The transcript from this week’s, MiB: The Jeremies! Schwartz and Siegel on SFTLR!, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, oh, how much fun was this? I can’t begin to tell you what it’s like to sit in a room with the Jeremy’s, Professor Jeremy Siegel and I keep calling him Professor Jeremy Schwartz, but he’s just Jeremy Schwartz, chief investment officer of the $75 billion ETF and mutual fund company, WisdomTree. I am just a fan of both of these guys.
I have interviewed Professor Siegel several times. He’s always fascinating. You’ll hear him sort of zip in and out of focus like this, because he’s sitting on the chair spinning around, just having fun, telling stories. So if you hear his audio cut in and out, he’s all but spinning in circles. He’s just charming, as is Jeremy Schwartz is one of the smartest people you meet in finance, just a thoughtful, intelligent person who really understands what value is about, how to find investments that will outperform the broader markets with less risk, less volatility.
He’s been a big advocate, along with Professor Siegel, of fundamental indexing, where you’re focusing on things like earnings and dividend and value. And they have some fascinating things to say. Latest version of “Stocks for the Long Run” has just come out.
It’s sold ungodly numbers of copies, and is on everybody’s best finance books of all-time list. I found this conversation to be so much fun. We could have gone for another couple hours, but I had to stop and send them off to the New York Stock Exchange to do whatever they’re going to do there. I think you’ll enjoy this conversation; I know I did.
With no further ado, my sit-down with the Jeremy’s, Professor Jeremy Siegel and Jeremy Schwartz. Professor Siegel, you began at Wharton back in ‘76. Did you ever imagine half a century later, you’re still teaching in the same place?
JEREMY SIEGEL, PROFESSOR EMERITUS OF FINANCE, WHARTON: Well, I’m still associate. I’m emeritus professor, Barry. I actually left active professor in July of 2021, after 45 years of teaching at Wharton. I had taught four years in University of Chicago before that. So 49 years of university teaching. I’ve been as busy, because finishing, as we’re going to talk about, sixth edition of the book and conferences more than ever because now you can do them on Zoom. So I can do San Diego at 9:00 a.m. And at 10:30, I can do New York, which of course never used to be possible.
RITHOLTZ: Modern technology. And Schwartz, you went to Wharton. You had Professor Siegel as an instructor. Tell us what that experience was like. How was he as a professor?
JEREMY SCHWARTZ, GLOBAL CHIEF INVESTMENT OFFICER, WISDOMTREE: So I got to Wharton in 99, which was the peak of the tech bubble. I was coming into my own, seeing the tech bubble living through it, having some experience investing until those tech stocks, watched them crashed. And he was on — I got to meet him through, who’s now the Philly Fed President Patrick Harker, I was on a team called the Dean’s Advisory Board. We organized sessions with the Professor and I got to meet him through that. And then he got me into his class. I didn’t even know you have to apply to his class. He got me into his class. And the summer —
RITHOLTZ: What do you think, he’s just walking in off the street and say, “Professor Siegel, I’m here?” It doesn’t work like that.
SCHWARTZ: You have to apply. You have to apply. I didn’t know that. But I was lucky to meet him. And then — so ’01 was when I was sitting in his class. So this is after March of 2000, his famous op-ed “Big-Cap Tech Stocks are a Sucker’s Bet.”
RITHOLTZ: I remember that vividly.
SCHWARTZ: So he’s on CNBC all the time talking about this, and I needed something to do for the summer. And that was the third edition. Back in ’02, we helped — that was my first project with him was the third edition of “Stocks for the Long Run.”
RITHOLTZ: Really? So you have a 20-year relationship with “Stocks for the Long Run,” as well as with Professor Siegel.
SIEGEL: That’d be great.
RITHOLTZ: So the question for you is, you come out of Wharton, how do you end up at WisdomTree?
SCHWARTZ: Well, WisdomTree now — I’ve been there 17 years. The Professor — we knew the founder, Jonathan Steinberg.
SCHWARTZ: He had a magazine. The Professor was publishing for the magazine, and the Steinberg family is very involved in Wharton. So we were looking at their indexes. The second book, “The Future for Investors,” which we did, came out in ’05, had a lot of work on dividend investing, value investing. And we helped validate their initial research, which got the company funded in ’04. The Professor invested and joined as an advisor. And they saw — I did all his research. And I’m now the second longest employee and have been there from the very early days.
RITHOLTZ: Wow. You’re right behind Jono, who remains elusive and is a phantom figure who I can’t get to the studio, but we’ll talk about that later. So WisdomTree goes public, the two of you are affiliated with it. But I recall vividly Professor Siegel as a traditional market cap-weighted index sort of guru.
RITHOLTZ: How did you find dividend weighting or evaluating, or other ways of looking at what some people terribly call smart beta?
RITHOLTZ: But how did you find your way to those sorts of indexing, which is what WisdomTree has become known for?
SIEGEL: And as Jeremy mentioned, the tech bubble itself was quite instrumental in saying, just a minute, it’s cap weighting at the very best. And Jon Steinberg had called me up and said, “We were thinking of fundamentally weighting instead of buy just market cap, which is the assumption of an efficient market hypothesis by either earnings or dividends. Would you do historical research on stocks to see whether it gives you a better risk-return trade-off?” And that’s where Jeremy came in because he was my right hand man, to say the least, in doing all this. We did it not only for the U.S., we did it internationally. We wrote a white paper that was associated with it.
And when we did it, I said, “You know what, it is significantly better risk-return trade-offs.” It makes sense for me. I was formulating a theory called the noisy market hypothesis instead of the efficient market hypothesis, where this sort of fundamental indexing would do better. And Jono asked me and I said, “You know, I’ve spoken for dozens of companies, I’ve never really taken any official position.” But I said I would be willing to certainly consider being an advisor on WisdomTree. And I am a senior investment strategy advisor to WisdomTree since that beginning.
RITHOLZ: So let’s not bury the lead, if market cap isn’t the most efficient way to organize an index, what is?
SIEGEL: What is? Well, fundamentals.
RITHOLTZ: More specific —
SIEGEL: And more — well, we like dividends and/or earnings as the weighting procedure.
RITHOLTZ: So value with a dividend?
SIEGEL: Yeah. So — and yes. And what it does give you is a value tilt. There’s no question about that. And I remember telling Jono, “I’ll go with you on this, but we have to be inexpensive. I don’t want to charge 100 basis points.”
SIEGEL: And he said, “I want as many people to use it. I want it to be inexpensive.” We came out with the lowest cost. But for now, it became more competitive since then. But when we came out, we’re really lowest — definitely lowest cost of all, I think, the fundamental weighted indexes.
RITHOLTZ: And you guys prefer the name fundamental as opposed to smart beta? I think kind of smart beta has fallen out of —
SCHWARTZ: It’s semantics and branding. We actually use the term modern alpha now.
RITHOLTZ: Modern alpha? Okay.
SCHWARTZ: So it’s, you know, more in line with what you’re trying to achieve and not just trying to be beta. You can say you’re being dividend beta —
RITHOLTZ: I like dumb beta, but that’s just me. That’s my preference. I don’t — it’s so weird how these names sort of catch fire for a while and they go viral. We’ll talk a little bit about your recent viral TV appearance a bit. But before I get to that, I have to ask, so how do you two guys meet? You’re an undergraduate or graduate student?
RITHOLTZ: Undergrad. So you’re just a Pennsylvania kid walking around.
SCHWARTZ: Lucky place, right time.
SIEGEL: Well, you know, I have to tell you actually, he invited me to be a talk to an — some student group, and I was so busy, it slipped my mind. And I felt so embarrassed. And he came up with a smile and said, “Oh, Professor Siegel, we can reschedule.” And I said, “This is a truly wonderful” —
SCHWARTZ: I was worried. I was like, “Is he okay?”
SIEGEL: Yeah, he was worried if I was okay. But I would say and I repeat this in the preface of this new edition, when he offered to work for me, we were working through some risk-return type of analysis. And I said, “Listen, this is going to take a little bit of time, but I want to get too familiar with the data.” I know this was a Friday. “Come in Monday, you know, familiarize yourself with the data. Come in Monday and we’ll discuss how to do it to get the results.”
RITHOLTZ: I know the answer to this. Keep going. I love this story.
SCHWARTZ: Yeah. I mean — and so he came in on Monday, and I said —
SCHWARTZ: Probably Saturday.
SIEGEL: Yeah, Saturday probably. I — you know, who knows. I was in on Saturdays.
SCHWARTZ: It’s definitely on Saturday.
SIEGEL: It was a Saturday. All right. Jeremy remembered better than I. And you know, I said, “Okay, let’s talk about it.” And he said, “Well, Professor Siegel, I do have, I think, all the answers that you want.”
RITHOLTZ: Yeah. I’ve done this already.
SIEGEL: I said, “You do?” And we looked — I looked them over, I said, “This looks right.” And I said, “Okay, I’ve got someone special here.” And I did.
RITHOLTZ: You know, I know I have a lot of business professors who listen to this podcast and assign specific ones to their students. But that should be a lesson to somebody who says, “Hey, how do I stand out from the crowd?” When a professor says, “Come in, we’ll talk about the assignment,” and you come in and say, “I’ve already crunched the number. Here’s the data. Most of what you’ve written previously is right. Here’s a couple of little mistakes I caught.” That has to impress you, right?
