Taylor:

Hi everyone. Thank you for joining WisdomTree Office Hours, Jackson Hole. Did Powell Tip His Hand?, where you'll be hearing from Professor Jeremy Siegel, WisdomTree Senior Economist, Jeremy Schwartz, Global Chief Investment Officer, Kevin Flanagan, Head of Fixed Income Strategy, and Jeff Weniger, Head of Equity Strategy.

Jeremy Schwartz:

Well, professor, always a pleasure to get your thoughts on these big Fed days and certainly the marks were preparing for something a little negative that they're rejoicing what they heard. We'd love to get your updated thoughts on what Powell said, and then we'll get into some of your frameworks on thinking about policy. Great. Have Kevin and Jeff joining us also. We'll be off a little bit after 2:30, but professor turning it over to you for your first reactions.

Jeremy Siegel:

Yeah, I mean with the title, did Powell tip his hand? I think Powell showed full monty here. There was, I mean it was definitely one of the dovish pivots even maybe more than a year ago. Remember when he pivoted and then followed by a 50 basis point. We'll talk about whether that's possible later, but oh, definitely a pivot. I mean, first of all, any of you who've been following, it's exactly what I said. You got to see through the tariffs. He finally said, yeah, the tariffs are one time increase. He never said that in at the end of, on the July 30th fed meeting, he didn't say, we always see through the terror. He said, oh, it's not going to cause inflationary expectations. We see them well anchored. He didn't say that before risk to the downside they're in balance, but a balance that causes you to risk to the downside.

I mean you could go on and on. There was no question that he's in favor of a decline. I mean barring some crisis, we still have four weeks, but that he's in line for a decline in the rates. That's exactly what the market wanted. Now the market, so what was the market poised for you? We got Thursday, we got some strong s and p global manufacturing indexes and service indexes that were surprised on the strong side. We did have a little blip in jobless claims on Thursday, but five of the 10 came from Kentucky, which is very volatile. It isn't really that meaningful. The rest of the data is supporting, there's no falling apart of the economy that we can see. Goldman raised its third quarter estimate of one and a half. Now that's a full point less than what Atlanta Fed thinks about, which is two and a half, so it's between one and a half and two and a half.

That's not great, but nothing seems to be really falling apart. We all know that the impact of tariffs is going to be cumulative. I mean the Goldman Sachs determined that only 21 basis points or so of the full tariff has now reached the consumer and it estimates it's going to go to 80% plus by the end of the year, so that's going to march forward. But basically, I mean what policy seem to say is okay, it's a one time increase and we're going to look through it. Now what does that mean? If you want to know the truth, I don't think the inflation reports are going to be that important anymore. Not if they're due to the tariffs and with the sur down, some people worried about the service sector. We see home prices on the soft side. It's actually of all the services, the softest.

Now we saw the new home sales, the median price for home falling. We've seen the case show indexes for several months going below expectation next week on Tuesday we get another one home prices beginning to decline, rentals beginning to stabilize. I mean that 60 50% of service core, it does take a while to get into those indices, but that pressure is downward, not upward. So if we're going to ignore the core inflation caused by the goods of the tariffs or we're going to try to look through them, I don't see any other force there that says, oh my God, we got to tighten no matter what a data comes. And by the way, the PCE Deflator is not supposed to be at all bad coming up over here for, well, it'll be the month of July, so now we only have the employment report. I mean, I don't know early estimate.

We don't get that for two weeks. Is there 80,070? We'll see a number of players are calling for a negative print potential. Don't forget the Goldman Sachs thinks the underlying increase in payrolls 33,000 a month doesn't take much of a negative demand shock and it's a statistical error to get you to a negative. The psychological impact of A is very strong here. I'm not calling for a recession, but Powell basically said that the risks are to the downside, so I think the employment market is absolutely the one that he's going to look at. I think I don't see any real problem with the inflation market. I think that anything that comes through the tariffs is basically going to be ignored as a one time increase and as a result, I expect, what do I expect? I said I've been saying for six months or longer, fed funds should be a hundred basis points below the 10 year, which is low threes. That's a hundred basis points below where we are right now at four three, I think we're going to get 25, 25, 25 unless the labor market falls apart and next three and then early next year we'll get down to 3%. Now let's talk about the long rate. That's the real interesting one. How much is the long rate going to go down? Some commentary showed that the 30 year, I don't know what the 30 year did now on I don't. Maybe one of you have it.

