Irene:

Hi everyone. Thank you for joining today's Timely Office Hours title Powell's Five Card Draw: I'll Raise You Another 50, where you'll hear from Professor Jeremy Siegel, WisdomTree Senior Investment Strategy Advisor and Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania. Kevin Flanagan, WisdomTree's Head of Fixed Income Strategy. And Jeff Weniger, WisdomTree's Head of Equity Strategy.

So with that, I'll turn it over to Kevin for some opening remarks.

Kevin Flanagan:

Thanks Irene. Thanks for coming on, Professor, Jeff, great to see you guys. Obviously, the title, I'll See Your 50, I'll Raise You 75, that should be the new title for those of you Fed poker players out there for what we got today. Professor, I thought it was going to be an easy summer, hanging out on the beach in Jersey or Cape Cod, 50 June, 50 in July. I'll see you after Labor Day, but I think Powell and company had something a little bit more different in store for us.

Jeremy Siegel:

Yeah. Doesn't that mean that Powell has a better hand when he wants to raise 75 rather than 50.

Kevin Flanagan:

Yeah.

Jeremy Siegel:

Well, the market reaction was actually pretty good. This is one of the few times when I've seen such a rapid shift from, basically, a 50 to a 75. And really, that's, I think, the CPI last Friday. It's interesting, because sometimes you hear the Fed really downplay CPI. "Oh, we watched the PCE core. Blah, blah, blah." But you cannot ignore the CPI. And you cannot ignore the political implications of the CPI. The Fed is certainly a creature of Congress and has to pay attention to that. So the CPI was important. Also, he mentioned inflationary expectation. Now, he also predecesses, that preceded that, that's the word I need, with saying some measures.

The interesting measure that the Fed loves the most, is the difference between the TIPS Bonds and the standard nominal. And that has not shown a deterioration. It's actually the survey data that has shown the acceleration. And they use the TIPS data, that has really not shown an acceleration in that inflationary a difference between those two rates. So I think that's, if you want to know why the word, he said some, rather than all. Their favorite has always been the difference between the TIPS yield and the nominal.

All right. With all that, let's talk about a number of things that's important. Want to know what I think was the most important thing today? Not the Fed, the retail sales data, which were terrible.

Jeff Weniger:

I'll see if I can put retail sales while you're talking. Go ahead.

Jeremy Siegel:

Yeah. Way below expectations. Plus, revisions of previous months downward. Now, by the way, all the people I follow that do GDP have now, not only lowered their projection for the first quarter, which is way past, but the second quarter, which was looking to sum a month-and-a-half ago with being at three to three-and-a-half, we only got what, 15 more days in it. It is now looking at sub below two.

Let me tell you an interesting little statistics that went through my mind. We don't define, what I call a rule of sum of recession. As you know, it's two consecutive negative quarters of GDP growth. I say rule of thumb, because it's not the formal definition, which there is no real formal, it's a judgment of the dating cycle committee of the National Bureau. But nonetheless, we are going to have, I think, positive GDP growth the second quarter. So we won't fall into that. But the average of the first and second quarter is going to be negative.

Think about that. First half of this year, it looks like, now, again we still got time and data, but it looks like negative. So the first part of it was a little less negative, but no, it borrowed a little in the second quarter, we'd have two negative ones where we are in a recession right now.

Another thing that's a little bit worrisome is one forecaster that gets into the nitty gritty said that, the only reason we're having a positive one GDP for this quarter is the early part of the quarter, where things have really fallen off toward the end of the quarter.

Jeff Weniger:

That might be a good point to have one of those polling questions, Kevin, which was asking about this session and hear from one of the questions.

Jeremy Siegel:

Yeah. Let's take a look at what this all means for where the Fed is going to be, and then I'll a little bit about what we're going to mean. Yeah.

So where do you think the Fed is going to end up at the end of this year? Two-seventy-five to three-and-a-quarter? Three-and-a-quarter to three-and-three quarters? Or do you think they're going to have to go higher?

Kevin Flanagan:

Well, we know what the dot plot told us, right, Professor, and where Fed Fund's futures are saying.

Jeremy Siegel:

Yeah. Well, we'll talk about that. I got the Fed Fund Futures in front of me. Okay. Most people, 57% are in the middle here and about an equally weighted are a little bit below. Well, the middle is going to have it

The median on the dot plot is 340. And what's interesting is, that's exactly, to the basis point, what the Fed Funds Future, December 22, I'm looking at my screen, Fed Funds Future as at 340. So it looks like all expectations, the market, you guys, and the Fed, are in sync.