SIEGEL: Oh, definitely. It definitely impressed me. I mean, all through our relationship, you know, I mean, it’s amazing because he travels back and forth, living in Philadelphia and working in New York, although he doesn’t necessarily have to do it as much now because of, you know —
RITHOLTZ: How much you’re splitting your time?
SCHWARTZ: So we recently went to be fully remote first organization. And you talked about Jono, he was the most New York in-person. I mean, I tried to move to Miami, call it, 12, 13 years ago, he said, “No, you can’t move to Miami.”
SCHWARTZ: That’s where I grew up. And we’re now completely remote. First, we find it to be very productive. We are — you know, we have global team. We have a team in Europe. My research team is almost 30 people, and almost half — you know, half of them in Europe. And we can be more interconnected doing — talking to them weekly in a different format —
SCHWARTZ: — through Zoom or Teams that were on. So I don’t come up as much. But you do find the benefits. I was — in the office yesterday, we had six of our team members in the office, and you do find little things. There is the benefit of the collaboration that you find things you wouldn’t have found on a Zoom call because you’re bantering.
RITHOLTZ: That’s the key word, though, is collaboration, to have everybody schlep into the office to sit and stare at a computer, or worse, do Zoom calls from the office is kind of pointless.
RITHOLTZ: But when you could get together face to face and have conversations, that’s a very different experience. So let’s talk a little bit about this book, which has really become a classic. Really, the first question I got to ask is, how do you go about updating and editing a book that really has stood the test of time for, geez, it’s almost 30 years. It’s on everybody’s must-have list, top 10 finance book, best investment books of all time. Do you approach updating this with a little bit of trepidation? What’s the experience like?
SIEGEL: Well, you’re right. The first edition came out in May of 1994, using data up through 1992. So we have 30 years more of data.
RITHOLTZ: So now it’s really stocks for the long —
SIEGEL: And now, of course —
RITHOLTZ: –stocks for the longer run.
SIEGEL: This is the sixth edition. But it’s also — the fifth edition was written just after the financial crisis — a couple of years after the financial crisis and a lot of things had gone. I mean, the huge bull market, the COVID which has a whole chapter on. It’s up-to-date. I mean, it even to some data on the recent bear market, which most general books can’t get as far as we got.
RITHOLTZ: The 2022 bear market?
SIEGEL: A little bit is in there.
SIEGEL: Yeah. A little bit is in there. You know, we don’t know if it’s exactly over yet. We’ll certainly talk about that later. But —
RITHOLTZ: Jeremy will let you know.
RITHOLTZ: We’ll nail — we’ll try to nail that.
SIEGEL: But there was so much more — I had to say this is the biggest revision and the most new material of any of — there’s been almost five new chapters that have been added. And there’s been parts that have been added. I mean, you know, obviously, I deal with cryptocurrencies and Bitcoin, which was not an issue 10 years ago. You can feel how heavy it is.
RITHOLTZ: I know. This is vaccinated and boosted.
RITHOLTZ: This is really — not that the other books were skimpy, but you could tell, this has a little bit of a heft to it. So —
SIEGEL: Yeah. For instance, in the past, I had one chapter basically on value and growth. There’s four chapters that are directly related to value and growth.
SIEGEL: And I mean — and other factor investing which became very popular in the last 10 years. One section I had to do, another one was on real estate. I’ve never had anything on real estate returns before. I mean — and these are just some of the changes that I wanted to put in to make it more complete.
RITHOLTZ: So let’s talk about some of these additions that you added. We’ll start with real estate.
RITHOLTZ: Your friend Professor Bob Shiller of Yale puts out the Case-Shiller Housing Index. And I believe if you look at housing for the long run, it doesn’t do much better than inflation, does it?
SIEGEL: So this is the interesting thing. The price doesn’t do much better than inflation, but there’s a return.
RITHOLTZ: Well, you got to live somewhere to start, right?
SIEGEL: Yeah. First of all, there’s two types. First of all, your it’s your own house residential. And then we now have and this is sort of the research we have, we have 50 years of REIT data that we never had before. So I felt it was long enough. I mean, it’s not the 220 years of stock market data.
SIEGEL: But 50 years is still a good time.
RITHOLTZ: Respectable. Sure.
SIEGEL: So I did a very complete analysis on that. And let me just summarize I think the most interesting part. The return on the REIT index is virtually exactly the same as the S&P 500. Most people say, “Oh, my God, it’s the same and it’s so much more stable.” No. This is the interesting thing. People think real estate is more stable than the stock market. In every recession, except one and that was the tech bust of 2000, the drawdown of REITs was greater than the S&P 500.
RITHOLTZ: That’s really interesting. You know, people don’t get a print on their house second by second.
SIEGEL: Every second. Yeah, exactly.
RITHOLTZ: So it feels stable because you’re not seeing prices.
RITHOLTZ: But in reality, any day you want to put your house up for sale, you might get a different price then —
SIEGEL: If you — I mean, you know, if times are bad and then you say, “I got to sell it the next five minutes,” you don’t want to look at that price.
RITHOLTZ: That’s right. So you mentioned you have a couple of new chapters on value and growth. Up until this year, value seem to have been struggling against growth.
RITHOLTZ: Certainly in the 2010s, growth wildly outpaced value.
SIEGEL: That’s a euphemism, Barry, struggling.
RITHOLTZ: I’m being polite. Well, you know, okay, so value —
SIEGEL: It’s hard. It’s been hard.
RITHOLTZ: I could say that, right?
RITHOLTZ: Value and growth struggled.
SIEGEL: It has mightily struggled.
RITHOLTZ: Why do you think that is, given the historical advantage of value over everything?
SIEGEL: And you know, I mean, everyone has said this way before me, and it was the worst 10 years, actually the worst 15 years in history. And we have value and growth back to 1926. There’s never been anything that has approached the underperformance. And I would say the major reason for that was the boom of the giant tech firms.
RITHOLTZ: So it’s Apple. It’s Amazon. It’s Google.
SIEGEL: Yeah. I mean, it’s used to be called FANG. They had gone out of favor obviously with the bear market or have shifted. And arguably, they went from an underpriced position in 2004 I’d say —
SIEGEL: — or 2006, ’07, ‘08. They were underpriced probably at that time, given their tremendous further growth. And as is usual, they got overpriced at the top. But that — I’m not going to say the word hijack the market because that sounds like they did something illegal.
RITHOLTZ: They had a lot more mindshare relative to —
SIEGEL: I mean, you know, the percent that was wrapped up in that. And then, of course, your cap-weighted index, you were there in that. And it’s been virtually impossible for any value strategy to have overcome the great bull market of the big tech companies of the last 15 years which probably ended in, you know, early ‘20 or late 2021 or ’20, early ’21.
RITHOLTZ: So the obvious question for both of you is, what does this suggest about near term future performance? And by near term, I mean, the next decade, because I’m talking to you guys, it’s normally we’re talking about centuries. But for the rest of the 2020s, what does this say about value versus growth?
SCHWARTZ: Interestingly, this year, you’ve had a big correction, and a lot of the mega growth stocks and profit tech stocks collapse the hardest.
SCHWARTZ: It’s interesting with —
RITHOLTZ: Unprofitable tech stocks.
SCHWARTZ: Unprofitable tech.
SCHWARTZ: What’s interesting is even within value, there has been a big dispersion. So value is being growth by — like in the Russell Value versus Growth, call it, almost 2,000 basis points. But —
RITHOLTZ: Geez, that’s giant.
SCHWARTZ: But there’s even still high dividend stocks versus the traditional price-to-book value. It got like another 1,000 basis points.
SCHWARTZ: And so high dividend stocks are definitely doing well relative — so some of that is — well, what is a high dividend stock that’s not in the price-to-book index? It’s overweight energy stocks which had been —
RITHOLTZ: Killed over the past year.
SCHWARTZ: And then S&P cut down to 3%. Right? It was double digits 50. This is the challenges of cap weighting; it writes things down, will never add to the weight.
SCHWARTZ: But high dividend stocks, you know, in one of our baskets of high dividend DHS is 18% to 20% energy. And then that rebalances every December, it’s going to stay that way.
RITHOLTZ: So a high dividend index, how has something like that done in 2022?
SCHWARTZ: It’s up about 2,000 basis points ahead of the S&P. I mean, it’s basically largely flat.
RITHOLTZ: Meaning if — meaning it’s flat while the S&P is down 20%, 25% —
SCHWARTZ: Yeah. Yes.
RITHOLTZ: — depending on what we see in there?
SCHWARTZ: And still, where you say, well, you had all your outperformance and so what? It’s an 11 times earnings and 9% earnings yield.
RITHOLTZ: So it’s still cheap 9%.
SCHWARTZ: 9% earnings yield before rebalancing, and if you, you know —
RITHOLTZ: 9? That’s a pretty substantial earning yield, isn’t it?
SCHWARTZ: Versus the 1.5% TIPS rate with a real yield, bond yield, almost an 8% equity — probably an 8% equity premium on this basket. And so for the volatility of the markets, I do think it is still — you know, you can say decade ahead. All right. But the next three to five years, I think it is a very attractive place to be.
RITHOLTZ: So the product that focuses on high dividend yielding, value stocks at WisdomTree, which funds would be covered by that?
SCHWARTZ: DHS is the U.S. version. There’s a whole family. DHS is the U.S. DTH is the International. DEM is the emerging. You know, you go to the emerging markets, which has been way out of favor —
RITHOLTZ: For years and years and years, and it’s been given.
