Two Down, Two to Go

Doug Nolan


“U.S. Stocks Finish Best Quarter in More Than 20 Years” – yet another extraordinary period worthy of documenting in some detail.

The S&P500 returned 20.5%, led by energy companies Halliburton (up 89.5%) and Marathon Oil (86.2%).

The Dow Jones Transports returned 19.2%, with Avis Budget gaining 64.7% and Ryder rising 41.9%.

Lagging, the NYSE Financial Index returned 13.1%. Goldman Sachs rallied 27.1% during the quarter.

The broader market outperformed. S&P400 Midcap and Small Cap Russell 2000 indices returned 24.1% and 25.4%.

There were 155 companies in the Russell 2000 that gained 100% or more during the quarter.

The equal-weighted Value Line Arithmetic Index of 1,700 stocks gained 30.1% during Q2, the strongest return since Q2 2009’s 32.2%.

The Nasdaq Composite returned 31.0%.

The Nasdaq100 (NDX) returned 30.3%, led by a who’s who of popular short positions.

Tesla gained 106%, Mercadolibre 102%, Paypal 86.4%, EBay 74.5%, Zoom 73.5%, and Lululemon 64.6%. Apple returned 43.8%, Amazon.com 41.5%, and Microsoft 29.4%.

The Nasdaq Industrials returned 32.4%, while the Nasdaq Telecom Index returned 24.2%. The Philadelphia Semiconductor Index (SOX) returned 32.8%, with two-thirds of the index members gaining at least 32%. The Nasdaq Biotechnology Index returned 26.9%, with almost a tenth of member stocks doubling during the quarter.

Indicative of the pain meted out on the short side throughout the quarter, the Goldman Sachs Most Short Index rose 56.2%. Many popular shorts posted spectacular quarterly gains.

Wayfair returned 269.8%, Big Lots 195.4%, Eldorado Resorts 178.2%, Etsy 176.4%, Bed Bath & Beyond 151.8%, Murphy Oil 125.1%, Jack in the Box 111.4%, Aaron’s 99.3%, Polaris 92.2% and Brunswick 81.0%.

The Philadelphia Oil Service Sector Index rose 35.5%, with nine of 15 index members gaining more than 57% for the quarter. Retailers (XRT) jumped 44.3%, with gainers including GAP (79.3%), CarMax (66.4%), Carvana (118.2%), Dick’s (94.1%), Best Buy (53.1%), Expedia (46.1%) and Kohls (42.4%). The homebuilders (XHB) surged 47.7%, with Toll Brothers up 69.3%, DR Horton 63.1%, Lennar 61.3% and Pulte Group 52.5%.

“Risk on” was certainly not limited to U.S. equities.

Credit default swap (CDS) prices collapsed, reversing much of Q1’s spike. Investment-grade CDS sank 37 bps for the quarter to 76 bps – and is now less than half of the high (159bps) from March 23rd. High-yield CDS sank 141 bps to 516 bps (down from March 23rd high 886bps). The iShares Investment-Grade Corporate Bond ETF (LQD) surged 9.72% for the quarter, with a first-half gain of 6.46%. The iShares High-Yield ETF (HYG) rallied 7.36%, reducing its y-t-d loss to 5.10%. Leveraged loans returned 10.1% during Q2.

Even more spectacular CDS price declines were experienced overseas. The European (high-yield corporate) “crossover” CDS sank 189 bps during the quarter to 382 bps, dropping almost in half from March 23rd trading highs (572). European subordinated bank CDS fell 88 to 167 bps during the quarter, ending June at less than half March highs (367).

European equities posted big quarters. Germany’s DAX rallied 23.9%, with major indices up 15.0% in Italy, 13.5% in France and 8.0% in Spain. The UK’s FT100 index recovered 9.6%.

The gain in European periphery bond markets is more notable – especially considering skyrocketing fiscal deficits. Italian yields sank 26 bps during Q2 to 1.26% - about half the 2.42% March high. Greek yields fell 43 bps to 1.20%, down from the 3.67% March 18th high. Portuguese yields sank 39 bps to 0.47% (March high 1.45%), and Spanish yields fell 21 bps to 0.46% (March high 1.22%).

Perhaps most noteworthy, the emerging markets rallied sharply in the face of a rapidly expanding global pandemic. EM CDS sank 157 bps to 195 bps, down from the 478 bps March high and back to February levels. Stocks recovered 30.2% in Brazil, 30.8% in Turkey, 20.4% in Taiwan, 20.2% in South Korea, 18.7% in India, 10.6% in Russia, and 9.6% in Mexico.

The Shanghai Composite gained 9.8%, with the CSI 500 returning 14.2%. China’s growth-oriented ChiNext Index surged 30.9%, with first-half gains of 36.2%.

EM local currency bonds rallied strongly. For the quarter, yields dropped 172 bps in South Africa to 9.24%, 167 bps in Brazil to 6.95%, 127 bps in Romania to 3.88%, 124 bps in Mexico to 5.82%, 121 bps in Chile to 2.40%, 85 bps in Russia to 5.90%, 67 bps in Indonesia to 7.18% and 56 bps Hungary to 2.15%.