Kevin Flanagan:

So Professor, continue what you were talking about there, projections. Now, I'm looking at a Bloomberg screen where I see are old pal Bill Dudley saying that the Feds' projections, there they are, are too optimistic still.

Jeremy Siegel:

Yes.

Kevin Flanagan:

Can you comment on what the Fed is telling us now in their new outlook?

Jeremy Siegel:

Okay.

The people who say too optimistic think that inflation's going to be much more intractable than now it appears. And that the Fed is going to have to go higher than what it is. And how high do they have to go? Let's talk about that.

By the way, let me just mention, for the end of 2023, now that we've got that there, that would be the Fed Funds target at 3.8. Fed Funds Futures for December 23 is 3.5. They're actually higher than Fed Funds Futures. Now, as I pointed out for those people who are the quants out there, the future is not an unbiased estimate, it's a slightly underestimate because if real bad things happen, it's a hedge asset. So with a negative beta. So there's a little bit of an understatement there. But it's interesting that the December 23 set Funds Futures at 3.485 is below now what the estimate is at 3.8.

By the way, take a look at the difference between March and June there at the bottom. For the end of this year, from 1.9 to 3.4, one-and-a-half percentage points in three months. Now, it should have been a 3.4 three months ago now.

All right. Let me continue on what I'm saying. I think we're seeing a slow down. I think we're going to be seeing it in the data in the next couple months. And now, I would like to see it in commodity prices. We saw oil drop 2.7% WTI, but it bounces around, to say the least. We would like to see the commodity prices because sensitive early indicator. But of course, oil is always a big portion of those indicators. But I see a slowdown. I see a slowdown now. I didn't think I would.

If the Fed is confronted with a slowdown, and therefore less pressure, because oil will be subject to a slowdown. Oil is a positive beta asset to economic activity. So if there's slow down, that will put pressure off of oil, no matter what happens in Russia, and in all the other energy complexes.

The Fed could afford to go a bit slower. Now, again, there's a trade off here. Yeah, you want the the Fed to go a little bit slower, but you don't want a recession, but there's another interesting factor about all this. Think about what I said, first half of this year, very well might show negative GDP growth. How have your earnings done? Pretty good.

Now, I want you to think about that for a moment. For all those who fear so much a recession. That, "Oh my God, I got to sell, if a fit is going to topple us over into a recession." We might be in a kind of a technical recession the first half of this year. And earnings, we're not bad. Now, it is true that in an actual recession, we do get a drop in earnings. But it's not the beginning of the end. And a drop of even 20% of earnings for a year, which then leads to a big recovery afterwards, does not spell the doom for stock prices on any present value basis.

Let me mention something else. Two things I want to bring up about rates. It is one of the most dramatic rises in TIPS yields that I've ever seen. The 10-year TIPS, which today settled at 61, I think yesterday was in the 70s, maybe near 80, was less than minus 1% at the beginning of the year. We've had almost 175 to 200 basis point increase in the real rate of interest. Now, it is the real rate of interest that discounts real assets such as stocks.

Let's just take an equity premium of 5%. So what are stocks discounted at? The TIPS plus the equity premium. You see the equity premium go from minus 1.1, minus 1.2, to plus 0.7, with the same equity risk premium. Do the math. How much does that depress prices by everything we've had? So we have a 20% Bear Market on the S&P. That can be twin completely by the rise in the discount rate. Now, there's a tiny sliver of maybe softening of earnings in 2023.

Now let me mention something else. Let's take a look at the chart that you got here. The Fed Funds Rate. They say the long run Fed Funds Rate, now, notice they tick it up from 2.4 in March to 2.5. I disagree with that completely. You know what the neutral Fed Funds Rate is in my opinion? Between one-and-a-half and two. And by the way, a lot of commentators on CNBC and everywhere are totally confused about neutral rates. They say, "Oh, I think the neutral rate has to go to four or five." That's not the neutral rate. The neutral rate is when you get to 2% inflation. Yes, we have to go above the neutral rate now. So there's been a little bit of a confusion there. I think neutral rates are much lower than other. In fact, if you take a look at the last 20 years, 20 years ago, they had four-and-a-half percent and they kept on going down.

I've said that, way too high on the neutral rate, they keep on going... I now see that they ticked it up 10 basis points. Who knows? Because they know they have to raise this rate. I don't know. I actually think it's one-and-a-half to two. We're there now. Of course we have to get above the new troll to actually have contractionary effects. Although the market in anticipation of the contraction of the Fed is already slowing this economy.