SCHWARTZ: This is like five P/E-type stocks. Now, this is — now, you’re going to China, China banks. You’re going to energy materials, commodities, cyclical stocks, but you’re getting close to double digit yields.
RITHOLTZ: And what is the dividend yield now on something like DEM?
SCHWARTZ: The average yield of the stocks, I mean, I want a stock to look at Petrobras in Brazil, almost a 40% dividend.
RITHOLTZ: The problem is it’s in Brazil and people are nervous about that.
SCHWARTZ: Right. But energy is — you know, they’re paying out a big percentage of their earnings as dividend. This is well-covered. This is —
SCHWARTZ: You know, it’s a very interesting dynamic.
SIEGEL: Yeah, I think — what is the P/E of Brazil like? 6 or 7?
SCHWARTZ: And whose currency is up on the year? Not America, but Brazil.
SIEGEL: And it looks like — I think da Silva is going to win who’s a — I mean, you know, we could have opinion, Bolsonaro versus da Silva. I mean, they both have deficiencies, obviously. But, you know —
RITHOLTZ: That’s what the D stands for.
SIEGEL: I mean, you know, da Silva was president for quite a long time. And although he was considered a socialist at one point, he let the markets work. And evaluations were much higher under da Silva than they were under Bolsonaro. I mean, I’m not advocating Brazil, I’m just kind of commenting on what — you know, commenting on Brazil. But I mean, we could talk about other countries.
RITHOLTZ: Sure. What are other countries you have interest in/
SIEGEL: I mean, well, we were forced to back off and Russia down to zero. Is that correct?
SCHWARTZ: But we’re the few index providers — and actually, your Bloomberg colleagues like — love me talking about this. But we’re the only index writer who hasn’t kicked Russia out of the index.
RITHOLTZ: Why is that?
SCHWARTZ: And we’re going through the index rebalance this week actually, and I’m still not kicking out the index. I’m marking it at zero.
SCHWARTZ: What’s the downside? That’s already marked at zero. So —
RITHOLTZ: The investment downside or the political fallout?
SCHWARTZ: That’s the political fallout. But my point is I’m trying to run these funds in the best interest of shareholders, which is —
RITHOLTZ: I mean, not that you could sell your Russian holdings anyway.
RITHOLTZ: There’s no market to sell.
SCHWARTZ: So the data, you’re allowed to sell it. Should I sell the data while I can sell it?
SIEGEL: Yeah. It’s a government requirement. Was that an SEC requirement?
SCHWARTZ: It’s all a political statement, right? So now, it’s very interesting critical time.
RITHOLTZ: There is no place to sell that. So you market to zero.
SIEGEL: We market to zero. We keep it in the index. And if it ever has value, we can recoup the value for shareholders. But, you know, we’re not forcing it out right today because there’s no real point to doing that.
SIEGEL: Why? I mean, we don’t love Russia or Putin. It’s horrendous, what’s going on.
RITHOLTZ: Who does?
SIEGEL: No one does. But at that particular point, the Russian stocks will probably be reallowed into the index.
RITHOLTZ: Once Putin is gone, Russian stocks become attractive. Is that a fair statement?
SIEGEL: Well, smart money would maybe be snatching them up before that. I don’t know if they could.
RITHOLTZ: Right. You can’t get executed and you can’t trade anything.
SIEGEL: No. I don’t know if you can trade in derivatives to get there and do private transactions. But throughout the entire emerging markets now, with the dollar so high, with interest rates going up, fear the debt — I mean, you’re getting — what is the average P/E? 10 of the emerging markets?
SCHWARTZ: In this high dividend, it’s 5. But in the broad index, it could be —
SCHWARTZ: Yeah. It’s probably 12, 13, something like that.
RITHOLTZ: So pretty reasonable.
SIEGEL: Don’t forget, I mean, up until very recently and even today, the GDP growth of those countries is higher than the United States in the developed world. I mean, still several points higher, even with all the problems that they have. Not that that always, you know, means a difference. We talked a little bit about not paying that much attention to GDP growth, you know, in the book. But I also want to say, because you started out on value and growth, and we point this out in one of the chapters. But a couple things have come to mind right now.
We have had these growth spurts of overvaluation through history. And it appears, at least, in the post-World War II period, they come about every 25 years, the Nifty Fifties, which was a period where institutions and pension funds bought just growth stocks.
RITHOLTZ: Late ‘60s we’re talking.
SIEGEL: Yeah. Late ‘60s, early ‘70s. No matter what their P/E ratio were. I mean, they bought such beauties as Polaroid at 90 times earnings, Eastman Kodak, Sears and Roebuck. And they paid an astronomical price. They all collapsed later. Some did better. I mean, IBM was on the list and a few others, but many did not. Then 25 years after that, in 2000, well, we all know dot-com burst and then bust. Then we have, you know, 2020, 2021, another — oh, not quite 25 years, but 22 years. I mean, it seems like — I’m not going to say in 2045 or 50, we’ll get another one. But it seems like there’s a cycle where people, investors get over enthusiastic about a group of stocks that have been growing fast, and then inevitably overprice them.
RITHOLTZ: I’m going to take that bet with you for 2024.
SCHWARTZ: My girls, when they’re in their 30s, they’re going to be getting their capital. They’re going to —
SIEGEL: Well, I’d be very thankful to be around that, to pay off that debt, but —
RITHOLTZ: I’ll tell you one. I got 100 bucks says you’re wrong and I’ll pay you in 2045.
RITHOLTZ: How about that? So one of the things you bring up in this, that is so interesting is if we have these speculative excesses, and they seem to come along once a generation or so, is it really just a question of the new folks coming through the system just haven’t read their history and —
SIEGEL: Maybe it’s a generational thing. And you’re right, once it is a generation, you really consider 20 to 25 years. I’ve been through several, so maybe I have more institutional memory, or whatever, of going through what we went through. But in the postwar period, we’ve had the cycles. Now, what’s interestingly enough is that oftentimes, the bust brings them to undervaluation eventually. When I look back at 2005, ’06, ’07, yeah, those growth stocks that collapsed from way too high, probably were too low.
SIEGEL: Yes. I mean, the growth index and the value index 10 years ago were almost the same multiple.
RITHOLTZ: Really? That’s —
SCHWARTZ: If they compressed — and the high dividend stocks had a P/E ratio higher than the market. There’s a lot of people writing about that back in 2012, 2013, that they started selling at a premium multiple to the market, which is very obviously not the case today.
RITHOLTZ: So here’s the question about 2020 and we could talk a little bit about the pandemic, when you have an event from outside the market, sort of feels less like the dot-coms and the valuation issue, and more like the meteor that killed the dinosaurs, it’s totally outside of the system.
SIEGEL: Right. But a lot of these things were building before the pandemic. The pandemic probably accelerated because people said, “Okay, it’s technology,” you know, and then they fell in love even when — now, there was the Pelotons and the DocuSigns. I mean —
RITHOLTZ: All the work-from-home stocks.
SIEGEL: Yeah. They were the work-from-home stocks, many of them using technology, some of them less and some of the more, that really took the boost. But the surge, I mean, you know, Netflix, Facebook, Meta, I mean, they took root and began soaring before the pandemic. But that seemed to accelerate it because people said, “Oh, well, no face to face. Technology is going to be the wave of the future.” And with all the money that was created by the Federal Reserve, it just could go right to those stocks.
RITHOLTZ: And —
SCHWARTZ: A lot of these stocks are becoming value stocks.
RITHOLTZ: Well, I was going to say —
SCHWARTZ: So a number of them are getting added to value indexes. There’s a number of them in our earnings index that are being overweighted. Now, Meta is an example.
RITHOLTZ: Well, Facebook is cut in half. Netflix, even though they had a good quarter, they’re way off their lows. Peloton (inaudible), DocuSign, telehealth, you could go through all list.
SIEGEL: All these are 70%, 80% —
SIEGEL: That’s many of them, top to bottom. I mean, the ones that are really significant, like Apple and Microsoft, have not —
RITHOLTZ: They haven’t fallen that much.
SIEGEL: They were too high. But they were not — they were not crazy. You know, and — I mean, some people consider Apple to be the conservative one. Although, you know, years ago —
RITHOLTZ: So owe it on Warren Buffett.
SIEGEL: Yeah, I mean — yeah, Warren Buffett, his first real tech stock was Apple.
RITHOLTZ: Right. And he still looks at it as a more conservative, and their multiple has been more moderate.
SIEGEL: Well, it used to be 10, 11, 12 all the time.
SIEGEL: I mean — and it never got up to be 50, 60, 70 ever —
SIEGEL: — even at the height of enthusiasm for it.
RITHOLTZ: Right. Not quite a value play, but more reasonable. Before we digress back to stocks for the long run, you recently were on TV where you had quite the rant about the Fed. And not only was it a bit of a “What is the Fed doing? They’re late. They missed inflation to start. They missed the peak of inflation. They’re overtightening,” it went totally viral. I think not just because people agreed with you, but you were very passionate. You were very excited about it. Tell us a little bit about what led to that and what your thoughts are on where we are with the Federal Reserve.
SIEGEL: Well, Barry, you know, you interviewed me how many months ago? I forgot.
SCHWARTZ: May of 2020.
RITHOLTZ: Yeah. No. That was right after the pandemic.
SIEGEL: And I told you that there are going to be huge amount in inflation.
RITHOLTZ: Yup. You said both fiscal and monetary were going to cause a surge.