Dollar-denominated yields sank 278 bps in Ukraine (to 7.37%), 165 bps in Turkey (to 6.74%), 115 bps in Qatar (to 2.24%) and 85 bps in Mexico (to 3.39%). Brazil’s dollar-denominated yields jumped 78 bps during the quarter to 4.93%.

For the most part, EM currencies rallied during Q2.

The Indonesian rupiah recovered 14.3%, Russian ruble 10.2%, Colombian peso 7.9%, Thai baht 6.1%, Czech koruna 4.5%, Polish zloty 4.4%, Chilean peso 4.1%, Hungarian forint 3.6%, Mexican peso 3.0%, and South African rand 2.8%. On the downside, the Argentine peso declined 8.6%, the Brazilian real 4.8%, and the Turkish lira 3.5%. China’s renminbi increased 0.26% versus the dollar during the quarter.

The dollar index declined 1.7% during the period.

The Australian dollar rallied 12.6%, New Zealand dollar 8.4%, Norwegian krone 8.1%, Swedish krona 6.3%, Canadian dollar 3.6%, Euro 1.5%, and Swiss franc 1.5%. The Japanese yen declined 0.4% versus the dollar during the quarter.

Australia’s ASX 200 equities index gained 16.5%. Japan’s Nikkei 225 Index rallied 18.0%. Recovering only 6.0%, Japanese bank stocks lagged. In general, bank stocks notably underperformed during the quarter. Hong Kong China Financials index slipped 0.3%. Europe’s STOXX600 Bank Index rallied 7.8%, led by an 18.7% recovery in Italian banks. U.S. Banks (BKX) returned 15.1%, significantly lagging most sectors.

The S&P500 just completed its strongest quarterly return since Q4 ‘98’s 21.3%. There are some parallels.

Having returned a blistering 23.0% y-t-d, the S&P500 traded at a then all-time high 1,191 on July 20, 1998. U.S. markets were completely disregarding mounting Russian fragility.

Devastating “Asian Tiger” Bubble collapses the previous year had required major IMF bailouts.

Despite U.S. market and economic booms, fed funds were at 5.5% in the summer of ’98 (the same level as the end of ‘95). Treasuries had sniffed out trouble on the horizon. After trading to almost 7.0% in Q2 ’96, 10-year Treasury yields were down to 5.4% by July ’98 (and 5% in August). Sinking yields and a boom in leveraged speculation bolstered the liquidity backdrop, with equities turning progressively speculative.

EM contagion hit Russia’s currency and bonds in September. Aggressive hedging heading into the crisis ensured spectacular market dislocation. A disorderly de-risking/deleveraging episode hit the leveraged speculating community, most notably Long-Term Capital Management. The collapse of LTCM’s egregious leverage and massive derivatives positions almost brought down the global financial system.

The Fed cut rates and took the unusual step of orchestrating a bailout for LTCM (and its counterparties). The Greenspan, Rubin and Summers “committee to save the world” worked its magic - and the world would never be the same. Instead of a much-needed reckoning for the aggressive leveraged speculating community and derivatives complex, it was off to the races.

Stocks rallied big during Q4 – and didn’t turn back. Nasdaq nearly doubled during 1999’s fiasco – demonstrating the precariousness of employing monetary stimulus and bailouts with markets in the throes of a major speculative Bubble.

Even in the face of the most conspicuous speculative excess, Greenspan remained wedded to “baby steps.” Fed funds didn’t get back to 5.0% until mid-‘99. The Bubble had turned increasingly vulnerable late in the year.

The economy was downshifting, while fundamentals were deteriorating in the bubbling technology sector. But that didn’t stop one final short squeeze and derivatives-related “melt-up” to push Nasdaq to even crazier extremes in Q1 2000 (record highs not surpassed for 15 years).

I’m not sure Ben Bernanke makes it to the Fed in 2002 if not for all the excess, bailouts and only greater late-nineties Bubble craziness. "The powers that be" believed THE Bubble had popped – and the Fed resorted to mortgage Credit as the mechanism to reflate the markets and economy.

No Bernanke and no mortgage finance Bubble – and I doubt the Fed experiments with QE. If not for Fed QE, does the world succumb to “whatever it takes” QE on a global basis?

Without QE, the world today would be a lot less unstable and troubled place.

June 29 – Financial Times (John Plender): “One innocent explanation for the extraordinary bounce back in global equity markets in the second quarter is that investors have concluded that the worst of the pandemic is over and that recovery is within reach. A less innocent — but all too plausible — alternative reading is that investors now believe central banks will exercise complete control over asset prices for the foreseeable future. In other words, the categorical imperative of policymakers doing ‘whatever it takes’ to counter the current crisis could ensure a lasting decoupling of equity prices from ailing economies. Lending support to this latter view is the growing conviction in markets that the US Federal Reserve may now move to a policy of yield curve control. That would mean following the Bank of Japan in capping borrowing costs by targeting a longer term interest rate and buying enough bonds to stop yields rising above that level.”

The second quarter was momentous for reasons beyond huge securities markets gains. Speculators and investors do “now believe central banks will exercise complete control over asset prices for the foreseeable future.”

There is no longer any shred of doubt: Highly synchronized global market Bubbles are the ultimate “Too Big to Fail.”

Moral Hazard has reached its pinnacle.