Now that said, we've talked about this extensively, the official CPI lags greatly the actual CPI. I think we have had over 10% year over year inflation, but because housing prices are not fully factored in, it's showing the eight, 8.5% year over year. I think we're well over 10, I think we're probably at 11. We've had more inflation than what we actually has recorded. What does that mean? We don't want the Fed to panic, so, "Oh my God, we're seeing inflation in all these coming months. What is it?" All it is, is lagged statistical collection by the Bureau of Labor Statistics.

The housing market is definitely cool. I'm not predicting a collapse and I actually think it could still creep forward, but the double digit 20% type increases, which has really been what the year over year rate has been, I think that's over.

Jeff Weniger:

Professor Siegel, when we called this meeting, it was 50 bps and we ended up getting the 75, we're making the references to the poker game, and we also, surprise, had an ECB meeting as well. And there seems to be almost a different posture there. Can you summarize what you took from that? That was, what, six hours ago or so? And that was kind of like…

Jeremy Siegel:

No, I think that they're way behind the curve. I mean, first of all, there's a number of things to say about Europe. First of all, they didn't supply as much stimulus as we did. They didn't have as big a bump of the money supply. And as a result, I don't think I'm ultimately going to have much more inflation; but on the other hand, they are much more subject to what's going on in Russia than we are. They're not energy independent. So even though they didn't supply enough stimulus, that's the positive of their inflation, positive in terms of higher inflation was that they are really subject to the energy cost situation much more. And we know natural gas, which although has risen a lot in the United States is three to four times higher in Europe. That'll increase electricity, et cetera.

So now why are they so cautious? They are so cautious mainly because of that. I mean, this is a supply side issue. It's much more supply side for Europe than it is the United States. There is a demand issue here, but it's much more supply side. We're energy independent, actually, overall. We have to import some of the refined oil, we export the natural gas. And so it's a very different situation. So yeah, they're going to have to start any ways to increase it, but they're in a much more supply side situation. They did not have as much stimulus. So I think they are facing somewhat of a different set of problems they have, but they also, by the way, with the strong dollar with the US raising real rates so much, and the dollar at such a high, they've got imported inflation. Don't forget inflation. Energy in euros has gone up a lot more than energy in dollars, and we all know how much energy in dollars has gone up.

Jeff Weniger:

So many questions are pouring in here. I'm going to read one. Maybe, Kevin, you would handle this one. Person says, "Okay, what happens to the 10-year?" This is the biggest question that's come across so far in my mind, "What happens the 10-year if the Feds-" What's that?

Kevin Flanagan:

I was going to say, I think the professor was going down that avenue, I'll defer to you, Dr. Siegel.

Jeff Weniger:

Okay, go ahead, Doctor.

Kevin Flanagan:

Now, talking about what was going on in real yields, I mean, I think you can make the argument, what we've seen in real yields has been driving what we're seeing in the nominal 10-year.

Jeremy Siegel:

Well, actually, not because, I say the difference, and that's what's driven up the nominal. We haven't seen that much of an increase of the difference, which is the Fed's favorite measure of inflationary expectation and the reason why Powell kept on prefacing it by some measures, because I'm sure there were a couple of people there, maybe Esther George, who dissented. Yeah, that was a big shock. She dissented on the hawkish side back pre-pandemic a number of times. She was considered a hawk. Maybe she said, "Listen, I look at the five-year, five-year, the forward rates on tips and nominal bonds, and I don't see it. I don't see an increased inflation expectation." She may have also said, "I see a big slowing in my economy, and I think we could overdo it." I'm just trying... I don't know her. I don't know her, I'm trying to get into her head, but it's not a totally crazy idea.

I think the Fed do the right things, though, to get control of the narrative, but there is a slowing. Now, I have said that I... What's the 10-year right now? It's ended as 329, it's sinking actually. It was at almost 350, it's 329 now. I don't think it's going much above 350.

Jeff Weniger:

Okay, I think that answered the question the person was asking about.

Jeremy Siegel:

Now, honestly, does this mean an inversion? Yep, there may be a small inversion. And I've talked about that before, it's nothing to panic about. As I said, in the future, because of the structure of the bond market and everything else, we're going to have a much flatter type of term structure for much of the future, and inversions, particularly mild inversions, are going to happen more often. Don't necessarily mean that we're going to have a recession the way it was a far more reliable indicator in most of the post-war period.

Kevin Flanagan:

Irene, let's go to that polling question number two, and then we'll get into the meat. Professor, you have a lot of questions you're going to need to answer in the next 20, 25 minutes.

Jeremy Siegel:

Okay. Well, I've given my opinion, let's see what other people think. Where do you think the 10-year is going to be on December 31st? That's almost exactly six months from now.

Jeff Weniger:

And it's at what right now, what is the quote on it?

Jeremy Siegel:

Oh right now, right at this second, it's 329.53, to give you an exact quote on.

