out quantitative tightening, very much like what was advertised kind of half the rate. I mean this is another example of way too late. There's over a trillion dollars of excess reserves of banks don't need, they put them in reverse repos. Well, do you know how long it's going to take even at the full tightening levels that won't be reached until June? It's going to take a year before they mop that up. Well by then, according to Powell, we'll be back in a much lower inflation environment. And then how is going to have effect until you mop up all those huge amounts of excess reserves and there's even more excess reserves and about.

So yeah, I mean the effect is, are going to be selling into the markets, all that government debt is going to be basically there. But there's a huge market for the government debt. We saw the dollar, I mean, it really took a hit today down 81 basis points and [emerging markets] EM, which was down early today, I see is up 1% or more. I mean, it's obviously been, this is good news for that because obviously with all the dollar debt that a lot of EM have, we don't want a real tightening that would squeeze that market, because that gets into the kind of high yield dollar debt type of situation. This is something that it will be more manageable. I think for them, I mean obviously the values in EM are incredible with PEs. And Jeremy might be able to talk about it more of 11, 12, 13 in the markets and very, very high dividend yields.

So relief meant rally, no 75 mapping out two meetings. We know what it is pretty much, got barring any shock that always can be with us. And the market, this is not a surprising rally. Now let me tell you about the 10-year. It's 291. I mean, yeah, it has a relief rally because there's no 75 for a little while, but it's got to worry about inflation. And if the Fed is going too slow and those combined prices keep on pushing higher. Don't forget commodity prices are the most sensitive. If you're really going to slow down this economy, we really haven't seen them go down really not at all. They spiked in Ukraine and then came down when that eased a little bit, but they're right on that upward sloping trend that they were before. If you take a look at almost any of the commodity index.

One piece of pretty good news that I want to mention before I hand it over for some maybe Kevin's thoughts on this matter is that for the last two months, we have seen a meaningful slowdown in the rate of money growth, which as you know, is what I look at. The monetary theorists is what I use to predict all the inflation that we were going to have way back in 2020, not even 2021, way back in 2020. The last two months, the annualized rate of M2 money increases four and a half percent. That's consistent with 2% inflation. Now it's two months only. The money supply is still up about 10% year over year. We still have money up to about 25% over trend. In other words, if you would've extended the trend from, let's say 2005, '10 onward, the big bump that we had during the COVID relief and subsequently has brought us 25% higher.

Now that means that the price level is going to have to absorb a big bunch. And that's why I don't think we've seen it all. Remember housing is not in the CPI, but with an extreme lag, it's going to keep on pushing in there. As the Bureau of Labor Statistics continues to sample the housing, it's going to be a persistent, upward and very, very strong force and a core, not a, you know... and a core, not a non-core, a core measure of inflation that is going to be pushing upward in my opinion, for the next 12 months or longer in the market. Let me finally say, I still think that given these pressures, by the way, let's see, the tips, interestingly enough, the tenured tips is down to three bases points. It was up 15, it's almost dipping down again. So the real rate pressure has gone down because of spread statement and that has taken that pressure off the stocks. But I still think it's the dividend paying stocks because let's face it, at 3% bonds are not attractive. The Fed is raising 50 basis point, 50 basis points, none of the short term is attractive. Everything is still going to be way below inflation, no negative real returns into the next three to six months in my opinion. With that, Kevin, do you want to give us your thoughts on the Fed and other matters?

Kevin Flanagan:

Yeah, well, I thought what I would do since we have so many questions, I'm going to try to work a couple of them into a dialogue here and get your thoughts on it as well. Kind of see if we can do two birds with one stone here. I find this interesting, there's a lot of talk about stagflation, the possibility of recession. So I'm going to ask you please to comment on that, but before we transition to that, it was obviously the impact of the negative GDP in the first quarter didn't impact what Powell and company did today. I was looking at the dates going forward for the Fed meetings, July 27th. So that's right around the time that-

Jeremy Siegel:

There's a June meeting. Isn't there June meeting, Kevin?

Kevin Flanagan:

Yeah, the June meeting is on June 15th. The July meeting is the 27th. So it'll be right around then when we're going to get second quarter GDP. Just say for argument's sake, second quarter GDP comes in flat. Do you think that's going to curtail plans for what the Fed wants to do?