And, after unleashing several Trillion at home and Trillions more overseas, central bankers will find it impossible to ween highly speculative and inflated markets off aggressive monetary stimulus.

There were 43,644 new U.S. COVID cases on June 30th, almost doubling the 22,562 reported the last day of Q1. Daily cases are averaging more than 54,000 during the first three days of July. There were a then record 71,000 new cases globally in the midst of a pandemic surge on the final day of Q1. Daily new cases now run above 200,000.

How can markets remain ebullient?

Because a worsening pandemic ensures additional fiscal and monetary stimulus. This is not about economic fundamentals or markets pricing a solid “V” recovery. It’s greed and FOMO (fear of missing out) – Monetary Disorder and a resulting runaway speculative Bubble. This game has been playing out for a while now.

It’s an increasingly dangerous game – one that seems to be building toward some type of conclusion.

It’s worth noting the safe havens were not in the least spooked by Q2’s “risk on.” Ten-year Treasury yields actually declined a basis point to 0.66%. Bund yields rose less than two bps to negative 0.46%, while Japanese yields rose less than one basis point to 0.02%.

As the ultimate safe haven, gold surged $204, or 13%, to $1,781 – the high since the 2012 European debt crisis.

In a year for the history books, two extraordinary quarters down and two to go.

Will public debt be a problem when the Covid-19 crisis is over?

There is unanimity about macroeconomic policy for now, but not about exit strategy

Gavyn Davies

Once recovery takes hold, macroeconomists who agree that massive public debt is the right path are likely to divide again along their usual lines
Once recovery takes hold, macroeconomists who agree that massive public debt is the right path are likely to divide again along their usual lines © Getty Images


Since Covid-19 disrupted global growth early this year, the major advanced economies have made some of the biggest policy changes ever seen in such a short time.

As Lenin put it, “There are decades where nothing happens; and there are weeks where decades happen.”

We have just experienced several of those weeks.

Even more notable has been the unanimity among macroeconomists that massive fiscal and monetary stimulus is the appropriate response to a “wartime” economic emergency.

Almost no one seriously disputes that policy should be doing “whatever it takes” to overcome the shock from the virus.

This agreement reflects a key conclusion from public finance theory: that higher government debt is the correct shock absorber for the private sector in the face of unpredictable, temporary economic crises. It avoids the distortions that would follow the big variations in marginal tax rates that would otherwise be needed to finance a surge in public spending over a short period.

The chorus of approval from the macroeconomics profession has helped fiscal and monetary policymakers introduce massive stimulus packages almost instantly, in contrast to the much slower response to earlier recessions, including the 2008 financial crisis. Markets have been very volatile but overall they have largely endorsed these decisions.

Despite the rise in public debt, long-term US government bond yields are expected to remain below 1 per cent until at least 2022. Equities have rebounded from their lows and may revisit them only if policy support for the recovery is withdrawn too soon.

But once the recovery is established, the public debt overhang is likely to divide economists along familiar lines. Most New Keynesian economists, including Paul Krugman and Lawrence Summers, believe high debt levels will not in themselves be a problem for advanced economies.

They even suggest further rises in debt would be desirable, as that would help reverse the trend towards secular stagnation in Europe and the US. A key reason for their optimism is that the annual cost of servicing the debt will be clearly below the nominal growth rate in the economy and the central banks seem set to keep it there.

If the interest rate keeps below the growth rate, the debt/gross domestic product ratio will eventually stabilise, provided governments’ non-interest — or “primary” — budget balance remains stable. Assuming the high public debt strategy succeeds, real bond yields will probably rise gradually towards more normal levels.

In addition, equities will respond positively to improved growth prospects as inflation returns to the 2 per cent central banks’ targets. Debt could be managed without a crisis.

That may be the most likely path for the advanced economies in coming years — but it is not guaranteed. John Cochrane and Kenneth Rogoff are among the influential economists who warn that most advanced economies, notably the US, could soon be running on balance-sheet public debt ratios higher than anything seen before, even following the 2008 crisis. Off-balance sheet commitments in social security and health increase potential government spending even further.

This group concedes that interest rates have remained below growth rates for long periods before, helping to control public debt. But they argue that politicians are beginning to respond to lower debt-servicing costs by adding to primary deficits through tax cuts and long-term spending commitments. This feedback loop can cause indefinitely rising debt ratios, even with interest rates below the GDP growth rate.

Furthermore, low debt-servicing costs have not prevented previous fiscal crises from erupting without much warning when the financial markets suddenly deem public debt and deficits too high. In the advanced economies, especially in the US, this could be triggered by a sharp rise in inflation, forcing central banks to sell their government debt holdings back into the market at a time when higher interest rates are needed to control inflation.

That kind of step could cause a run in the government bond and foreign exchange markets that would be catastrophic for the financial system and for asset prices. Mr Cochrane says this would be an “immense disaster” — and that is no exaggeration.

The recent explosion in public debt is not a problem right now. But one day, perhaps out of the blue, it could become a serious crisis. As Stanley Fischer has argued, a coherent exit strategy will be needed to mitigate these risks.


The writer is chairman of Fulcrum Asset Management

Post-Pandemic Economic Leadership Begins in America

No matter how big an economy is, it is heavily influenced by US economic growth, financial stability, and policy spillovers. With the COVID-19 crisis, the evolution of the global economic-policy paradigm has become an urgent matter, and the rest of the world must not suffer the consequences of a US that does too little, too late.