Jeff Weniger:

Twenty-nine, got it.

Jeremy Siegel:

And it's gone down a good 10 to 15 basis points since 2:00.

Jeff Weniger:

These choices are really narrow between A, B, and C. We didn't really make a big bell curve on this thing.

Jeremy Siegel:

No, no, we didn't. No, we didn't. Well, I think most people here are actually 52, and then the next one is the banal. Under three would be a recession starts early, I would say. We were really slowing, it's not a crazy prediction. We've got 10% of you there over 50, the Fed is... That's also not there, I mean, I'd say it probably won't go much above 350. I would say you guys are right in line pretty much with the projection over here.

You got to remember that the 10-year is the 10-year on... And I know that the bond market's falling apart with the stock market here, but on a day to day basis and over the last 20 years, it's been a pretty reliable negative. Except in this tightness, real tightening period where the inflation has gone up, it's been a negative beta asset, and so people will hang on it even while the real yields will actually be low coming up. All right, why don't we shoot on questions.

Jeff Weniger:

Sure, I'm going to tie questions together.

This person is asking about Atlanta Fed GDP now, which just recently was a zero. A zero on Atlanta Fed GDP now, are there holes to poke in that metric, if you have opinions on that? And tied in, I think, with a very important question asked here by Julie, what about this next meeting, is 75, is that now... What's the base case in your mind?

Jeremy Siegel:

You can say, yeah. He said, "I don't know if it's 50 or 75." I mean, Powell was very explicit. And by the way, I like the fact, I think the market liked the fact, you're not absolutely tied to everything you say. And talking about things change quickly, and he did use the term "move forward", as far as I'm concerned. What was your first question, Jeff?

Jeff Weniger:

Atlanta Fed GDP now, there was a few people asking that.

Jeremy Siegel:

Oh, okay. Now, on that, let me say, the Atlanta GDP now, I find it's not as accurate as some of the professionals that I follow. You're talking about the second quarter GDP, I don't think it's going to be zero.

I saw a big decline of six, seven tenths of a percent today by the professional forecasters down to about one, which again, when averaged with the now almost minus two of the first quarter, which is being nudged downward, is we'll give you a negative GDP for the first half of this year. So even if it's not zero, but, yes, we are in a slowing mode. I really think we are slowing mode.

Let me mention, we economists don't like to use anecdotal data because it's one person, but my son is in the ticket reselling business. So he buys concert ticket, sports tickets, and all sorts of venues. He said June is the worst month he's ever had since the reopening after the pandemic. He said, "I've just seen demand totally fall off," and it's happened really quickly, which is, people are not buying. Is it the gasoline? Is it their stock account? Is it their Bitcoin account? I don't know. I mean, or all three, or whatever. But he told me, "I have not seen something like that."

Again, that's one data point, I just want to mention to you, we're seeing signs that the expectation of the tightening has already begun to work. I think we're above neutral. I don't think, like we have one point... And again, what did I say? 10-year tips one six. I don't think that's the equilibrium. I think that's above equilibrium. I think actually I would say, my feeling is probably the long term tips is closer to zero. We were at minus 1% for several years.

The new chapter in my sixth edition Stocks for the Long Run could come out, by the way, in September, October. I have a whole chapter on what's going on with real interest rates and the discounting mechanism and the long slide from 2000 till today and what's causing it, it has to do with a lot of factors. And around the world, tips have gone steadily downward.

But this is a sharp interruption because of expectations of tightening by the Fed, and I think it's having its effect right now. So we'll see how much of a slowdown we have. Now, let me also mention to you people, those of you who followed me on other calls or CNBC, I follow the money supply. The money supply comes out on the fourth Tuesday of every month, so it's quite lagged, and so we have a...

Jeff Weniger:

And I have an M2 chart in here somewhere. Yes, here it is. Here's the M2 chart, continue.

Jeremy Siegel:

Yeah, do you see the decline at the last month? That is the second largest percentage decline in the money supply in more than 60 years.

Jeff Weniger:

That little, tiny, little blip?

Jeremy Siegel:

That little, though, but that's a second life. It almost never declines, almost never do you have a decline in money, especially in an inflationary situation when people need more money to transact goods. I got scared when I first saw that. I want to see what comes out in a couple weeks. I guess it's a week from Tuesday.

Yeah, whether that continues, which would be, again, something that would be unprecedented. Now, we're still, as you can see, way above trend, and I don't want... Listen, if you bring the money supply back to trend, the only way you could do that is slam on the brakes on the economy so much that you send everyone through the windshield. You don't want that. You want to get it back to the 5% growth rate, that you see that smooth growth rate that existed before March of 2020, where you see that big rise in the pandemic.