SIEGEL: Yeah. And I was yelling about it through all 2021. And the fact that they didn’t begin to pivot until the November of 2021 and they didn’t start doing anything until — so I’m still getting excited about this — until March of 2022 is unforgivable.
RITHOLTZ: Late to the party, right?
SIEGEL: To my opinion, it’s gross negligence as a steward of our monetary system. And it makes me emotional because I’ve taught this subject for half a century. And I’m not saying that anyone that’s at the Fed now was a student of mine, but I taught —
RITHOLTZ: But it would have been better off if they were.
SIEGEL: Maybe — well, they — I hate to say it, but the answer is yes, they would have been.
SIEGEL: They had a chance to put him as part of the Fed, and they didn’t take him up on that. They should have thought that —
SIEGEL: Well, it’s very interesting. I mean, actually, under Bush, I was nominated as the Fed, and then I got a — we started the process, and then I got a call and say, “Jeremy, the Democrats are going to hold it up because there’s going to be a presidential election. They think they’re going to take over, and you know, so let’s wait and see what happens.”
RITHOLTZ: You’ve done more good if — from your post, they would —
SIEGEL: Thank you. Yeah. Perhaps —
RITHOLTZ: That has six-year post at the Fed.
SIEGEL: And you know, often it’s like Milton Friedman who refused to take a post in Washington. He said, “It just compromises you. I rather be a critic from the outside.” And he was —
RITHOLTZ: Plus the weather is terrible.
SIEGEL: He was a critic from the outside, and an effective critic from the outside to do that.
SIEGEL: But — so I was yelling and screaming, I said, “Is Jay Powell behind the curve?” I said, “He’s so far behind the curve. He’s up in the bleachers where the pitcher is throwing to the catcher at home plate. That’s how far behind the curve he was.”
RITHOLTZ: So the Fed has a giant research department. They have wonderful economists, really smart people —
SIEGEL: Well, I don’t know how wonderful they are, Barry. I’m going to have to tell you —
RITHOLTZ: Why did they miss this?
SIEGEL: — they’re not so wonderful. I don’t know. I mean, because they were the ones that kept on saying this is temporary inflation. They fed that I’m sure to Powell and the others, and they bought it, hook, line, and sinker. And you know, what also upsets me is the Fed was designed 19 FOM — it only has 18 members of the Federal Open Market Committee, and it’s supposed to be diverse opinions. There is virtually no diversity of opinion. You would think that, you know, at least out of those 18, three or four would say, “Hey, we’re just way overstimulating here. We’re going to have trouble if we don’t stop.” Not a word. That upsets me too. They’re not being constituted. It’s groupthink. It’s groupthink that’s totally dominating the Fed. All these things are happening at once, and that’s why I gaze around. But let’s go on. So I think —
RITHOLTZ: Wait. Before you move on from that, I just have to point out that this isn’t hindsight bias. You were saying this in early 2020.
RITHOLTZ: A year before inflation really started to rear its head, you were lots of fiscal stimulus, lots of monetary stimulus, guess what happens?
SIEGEL: Yeah. And I knew it was going to be inflation. And as you know, I said the increase of the money supply in 2020 was the greatest in history. I mean, we have a chapter in the book on COVID. I point out the long history. I talked a lot about what should have happened, what the Fed should have done, what it did wrong, and why, what happened happened. And I was really– in a way, when I started thinking about the book, this was before COVID. So I knew there was no such thing as a COVID chapter. But once COVID hit, I wanted to put there’s a chapter on the great financial crisis and that was put in on the last edition. There had to be a chapter on COVID and the monetary response that came from that.
RITHOLTZ: So here we are, the Federal Reserve is belatedly recognizing inflation.
RITHOLTZ: They’ve raised rates several times, 75 bps at a time. We’re now three and a quarter on our way, if you believe consensus, to the November meeting, taking us to four to four and a quarter, whatever that range is, and arguably, another 75 after that.
RITHOLTZ: So we’ll be at 5%. So two questions.
SIEGEL: 5% funds.
RITHOLTZ: So 5% funds rate, what does that do to the economy? And are we already sufficiently past week inflation? Let’s —
SIEGEL: Yeah. You see, that’s the thing. They’re looking just at the interest rates, they say, “We got to get the interest rates way above inflation.” They’re failing to look at a whole number of other indicators that show how tight they are. Look at the dollar, soaring to all-time highs. Look at the money supply, and that’s something that is — you know, I’ve been looking at for 50 years. And the money supply has shrunk since March. Now, that is almost unprecedented. I mean, going back, I think there’s only one other episode in the postwar period where over the next five months, we’ve had the money supply.
RITHOLTZ: It’s up because of the end of quantitative easing, or are there other factors driving that?
SIEGEL: No, it’s more — no, it’s actually because the rise of interest rates has slowed down credit and it’s moved funds out of bank so much, that the liquidity is actually declining in the system. And that was the first thing I said, whoa, you know, I’ve written, in fact, in the chapter, I talk about what is consistent with a 2% inflation rate is 5% money growth. Now, they grew at 25% in 2020 and about 18% in 2021. But it doesn’t mean now you slam on the brakes and go to zero —
SIEGEL: — because that could really precipitate a recession. I want them to go back to a 5% growth. I think that interest rates — and by the way, there’s a whole new chapter on interest rates and stock prices, and the downward trend of interest rates over the last 2025 years, something I talk about a lot.
RITHOLTZ: 40 years from Volcker in 1981, right?
SIEGEL: Well, in 40 years, yes, and real interest rates. I mean, the early part was a lot of reduction of inflation.
SIEGEL: Inflation has remained pretty good. It’s been a reduction of those real rates. I mean, TIPS in 2020, the 10-year TIP was nearly 4.5%. At the beginning of this year, it was minus 1. Now, it’s ratcheted up to 1.5 because of the Fed tightening. But this long — we talk about this long decline, but it’s caused by — a lot of people think it’s caused only because the Fed has been easy. That’s not true. There’s a lot of very fundamental reasons that I discussed in that chapter, why these real interest rates are declining, what that means for stocks, and what that means for the Fed, and what that means for the markets.
RITHOLTZ: So let’s talk about that, because we’ve previously discussed things like how much more productive we are and the impact of globalization and software and technology. What does that mean for the long term interest rate? Once we get through whatever is going on post COVID with this inflation spike, do you expect us to return back to if, not zero, but historically low rates?
SIEGEL: Well, this has been the biggest surprise of all. I actually thought we would have a spurt of technology. I mean, I think Zoom does replace a lot of things that don’t need to be face to face and other things. You know, DocuSign, I mean, we could go on and on. The biggest shock has been that productivity has collapsed. The first two quarters of this year has been the slowest productivity growth we’ve had since World War II, and not only by a small amount, by nearly twice as great as any other collapse of productivity. And I’m rather upset the Fed has not addressed this, what does this mean for the markets? Are people saying they’re working at home and not working at home?
RITHOLTZ: Did you see the Liberty Street Economics research paper? So previously, a lot of data was showing, during the pandemic, work from home, people weren’t commuting. They were working longer hours. They had substituted their commute for more work time. This recent paper at Liberty Street Economics blog, which is the New York Fed Research blog, said, “Oh, it turns out that people have adjusted to work from home. And not only are they not working more hours, they’re working less hours.” They’re spending more time with their family, and they’re actually sleeping more, which is unprecedented from —
SIEGEL: But are they putting out what they need to put out?
SCHWARTZ: Well, profits are still doing well. So this is a —
SIEGEL: Profits are still doing well, but real wages aren’t doing properly. Because don’t forget, a lot of people been locked into a lower real wage situation. Don’t forget a lot of firms that locked in, they’re dead at 2%, 2.5% and 3%. I mean, this is golden for them. They’ve been raising prices, though debt prices are the same. Only now are they beginning to get the pressure on the employee prices. They got a lot of leverage. So profits are doing okay. Although profits in the first half of this year were pretty sluggish. But we had negative GDP growth. You know, I keep on going on and asking how did we have 4 million new people hired in the payroll reports this year and have negative GDP growth?
RITHOLTZ: Well, negative real GDP. But in nominal terms —
SIEGEL: Yeah, but negative real.
RITHOLTZ: Right. So that’s —
SIEGEL: I mean, you’re putting more hours. I mean, we’ve got 4 million new workers that are producing less real goods. How can that be?
RITHOLTZ: So that’s telling us the negative numbers are all inflation-driven.
SIEGEL: Yeah. But why are firms hiring? What are these people doing? I mean, I’m —
RITHOLTZ: Arguably, they’re —
SIEGEL: The real numbers strip away inflation, so we’re producing less goods now with 4 million people than we did in December of 2021.
RITHOLTZ: Is that right?
RITHOLTZ: ‘Cause when I — when we looked at consumer spending —
SIEGEL: No real GDP is lower — no, no, we’re going to get GDP at the end of this quarter, third quarter —
RITHOLTZ: Which is likely to be positive.
SIEGEL: Yeah, so 2%. But we were negative in first two, so we’re basically unchanged, with 4 million —
RITHOLTZ: Flat for the year. Sure.
SIEGEL: 4 million. Sure.
SIEGEL: Yeah. I mean — and maybe slightly dip [ph], 4 million new workers, the same number of goods.
RITHOLTZ: So CARES Act 1 was $2 trillion. The second CARES Act was another trillion. The third one, that one under Biden, the first two under Trump, was another trillion.
SIEGEL: One more trillion. Yeah.