Mohamed A. El-Erian

elerian126_Roy RochlinGetty Images_newyorkstockexchangeuseconomy
 

The economic damage wrought by the COVID-19 crisis in the second quarter of 2020 was even worse than expected: economic activity plummeted, inequality rose, and elevated financial markets decoupled even more from economic reality. And with a vaccine yet to be developed, the path out of the pandemic – and the associated economic crisis – remains deeply uncertain.

The world’s leading international economic institutions – the International Monetary Fund, the OECD, and the World Bank – now warn that it may take at least two years for the global economy to regain what has been lost to COVID-19. If the major economies face additional waves of infections, recovery would take even longer.

Timely and well-designed pro-growth policies could speed up this timeline, while making the recovery more broad-based and sustainable. This does not only mean more short-term relief, but also greater emphasis on forward-looking measures that promote productivity, reduce households’ economic insecurity, better align domestic and international growth impulses, and counter the increasingly dangerous disconnect between the financial system and the real economy.

Here, the US, as the world’s largest economy, has an important leadership role. As the supplier of the main global reserve currency, the US plays a major part in mobilizing and allocating the world’s investible funds, especially at a time when the Federal Reserve is intervening heavily in global financial markets. And as a dominant player in the IMF, the World Bank, the G7, and the G20, it can drive – or undermine – global policy coordination.

While US policymakers are generally more than willing to pursue growth-enhancing policies, their ability to do so is increasingly constrained by treacherous domestic politics. Yes, the $3 trillion COVID-19 relief package was an impressive display of bipartisanship. But, as COVID-19 infections rise and social tensions surface – exemplified by widespread protests over racial injustice and police violence – America’s lawmakers have returned to their respective corners.

As a result, progress on laying the foundations for long-term growth – including in areas where there appeared to be bipartisan agreement, such as infrastructure and (to a lesser extent) worker retraining and retooling – seems a more distant prospect.

A similar disconnect between will and ability can be seen in America’s monetary-policy response. The Fed is willing to do whatever it can to limit the cyclical and structural damage to the labor market, which includes more than 46 million people who have filed for unemployment benefits. But it lacks both efficient tools and support from fiscal policymakers, who are better equipped to promote durable growth.

With few options to promote genuine economic growth, the Fed has felt compelled to take previously unthinkable steps that are increasingly distorting the functioning of financial markets, thereby aggravating wealth inequality and encouraging excessive risk-taking by both debtors and investors. Instead of being part of the solution, the Fed is now at risk of creating more problems, including resource misallocation, debt overhangs, and financial instability – all of which would undermine growth.

Intention and outcome are also misaligned in international economic relations. In its bid to make the global trading system fairer, US President Donald Trump’s administration has pursued bilateral policies that have undermined trade flows. The US is now the most protectionist of the advanced economies.

More broadly, at a moment when multiplying global crises are demanding close coordination of individual and collective policy responses, the Trump administration has eschewed multilateralism. To some countries in Asia, in particular, its own policy has become increasingly unpredictable, fueling doubts about the robustness and reliability of a global system that has the US at its core. China, for one, has hastened its efforts to deepen bilateral and regional linkages so that it can bypass the US, but at the cost of fragmenting the international system.

US policymakers are divided on many issues, but surely they can agree on the desirability of faster, more inclusive, and more durable growth. The only way to achieve this sustainably is to accompany short-term relief measures with forward-looking pro-growth (and pro-work) fiscal policies and structural reforms. Otherwise, potentially reversible short-term problems, such as high unemployment, could become deeply entrenched and much more difficult to address.

For its part, the Fed must exercise more caution in how it intervenes in markets. By continuously expanding both the scale and reach of its asset-purchase programs, it is stripping markets of their ability to price and allocate resources appropriately. If it’s not careful, the Fed could end up inadvertently pulling the rug out from under America’s potent market-based system, propping up productivity-weakening zombie companies, and further reducing the likelihood that genuine economic growth would eventually validate elevated asset prices.

Finally, US policymakers should work together to restore their country’s global economic leadership, by reinvigorating multilateral policy discussions and improving the functioning of the rules-based global system. To this end, the US should revive stalled efforts to reform IMF and World Bank governance, including by bringing representation into line with today’s economic realities and working to increase the Fund’s resources.

Other countries should not underestimate the importance of such changes for their own economic performance. No matter how big an economy is, it is likely to be influenced by US economic growth, international financial stability, and monetary policy spillovers. With the COVID-19 crisis, the evolution of the global economic-policy paradigm has become an urgent matter.

The challenge for other countries now is to reduce America’s “execution risk,” by doing whatever they can at home to ensure self-reinforcing growth impulses and a fairer international system.


Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Putin’s New History of Europe and the Rehabilitation of Stalin

By: George Friedman


Russian President Vladimir Putin likes to argue that World War II, and much of the suffering wrought by it, was the responsibility not just of Nazi Germany but of governments that went against it. He has made this argument before, but the most recent version delivered during Russia’s annual Victory Day celebration was the most comprehensive yet.

He shifted the responsibility for Germany’s invasions and atrocities to other countries, and used that to minimize the Soviet Union’s responsibility for the war.

