Below is the rough transcript containing the main points of an interview with popular finance professor at Wharton Business School Jeremy Siegel on the current volatility in the overall market.
He said the market is certainly scary in the short term but has irresistible values in the long run. It is selling at 11 - 12 times earnings in zero-interest environments. So it’s unprecedented for an investor. If investors can get through this volatility, they are really going to be rewarded in the long run
There are comments that if you bought S&P 10 years ago, then the day when the stock was down, you would have over a 10-year period of losing money. However, Jeremy had reminded that in the year 2000 we had the tech bubble, selling at 30 times earnings. That’s an extraordinarily high valuation. Currently we are almost selling at one-third of that level today. So the probability of another decade like that from these valuations is just not going to happen.
He doesn’t think the Fed can forecast two years in advance to set the right policy for it. Looking back in March, they were optimistic about growth. And now, five months later, they are pessimistic. Maybe six months, nine months from now they might say, “The circumstances have changed and we have to raise rates. And then what about the credibility of the Fed?" So he is not enthusiastic at all about this policy from the long-term perspective. But he is glad that they did something. He thought this was not the right thing to do for the Fed’s credibility.
He once said that the bond market was in a bubble now and thinks it’s in a super bubble right now. The ten-year is going to be negative yield — unbelievable. People are giving money to the US government for 10 years and say in 10 years give it back to me worth less than what I’m giving you now. When these first came out, they were nearly 4% inflation, and his feeling is that the bond market is just grossly overvalued. We will have 2%, 3%, 4% inflation. That’s what Bernanke is saying. If he keep these rates low for two years, that pushes the inflation forecast higher.
And this current market situation is not 2008 again. We are not going into the collapse again. We have a few encouraging numbers on growth. This is the scenario where people fear another financial meltdown like 2008, but our own financial system is not leveraged that way. Financials are not over blown in value.
And for Europe, Jeremy believed the ECB is going to protect the banks in Europe just the way the Fed protected the banks in the US. They will put a fence around the asset and loan against that. They have the problem in Europe and they are going to provide liquidity so there is not a run on the banks there. The valuation in Europe, those stocks are selling at seven or eight times earnings, the banks are the lowest relative to their book value ever in Europe. So the market is totally discounted for the worst scenarios. If the ECB comes in and says, "Hey we’ll liquefy," Jeremy can see the rally coming in US and in the EU.
Europe has severe problems in the periphery: The euro got too big and there are too many countries with different policies. He thinks the Greeks wish they had their money back so that they can devalue and move forward at this point, and Portugal, the same thing. They do have the fiscal problems and stability problems but he is certain that the ECB is going to keep the system liquid and the credit moving again in Europe.
Otherwise Europe will have a depression and recession for the next five to ten years. The price structure is too high given the productivity and what we call internal devaluation; prices going down is extremely painful. External devaluation is easier. He remembered back on the time when Argentina devalued. Now they’ve had tremendous growth in the last 10 years. So how is Europe going to transition to that? How would you introduce a new currency? This is unprecedented. Argentina still has the peso even though they are linked it to the dollar. This is one of the first times in history where countries have given up their national currency, and they wish they had it back right now.
The interview video with him can be viewed here.
He said the market is certainly scary in the short term but has irresistible values in the long run. It is selling at 11 - 12 times earnings in zero-interest environments. So it’s unprecedented for an investor. If investors can get through this volatility, they are really going to be rewarded in the long run
There are comments that if you bought S&P 10 years ago, then the day when the stock was down, you would have over a 10-year period of losing money. However, Jeremy had reminded that in the year 2000 we had the tech bubble, selling at 30 times earnings. That’s an extraordinarily high valuation. Currently we are almost selling at one-third of that level today. So the probability of another decade like that from these valuations is just not going to happen.
He doesn’t think the Fed can forecast two years in advance to set the right policy for it. Looking back in March, they were optimistic about growth. And now, five months later, they are pessimistic. Maybe six months, nine months from now they might say, “The circumstances have changed and we have to raise rates. And then what about the credibility of the Fed?" So he is not enthusiastic at all about this policy from the long-term perspective. But he is glad that they did something. He thought this was not the right thing to do for the Fed’s credibility.
He once said that the bond market was in a bubble now and thinks it’s in a super bubble right now. The ten-year is going to be negative yield — unbelievable. People are giving money to the US government for 10 years and say in 10 years give it back to me worth less than what I’m giving you now. When these first came out, they were nearly 4% inflation, and his feeling is that the bond market is just grossly overvalued. We will have 2%, 3%, 4% inflation. That’s what Bernanke is saying. If he keep these rates low for two years, that pushes the inflation forecast higher.
And this current market situation is not 2008 again. We are not going into the collapse again. We have a few encouraging numbers on growth. This is the scenario where people fear another financial meltdown like 2008, but our own financial system is not leveraged that way. Financials are not over blown in value.
And for Europe, Jeremy believed the ECB is going to protect the banks in Europe just the way the Fed protected the banks in the US. They will put a fence around the asset and loan against that. They have the problem in Europe and they are going to provide liquidity so there is not a run on the banks there. The valuation in Europe, those stocks are selling at seven or eight times earnings, the banks are the lowest relative to their book value ever in Europe. So the market is totally discounted for the worst scenarios. If the ECB comes in and says, "Hey we’ll liquefy," Jeremy can see the rally coming in US and in the EU.
Europe has severe problems in the periphery: The euro got too big and there are too many countries with different policies. He thinks the Greeks wish they had their money back so that they can devalue and move forward at this point, and Portugal, the same thing. They do have the fiscal problems and stability problems but he is certain that the ECB is going to keep the system liquid and the credit moving again in Europe.
Otherwise Europe will have a depression and recession for the next five to ten years. The price structure is too high given the productivity and what we call internal devaluation; prices going down is extremely painful. External devaluation is easier. He remembered back on the time when Argentina devalued. Now they’ve had tremendous growth in the last 10 years. So how is Europe going to transition to that? How would you introduce a new currency? This is unprecedented. Argentina still has the peso even though they are linked it to the dollar. This is one of the first times in history where countries have given up their national currency, and they wish they had it back right now.
The interview video with him can be viewed here.