Yeah, 30 year didn't go down that much. The 10 year did go down about four or five, six basis points. Again, I don't expect no. So 30 year mortgages which have a duration closer to 10 year treasury. Usually the spread between the 30 year mortgage and the 10 year treasury is unusually wide. The reason why it's wide is because of the prepayment option on the mortgage. Because of the volatility of long-term rates, that prepayment option has to be priced in pretty heavily. If people get the idea that maybe this is going to be lower even we could see, we could see 30 year mortgages go down a hundred basis points or 125 or 50, 150 basis points. Even if the tenure only goes down 50 basis points or 40 or even if the tenure doesn't change much at all, we can see the 30 year mortgage go down now. That's why we had such a huge rally in the home builders and don't forget, anyone wants to get his adjustable mortgage. We'll get the benefit of the Fed cutting rates over here. The dollar was weak as you would expect. Obviously that's good for the profits of the multinationals also.

So this was a good day. They got what they want. It was even stronger. I'm not that surprised. It's what we've been saying stronger than what I expected. I think the skies are clear for continued equity rally here.

Jeff Weniger:

The rates just mentioned the 10 years at 4.26. That's rallied by seven basis points here in the session, 4.89 on the long bond professor and the 30 year conforming mortgage at 6.55.

Jeremy Siegel:

How much are the mortgage? Do you see a change on the day there, Jeff at all?

Jeff Weniger:

Well, I had it on mortgage news daily. It was showing seven basis points. I don't know whether that's inside the session. That should usually trade off. They probably the 10 year

Jeremy Siegel:

Connect, the 10 year, yeah,

Jeff Weniger:

Call it seven

Jeremy Siegel:

Basis points probably connect

Jeff Weniger:

And that would put it like two and a quarter north of a 10 year.

Jeremy Siegel:

Yeah, even a quarter point is not something that maybe the home builders are reacting. I don't know how much mortgages are really going to go down on the 30 year fixed. Don't forget, remember we made a really good call exactly a year ago when the Fed cut 50 and I said, long rates are probably going up, but that's because recession risk was high and they took recession off the table when they moved down 50. The Fed is the fact that the long rate aren't going down as much as people think the short rate is. It's not just because, oh my god, there's going to be more inflation. It's going to be a stronger economy than it would be otherwise. That's good for stock prices.

Kevin Flanagan:

I think that point that you just made is one that really needs to be repeated that so many people out there, they come to the conclusion that just because the fed's going to cut rates, that means 10 year treasury yields are going to completely follow suit. And as you mentioned, we've seen many times that's not necessarily the case on that and I think that's just an important point to highlight. There were some other things that we've gotten a lot of questions in here. There was one in particular that I wanted to ask. We'll get to Lisa Cook, we'll get to all that in a second, but there was this one question that I saw come in that I thought was interesting. It was like basically does one to three rate cuts really matter? I wanted to throw that one at you.

Jeremy Siegel:

Okay. It absolutely matters. Okay. 20 trillion worth of loans are paid one-to-one to the Fed funds rate through either the SOFR rate, the previous LIBOR rate through the prime rate, through the home equity rate, through all short-term lending rates, all inventory rates, all that trillions. Why is it helping small stocks more? Because small businesses borrow at the short rate. Big businesses if they borrow, borrow at the long, yes, they do do finance some inventory short, but they borrow long tech firms don't borrow at all. Not in the debt market or hardly any. I mean, but who it helps are all the mom and pop stores and small firms that borrow through the bank at the bank rates and that's why this fed funds matters. Now, does it matter for the long bond? We talked about that, but it definitely matters to everyone taking credit card loans. Our one-to-one with prime, prime rate is set exactly 300 basis points above the Fed funds target. So when you borrow out a credit card rate, you're one to one with all these rates are one to one. I'm not talking about some loose correlation. I'm talking about a hundred percent correlation with the Fed funds.

Kevin Flanagan:

So do you want to go down that rabbit hole you want to talk about? We've gotten a number of questions politicization of the Fed right after on my Bloomberg screen Anyway, the next headline's in red was Trump's going to fire Lisa Cook if she doesn't resign.

Jeremy Siegel:

Yeah, that's what she said. This is difficult situation here. I mean it looks like she did. I'm not going to say definitively, but they think they got evidence. Is that, cause it seems like the legal language is that the Fed, that the president could fire a fed member for cause, but what is cause and she could sue in federal court, is that sufficient cause until she's actually been convicted of that, which might be drawn out over a long period of time. We also have the politicization. There is always indirect pressure. The difference between the Trump presidency and all the other presidencies is in the other presidencies. The president's called on a private line to the chair and other members, I think we should lower a raise or whatever. Trump is not like that. Trump doesn't go through intermediaries, he doesn't go through channels. He says exactly what he wants right away instantly. So in a way he makes it all very public about what should not be public. Now she's she's not a major mover. She follows pretty much who the chair is from what I see, she's not an independent voice from what I can see in the Fed.