RITHOLTZ: You give Americans $4 million to $5 trillion, we’re going to go out and spend it.
SIEGEL: Well, they did, and that produces the inflation —
RITHOLTZ: And the goods.
SIEGEL: GDP measures the amount of goods that are produced. So it has always been linked with the amount of labor, because labor is the three-quarters of the value of input. We hired 4 million more. We have the same capital as before.
SIEGEL: 4 million more. And the only thing that we then record is a drop of productivity. We’ve hired 4 million more, but they’re just not working.
RITHOLTZ: So how much of this is just the velocity of the money moving through the system? Are we seeing faster money or slower money with all this fiscal stimulus? You know, is the —
SIEGEL: (Inaudible) is responsible for the inflation.
SIEGEL: GDP strips out the inflation and says how much goods are you producing. And why are we producing less goods with 4 million more people? Only because people are not working as hard. It is not as productive. Now, we could get a bounce back of productivity. And if we get a bounce back, wow, that will put downward pressure on prices, because we’ll replenish the supply chain. And that will put downward pressure on prices, if we get a bounce back.
SCHWARTZ: It’s very interesting to see like this question of what are these workers doing? When we posted that question on our podcast to Don Kohn, the former Fed vice chair–
SCHWARTZ: — and Don thought maybe we’re undercounting GDP actually, will future revisions, revised GDP higher?
RITHOLTZ: Isn’t it a fair argument to say our measurement of productivity has always been terrible? We wildly undercount productivity. And what’s the old joke? The computer advantages are everywhere, but the productivity is not.
SIEGEL: Yeah. Well, it was actually Robert Solow —
RITHOLTZ: That’s right.
SIEGEL: — who said, “The computer is everywhere except in the productivity statistics.”
SIEGEL: That was his quote. But I want to follow up on what Jeremy was saying because we did interview Don Kohn and he said, “Oh, I expect them to do a revision.” Well, believe it or not, we did the revision and it didn’t change.
RITHOLTZ: So what does that mean?
SIEGEL: We did get that a revision. And believe it or not, it actually moved one measure of GDP, which is called gross national income. It’s not product, another way of measuring it down. So it did not at all eliminate the puzzle of why this productivity collapsed in the first half. So again, we might get a bounce back. Let’s hope it did, because the standard of living depends on productivity. Productivity is the measure of standard of living. It’s output per unit hour work. So it’s like your real wage stripped away from inflation. And you know, real wages are down, productivity is down. What is going on?
RITHOLTZ: I’ve posited this question to a number of economists, Fed researchers and others, because I have consistently said I feel like myself, my firm has just gotten more and more productive. We put out more and more output, with the same or marginally more people. And the pushback was you’re in a white collar content and creative business, that you get to take full advantage of every new tech innovation. Most of the non-white collar jobs don’t have that same advantage. Is that fair?
SIEGEL: Yeah. I mean, you’re a bus driver, you got to go to the bus and drive. You can’t do that remotely, not yet.
RITHOLTZ: And there’s no productivity gains taking place with that.
SIEGEL: Yeah. No.
RITHOLTZ: What about the industry? Our industry not manufacturing?
SIEGEL: Well, there’s both — I mean, well, you know, we’ve always used to buy new machines that do things faster and better. I mean, go through, you know, what it is, and that has been productivity. In fact, productivity in the goods-producing sector, historically has been much better than the service. Because the service says, “Are you ever going to be more productive, really, like, you know, a haircut in the barber shop?” I mean, it takes what it does.
SIEGEL: Or they say, the orchestra, there’s no productivity in the orchestra, you know.
SCHWARTZ: I came back to the barbershop once since the pandemic. That’s super productive.
SIEGEL: Although they’re springing up everywhere, these fancy barbershop.
SCHWARTZ: I need a home haircut.
RITHOLTZ: So here’s the question, you look like a — you could use a Flowbee,
RITHOLTZ: Right? But here’s the real question, have we been mismeasuring productivity, or do we genuinely have a problem with slackers and people working from a — like sports —
SIEGEL: I think economists — I mean, this is very new data. Don’t forget the first two quarters was a shocking drop. We’re going to see the third quarter, it looks like mediocre productivity at best. It’s going to get 2% GDP growth, maybe zero product. It’s not going to be as bad as it. But I think as we collect more data, it’s going to be a major topic. And I think in 2023, we’ll have a better handle on this situation. I’ve just been a little bit surprised that the Fed, etcetera, has not been trying to address this because how has it become so vigorous on pressing monetary policy when it — well, what is really happening in the real economy?
RITHOLTZ: I want to just mention and ask you about some of just the key points within the book that all these additions have not changed, have been consistent, starting with what is the long run return for stocks both in nominal and real inflation-adjusted terms?
SIEGEL: Well, I mean, that was the first edition data through 1992 from the beginning in 19th century, 6.7%.
RITHOLTZ: Real? That’s real?
SIEGEL: Real. Dividend plus capital after —
RITHOLTZ: Total return of 6.7%?
SIEGEL: And stocks, compound annual. You add 30 years, and we went through to June of this year to make sure we got the recession in, 6.7%.
RITHOLTZ: Unchanged? The same exact since?
SIEGEL: Unchanged. Given everything that’s happened in 30 years, the financial crisis, the COVID crisis, the dot-com boom —
RITHOLTZ: And bust.
SIEGEL: Yeah, and bust. I mean, through all of that, the real return has remained the same.
RITHOLTZ: And bonds were about half? A little —
SIEGEL: The bonds were half, but are much less now.
RITHOLTZ: Oh, really?
SIEGEL: I mean, the real returns on — well, when bonds interest rates peaked in 2000, it was a great 20, 30-year period for bonds.
SIEGEL: And I remember saying on all the networks in 2021, that the 40-year bull market because it started in 1981 with the peak —
SIEGEL: — through 2021 was over.
RITHOLTZ: You told that.
SIEGEL: And it is over with a vengeance, even more vengeance than I thought it was going to be over with, with a vengeance. And the real return on bond has been absolutely terrible as we know, on a comparative basis, even worse than stocks since it actually — not since the bull market ended at that point, but from the low point in 2020.
RITHOLTZ: So I said something at an event where I had said to a group of young people, hey, if you’re in your 20s, 30s, 40s, you really don’t need bonds in your portfolio. You have such a long horizon; you don’t need that ballast. You go even further than that and say, “Most portfolios could be fine if they’re equity only.”
SIEGEL: Yeah. I mean, you know, what we show — I mean, and that’s hasn’t changed over 30-year periods. In real terms, after inflation, stocks are less volatile than bonds.
RITHOLTZ: That’s wild. So now, you have the 10-year 4% or so —
RITHOLTZ: — depending on when this broke out. At what point are we done with, “Tina, there is no alternative to stocks?” Well, at what point do bonds get cheap enough where they start to look attractive?
SIEGEL: Well, a lot of people — it’s interesting. We’re talking today, and they say, “Lock at 4%, I can lock that in for, well, even two years, four and a half.” I said, “Yes, you can lock that in.” But you know, after two years, I mean, the stock market is going to be 20% to 30% higher than it is today.
RITHOLTZ: Really? That’s a bold move from here.
SIEGEL: Yeah. I mean —
RITHOLTZ: Hold on. Let me just see if I could buy some out-of-the-money call out to this.
SIEGEL: It has to be long-dated, though, pretty long-dated.
RITHOLTZ: Yeah. No. You go out two years, you get those two years.
SIEGEL: You get out two years. I mean — and by the way, when people tell me 4.5% is good, it certainly is good relative to zero. But let me ask you, that’s before inflation.
SIEGEL: And when the long run on stocks is 6 after inflation, tell me how you’re going to be better off in the long run.
RITHOLTZ: It sounds like you’re not. You should write a book about this. That’s right. So the one question I always forget to ask and I wrote it down so I’m not going to forget to ask is gold.
RITHOLTZ: Tell me your thoughts on —
SIEGEL: Well, a long run on gold is less than 1% above inflation. So it’s basically an inflation hedge long run. Now, what’s happened with gold? It hasn’t — it has failed, so to speak, as an inflation hedge.
RITHOLTZ: I mean, does that surprise you? You would have thought 2022 should have been the year gold exploded.
SIEGEL: But I think the big difference is — I mean, I think that in the early part of this inflation, Bitcoin usurped the role of gold.
RITHOLTZ: Millennial digital gold.
SIEGEL: Digital millennial gold, they wanted to go to that and it was sold as an inflation hedge, and that’s another thing that made it go up too high. You know, now —
RITHOLTZ: What? Bitcoin?
RITHOLTZ: Yeah. But Bitcoin ran up when inflation was under 2%, right?
SIEGEL: Yeah. But that was the innovation and all the rest, and then it was being sold as the inflation hedge because the truth is, there is going to be a limited number of bitcoins. There’s not a limited number of dollars. So there was some logic to that. Now, it shouldn’t go up as much as it did, but the logic was, it is the new inflation hedge. The Bitcoin, it serves as the gold, where in 1978, ‘79 and ’80, people rushed to gold. There was no Bitcoin.
SIEGEL: People now we’re rushing to Bitcoin, and the younger people don’t care about gold, and wasn’t driving them.
RITHOLTZ: And we need to do a disclosure on this because my firm and your firm, WisdomTree and Ritholtz Wealth Management work together on the — tell us — Jeremy, give us the full —
SCHWARTZ: There’s an RWM WisdomTree Crypto Index, sort of basket of 14, 15.