Previously, Putin had charged that the British and French agreement at Munich for German occupation of part of Czechoslovakia laid the groundwork for World War II, that U.S. trade with Germany before the war strengthened Germany, and that the Polish government caused the mass slaughter in Poland after its occupation by fleeing.

All of this is designed to reduce the importance of the Hitler-Stalin pact and the Soviet invasion of Poland. It is in his telling no more consequential than many other events.

To be polemical for a moment, let me take each charge one at a time. The government did flee Poland as did governments of other countries after German occupation. Trying to create a government in exile was what many did. The idea that by leaving the country they were responsible for what happened is absurd.

Poland was occupied by German and Soviet troops. The Germans rapidly began rounding up and executing any possible resistance, and the Soviets carried out the murder of thousands of Polish army officers they captured. The idea that the presence of Polish government officials in country would have stopped Hitler and Stalin in their tracks is self-evidently wrong.

The charge against the British and French has some weight. Neither were ready for war, militarily or politically. They hoped to avoid or at least delay it. They failed, and Europe paid the price. But there is a fundamental difference with the Hitler-Stalin pact. Stalin reached a treaty with Hitler over Poland.

But unlike the British and the French, the Soviets seized (and still occupy) a large part of Poland. The Munich accord did not include a clause for cooperative invasion and occupation of Czechoslovakia. The German-Russian agreement did.

The United States obviously traded with Germany. Its policy was to avert war. In retrospect this is unfortunate, but at the time there was no sign of the German occupation of Europe nor any indication of mass murder.

If the United States had waged a conventional war against the Soviet Union during the Cold War, Washington could be accused of selling grain to the Soviets beforehand, limiting the danger of famine. American trade was condemned by some at the time, but the amount of trade made little difference to the course of the war.

What mattered was the massive shipments by the Soviets of vital minerals after the joint invasion of Poland and to the moment when the Germans invaded Russia, when it is said that a Soviet trainload of vital contents moved west across the border, just as German troops moved east across it.

The treaty between the Soviets and Germans included a massive trade agreement, which Stalin obeyed meticulously, hoping to pacify the Germans.

To move beyond the polemical, we need to understand German and Soviet strategy. During both world wars, Germany was filled with appetite and apprehension. It feared a simultaneous attack from France and Russia, knowing it could not survive a two-front war.

In World War I, it attacked France while mounting a holding action in the east. Germany failed to defeat France, and the war there collapsed into static warfare that bled Germany dry.

The Germans were planning to use the same strategy in World War II, this time defeating France quickly. Their offer of a treaty to the Soviets to sacrifice Poland was meant to ensure that the eastern front would remain peaceful while France was defeated, even if the defeat took longer than hoped.

From Stalin’s point of view, the German expectation of a Franco-British force was an illusion. Stalin’s military thinking derived from World War I and the Russian Civil War, neither of which were mechanized. He did not understand the potential speed of armored warfare and the degree to which it rendered trench warfare impractical.

So he expected that the Germans would dive into attritional warfare lasting for years. He expected not only part of Poland from the deal but the gift of time to build up his military forces, as well as a real opportunity to thrust west out of Poland and take Germany, while the Germans were being ground down in France.

Stalin’s plan went bad because tank warfare flanked the poorly thought out Maginot Line, and because France was exhausted by a war just 20 years earlier that had deeply demoralized the nation and its senior military.

They expected to lose, and they did lose. And Stalin’s brilliant gambit became a nightmare as Germany shifted its forces east at stunning speed and, a year after the defeat of France, descended on an unprepared Russia.

To understand World War II in Europe, it is necessary to understand the incompetency of Stalin. He could not grasp the revolution in warfare and how it shifted risk. He could not grasp that France was incapable of resisting.

And he could not comprehend that Hitler wanted the treaty in order to attack the Soviet Union before it had time to prepare for war. But then Hitler did not understand that Russia, in spite of Stalin, and despite the price it would pay, would crush the Germans. Regardless of Stalin’s failures, history played itself out.

In all of Putin’s claims, he appears to be trying to share moral responsibility. What he is really trying to do, I think, is rehabilitate Stalin. Stalin laid the groundwork for Hitler’s war plan. He was oblivious to military reality.

When we look at Stalin, and if we think that one man is responsible for history, then Stalin was incompetent beyond belief. But if we turn the discussion away from Stalin’s miscalculations to fantasies about Poland, moral equivalencies with Munich, or U.S. pre-war trade with Germany, then Stalin is no worse than any other, and his failures can be hidden.

In my view, Russia is in trouble. Its economy moves with the price of oil, and its internal and external policies go with it.

Russia has failed to modernize its economy after 30 years of quasi liberalism linked to a pseudo free market. In 1980, Yuri Andropov, then the head of the KGB, recognized that the Soviet experiment was failing. Under Mikhail Gorbachev, it finally did.

Putin was a KGB officer at the time. He learned that liberalism was not the cure for Russia but a poison pill. He took control of Russia, constantly aware of the KGB experience that shaped him.

As he looks at the failures of the Russian economy, the loss of his western buffer states, and Russia’s vulnerability, he must be as concerned as Andropov was.