Jeremy Siegel:

The current estimates of this quarter's GDP, second quarter, the firm that I follow, IHS that I think does the best job is at 1.7. I think the GDP now that the Atlanta Fed does is at 2.3. So let's say it's 2%. We're running 2%, we're only one month into the second quarter. I'd be shocked if it were negative. I mean, it could be though. Absent another crazy COVID variant and another big supply shock from oil, which I think is a major reason why the first quarter was negative. It would be really, really disappointing to have that. I actually do think first quarter is going to be revised upward. Although I will be surprised that the final trade number that actually came in this morning was actually, I thought that might be revised to less negative. It really wasn't.

But if there's a big trade negative number that often comes in inventories, which we won't get for a few weeks, I don't think it's going to be as bad as minus 1.6 first quarter as before. The second quarter is coming in at two and second half of this year, I think should be coming in closer to two and a half and three. But that's an early call many things could happen as far that's concerned. The big thing is the firms again, can raise prices to the extent they have fixed contracts, they're enjoying that ability to raise product price without getting costs up too much. Their labor costs if they have employees on multi-year contracts is not going up with inflation, although there's agitation from many of them. As several commentators had said, the quits rate in the jobs data is amazing. It's on an all-time high. People are totally confident they can get a job when they quit and get a job at higher pay, and many of them are quitting to get that higher pay.

So they're telling corporation, "You give me higher pay, or I quit." This is unprecedented in terms of the number that are in this. You don't get a recession in that market. That's not a pre recessionary market. I'm not calling for an inflation, excuse me, a recession in 2022, could there be in 2023, if the Fed has to really reign in the inflation and jump rates, of course. Am I getting of a probability for 2023, a recession, which would be two negative quarters, rule of thumb, GDP growth. I'll say 50% that way, I can't be wrong.

Kevin Flanagan:

One bad answer.

Jeremy Siegel:

That made me also say, because this is important. I get the question, oh my God, a recession. Oh my God. All right. So a recession comes, so you have one year that earnings are down 10%, 15%, interest rates will go down at the same time and they won't go up as much. What is that to a long term investor? Should that cause you to totally throw away stocks? No. There's nothing that points to a deep recession, and we talked about VUCA [volatility, uncertainty, complexity, and ambiguity], Powell talked about VUCA. Don't forget inflation was 10% and it was 8% to 10% for a period of almost a decade where only a year, year and a half in an inflation. We're nowhere near that situation. If we get that money supply and keep it under control, and again, that's a big if, but it could definitely, it's beginning to happen. We're only going to have a couple more years of 5%, 6% inflation we're over the hump in that situation and you don't have to pull the reigns as anywhere near, as far as Paul Volcker did in 1979, 19 80.

Kevin Flanagan:

Jeremy Schwartz, a question that I saw, I think is right up your alley, given what the Professor was just talking about. One of the questions coming in about the 60/40 portfolio, or thoughts, is it dead? I'd love to hear your guys thoughts on that.

Jeremy Schwartz:

For a lot of people on this call, they have access to some of our Siegel branded model portfolios. Some of the major firms, I know there's a lot of people on this call who has access to some of those models, and we did say the 60/40 is challenged with the low real returns on bonds, and we have a 75/25, that's called the global sort of longevity model that has really a 72, 22, 6. There was one of the other questions from Benton came in, talking about satellites before the portfolio, and part of my response was going to be given the unique dynamics, commodities, potentially as one of those places, that's offering a unique hedge for stocks and bonds. So the more commodities go, the harder it's been for bonds and the challenge for stocks. But that global longevity portfolio is 172, 22, 6 is the allocations we're doing in that one. But professors is there anything else you would say on the research behind going away from a 60/40 today?

Jeremy Siegel:

Yeah. We did a number of slides. We did real rates minus half minus one. So one person asked me, "Well, Dr. Siegel and the real rates went back to zero on the 10 year?" Yeah. But we all projected ahead four and a half real return on stocks when the BE was 22. Now with the BE of 18 real return on stocks is five and a half. So just like the real return on tips has gone up 1%, the real return on stocks because stock prices have gone up 1%. So those relative values are the same, and all those slides that we did that showed that there's the probability of running out of money with a 75/25 portfolio is less than a 60/40 portfolio, is still absolutely applicable. Even though tips rates have poked their nose barely above zero on the 10 year tips.