Jeff Weniger:

Yes, that blip is a -1.69% change over four weeks. It's by orders of magnitude, very, very large on a 40 or 50 year chart. Professor, continue.

Jeremy Siegel:

Yeah. I'm showing here, and I actually just prepared this chart this morning. The M2 over the last 17 years, and the CPI, the M2 is 24% above trend.

Kevin Flanagan:

Wow.

Jeremy Siegel:

The CPI officially is 9% above trend. You see it went down. Can you see my pointer here? I don't know if that comes out.

Jeff Weniger:

Yes, we can.

Jeremy Siegel:

You see that actually we had a decline in the CPI, as we did during the financial crisis. You actually do, you have a short term decline. We had a decline during even the recession and the pandemic and then came back up. So the cumulative is great.

But from this point to this point, we are officially up nine. Now my feeling is, we're officially up about 12. If we had an actual current projection on what real inflation is, 12, maybe 13. So we've worked half of our way through this increase in the money supply. Now if they stabilize the money supply, if you get that to trend, well that would mean actually reversing. All the CPI would then go down and then back to trend.

If we start here and now go at 5%, from this point on, then what we will do is that we will have another accumulative, maybe five to 10% inflation, and then we will come up about 20% or so, and then go to five.

I'm just trying to give you a big macro picture here about where we are relative to the long run. But again, we don't want to slam on the brakes to too high. I'm worried I'm going to see another decline in the money supply on this next quarter. And if I do, that means loans are being repaid, people are not taking out installment credit. They're paying back. As I say, how unprecedented declines in the money supply are, if you go back in the data. That's slamming on brakes too much. And you're going to see it in the real economy. And maybe in the July meeting, it comes at the very end of July, so there's going to be actually two more money supplies that they're going to see. And one more price level. They'll see the July, but then it'll be at the very end of July. But they'll see a lot of the indicators to see what is actually going on. They'll see if there's a real softening.

We may find, if we get a lot of soft data, not much more is necessary. As I said, if the true neutral rate is one and a half to two, that's nominal, that's minus one half to zero real. We're there and want to go above it and we don't want to go too much above it. There's two things, slam on the brakes hard enough to get inflation all the way back or accept some inflation in the pipeline to keep the economy going strong.

We don't want the Fed to overreact. I hope they are aware of all these factors. I would've said of course they are, but given how much they've missed this whole thing, you begin to wonder, do they get everything that's actually going on or not in the economy?

Kevin Flanagan:

So just to shift gears for a second, Professor, looking at things through the equity lens, couple of questions here. One of them mentions that you've talked before about seeing a VIX spike to 40 or 50 before the bottom of a bear market. And just, why do you think that's important?

Jeremy Siegel:

Well I've often said it doesn't happen every time. That's the wash up. And in fact, VIX is now down 10% today, down below 30, 29.62. It doesn't always happen. I think we're near the bottom. The valuations guys, we know that. So right now, on the basis of this year's earnings, S&P at 16.5, that was 16. NASDAQ is 23 times this year's earnings. Toronto stock exchange is 12. Mexico was 12. Brazil is six. Europe, the Europe stocks, 50, 11.2 times earnings.

The NIKKEI is 14. That's a little higher than the TOPIX, I think which maybe a 13. Hang Seng is 11. Shanghai Composite is 13, and the Australian index is 13. Wow, don't forget, one has to remember that even with the Fed hiking, this is a still low interest rate world, especially in an inflationary environment, a very low interest rate world.

And even if the TIPS, which has been brought up to 70 basis points, okay, that's your challenge. That's your inflation protected challenge. When you have PEs of 11, that's a 9% real. When you have PEs of 16, that's a 6% real.

The advantage of stocks over bonds is still huge. And I think really, I really think the equilibrium tips is now above it, what it needs to be, because of the tightening mode. And we may see that go back down to negative, if we see a real softening of the economy. It may be happening a lot sooner than what we think. Again, there is still inflation in the pipeline, and I'll tell you where the inflation's coming from.

Not only because of the lag in the computation of the housing costs, but also, it's also coming from the fact that a lot of wage earners and salary men and women have just not gotten the increases that they're going to get. History, long term history is that wages grow 2%, 1.5-2% above inflation. Well, they've fallen behind 1.5-2%. So there is catch up, and that's going to continue to press costs by firms.

Now people say, "Doesn't that mean less margins?" Not if you can pass it along. And we are seeing a lot of pass along. Don't forget, where the wages have gone up more than inflation is at the lower end of the wage scale. The people that work for McDonald's, the minimum wage people, the people that turn around, we all know they've actually are one of the only few groups that have kept head of inflation on the wage front, lower end.