He does he need another person now that Powell is on board, so to speak. Now the question is, is he on board fast enough? We know that Trump wants a much faster, so the question now, and I think we should discuss whether it's 25 or 50 and I think it would only be 50 if we got a negative print for the August report in the first week of September, that could argue for a 50 and I think even though Trump has said 250 and is thrown out all sorts of things, the sensible people such as Bessent and others and Hassett are going to tell 'em, listen, you want to get it down a hundred basis points. That's what you really want to do. Depending on how weak it could go, you could go a little further, see exactly what happens. How much of a pullback will consumers actually experiences as they confront higher prices, as I'm sure they will toward the end of the year, but that basically will they get there by beginning of next year probably and that something takes off? Is that too slow for him? Does he need more? My feeling is don't forget, don't forget there are 12 voting members of the federal open market committee.

Changing one doesn't change the whole picture and she wasn't a hawk either, so I mean she probably would vote. Well, whoever the chairman is going to vote, if he picks his own man on this, that man may push for a 50 basis point if he picks wall or as chair or wash his war's chair. They're smart people. They're not going to go hog wild and slash at a hundred basis points or anything. They're going to look at the data also. So whether he replaces cook or not, honestly I don't think is going to have a big impact on the Fed. I mean the power pivot here. Now some people might say this is because of Trump, but let's say this is a power pivot without question leading, I think to a series of rate cuts. Barring some surprise here,

Jeremy Schwartz:

Professor, his speech title was a framework setting. You've also put out a framework setting for how to think about rates. I don't know how much you've had conversations with people at the Fed, but maybe for people who are not familiar with your op-ed, we have it on wisdom tree.com. We've got a special commentary where you can get and read about it. But for people hearing about it, tell us your framework of where you think they still need to go.

Jeremy Siegel:

Right? Let me say, remember the second part of the speech was the change in framework, which is critical. So what did he basically say? Yeah, in 2020, right before the pandemic, we set a new framework without saying we're junking everything we said in 2020, which he basically did because it was misunderstood, it wasn't relevant. Oh, the zero lower bound and then of course inflation does, inflation's never going to be a problem, blah, blah, blah. Basically he junked 2020, went back to the 2015 with a minor change. Now my article states all he did was change a bad set of policies that were really never enacted. I don't really think they affected decisions honestly, but that was considered their framework. They junked it back to the original. I want them to go back to a scarce reserve regime where the Fed funds rate is determined by supply and demand of reserves and not by fiat set, by the federal open market committee to which he meant talked nothing about the size of the balance sheet and therefore reducing it to get back to a market there in the short term rates. He did not address that at all. Basically he just junked the 2020, which everyone knew was totally inappropriate six months after it was written.

Jeff Weniger:

Nobody had a pre-submitted question on this. It's been a thing racking my brain for some time, which is you have this dual mandate, half of it's employment. How do you wrap your mind around employment trends and employment data if we don't really know what's happening in migration and out migration in this country?

We know that border crossings are down 97%, so there is no, basically nobody.

JeremySiegel:

That was the big source of the increase. I mean that added a hundred to 150,000 base to the employment report in 2023-4.

Jeff Weniger:

So 73,000 on

Jeremy Siegel:

That added millions to it. Now that part is gone. Now you're right. We don't know what the participation rate does fluctuate from all the time, and that's always a question mark, who wants to be in the labor market? Who doesn't? That always has moved forever, but we certainly know, certainly no one, I think on the migration part at least certainly on those border crossings.

Well, there's a question of how many migrants are into hiding or they're not working or where they are. We know that that's a big part of it and

That I've quit their jobs waiting it out. Don't want to be caught. That is a question mark as far as that's concerned and affecting. I mean, as I said, I said in my opening remarks, Goldman Sachs now thinks that the amount of entrance of the labor force is so small now that it means 33,000 a month and also there's that Burke death. They assume a certain amount of new additions to companies and everything like that, and that's been a source of overestimating payroll for the last two or three years. I mean, I think that Rosenberg was on, David Rosenberg was on CNBC talk. I don't know if you saw that, was talking about that shortly after Powell's talk about the distortion, which is sometimes quite substantial. There's one reason why when we have the February redo of the payroll report, we actually have, we had an $800,000, 800,000 person, excuse me, reduction because we were assuming new companies were formed at a certain rate. Now they've done a lot to bring that back into line. That's always a question mark. It's called the birth death. It means how many companies are born and died. You got to make estimates of that when you do the payroll. That's a big question mark, and it's been overestimated greatly. So we're on the cusp right now. I mean we are on the cusp of a near a zero.