Kevin Flanagan:

Go ahead, Jer. Go ahead.

Jeremy Schwartz:

I was going to say one of the questions that there's a lot of questions about. I think the first question, the live question take from Corey, would you ever buy bonds again? Is a real one, but the professor was saying 50 bps hikes is going to be a challenge for bonds. What's the impact of QT [Quantitative Tightening] on longer duration, fixed income was another submitted question. Kev, what are you telling people? You're talking to people on the fixed income side of the equation?

Jeremy Siegel:

Basically, and I said this a year and a half ago, was it August of the first pandemic year 2020 when the 10-year hit 51 basis points or something like that, and then started moving up. I said, "Look, those people lived through this, this will be the lowest rate you will see, the 10 year act." That the 40 year bull market in bonds that started in 1981 ended in 2021, and that it's over and the trend is going to be upward. That's being said, we're not going back to 18% or 16% or 10% or probably even 5%. As I've said so many times that the long bond, it's established a hedge against... Listen during the pandemic when the stock market was down 35% in a period of what? Six weeks, eight weeks, the treasury soared in price. Go to the financial crisis when stocks were collapsing, treasury soared in price. It's the hedge asset. It is now that hedge asset for those people who really love short term hedges, it has tremendous demand and worldwide demand for that.

So, personally people ask me, where's this ceiling for the long bond, where is it? So I see it now, it's at 293. It could be 550, and then people say, "Well, if it stops at 350, should I buy it?" Then I said, "Well, do you want to buy 350 in a 5%, 6% inflation environment?" Even if it doesn't go up so you're not taking more capital losses, you're still having a negative return. When as we know dividends in stocks are inflation protected and positive. Why would you go for negative? I mean, unless, again, you just need that real short, and it is a really short term hedge. I know that's comforting to people and they need to buy it. They suffer a lot.

I've talked to some program manager and say, you know what? It's always a fight between getting people with that short term hedge versus their long term returns. You get them focused on long term you would never hold these things because they just drag your whole portfolio performance downward. But the demand is there, I think 10-year goes three and a half, I think at most, and I think Powell is going to have to go to four eventually on four to four and a half on that, and you're going to invert the curve. I've also said, and we've illustrated, I think flat curves and inverted curves are going to be more typical of our future than our past, and that an inverted curve does not necessarily mean a recession, a sharp way, inverted [yield] curve, very well might, but a mildly inverted proof not necessarily.

Kevin Flanagan:

I couldn't agree more with that, and I do think QT playing the role here and, Jer, what you were alluding to somebody asking, tips, what other strategies out there? Professor, you kind of said it there's been no place to run, no place to hide, except treasury floating-rate notes, which we continue to be our high conviction idea for fixed income. USFR [WisdomTree Floating Rate Treasury Fund], which is our strategy based on treasury floating-rate notes. If you just look at what we've seen so far this year, and they float with the three-month T bill. So, essentially, you're floating with the Fed. And Powell's telling us where we're going. More than likely, over the next few meetings, if you think about it, another 150 basis points, you'll be floating right along with the Fed. And this is a perfect segue, professor, for what you were just saying, for poll question number two, because, we get asked that question about; should we go long duration here? Do you think treasury yields have peaked? And this goes right into some of the comments that you just made. So, curious to see what our audience thinks.

Jeremy Siegel:

All right, this is interesting, what people will say.

Jeremy Schwartz:

You're only biased a little bit.

Jeremy Siegel:

I mean, they may want them, even though yields may not come down for that hedge factor. And if you really think they peaked, you might go long duration. Or are you saying number three there? No, I don't want to go in that direction. So, what are you guys thinking now?

Kevin Flanagan:

I know I'm thinking, see, I'm staying rate hedged, professor. That's going to be my answer.

Jeremy Siegel:

I'm there too because the short-term hedge doesn't matter. And I certainly don't think rates are really going to go down from here, but let's see what people say. Oh, yes. They say that; I'm staying rate hedge very good. 70% actually do say that. And that would also be our thesis. So, given that's your rate hedge, that's when that floating rate product is the most valuable.