Jeff Weniger:

Dr. Siegel, on inflation, several matters not addressed. We're at 40 minutes past the hour. Russia, Ukraine, China, COVID zero turning into a supply chain amelioration, can you address some of these matters?

Jeremy Siegel:

Russia, Ukraine, I think that's going to be a long term guerilla war and a standoff for a long time.

Jeff Weniger:

Okay.

Jeremy Siegel:

I don't see a resolution. I hope for resolution. I'm certainly not a political expert, or have any really insight. I don't know who has the insights into the mind of Vladimir Putin.

Jeff Weniger:

Right.

Jeremy Siegel:

And then I'm going to say the following, who has insights completely into the mind of Xi Jinping? That's a worry for me, because I don't know whether these COVID variants can ever be contained. And if he's going to totally closed down the economy every time a number of these cases come up, I don't see how the economy can really operate at anything like normal speed.

I don't know what the outcome. There's a lot of descent now in China. He controls the communist party. Everyone got their jobs because of him. And so he's probably got that other term. But there's a lot of dissent. They're losing people. This is a big negative for China. We need a new leader in China and we need a new leader, certainly in Russia. Wow, those would be two big positives for the world. Let me tell you.

Of course, some people say there are worse leaders than them that could be in the wings. And I guess there could be. But those are... We're suffering from... Listen, oil was headed over a hundred, even before Putin invaded Ukraine. I often like to take a look at, and you can look at, you can put up if you want, the graph of WTI crew over the last two or three years.

What you see is a big spike when they invade, and then back down to the trend line, and it's just going off the trend line. No, if you woke up today and just extended the trend line before, you would say, "What? No, nothing happened. We're not above trend line. We're at where the trend line was." Food was going up anyways. Everything was going up because of all the liquidity that was pushed in the system.

And of course, listen, and of course, we have oil there.

Jeff Weniger:

Yeah, this West Texas Intermediate, which is within a few points of Brent.

Jeremy Siegel:

Yeah, I know that. Is that one year or is it...

Jeff Weniger:

This is front months. This is front months. And it looks like the quote here was 116.

Jeremy Siegel:

Yeah. But I'm not-

Jeff Weniger:

Not over here would be a six month chart. I can-

Jeremy Siegel:

Yeah, hit a...

Jeff Weniger:

Two years?

Jeremy Siegel:

Yeah, hit a... Again, you see the spike that came way before the Russian invasion. And then you draw a trend line. Yeah, draw that trend line up there. You see the spike at the invasion and then back down. And now it's just continuing. Now rolling over a tiny bit, maybe because of softness. But if you cut that out, it was already going up.

It's because of years that we didn't have... Well, it's not. All right, it's not just a Biden anti fossil fuel policy, although that certainly does not help. However, it is the fact that basically when oil collapsed, all capital left there. And all the rigs were closed and capped. Now they're getting redone and everything. But no one wanted to put money there, no one. And a lot of people lost a lot of money there.

That is a major reason why there wasn't more investment in supply there. Of course, the negative tone of the administration, everything else, certainly does not help. But there were a lot of other dynamics. Talk to people that are real closely... Well, I have a few friends that are really close to all industry, telling me about what is going on there. And that's the story they tell.

Kevin Flanagan:

We've gotten a lot of discussion around recession, tons of questions. So Irene, I think this would be a good time to throw up the last polling question to get some thoughts, not just from you, Professor, but also just the audience.

The bottom line, right, if you go back just a couple of weeks ago, that was all the rage. People were saying, "Oh, the Fed's going to have to take a pause. They're going to push the economy in a recession." Now we're talking about 3.5% on the Fed funds rate. Amazing how things have changed. So here's the question, a simple yes or no, do you think the Fed will push the economy into a recession?

And Professor, I know what we were hearing, what you were talking about, where we are here in the first half of the year. Do you think ultimately, if you saw 3.8%, let's say that's the terminal rate using their median projection today on the dot plot for next year, does that take us too far? Does that tip to scale? Or do we even go into a recession before then?

Jeremy Siegel:

If we are going to go into it, I think we'll go in before that. And then we'll never get there. Actually, I think that, again, I think that if we can keep that money supply under control, then we won't have to go that much higher. You got to keep your eyes not only on the rates, the real economy and the money supply. Except the inflation that's in the money supply. Accept the inflation that's in the pipeline. Don't slam on the brakes too much. There's going to be a big wage catch up. There's a statistical catch up. And that's your best chance for a smooth landing, which is still not impossible. And of course, we do have two thirds to one third. I would say that's not a bad choice. Of course, let's face it, no one asks a severe recession or not, either mild recessions and there's severe recessions and it's a big difference in terms of what could happen to earnings. But some sort of slow down at the end of this, whether it's technically a recession or not, and technically causes our earnings to go down or not is certainly most likely in the cards.

