“Those who predicted a return of double-digit inflation couldn’t be more wrong.” — Jeremy Siegel
Last week on Veteran’s Day, I had breakfast at the magnificent old Union League of Philadelphia with Jeremy Siegel, the University of Pennsylvania’s renowned professor of finance, who is known as the Wizard of Wharton.
It was a fortuitous opportunity to sit down and speak with Professor Siegel. Five years ago, I met with him on Valentine’s Day 2009 before we went out to dinner with our wives. Before leaving, he showed me his 200-year stock market chart. Bear in mind that in early 2009, the United States was in the middle of the financial crisis and the Great Recession, and the stock market had fallen 50%. But Jeremy was upbeat. His graph showed that every time the stock market had fallen 50%, it hit a long-term bottom. The only exception was 1930-32, the Great Depression.
Siegel said that it was likely we would see the bottom within weeks. In the March issue of my newsletter, Forecasts & Strategies, I told the story about Siegel’s graph and said that the market was a “screaming buy.”
It was one of my best calls ever, thanks to my meeting with Professor Siegel.
Siegel also said that based on past cycles, the stock market should have five straight years of double-digit percentage growth that could reach as high as 20% a year, after a major bear market. He was right on about that prediction, too.
But now that the five years are up, what can we expect? I was anxious to get Siegel’s read on the market. Is the bull market recovery over? Is the market going to crash, as many of my gold-bug pundits are predicting?
He was upbeat, but he tempered his outlook. “It’s harder to predict the direction of the stock market when not at extremes,” Siegel said.
He was especially critical of those doomsayers and gold bugs who have been predicting runaway inflation since the Fed adopted easy-money policies and cut short-term interest rates to nearly zero.
“Their predictions were laughable,” Siegel commented.
Siegel said that those who forecasted inflation looked at the wrong monetary charts.
“They looked at the monetary base and the Fed’s balance sheet, and saw a huge inflation ahead,” Siegel said.
But Siegel learned an important lesson from Milton Friedman, his professor at the University of Chicago many years ago. “Don’t look at the monetary base, watch M2,” Friedman advised Siegel. And M2 has been rising slowly and steadily (4-6% a year) since 2009. “That’s not enough to ignite price inflation,” Siegel said, “especially after the 2008 shock.”
Furthermore, he asserted, as long as price inflation stays low, so will interest rates. He believes that stocks will probably head higher after interest rates rise, but the increase in interest rates will be “modest,” he predicted. From an historical perspective, “interest rates will remain permanently low.” And that means that the stock market can reflect a higher price-earnings ratio.
He also was critical of Robert Shiller’s Cyclically Adjusted Price-Earnings (CAPE) ratio and the Tobin Q ratio, both of which show stocks overvalued now. “Neither one accurately reflect the ‘new neutral’ of historically low interest rates,” Siegel said.
And low interest rates mean higher stocks ahead. The bull market is not over, he predicted, although he did not expect the same kind of performance we’ve witnessed during the past five years.
He also expressed support for my new statistic, Gross Output (GO), which the federal government is now publishing along with Gross Domestic Product (GDP). GO is a good measure of the “demand for money,” he said, because it attempts to quantify real business activity at all stages of production.
Today, the Bureau of Economic Analysis released Gross Output for the second quarter of 2014, indicating that GO advanced sharply at a 4.7% annualized rate, suggesting a strong economic recovery and continuation of the bull market on Wall Street.
I told Siegel about our mock trial at next year’s FreedomFest. We’re putting the Federal Reserve on trial. He grew animated.
“I’d be glad to defend the Fed’s actions during the financial crisis,” Siegel said. He’s checking his schedule to see if he can make it. Stay tuned!
You Blew It! Obama Declares War on ‘For Profit’ Education
On Oct. 30, the Obama administration issued new regulations that will basically cut off funding for college education to an estimated 1 million students, many of them minorities who are looking to lift themselves economically.
It is called the “gainful employment” regulation, all 945 pages of it. Basically, if “for profit” (mainly online) colleges show that their graduates’ annual loan payments exceed 20% of their income, current students at those colleges can’t qualify for federal student aid.
If this rule were applied to public institutions, 43% of graduates would fail to meet the test, and if applied to private non-profit colleges, 56% would fail.
Private, for-profit colleges and universities primarily serve adult, low-income and minority students, as well as the military. Examples include Phoenix, Kaplan, DeVry and Grantham universities. I am associated with the latter, which named its business school after me. I firmly believe these institutions provide a valuable service. And there’s no doubt that online education is booming and offers a great opportunity to continue one’s education as an adult.
The ruling is being challenged in court and probably will be overturned. It will hurt some institutions, but I’m of the opinion that federal financial aid should be done away with entirely. It should be a private matter, except for the military.
In case you missed it, I encourage you to read my e-letter column from last week about the impact of the midterm elections. I also invite you to comment in the space provided below.