Kevin Flanagan:

So, Jer, what about commodities? What are your thoughts on commodities in this era of 50 basis point rate hikes?

Jeremy Schwartz:

Yeah, we alluded to it. And that what's been uniquely diversifying, bonds have lost some of that diversification. I get professor's point that there's still the risk-off asset. It's been interesting that commodities are, by far, the strongest performer this year. The cost to roll commodity futures used to be... for the last two decades, it was a major drag, it was costing you 7% a year. It's hard to imagine it was that high, but for two decades, the Bloomberg Commodity Spot Index versus the total return with rolling futures, cost you 7% a year. You're now being paid more. And if you optimize where in the curve, what's called backwardation, where the futures price is below the current price, you're getting paid double digits to roll in all of last year, some of the early this year. You haven't seen as many people talking about the oil ETFs now...

Jeremy Siegel:

Oil is-

Jeremy Schwartz:

And it's across the commodity complex. So, I do think we use GCC [WisdomTree Enhanced Commodity Strategy Fund], which is a diversified commodity fund, not so oil heavy. A lot of the commodity, under 60, 70% of the risk, coming from oil. It so volatile. And it's 50 to 60% of the funds. We're more diversified across the spectrum, and I think that's an interesting one for current environment.

Kevin Flanagan:

So, there was an... Go ahead. I was going to say, professor, there was an article on the Wall Street Journal this weekend, that some great Sunday reading for a bond guy like me, talking about, we shouldn't be counting on Japan to bail us out on the rate side. The cost for the hedge for a Japanese investor to come in and buy 10-year treasuries is really not providing any incentive for them to do that. Do you agree with the premise of that?

Jeremy Siegel:

Well, there's something that I, as a professor, taught for almost half-century, called interest rate parody, which basically said the difference in interest rates between countries is lost by the cost of the roll or the forward price that you have to pay to lock that in. Now, that, we call it interest rate parity, used to be almost exact to the basis point tight. Since the financial crisis, interest rate parity has not worked as well, but as you mentioned, those Japanese... Now, what's really interesting about Japan is their pledge not to let the 10-year... What is the Japan 10-year right now? 23 basis points. Not to let that 10-year go above 25 basis points.

Even though, as we know, Europe is now one. The German, which is their highest quality 10-year, is 97 basis points. And you scale up from there, all the way, one, two. And of course, we're at three right now. But you lose on the forward rate on that if you hedge it. So, basically, that's one reason that the dollar has gone up, because, it's expected to depreciate into the future. So, you buy that dollar, but then if it depreciates in the future, you lose when you convert back what you would gain by the higher interest rates in the U.S., relative to the foreign rate.

Jeremy Schwartz:

Professor, some of this geopolitics question, John asked a question about... And I know you've done a lot of work on central base. What do you think about when they were sort of politicizing the reserves and cutting Russia their dollars or their euros anywhere? Do you think that's going to impact where people hold their currency reserves? What are they going to actually hold if not the dollar?

Jeremy Siegel:

Well, I think it is the dollar. Europe... I mean, how many major currencies? You have the Yen, the Euro, and the dollar. And Europe, their economy doesn't have the dynamism. Doesn't mean you shouldn't invest there because the valuations are strong, but it doesn't have the dynamism. And of course, now, being more proximate to Russian, that certainly knocked their prices down. Very honestly, I think there is a threat, and I don't think it's a mammoth, but it's out there in cryptocurrencies. Cryptocurrencies could be the reserve.

And that's one reason why we have to control inflation because obviously, one of the biggest benefits, for instance, for Bitcoin, not all the cryptocurrencies, but certainly, Bitcoin, is it has a finite amount, so, therefore, is, in long run, inflation-resistant, which of course, fiat currencies are not. But you worry a little bit. More and more people do trade through cryptocurrencies, that lowers the demand for dollars, that's more inflationary then. If you don't want the dollars, the Fed has to buy those dollars back, push more bonds into the system. And if they don't buy them back, it just raises the price of goods in the United States. Crypto could be... We could look at Dollar, Euro, Yen, and crypto.

Jeremy Schwartz:

Interesting.