If you were to ask me in the next three months, what's the probability of a negative payroll report? I say it could be close to 50%.

Kevin Flanagan:

So professor taking it along these lines. It was interesting, after we got the July jobs report, New York Fed President Williams was interviewed by the Wall Street Journal and he characterized, I guess the employment setting as no hire, no fire. Do you agree with that?

Jeremy Siegel:

Yeah. That's why continuing teams claims keep on hitting new highs as they did yesterday and yet initial job as claims are just sort of stuck in that 2 20 30 range. No hire, no fire. I mean people who lost their job can't find new ones. So people who are looking for jobs are not being hired, but firms aren't really firing. We are somewhat in that situation right now, but that's like a zero payroll gain. Right,

Kevin Flanagan:

Right.

Jeremy Schwartz:

I guess as you think about the set up for the markets going at forward, now this took off one of the big hangovers at Powell's two hawkish, but so

Jeremy Siegel:

I think the bull rally goes on. I mean look at technically second half of August is one of the seasonally weakest times of the year and this rally today is happening in that weakest time of the year into new highs for the Dow and close to that, I mean yes, it is not cheap, but we're going through tariffs. Most of the guidance has been good. We haven't seen a progressive deterioration. The big uncertainty is will people finally say, oh my goodness, I bought this item and I've been buying it for years and it was $8 and 50 cents and now suddenly it's 9 25 or something, and they start talking about that I'm going to buy 10 instead of 20. I mean, if we get that sort of discussion, that's kind of the wild card to how much consumer spending might fall. We just don't see it.

We don't see that yet. Now a lot of it is driven because don't forget the high income consumer with the stock market at all time highs with Bitcoin, crypto markets at all time highs. I mean basically there's a lot of wealth. So the high income person that says they spend out of wealth, wealth is high. There might be higher price. That's not going to deter them. They're going to buy the high end and they're continuing to buy lower income. People that do have to buy those things, goods that might be tariffed up in the second half of the year. That's the question mark. But the higher income people spend 3, 4, 5, 10 times as much as low income people, if they're still feel flush and the stock market's still strong, their spending won't decrease. It's the question of the middle, lower, middle, lower and them reacting. That's the question mark. But so far with almost no price increases so far, haven't seen that negative. The beat was one of the biggest beats on earnings second quarter that we've had. Third quarter looks good. Looks like Trump still wants to do deals with everyone and that the final tariff bite is not going to be that bad. We will have to see on that, but that's basically what the market thinks.

I see another five, 10% on equities from here. Again, very hard to predict the short run. Lots of things could happen, but this was what the equity market was looking for.

Jeff Weniger:

What do you like in equities? Should we be domestic equities, overweight, EAFE, emerging?

Jeremy Siegel:

Well, I think here's a case for small stocks. Now finally, and the value stocks, yes, some of the defensive stocks that would do well in a recession might not do well, but if they have a good dividend income, that's a positive and a lower yield type of environment. So you've got two forces there. Are they defensive? That's not as good, but if there are high yielders that is as good small stocks, it's good in general because they're borrowing at the short term rate the dollars down. That helps your foreign dollar things, but it also helps the multinationals in their translation of foreign currency into the U.S. dollar. So those other things to like.

Jeremy Schwartz:

Very good. Well, on that good note, a lot of it's positive all around. It sounds like there's a lot of positivity coming from the markets. Professor, always great to talk to you on this summer, Fridays. We've got some nice weather finally at the shore. This hurricane. Yeah,

Jeremy Siegel:

Hurricane has passed

Jeremy Schwartz:

In many ways.

Jeremy Siegel:

We'll see you guys next week.

Jeremy Schwartz:

Thank you professor.

Jeremy Siegel:

Alright.

Glossary:

Basis point: 1/100th of 1 percent.

Fed funds rate: is the interest rate at which depository institutions trade federal funds with each other overnight.

Federal Reserve: The Federal Reserve System is the central banking system of the United States.

Inflation: Characterized by rising price levels.

London Inter-Bank Offered Rate (LIBOR): a benchmark interest rate for short-term loans between major global banks. It was mostly phased out in 2023 and then completely in 2024.

Secured Overnight Financing Rate (SOFR): a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

See WisdomTree glossary for more.

Important Information

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

Professor Jeremy Siegel is Senior Economist to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be consid­ered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpreta­tions or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

Jeremy Schwartz, Jeff Weniger and Kevin Flanagan are registered representatives of Foreside Fund Services, LLC.