But he has no faith in liberalization, hence the attention he pays to the other end of the spectrum: Stalinism. Looked at in this way, Putin wants to make an unhedged bet, and he knows that the bet must be made while he is still alive, since it is not clear who or what follows him.

There are many Russians who see Stalin as a hero, and others who see him as a bungling idiot and a mass murderer. The president’s comments are likely directed toward a younger generation of Russians whose opinions aren’t yet fully formed.

Putin could live with the memory of a killer, but the memory of an incompetent runs counter to everything.

Stalin’s greatest blunders came before the Battle of Moscow. So what happened before has to be recast. In rewriting the story of Stalin, Putin sets the stage for a Russian transformation. The tale need not be coherent because the central argument he will make does not depend on that. It has to say three things.

The West caused World War II. Poland is responsible for the Katyn massacre, and Russia triumphed in the face of the incompetence, brutality and mendacity of others.

And Stalin stood up and saved the Soviet Union, not in spite of his incompetence but from the duplicity of the rest of the world.

The Big Picture

Barry Ritholtz


VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: This week on the podcast, what can I say, an extra, extra special guest, tour de force presentation from Professor Jeremy Siegel. You know him from all his books, “Stocks for the Long Run,” Wisdom Tree, Wharton at the University of Pennsylvania. Siegel holds court and explains to us exactly what’s been going on in the stock market, in the bond market, what’s going to happen in inflation, why the 60-40 portfolio is dead and why you should have a little bit of gold in your long-term investments.

I’ve have spoken to Professor Siegel numerous times before. He’s been on the show previously.

He’s just a delight. He’s so knowledgeable. You could understand why he is frequently voted Favorite Professor at University of Pennsylvania, the Wharton School.

He — I’m just going to stop gushing and say, with no further ado, my conversation with Jeremy Siegel.

VOICEOVER: This is Masters in Business with Barry Ritholtz results on Bloomberg Radio.

RITHOLTZ: My extra special guest this week is Professor Jeremy Siegel. He is the Russell E. Palmer professor of finance at the Wharton School at the University of Pennsylvania. He is the author of numerous books, probably most famously, “Stocks for the Long Run” which is now in its fifth edition.

He is frequently voted Favorite Professor at Wharton, Jeremy Siegel, welcome to Masters in Business.

JEREMY SIEGEL, PROFESSOR, UNIVERSITY OF PENNSYLVANIA’S WHARTON SCHOOL: Thank you, Barry. Happy to be with you today.

RITHOLTZ: Right. Glad to have you back. Last time we were here, we were discussing something completely different. Today, obviously, the pandemic, the lockdown has caused all sorts of economic changes. How do you see what’s going on today impacting the market and macroeconomy?

SIEGEL: Yes. And this is important. As you know, Barry, my background is got a PhD in Economics with a specialty in monetary theory and policy. I went into finance afterwards because it was an interest. But actually, my training was money debt, Federal Reserve behavior and all the rest.

And very early on in March when the pandemic was raging and markets were tanking, I looked at what was going on and I said to myself, wow, we had unprecedented stimulus by the Federal Reserve. But this is — it’s very, very important in terms of shaping how I look at what our future is going to be macro economically and then we can take a look at the structures of which industries are going to do better.

Before the financial crisis in 2007, ’08, banks held zero excess reserves. They were tight against the limits and it was very little. By the way, we’re talking about $50 billion, which I’d say basically would. The crisis basically said, hey, you can’t do that anymore.

And because of requirements and all the risks, the Fed started expanding its balance sheet hugely but almost all the expansion of the balance sheet went into excess reserves held by the banks. They didn’t lend it out.

In other words, there was very little increase in what we would consider the traditional monetary statistics, M1 and M2, and I’ll talk a little bit about that later. The big difference this time is not only has there been a huge increase in the balance sheet again of the Fed but to a much greater extent, this money is going right into checking accounts, right into transactions account, right into payroll accounts, right into the bank account of individuals and businesses in a way that I’ve never seen before and I mean, on many historians on monetary statistics.

I brought up in just — some moment ago M1, M2. They’re not talked about very much anymore but we’re not going to school. They were like things you look at when grabbing big inflation.

M1 is basically all transactions accounts that are held by people. They’re debit accounts. They’re checking account and they’re used to called now account. They’re transactions accounts and that also includes all the currency outstanding but that’s a pretty stable amount. Those accounts are very, very important.

Those accounts in the eight weeks after the virus hit from the middle of March, the next eight weeks, increased by almost 25 percent. I’d never seen that before.

In the entire year that followed the Lehman crisis, the increase in the M1 money supply was 15 to 20 percent and that’s in a year.

RITHOLTZ: Wow. That’s amazing. So, let me ask you the other side of that question, the Fed obviously cut rates to zeros. They injected $3 trillion in liquidity. But we also soar on the fiscal side $3 trillion in stimulus passed by Congress, how impactful was the combination of fiscal plus monetary stimulus.

SIEGEL: Huge. Absolutely huge. I was privileged — my first teaching job after got my PhD at University of Chicago and I was, as we talked about earlier, a colleague of Milton Friedman and I remember him saying to me, he said, excess reserves are good, it’s good stimulus for the economy but if those excess reserves get pushed in either M1 or M2, they’re going to be far more potent, far more potent, and that is exactly what is happening this time that did not happen last time.