Kevin Flanagan:

Which gets back to one of the questions, I guess, with Warren Buffett and his comments on crypto. That was one of the questions. Did you agree or disagree with those, professor?

Jeremy Siegel:

Yeah, I did see. Actually, I saw that. Charlie Munger is a funny person. He has no qualms about being as outrageous as... And I guess he can afford to be. The first part of his statements were extremely negative, but he made an interesting statement, but unfortunately, it was not wrapped politically very well. He said, "Xi Jinping, he did the right thing by banning crypto." But he made a statement before that, which he said, "Crypto... It's very important for a country to have control over its currency and what is used as currency, because, that gives you control over the economy. That's the power of the Fed. If all of a sudden, people start using other currencies, that power is greatly diminished, and then you're free-sailing." And I don't think a lot of people feel real secure when you're totally free-sailing.

So, basically, that's what China did. They said, "I'm not going to have crypto. We have the Yuan here, and that's it. And we control it, and there ain't going to be no other currency." So, they banned it for payments. Now, we're a free country and we should, but we have to make sure our currency is sound. And as I've been saying for years, we've got to improve our payment system, and streamline it so that everybody can just flash a card, and wireless. I was in Europe just the last week, and everything is wireless and card. I mean, so many things, they said card only. And they have an extremely efficient system. And I said, "We should have a system, by the way, where merchants don't have to pay 3% and more to go through a credit card because they pay me 2%."

There should be an alternative card that just moves us dollars around at five basis points to the merchant, and that's it. That would increase efficiency by hundreds of billion. We've got to work on that, because, otherwise, you can think of crypto eating our lunch. You can't get lazy. You got to defend the currency, got to make it competitive. And for instance, transfers abroad, why do certain countries... What was it, El Salvador? Using crypto? Is that the country? I forget. In central America? I mean, it's because people from that country here, they want to wire money back to family and relatives, all the transfer companies charge them 5 and 10%. They want that. They should be able to transfer their money around the world at the same sort of two basis point transfer costs that the markets have.

But everyone takes their thing, and then they wonder about, why are we going away from the dollar? And I'll transfer Bitcoin at no cost. These are things you have to worry about, long run, in terms of defending the currency. And so, going back to Munger, he basically said... Chairman Xi said, "I'm not having any competition. This is our currency, I'm controlling it." And that's what's in China. And he kind of said we should do that in the US. I would say, make our currency and our money and our transfer system competitive. I don't like mandating things, so that we don't have to eliminate any competitors. Maybe crypto is will wake-up call for a lazy banking system that has not really seen the innovation that it really could see in terms of funds transfers.

Jeremy Schwartz:

We had a few questions. When you talk about banking system, one question came on financials, given rates were moving, and I was going to broaden it to... There was a second question on gross stocks. How much of the sort of Fed change has already been reflected in prices, in your view? There has been, just year-to-date, a huge rotation between sort of mega-growth and high dividends as like a factor. It was basically 2000 basis points in relative performance, almost. How much of that's already there? How much more do you think is... What's your sense?

Jeremy Siegel:

Well, I mean, I think that prospect of higher rates really crushed all those ultra PE ratio stocks that are down 50, 60, 70, 80%. But of course, when you go to higher real rates, all stocks. I mean, no, why does an Apple go down and all these other stocks go down? Everything has to get repriced when you increase real rates now. And that's how you slow inflation; is you increase real rates to make things more expensive, and you also lower asset prices in the result. How much further do we have to raise real rates? I think short term, we're going to have to raise real rates much more. There's still negative short term, remember. Way negative. We got to basically get real ... I think you got to get those real rates short term up to zero. Now, I don't think inflation ... if it goes up 4, 5, 10, that's 6%. Maybe you don't have to get quite that high.

By the way. I don't think the neutral rate, that was bandied around quite a bit in Powell's news conference. My feeling is the neutral rate is below the 2.4%. Powell said between 2 and 3. It ticked down two, five to two, four from the December meeting and the March meeting.

I actually think it's between one and a half and two. That's with 2% inflation. So that means that the are star, which is the real rate that corresponds to that is actually between minus one half and 1%. Powell, I think alluded to the fact that there's some models that are showing that real rates are much below what the Fed had said.