RITHOLTZ: Right. We 00:58:21 crypto which you would be —
SCHWARTZ: Trying to indexing [ph] anything. It could be more diversified exposure than just Bitcoin or —
RITHOLTZ: So full disclosure, that’s out there. But you’re going to say something about Bitcoin.
SCHWARTZ: I want to say something about gold also. I think gold and dollar terms has been a big failure. Gold and yen terms has been great. Gold and euro [ph] now —
RITHOLTZ: I hate that argument. You know why? Because people always tell me, “You should have gone back in time and bought gold and fill in the blank two years ago.” Well, nobody said that back then. It’s easy to look after the fact. Isn’t that just a currency bet?
SCHWARTZ: Well, the point is our team does a lot of work in gold because we’re big commodity players in Europe. And we have some modeling on what drives gold prices. And certainly negative interest rates, like, you know, gold had this cost of carry, you had to compete with bonds.
SCHWARTZ: And you had all this negative interest rate debt in Europe, and that was obviously a positive carry versus a negative rate. That went away. That was one of the things that drives. So real rates were a big factor in gold. So the fact that real rates went up 250 basis points, that’s a big headwind to gold. The dollar is surging. There’s a big headwind.
RITHOLTZ: A headwind to gold. So in other words, it’s not just inflation; it’s inflation minus rates.
SCHWARTZ: Real rates. Real rates being from negative — 250 basis point move in real rates, you could say, wow, gold is really doing much better.
SIEGEL: Than stocks and bonds. I mean, it is.
RITHOLTZ: Well, it’s only down 9% this year, but not what I would have expected, given inflation —
SIEGEL: But given the move in real rates, it’s actually — it’s surprisingly doing even better than that, given some of the modeling.
SIEGEL: Yeah. Yeah. And we talk about inflation and I do want to get this in —
SIEGEL: — about inflation because it’s part of what we are talking earlier about the rant on —
RITHOLTZ: Right, right.
SIEGEL: — flipping too tight. I have maintained — and now there’s finally papers that talk about this, that the inflation data that we’re getting today, particularly core inflation is overestimated and inflated, so to speak.
RITHOLTZ: On the services side versus the — or the good side, or both?
SIEGEL: On the — because of housing.
RITHOLTZ: Owners’ equivalent rent is problematic.
SIEGEL: Yeah. Owners’ equivalent rent, and housing cost, and rental, and even not owners’ equivalent, it’s the rental part of that. We — basically, because of the way the Bureau of Labor Statistics computed, it’s very lagged in housing prices. So we didn’t record enough inflation —
SIEGEL: — in the last two years.
SIEGEL: And now we’re going to over-record inflation today and the next couple of years.
RITHOLTZ: Something very similar had happened heading into the financial crisis like ’04, ’05, ’06. BLS was behind on the inflation reporting —
RITHOLTZ: — because it was embedded in housing. And then once people flipped from buying to renting, suddenly, they overshot on the other way, which raises an interesting question. If the FOMC is raising their rates, which is helping to drive mortgage rates higher, which is sending all these people to rent, is the Fed indirectly making inflation higher?
SIEGEL: First of all, they are responsible for the inflation. They are responsible for the fact that the Case Shiller Housing Index, from the month of the pandemic 2020 through the spring of this year, was up 40%.
RITHOLTZ: That’s a big number, isn’t it?
SIEGEL: Yes. 40%.
RITHOLTZ: Now, that’s off the pandemic lows or is that dropped off?
SIEGEL: No. This is from March, and then it went down a bit during the pandemic. So — but I’m taking it from March, before the pandemic, 40% up our national housing index. Rental indexes — and this is before the Fed tightened — were up 30%.
SCHWARTZ: What is the core BLS number? 10%.
SIEGEL: Yeah. Yes. The government’s inflation housing index is up like 11% or 12%. So they’re way behind. And they’re still showing an acceleration, while the real housing prices are going down now.
RITHOLTZ: Right. Even with the limited inventory, prices have softened.
SIEGEL: Oh, going down.
RITHOLTZ: Bidding wars are over.
SIEGEL: Oh, yeah. Their discounts are — people are now really worried if they have to sell.
RITHOLTZ: So the question is, is the Fed aware of the fact how behind the curve their housing data is?
SIEGEL: I hope so.
SCHWARTZ: They’re writing some papers on it, but they don’t seem to reflect it.
SIEGEL: Yeah. I hope so.
RITHOLTZ: The research department in the FOMC don’t seem to communicate.
SIEGEL: Yeah. I mean, I hope so. I mean, you know, but —
RITHOLTZ: And then second, if they are aware of this, at what point do they —
SIEGEL: Well, they should be pivoting.
RITHOLTZ: Right. At what point did they declare victory and say, “Okay.”
SIEGEL: They should be saying — I say maybe do another 50, but they won’t.
RITHOLTZ: In November.
SIEGEL: And then stop and see what happens. Now, Bullard is talking about 75-75 and weighting.
SIEGEL: I think that’s too aggressive and will accelerate the downside too much. That’s my position.
RITHOLTZ: I think a lot of people agree with you. And I think that’s part of the reason if you live in the real world and you look at copper, you look at lumber, you look at gasoline prices, and what do we have? 98 consecutive days of falling gas prices. And gas is now below where it was a decade ago. I think a lot of people agree with you, the Fed should declare victory and go on.
SIEGEL: Well, you know, you’re always on alert. But I pause — and you know, what’s surprising me, Barry, is that, you know, they exploded the money supply in 2020. When did we start really seeing inflation? 2021, end 2021.
RITHOLTZ: It takes a year and changed, right?
SIEGEL: Yeah. Now, all of a sudden, we only are six months into the signing cycle.
SIEGEL: And they’re saying, “Oh my god, I’m not seeing the results I wanted.” We’re tight and tight. Well, it doesn’t happen in six months. And in fact, you are seeing that if — and goods prices are way down.
RITHOLTZ: Way down. Right.
SIEGEL: And service prices take even longer. So this idea, “Oh my god, it’s not working. It’s not working. We got to keep on hiking,” is to me — I’m flabbergasted. I mean, it’s totally different from what they were just saying on the other side when inflation was building and they say, “Oh, we don’t see any inflation,” despite the fact of floating the credit and easy money policies that we —
SCHWARTZ: We’re petitioning Siegel petitioning for the Fed.
RITHOLTZ: Or just Jay Powell, have Professor Siegel show up and explain.
SIEGEL: I would be happy to debate him.
RITHOLTZ: No, no, no, not a debate. I want to send you to the Fed and you school them, “Hey, here’s what you guys seem to have forgotten since high school.”
SIEGEL: I wish there were another voice there, and I’m doing my best to bring some voices there. If it isn’t me, maybe I can and convinced some of the Fed governors or presidents to bring that argument.
RITHOLTZ: So two Fed governors — I’m not a Fed watcher. I don’t feel the need to hang on every speech on everything. But the two Fed governors that seem to be closest to making that pivot, the one you just mentioned earlier, and then Lael Brainard also seems to be saying, “Well, you know, we’re starting to see” —
SIEGEL: They’re beginning to make some noises, but most of them are saying we’re going to be tough through 2020.
RITHOLTZ: Neel Kashkari just said, “Something is crazy this morning.” Right?
SIEGEL: Yeah. I mean, just to keep at these rates to 2023 will cause the second worst collapse of the housing market in the postwar period. I actually think housing prices, from their peak, are going to go down 10% to 15%, still leaves them up. Remember, they were 40. But if they continue this up higher, you know, it’s going to get even worse.
RITHOLTZ: And it’s not just how far they fall, but it’s how long. If they’re down 10% and there’s no improvement over 5 or 10 years on a real basis —
SIEGEL: It could go down. And you know, it will crimp the housing industry, which is one of the most important industries in —
RITHOLTZ: In the overall —
SIEGEL: You can see that in the auto industry, the loan situations, it’s going to get very hard to get a loan on that, credit cards in general. We haven’t seen it in the real statistics, not yet.
RITHOLTZ: So are you —
SIEGEL: How can — yet in some of the statistics, the housing statistics are absolutely terrible.
RITHOLTZ: Right. I just showed in the middle of October, the prospective homebuyers traffic is almost as bad as the worse part of the —
SIEGEL: The National Association of Homebuyers, NAHB —
RITHOLTZ: Yeah. Wells Fargo doesn’t —
SIEGEL: is one of the biggest collapses we’ve ever seen.
RITHOLTZ: Yeah, yeah. It’s almost as bad as the middle of the pandemic, the early parts of the pandemic.
RITHOLTZ: So I hate asking the recession question, but I feel I have to ask you. Do you feel that if the Fed continues on this path, we will find ourselves in a recession in 2023? And how bad potentially could it get?
SIEGEL: Well, it could — the longer they continue on this path, that we keep on hiking or stay — we’re going to stay high for longer, I think the recession becomes a real possibility. I still think they have a chance to avoid one. But to pay the debt —
RITHOLTZ: Stop right now and we avoid a recession.
SIEGEL: Or you know, if they just put a ceiling for the market and say, “We’re seeing progress and we can soon begin to pause.” You know, that is what the market is looking at. What the market is so scared about is there seems to be no limit to their talk hike, hike, hike, hike, hike. Because if they’re going to wait for that quarter rate to go down to 2% a year, given the distortion and statistics, we are in for big trough.
RITHOLTZ: So you raised a really interesting point there, which is some people believe that Jerome Powell thinks markets are too high, and he won’t be happy until he sees markets take a haircut.