Jeff Weniger:

Before we... Well, Kevin, I was going to say just before we go into some of the final concluding comments, as you can see the S&P here at 3789 with the close of the session. And Dr. Siegel, several people asking if you had some targets, we can maybe let you marinate on that for a second here. You can find Dr. Siegel's stuff on the website. You come over here to strategies on the markets, and then it's over here on the right hand side. It's a weekly commentary. It's quick, it's in your face. Come and catch that. If you're a big Siegel fan, you can get this with frequency.

Kevin and I write this one over here, Minds on the Markets as well. We wrote one earlier about the yen. Didn't get too much time to get into Japan and what's happening with the yen, but there plenty of WisdomTree material on that. So Dr. Siegel, did you want to make comments specifically about the S&P, where we're standing here, an outlook for this year or thereafter?

Jeremy Siegel:

Yeah, it's always hard and by the end of the year, the next six months. We know the standard deviation of stock market returns is 20%. So that's there. I think the second half of the year is going to be much better. I actually think most of the earnings estimates are going to be met, even with this softening. As I said, negative GDP the first half, and most of the expectations have been met. Think about that. I think that's something to chew on a bit.

I think we're going to have a recovery whether we get back to a new hire or not is hard. I think it depends on whether the Fed over does it and says, I mean, if they just look at the official statistics and see that they've got to look at the sensitive commodity prices, oil, we've already seen lumber go way down, aluminum.

There's several things that are really going down now, oil, and see a couple of those other things. The dollar has strengthened a lot. That's another tightening feature. They've raised the real rate. Again, it's not they, it's almost a market's expectation that they have to, and therefore they're falling into it. Raise the real rate by almost 200 basis points. That's a huge increase. And I think above equilibrium at the present time. So if that eases back down to zero or negative and earnings expectations are met, I can easily see a 10 to 15% market return from this point on.

It doesn't get you the all time high. And you all know about short term predictions. People always want them, even though no one can really do them. One person said, "Yeah, you do them Jeremy a little bit better than most." It still doesn't mean... My eye score might be 50% or 40 and someone else's is 25 or 30.

Kevin Flanagan:

We've heard Powell and Brainard, they talk about, you know, and this would be a good way I think because we're getting closer to five o'clock. Watching as well, you hear oftentimes financial conditions. Professor, when you're looking at financial conditions, what is it flashing to you? Is it flashing red? Is it flashing yellow? What color are you seeing right now?

Jeremy Siegel:

Well, first of all, real rates going real up, that's a tightening, The rates are going up. We see spreads widening, not a pan and don't forget, I think the banking system is in great shape. And even during a mild recession, the property collateral and everything like that, we're not having a crash and so many things that are there, wages are there, salaries are there. You will see some widening. You have seen a little widening. You won't see a lot of widening, but certainly for firms now. Funding for firms that are not profitable and don't have good collateral is difficult. Because those other firms that are down 50, 60% in the market, so the rounds of funding are going to get real difficult for those people. For individuals, they got a job and the job situation still very good, it's still going to be there.

Yeah, there's been a lot of and the strong dollar, listen, let's not forget that. The dollar's been because of the real rates, the rise in real rates, hot money moves where the real rates are. The highest real rates in the world right now in developed countries is United States and that's where the money moved. And that's definitely a tightening credit situation.

So we see it. The yield spreads are just moderately higher, nothing blowout, nothing like the financial crisis. We don't have to see that. I don't want to see that. I think there's enough tightening in the rates and if the money supply stays level or moderate growth, actually I would prefer a little moderate growth rather than slamming on the brakes, certainly don't want to reduce that money supply to force the price level back down, which you could if you raise rates way too much, because people will just will not take out any loans and that could happen. But I don't think it will. I think the Fed will be attuned to the fact that the slow down looks like it might be here. If they see the softening of the commodities, we're getting to where we need to be.

Jeff Weniger:

We had a couple cool ones pop in here. This fellow here says, would you be interested in going on a stage with Jeremy Grantham? Like a little fun Jeremy versus... Would you do that if we set that up? This guy says Vegas.

Jeremy Siegel:

Well, Jeremy is my namesake. We have debated on a number of stages before.

Jeff Weniger:

Oh, I didn't... Okay.

Jeremy Siegel:

I would, oh, I would welcome another session with Jeremy.

Jeff Weniger:

That'd be kind of cool.