I've been saying for years ... actually, you know who the first person is to say ... the fed used to have their neutral policy rate at 4, 4 and a half percent. It was actually Bill Gross almost 20 years ago who said ... remember the new neutral?

Jeremy Schwartz:

New normal?

Jeremy Siegel:

Yeah. He said, "You guys are crazy. It's 2%." Well, the Fed took 15 years to get down to what he said back then. I remember reading his article on that and doing my own calculations and saying, "You know what, he's right." That's one reason why they never hiked to neutral before, because we're way too high on what neutral was. They're still too high on what neutral was. They don't appreciate how much real rates have actually collapsed and gone down for a whole bunch of reasons over the last several decades. They're probably still too high, although they brought it down probably 200 basis points from when they started the dot probably, what 20 years ago.

Kevin Flanagan:

So let's ask that last polling question, Irene. Let's get you the audience, let's get your take. Are your client's concerned? We got the professor's opinion, mine and Jer's opinion, your opinion. What is your clients talking about? Are they concerned about what rates are going to do going forward? I'm real curious to see what are clients thinking about? How are they perhaps wanting to position their portfolios going forward? So professor, any thoughts on what you think clients are talking about here?

Jeremy Siegel:

Clients are clearly concerned about higher rates. Let me also say something, and I know there's a lot of financial advisors on this call. We are too focused on the day to day valuations. What people don't realize, that when real rates go up, that actually improves income going long-term forward. Yes, it'll lower the capitalized value of your portfolio today, but it actually raises the amount of real income you get in the future.

If you think about funding a pension or a retirement, it's very different than the day-to-day valuation. People just get way too focused on those day to day valuations in the market. We are raising real rates, this is actually something that, yes, you'll have a drop in current values. Think of someone who buys a bond and just wants to ... forget about inflation for a moment, just wants to clips those coupons. He or she's going to live 30 years. Do discount rates go up? No, they're going to get the same coupon all the time. Who cares what the capital value is? It's time. Again, there's too much focus on that.

But anyways, let's see what people are saying, "Yeah, the Fed is only ... It's just begun." Yeah, we've only just begun, wasn't that a song?

Kevin Flanagan:

It sounds like something the Carpenters would've sang.

Jeremy Siegel:

Wasn't that the Carpenters? Yeah.

Kevin Flanagan:

Right, back in the '70s.

Jeremy Siegel:

We've only just begun. Well, I think Powell said we've only just begun. Today marks 75 basis points. As of yesterday, we were ... Can you believe it? We've had inflation over a year, and just today moved from 25 to 75 basis points, and we've only just begun. You could say better late than never. I'm faulting the Fed, though. They really misread the economy last year.

One of the reporters, I don't remember who it was, did ask, "Do you have a credibility problem?" Powell said, "No, look at when ..." He answered a different question. He said, "No, look at when we said in November and December we were going to tighten, the market's tightened. So we don't have that." But that's credibility about when they finally said they're going to lose rates. What about the credibility of not acting for a whole year against the explosion of stimulus and the beginning of inflation and monetary excess and quantitative easing when no one needed that when the markets had already well recovered?

Why are we still buying mortgage-backed securities when the housing market is in the greatest boom in its history? Why were they still doing that? I'm sorry, the Fed did fail in 2021. They're getting their act together now. Better late than ever, but you can't wipe away the failure of the last 12, 18 months on the Fed.

Jeremy Schwartz:

One of the questions talked about the equity premium, which is now you could say just a little bit over 2%, when you use your P/E ratio analysis on the S&P [500]. One of the ideas-

Jeremy Siegel:

No Jeremy, we should compare with TIPS. So really, if we want to renew the equity premium, we have a 5% ... and if we have an 18 P/E rate, so it's five and a half percent real, we should compare it with the TIPS, which is zero. So it's actually a five and a half percent equity premium. I don't compare it to the 10 year with three, because you're comparing a nominal with a real.

Jeremy Schwartz:

I should have let that get by. I should have ...