SIEGEL: And there’s talk about that. I mean, I —
RITHOLTZ: What do you think about that?
SIEGEL: Well —
RITHOLTZ: He’s like the anti-Greenspan in that way.
SIEGEL: Well, you know, we used to talk about Greenspan put. If there’s disruption in the market, which I don’t expect, then, you know, he will step in. I mean, that’s what the central bank — really disruption of the market, something really bad happens, and (inaudible). But if the market goes down another 10%, because he’s not coming in.
RITHOLTZ: And if the market goes down another 10%, I suspect you’re a buyer.
SIEGEL: Oh, I’m definitely a buyer. Well, I’ll tell you, when the Fed pivots —
RITHOLTZ: Look out.
SIEGEL: — you’ll see a thousand point more —
RITHOLTZ: I love that you’re saying this because we were just talking about this, it feels like the risks are very asymmetric, that the Fed could over tighten, that we can miss earnings, that we could have a recession. And we could grind 5%, 10%, 15% lower. But heaven forbid, the war in the Ukraine ends. We get some decent earnings, or the Fed says, “Okay, we — you know, we see a five-hand wave.
SIEGEL: We can do one more and wait.
RITHOLTZ: Look out — look out above.
SIEGEL: Look out above. And as I say, I think stocks are quite undervalued, not that they’ve been the most undervalued by history. Obviously, we’ve had worse. But I would say if you buy stocks, in a couple of years, you’re going to be very happy.
RITHOLTZ: Today’s special edition of Masters in Business is brought to you by confirmation bias. Barry’s confirmation bias, what this show is all about. You’re just talking my game. Everything you’re saying is what I want to hear. And so I feel like I have no objectivity, and I’m just like ready to stand up and start waving a flag. Jeremy Schwartz, tell us why the Professor is wrong.
SCHWARTZ: Well, I mean, it’s interesting 20% are valued even with the fear that the Fed keeps doing what they’re doing. We talked about the S&P at 16.5 times earnings.
RITHOLTZ: It seems pretty reasonable, right?
SCHWARTZ: You get some of these international markets. We’re talking about the emerging markets at single digit piece.
SCHWARTZ: But even broad developed markets, they’re half the valuation of the U.S. too.
RITHOLTZ: Europe has looked terrible for a long time.
SIEGEL: Yeah. Europe is selling at 10, right?
SCHWARTZ: And yeah, with the fundamental screen, it’s going to have even lower numbers.
SIEGEL: Even. I mean, that’s unbelievable. I mean, you know, on a fundamental screen, if you do fundamentally-weighted, it’s tilting undervalued.
SCHWARTZ: Well, yeah, it could get very low.
RITHOLTZ: So the pushback to that is, well, Europe is a mess. We have the Russian gas and the threat of war.
SIEGEL: Yeah. Well —
SCHWARTZ: U.S. small caps at 9 to 10 times earnings. And we have three different small cap ETFs, dividend based, earnings based, all of them are 9 to 10 times earnings, that small cap discounts?
RITHOLTZ: Small cap value is as cheap as we’ve seen a long time, right?
SCHWARTZ: Small cap generally had been cheap relative to large caps. You’re at sort of the bottom few percent in the last 30 years, and (inaudible) have been very good from these levels. We’ve been adding —
RITHOLTZ: It doesn’t mean it can’t get worse. But if you’re looking at 5 years or 10 years, so —
SIEGEL: Yes. When you get these prices, and dividend yield, and earnings yield is so high, you don’t even need much appreciation to get great returns because —
SCHWARTZ: 10% earnings yield is —
SIEGEL: Yeah, 10% earnings yield is a real yield.
SIEGEL: But if prices — even if 10 years from now, they’re 10, you’re getting 10% after inflation. It’s amazing. So I mean, you know, you don’t even need them to move up in valuation if you hold on to stuff that —
RITHOLTZ: So before I get to my favorite questions, I got to ask one last question about the book. So, you know, hundreds of thousands, or half a million copies of this have sold. It’s the sixth edition. We now have a “with,” with Jeremy Schwartz. Are we going to continue to see future updates every — what is this been updated? 12 times over 30 years? So —
SIEGEL: Six times. No, it’s not every five years, though. I mean, this was the longest period. I said eight or nine years.
SCHWARTZ: I think his wife thinks this is his last today.
RITHOLTZ: Is she looking for you to kick back and slow down a little bit?
SIEGEL: Yeah, she said, “Slow down a little bit.”
RITHOLTZ: Why do I sense that that’s not going to happen?
SCHWARTZ: Passing the torch.
RITHOLTZ: Are we passing the torch? Is the next edition going to be Jeremy Schwartz with Jeremy Siegel? Is that’s what’s going to happen?
SIEGEL: That’s a possibility. We actually have not had any formal discussion.
SIEGEL: We don’t need one right now.
RITHOLTZ: But “Stocks for the Long Run” is going to be here for the long run. This is going to continue.
SIEGEL: I think it’s going to continue.
RITHOLTZ: “Stocks for the Long Run” for the long run, is that it? So let me just try and touch some of my favorite questions that I ask all my guests, but I’m going to ask them to you both at the same time because I want to see how that works, having never done this before.
RITHOLTZ: Out of curiosity, during the lockdown when you weren’t ranting about the Fed, what were you guys doing? What were you watching? What was keeping you busy? What were you streaming on Netflix or Amazon?
SIEGEL: Wow. What were we doing? Yeah, I mean, we began obviously watching a lot more than I did before.
SIEGEL: You know, I love “The Crown.” I loved the “Succession.” Believe it or not, people say, “Do you really watch “Yellowstone?” I said, “Yeah.”
RITHOLTZ: I know people who love “Yellowstone,” love it.
SIEGEL: I mean, it’s like the western version of s”Succession.”
RITHOLTZ: What were you doing, Jeremy?
SCHWARTZ: I’m going to say, look, I’m not that good with pop culture. I mean, —
RITHOLTZ: But you have girls. You have three girls, right?
SCHWARTZ: I have two girls.
RITHOLTZ: Two girls.
SCHWARTZ: I would say I’m one who took the work — I was working more from home. My podcast consumption went way down actually, which was — that’s one of the things I missed.
RITHOLTZ: No commuting. Right.
SCHWARTZ: I did it all on the plane and the commute.
RITHOLTZ: It’s funny you say that because I watched our numbers go up, and I was the opposite of what I was expecting because on the train is when I listen to podcasts.
SCHWARTZ: And so my personal went down a lot. But as we start getting back into it, I’m getting back —
RITHOLTZ: What do you watch with the girls?
SCHWARTZ: Honestly, they do their own thing. My 7-year-old is on YouTube, like, you can’t get her off YouTube.
SCHWARTZ: My 10-year-old is less on all that. So they’re on their own little devices.
SIEGEL: Yeah. And one thing we did, we kind of formed — you know, we stayed away from each other from March until Memorial Day. And then we decided, listen, we spent formed the pod of the family and we started spending a lot of time together.
RITHOLTZ: You used to go outdoors. Right?
SIEGEL: Yeah. And you know, believe it or not, I’ve been in four international trips then two family trips abroad since then. So, you know —
RITHOLTZ: A lot of travel.
SIEGEL: Yeah. I mean, a lot of people were surprised. But we decided, hey, you know, we’re all pretty healthy. And you know, we all got vaccinated. And you know, we’re going to get it. It’s going to be mild and —
RITHOLTZ: That what you hope for, right?
SIEGEL: Who knows? I mean, you have left.
SIEGEL: Take advantage of what you —
RITHOLTZ: Right. You can’t hide for the rest of your life.
SIEGEL: You cannot forever because there are dangers everywhere.
SCHWARTZ: He does go out and travel even way more than I do.
RITHOLTZ: Oh, really?
SCHWARTZ: But the — I mean, the work from home — I guess the other thing that we did, I mean, I got to be more involved with the girls. Like, I was able to coach my 10-year-old’s basketball team. We did it in No Kid Hungry. Michael and Ben did their NFT for No Kid Hungry.
SCHWARTZ: We’ve also come around that organization.
RITHOLTZ: You raised a lot of money. That was — those are good —
SCHWARTZ: Our team raised the most for our basketball league as well. And we got to go play in the Sixers’ court because our team raised much money for No Kid Hungry.
RITHOLTZ: Oh, that’s a blast.
RITHOLTZ: In the Forum?
SCHWARTZ: Yeah. Well —
RITHOLTZ: What is it called these days?
SCHWARTZ: Wells Fargo. Is it Wells Fargo?
SIEGEL: Yeah, Wells Fargo.
RITHOLTZ: To me, it’s the Philadelphia Forum, but that’s old school.
SIEGEL: Yes. Spectrum.
RITHOLTZ: Spectrum. That’s right.
SIEGEL: The Spectrum.
RITHOLTZ: So normally, I ask this question right here, which is, who are your mentors, but I’ve — this is the first time I’ve actually asked somebody that question with their mentor. So I’m going to flip the question on Professor Siegel and say, tell us about some of your mentees and who helped shape your career.
SIEGEL: Well, clearly, I would mention Professor Milton Friedman at the University of Chicago. And I’d also mention Professor Paul Samuelson from MIT, where I got my PhD. And yeah, I mean, I regard those as probably the two — I mean, I was honored to be able to be so close to them. Professor Samuelson was on my thesis committee. Professor Friedman was a colleague of mine. My first four years of teaching was his last four years before he retired. We became very close friends. I saw him a lot after he retired — he lived in San Francisco — whenever my wife and I went there. They really made a tremendous difference.