And I think that as we get therapeutic vaccines, as our economy opens up, this liquidity that is in this economy, the Fed is not going to get rid of it. I mean, they basically committed to zero rates and if the government is not going to put a tax increase, this absorbs all this.

I think we’re going to have a huge spending boom next year and I think for the first time, and I know this is a sharp minority view here, for the first time in over two decades, we’re going to see inflation.

RITHOLTZ: That has been a bugaboo for a while. We’ve seen more people start to talk about that. We’re recording this Tuesday, May 16th, what did you make of the May retail sales report up 17 percent?

SIEGEL: Yes. It’s amazing. Again, part of that liquidity, hey, you’re not — how many people got — well, all those cancelled claims, they all got credited in their checking account. I’ve had people tell me for the first time, they have credit balances on checking.

RITHOLTZ: Savings rate is what, double digits now for the first time and how long? 
SIEGEL: Yes. About three weeks ago, Brian Moynihan (inaudible) 0:07:51.0 BoA. He was there and he said, a small — we’ve seen a 20 percent increase in people’s checking account. This has small — these are people that had less than $5,000. He said, compared to last time, we’ve never seen such an increase.


I mean, it was extraordinary. Now, again, we can’t — most people don’t want to travel now. Restaurants are just very beginning to open. All this is suppressed purchasing power.

My feeling is that it’s exactly what the stock market sees and that’s why I turned very bullish really late in March and never wavered from that despite what was going on in terms of the shutdowns and all the rest and I remained firm.

Also, I made the call in April. I said that the low bond rate that we saw, the 10-year bond in in March, is going to be the lowest in our lifetime. It in — it’s going to end the 40-year bull market in bonds. So, I make some very bold calls.

RITHOLTZ: And so far, so good. In fact …

SIEGEL: So far, so good. Yes.

RITHOLTZ: In fact …

SIEGEL: I’ve also learned. Ones got to be modest. Things start your way and you think you’re genius. I think that they don’t.

RITHOLTZ: Well, Mr. Market is very good at abusing us.

SIEGEL: I think that we’re going to look back — all of us are going to look at 2020 and say, wow, we — those deck was the low of interest rates not for a decade, a generation and maybe forever.

RITHOLTZ: Wow. That’s quite a forecast right there.

SIEGEL: Yes. Yes.

RITHOLTZ: Generational, if not, eternal bond lows.

SIEGEL: Yes. Well, I don’t know any is going to be around eternally. Maybe even humankind won’t be around there. But in summary, this huge amount of debt and money and liquidity is — Barry, let me tell you a really interesting story which I’ve told nonexperts. They say, I — that they say really helps them to understand what’s going on.

Everyone I talked about the last pandemic ’19 — in ’18, ’19 and everyone. of course, now knows a story that was worse than in the city of Philadelphia where I’m now sitting right here …

RITHOLTZ: Right.

SIEGEL: … talking to you. I live right in the city. We all know that the pandemic exploded because there was a bond sale, liberty bond for World War I because the government had to raise money and they didn’t call off, again, that’s how we raised money.

Back then, we raised money because the government had to have bond sales. We had a federal reserve but you know why the Fed couldn’t buy those bonds? Because we run a gold standard that said, you can’t buy bonds unless you got a gold to back up every dollar.

So, the Fed said no, sorry, I can’t buy your bonds. I’d love to help. You got to sell them to the public. Now, what’s the difference today? Well, we have $3 trillion, the fight — the war against COVID, did you see any bond sales? Did we see any calls to patriotism, buy COVID bond so we can fight this epidemic, keep people income and food and all the rest?

You didn’t see one. Not only did you not see one. You saw a government cuts taxes by over a trillion dollars to get even less revenue. And why is that possible?

RITHOLTZ: Well, that’s …

SIEGEL: Because the Federal Reserve bought all those bonds.

RITHOLTZ: Wow. That’s quite …

SIEGEL: Yes.

RITHOLTZ: That’s quite fascinating.

SIEGEL: Yes. But that history is critical because to make a long story short, people say, well, just a minute, who is paying for this war on the COVID-19, and I say, you don’t see it now but it’s going to be the bond holders.

RITHOLTZ: Let’s talk a little bit about the stock market today. We have — it’s hard to avoid noticing, the big keep getting bigger, the FANG stocks are really beating everything else, Facebook, Apple, Amazon, Google, Microsoft, the giant tech companies seem to be dominating. What it’s going to take for the rest of the market to catch up to the giant tech companies?

SIEGEL: Well, I don’t know if they were going to catch up all the way. But, obviously, as the economy opens up, as therapeutics and/or vaccines get developed that reduce that fear, you will see the so-called cyclical economy sensitive stocks do better clearly.

But that all said in the big macro picture, this pandemic just made a huge shift to showing how much as a society we rely on technology and how technology actually has made out some outcomes better than if we can wave a magic wand and the virus disappears and do — we could go back to the old ways.

But, hey, why should we? Why should we not have a Zoom meeting? Isn’t it better and simpler and easier? Yes. I could go down to the office and have that meeting and in some cases, I may really have to. But for many meetings, I don’t have to. Do I need to take that business travel?

I mean, all — this accelerated — this shocked us into a new mode that things that things — that some things are just better, it’s not just with the virus. So, in some ways — and the market is recognized and that’s why basically the FANG did better.