Jeremy Siegel:

Yeah. We're five. So we're five and a half. We got to be careful here. The P/E ratio or it's inverse, which is the earnings yield, is a real forward, real yield forward. The real yield then compares to the TIPS. So basically TIPS are zero, real yield is ... well, it's five and a half percent. With today's reality, it's probably 5.2% or whatever. Let's even say it's 5%. So you've got a 5% equity premium. That's healthy, because the long run, 200 year difference between real returns on bonds and real returns on stocks is three to three and a half percent. So it's historically not the biggest by any means, but it's in the 75, 80th percentile on gains of stocks over bonds looking forward.

Kevin Flanagan:

I wanted to give you guys a plug. Next Wednesday, 2:00. Jer, professor and CEO, Jonathan Steinberg.  You guys are going to be doing a ETF Trends Webinar on the original idea, #OriginalIdea. So Jer, want to give the audience just a little quick sound bite as to what you guys are going to be talking about next week?

Jeremy Schwartz:

Yeah. Well, a lot of these dynamics of the inflation causing the rotation from growth to value from the high multiple stocks to the lower multiple stocks. When we launched, I'd now been with WisdomTree 17 years, with the professor for 21 years. We've talked a lot about dividend weighting portfolios back in 2006. We launched 20 dividend weighted ETFs June of '06.

DLN [WisdomTree U.S. Large Cap Dividend Fund] is the largest of these today. Large cap dividends over a $3 billion ETF. It's got a strong value tilt that's below 15 P/E. So when we think about the markets having ... you can question how elevated the multiples are, but DLN is below the long term average on the S&P [500] with this dividend weighted approach. We're going to talk a lot about the case for dividend weighting, these macro pressures, why dividends and a little bit more on that original idea.

Jeremy Siegel:

Yeah. This is going to be exciting. As many of you know, I've been asked by many firms to join them and WisdomTree was the only one that I have joined. It's been a great relationships. The concept of fundamentally weighted indexes just was so attractive to me in terms of my conception of how markets work and how you can easily at low cost automatically tilt in such a way that can give you a premium.

Yes, it's been challenged. We know over the last 10 years because of the unprecedented growth of the FANG and growth stocks, some of which of course have fallen from favor most recently. But nonetheless, my feeling is going forward, I see all the ingredients very much like 20, 25 years ago for a reassertion of their supremacy over the next year and the next 5 to 10 years also.

Kevin Flanagan:

So one final question for me to throw in here from the audience. Looks like they were referencing at one of the conferences you were speaking at last year, you were talking about inflation at 5% for the next five years. Are you still there?

Jeremy Siegel:

Well, I said I thought we'd need 20. I didn't know if we ... Yeah, I sometimes said 5, 5, 5, 5. But now we're eight and a half. I said we would have a cumulative inflation of 20 and we've had a cumulative inflation maybe so far of ... well, we're eight and a half, but I think we're going to have a lot of inflation. Again, let's look at the money supply. That was when there was no slow down, we've had two months of slow down. It gives me a little bit more encouragement. But yes, I still think we're going to have 5, 6% inflation recorded.

I think again, because of lags. The 20% increase in housing prices and the 15% increase or 20% increase in rentals is going to filter through, but it's already happened. The rise in commodity prices it's going to filter through in some costs that'll be later on, but it has happened in the markets. So the markets are much closer to the end than the official inflation statistics.

Kevin Flanagan:

As Greenspan said, like looking in the rear-view mirror to some extent, right?

Jeremy Siegel:

Yeah, yeah. Absolutely. Really, the CPI is our measure, but the truth of the matter is, it is not the most timely measure. If we really measured how much housing costs went up last ... we would be at 10% right now year over year, not eight and a half.

Kevin Flanagan:

So Jer, any last thoughts? It looks like we did a pretty good job of going through a lot of these questions as part of the discussion. Any last thoughts on your end down there in Philadelphia?

Jeremy Schwartz:

No, I appreciate everybody, and professor always coming on after these Fed days with your inflation calls and the rotation towards dividends, I'm looking forward to, again, the webinar next week and the model portfolios for people who haven't explored on your various platforms, look for the Siegel Model Portfolios. Whether it's the all equity, the global longevity. We've got a number income oriented models on various platforms that I know a lot of advisors on this call look forward to talking you about those more. And Kevin, always thanks for your hosting here.

Jeremy Siegel:

Yeah. Thank you all.

Kevin Flanagan:

Thanks everybody.