RITHOLTZ: That’s some combination. And then I always feel like I have to bring this up when I speak with you, is that you and Professor Shiller are buddies and you guys socialize. The families go out together all the time.
SIEGEL: And let me tell you what’s amazing is tomorrow I’m going to the Poconos. And Bob Shiller and his wife, Jenny, are going to go down there. We used to do that every summer and this is the first time in probably 30 years that we’re going to be spending the weekend together. We’ve been friends for 55 years.
RITHOLTZ: 55 years? That’s a long time.
SIEGEL: 55 years. I met him as a first year graduate student, 1967 at MIT.
SCHWARTZ: I’ve got a story about their vacation that’s a pretty good one.
RITHOLTZ: Go ahead, let’s hear it.
SCHWARTZ: The first year I’m working for the Professor is the summer of ’01. And the New York Times was coming to do a profile of the two professors, and it was a great cover, David Leonhardt I think was the author.
SCHWARTZ: And I just started dating my now wife Bonnie and she had in her class, in Economics, she had to write a contrast irrational exuberance with “Stocks for the Long Run.”
RITHOLTZ: Oh, that’s hilarious.
SCHWARTZ: And she had to take off to go to a barbecue with them and we — and the Professor said, “Can I come?” And so anyway, she got to go to the barbecue with them in Ocean City. They’re doing it in Ocean City.
SIEGEL: Which we rent the place all the time. We now own it — but it’s, you know, near Ocean City. But at that time, we rented and he came over, spent the weekend.
SCHWARTZ: And you mentioned my poker playing. But she actually — in her paper, she got an A plus on the paper.
RITHOLTZ: I would hope. I hope there’s a photo with everybody together.
SCHWARTZ: There’s a contrast of — we actually went to Atlantic City and Bob didn’t want to play blackjack and the Professor was playing cards. And she used that as an analogy of the risk.
RITHOLTZ: Risk aversion versus (inaudible). Right.
SIEGEL: Oh, come on, Bob, you know, let’s play.
SCHWARTZ: So even there, there was a good anecdote.
SIEGEL: Yeah, he’s very much — it’s just a difference in psychology. He’s very much more risk averse.
RITHOLTZ: So it’s funny.
SIEGEL: But we’d love it. We have so much in common. We get together, we just talk about so many issues.
RITHOLTZ: So when I had Bob here for the show and he had — his next appointment was a speaking event across town. It was the same direction I was heading. So I’m thinking, well, here’s Bob Shiller, I’m not going to stick him in the subway to go downtown. “Hey, listen, we’ll get a car and I’ll have a car take you to your next event.” So we get in this, you know, cab, and he puts on his seatbelt in the back seat. And I’m like, “Well, if Bob Shiller is putting on the seatbelts, maybe he’s done the math, maybe I should be wearing a seatbelt in the back of the car.” And —
SIEGEL: He’s very cautious.
RITHOLTZ: It was —
SIEGEL: I remember when — I love heights and I remember once there’s was a bridge and there was a ledge that you could walk on. It was wide enough.
SIEGEL: And he said, “Jeremy, don’t go up there.” I said, “Oh, Bob,” and I walked across. And you know, he said, “I won’t come.” You know, he was so scared of doing that. He said, “Oh, you might trip. You might fall. You might fall.”
RITHOLTZ: That’s so funny. And you guys still spend that much time with each other on a regular basis?
SIEGEL: Oh, we just love each other. Yeah.
RITHOLTZ: All right. So down to my last couple of questions, let’s talk about books. What are you reading now? And what are some of your favorites?
SIEGEL: This has really dominated so much of what I’ve done recently. And there is one book that I have read recently, and I’m sorry that it’s really quite interesting because it has nothing to do with finance, Ross Douthat’s book.
RITHOLTZ: From The Times.
SIEGEL: From The Times. And he wrote about his journey into a severe Lyme disease situation.
RITHOLTZ: Oh, really?
SIEGEL: And you know, I’ve had some medical issues myself in the past. And I was fascinated how he dealt with it and how the medical establishment dealt with it. And he had written several articles about how that affected his feelings about medicine and the government, and all the rest.
RITHOLTZ: “The Deep Places,” is that it?
SIEGEL: “The Deep Places,” you got it.
RITHOLTZ: That’s very interesting.
SIEGEL: Yeah. And so I — it’s a fast read. He moves to Connecticut because it’s something he loved all the time. And within like two weeks, he gets it and no one can cure it and it gets worse. And he goes to all these extremes and what he learns and thinks about. I thought it was a fascinating book.
RITHOLTZ: Really interesting.
SIEGEL: Then it was — you know, I tried to read a couple of things that aren’t just economics.
SIEGEL: But that was — that was — and there was one other book, but I can’t think of that one either, but —
SCHWARTZ: I’ll say, like, it’s sort of a similar story to my podcasting. I used to do more Audible because I got into podcasting.
SCHWARTZ: And that was how — and so I actually have 12 Audible credits. So my point on it, it’s been a while since I’ve been doing a lot. But the last one I read was “Hot Commodities” from Jim Rogers, which people —
SIEGEL: I remember he wrote “Investment Biker,” didn’t he?
SIEGEL: Yeah. I remember reading that of many, I got —
RITHOLTZ: Late ‘90s?
SCHWARTZ: Look back, the commodities were coming back for the first time.
SCHWARTZ: So like 15 years — his book was about 15 years early, but like everything he was talking about, it’s coming together more today.
SIEGEL: There’s another very interesting — I like history, in particular stories about the war. And yes, the book was entitled “The Newspaper Axis,” and it had to do with both in the United States and in Britain. Some of the most major newspapers were big supporters of Adolf Hitler, and made excuses for him and all the rest. And it mentioned some of the biggest editors, some of it might be people who supported Trump today. But it was a — it wasn’t just a rivaling media; these were dominating media’s that were very sympathetic. It was a pretty shocking book.
RITHOLTZ: Was this a function of who owned those papers or —
SIEGEL: Yeah. I mean, it was the editors of McCormick of the Chicago Tribune. Beaverbrook, was it The Guardian or The Telegraph in London, who was an admirer of Hitler. Although once the war started, he really went to the side of the British.
RITHOLTZ: “The Newspaper Axis: Six Press Barons Who Enabled Hitler” —
RITHOLTZ: — is the title of that.
SIEGEL: Yeah, that’s another one.
RITHOLTZ: What sort of advice would you give to a recent college grad who is interested in a career in investing in finance?
SCHWARTZ: Avoid the investment banks, go find something of your passion. Everybody thinks they got to go to the investment banks.
RITHOLTZ: So don’t start at Goldman or Morgan Stanley. Go to —
SCHWARTZ: It’s such a routine. I mean, I obviously followed a different path. I found the Professor. We found more interesting things. I mean, it’s really the world is getting quant, so Python as like the language of choice.
RITHOLTZ: So you’re on programming, right?
SCHWARTZ: Getting to data sciences, where the financial engineering programs are, the highest in demand people from my side.
SIEGEL: And I would say, you know, a more general thing. And I wouldn’t have said do what you love. Do what you’re good at. You know what you’re really good. You think better than others. You know, a lot of — oh, yeah, I think about that really well. Pursue your comparative advantage, as an economist would say. And do what you feel good about, not what someone else, your parents or others are saying. You got to find your own thing. But also know what you’re good at, you know, “Hey, I’m pretty good at that.” And that’s where you should go.
RITHOLTZ: And our final question, what do each of you know about the world of investing that you wish you knew 20, 30, 40, 50 years ago?
SIEGEL: Well, I probably would have not had any bonds in my TIAA-CREF university account.
RITHOLTZ: No bonds at all.
SIEGEL: You know, I had — I started out — they always — I said, oh, Jeremy, you got to be 50/50. Okay, back then, you know, I was —
RITHOLTZ: Even 60/40.
SIEGEL: Yeah. I mean, you know, I wasn’t — you know, when I started — don’t forget I started as an economist. I get into finance, actually, later. So — and until I studied myself, and I said, what am I doing this for? And I started shifting away. But, you know, if you’ve got that long horizon and you’re young — and you’re young today, this is a golden time. I mean, you’re not buying at the top. You’re buying near the bottom. You are going to be guaranteed great returns when you retire.
RITHOLTZ: In equities, not in bonds.
SIEGEL: Not in bonds, even with their real rates suck.
RITHOLTZ: Just to make so. Jeremy Schwartz, what do you know today that would have been helpful 25 years ago?
SCHWARTZ: The remote first world, if I would have known how remote it was going, I might have moved into different places.
RITHOLTZ: There you go. That’s really interesting. We have been speaking with Professor Jeremy Siegel of the Wharton School of Business, and Jeremy Schwartz of WisdomTree Asset Management. Thank you guys for being so generous with your time. If you enjoy this conversation, be sure and check out any of our previous 425 conversations we’ve done over the past eight and a half years. You can find [email protected], iTunes, Spotify, YouTube, wherever you feed your podcast fix.
We love your comments, feedback, and suggestions. Write to us at [email protected] Follow me on Twitter @ritholtz. Sign up for my daily reading list, that’s at ritholtz.com. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Robert Bragg is my audio engineer. Paris Wald is my producer. Atika Valbrun is our project manager. Sean Russo is my head of Research.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.