Jeremy Siegel:

I think he is completely wrong. Those people follow him know that he's been a doom and bloomer for years. In fact, if you go back to eight or nine years, he was doom and gloom in one of the greatest bull markets in history. I think he's chronically too bearish here. We could go into all the reasons one way or the other. I'm happy to debate anybody.

Jeff Weniger:

Right, right. I think he would do it. Yeah, he would be civil about it. Then somebody else did a thought experiment here. What if it was Paul Volcker right now? Not J. Powell, Paul Volcker, who the viewer knows was the central banker here that ratcheted up rates aggressively into the 1980 to 1982 double dip recession to crush the 1970s inflation. What if it was Paul Volcker right now, not J. Powell?

Jeremy Siegel:

Okay. Well. We got to realize the situation was so much worse and so much different. We had inflation for 10 to 15 years actually that kept on building. We had inflationary expectations that are way above the levels that we had today. We had of course interest rates that were, we all know that the 10 year bond when it hit 16%. He had to crush inflationary expectations that were orders of magnitude higher than what we have today.

Yes, we've had a tick up and we certainly had Powell mention that, but it is nowhere near. So we don't have to crush this economy. You see the slowing and we see the slowing commodity prices, and oil, I don't think it's going to go down much, but at least stay in the 5 to 510 area for a while, which is possible. Again, with a slow down, you could really see that. People will begin to see the moderation and we will not have to undergo the crazy tightening that Paul Volcker had the guts to do. Wasn't crazy. At that time it was needed.

Kevin Flanagan:

We got about five minutes left and it's nice I think to put a bow on it, to sort of tie things together looking at solutions. We've talked before about our treasury floating rate note USFR. Jeff, I know you've talked about hashtag Original Idea as well on the equity side. And from a broader perspective, since we have the professor on here and I believe you had it up quickly a little while ago, our Siegel model portfolios as well. So Jeff, if you wanted to just kind of, as I said, put a bow on it looking at the model adoption center that we have on our website, looking at the professor, our collaboration with the professor and the models on that. And where can our viewers find that information?

Jeff Weniger:

Absolutely. And the easiest way, because you're not living on our website is just coming in here in the search functions and look for these. There's this long collaboration with Dr. Siegel for so many years. And this has been one of our big, big successes of recent years is getting inputs of Siegel into the model portfolios. And of course, as you can see across the page here, you got a little bit of something for everybody because we know people have different ways of constructing mandates. Now, critically, USFR, which is what you pointed out on the fixed income side, I'll just do the speaking here since I'm flowing Kevin and we're running on time, USFR has been like WisdomTree fixed income in 2022, boom, USFR. It is floating. People don't even know that there are floating rate treasuries; if you're afraid of the long end of the yield curve, which was several of the questions Dr. Siegel didn't really get to get to some specific targets on, for example, the long bond. We'll do that next time. USFR has been our claim to fame on the fixed income side this year. Of course, with this massive pivot, massive pivot to value, and those of you who are reading our stuff, following us, by the way, follow us on Twitter. Let's see here. Let's get some DLN back up here, some DHS. There was this pivot. We ran growth rolled of devalue from 2007 to 2021. That stopped on if you need a specific date, let's call it November 19th, 2021 when this pivot occurred.

Historically, 1989 to 2000 was growth. 2000 2007 was value. 2007 to 2021 was growth. And who knows, maybe we're eight months into this, we're calling this the big pivot, the big rotation, the big thing, the rationale behind even building this ETF business in the first place in June, 2006 was the Dr. Siegel dividend concepts, 1957 to present, all of that data exists on the website.

We've been so fortunate. We saw Morningstar give us a five star this year here on DLN, which just had, Dr. Siegel, a 16th birthday. That is the major play here in large cap value. There is also this in call it all cap value. Many of you on the phone, DON and DES. Didn't really get into developed and emerging, but rest assured all of the dividend concepts, if you believe that this pivot is for real, that growth is out, that value is in for the 2020s, rest assured just navigate a website. You're all adults. In EAFE land and in EM land, we also have those types of concepts.

Dr. Siegel, you want to give it a final 60 seconds to end this?

Jeremy Siegel:

Let's also not forget earnings, not just dividends. Those two fundamentals, earnings and dividends, the fundamentally weighted indexes, which we at WisdomTree pioneered well, more than a decade ago, I think are the way to navigate the markets in the coming years.

Jeff Weniger:

This one is 15 years old and has charged eight basis points. Well, Kevin, I say it's a wrap. What do you say?

Kevin Flanagan:

It's a wrap. Professor Siegel, always a pleasure. Thanks for coming on.

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