Now, the FANG also did big because we had to rely on the technology. I mean …

RITHOLTZ: It was good for that business.

SIEGEL: The only thing that will really derail FANG in a way and, honestly, I think it’s anti-trust government action, et cetera, one way or another. Again, I think the old market is going to do well. As I said, the feeding of the liquidity in and I think we’re going to snap back.

But — and I think relatively during this snapback, the FANG will tend to lag. But when we look at relative FANG tech in, let’s say, the end of 2021, we have everything else relevant (ph) now, they’re going to be up — no, they’re already up but this is a step function that gave them a huge boost, which in a way I don’t see it easily derailed.

RITHOLTZ: So, given all that, what did you make of the violent move in March? It was the fastest dropdown 30 percent. March was one of the 20 worst months in market history. Why did we have such a violent overreaction? What was the market seeing then?

SIEGEL: It was a reaction from this is just a virus in China to, my God, this could be the pandemic of 1918, and it went from complacency to panic and it went to panic also because we weren’t — we suddenly ran out of sanitizer, we ran out of mask, we got terrible advice from the CDC, in my opinion, terrible advice, terrible preparation, and all of a sudden, it was like you’re on your own.

And then the government’s panicked and I think the closedowns and the why it was done was extremely destructive in the way that it was done and the pendulum just swung the other way and the market just absolutely tanked with it.

RITHOLTZ: So, I’m going to guess, I’m going to guess given what you said about the combination of fiscal and monetary stimulus and how it all found its way into M1 and M2, you probably weren’t surprised that the market began to recover but this has been like a two-month 40 something percent snapback. Did the speed and strength of this recovery surprise you know?

SIEGEL: Well, it’s very interesting that you asked that. When — before the March 14th, and I call that weekend the crash weekend, that’s — we all have story, where all of a sudden, we’re developing everything and things closed down.

But things were getting a little dicey and the market had couple of spills in February. And I was on all the media and I was asked about, my God, what will affect the market, and I said the following, I said stocks are the longest term assets that we have. Theoretically, they go on forever as they get absorbed by another firm that keeps on going on.

If you would wipe out 100 percent of their earnings over the next 12 months and then in any — listen, I’m a professor, any valuation model you use, how much would the stocks go down? If it’s telling for a 20 PE, they should go down by five percent.

So, if a hundred percent wipe out in a year, if you get back to normal in a year and we could debate that obviously, but at that time, that was not an unreasonable and still is not. But even before the Fed acted all this, I said, if we have a terrible year that wipes out S&P earnings to zero — by the way, the current estimate is 30 percent decline in S&P.

But let’s says — I even said, let’s go terrible, this is so bad, it wipes out hundred percent of S&P earnings. But let’s assume in 2021 we get back to only 2019 levels, stock market should go down five, six percent. I think that’s what the math shows.

RITHOLTZ: Wow. That’s impressive.

SIEGEL: Yes. And …

RITHOLTZ: So, really …

SIEGEL: Yes. And actually, I said, it’s going to go down more because fear always drives it down more. But the theory says if you have a V that you can see coming up and we can talk about V and W and all that but that recovery should not cause 34 percent decline in the S&P, which, of course, happened between February and March 23rd.

RITHOLTZ: Let’s talk a little bit about inflation. We’ve heard right after ’08, ’09 we’re going to see an uptick inflation because of all the actions of the Fed. Very famously, a bunch of conservatives and libertarians sent an open letter to Ben Bernanke, I think that was 2011, warning of hyperinflation and the collapse of the dollar. Neither ever showed up. Why do you think we’re going to see inflation eventually and what does that mean for the bond market?

SIEGEL: Yes. And that this is really important and these distinctions are really important. You got very famous people like John Taylor who’s Under Secretary of Treasury often mentioned to be Fed chair, Paul got it. But they came to me and said, Jeremy, you want to sign this letter, and I say, no, I’m not signing that letter.

Why? Are you not finding that letter? The QE, we’ve never said anything. Because, I said, it’s going into excess reserves. I see a little bump in the money supply and that — but nothing else. This is all cushion around the banks. They’re just not lending it. Interest rates are zero. So, I mean, I don’t think this is going to feed in to it. And I refused …

RITHOLTZ: So, let me stop you there a sec.

SIEGEL: I refused to — I said, I’m just not signing because I just — I don’t think this is right. Now …

RITHOLTZ: So, let me — let me just clarify what you’re saying so people understand exactly what you mean. So, in ’08, ’09, the Fed introduced all of these new policies, TAMP (ph) and TARP and all these different things to help banks stabilize, deal with bid mortgages, get a lot of the junk off their books.

And when they flooded the system with all this cash, the banks basically took this money, put it on their savings account, didn’t lend it, didn’t spend it, they just kept it there for safety reasons and that’s why you’re saying we never saw that uptick in inflation.

SIEGEL: Exactly. They kept it — what we call excess which is way above what — there are mandatory requirements against accounts. They were trillions above it and they just want — didn’t want to go like what happened in 2000, didn’t want to be cut short.

Everyone wanted liquidity and the banks wanted it. The regulators wanted it. They all want it. It was not lent out. That’s the critical difference.

What I see today is it’s lent out. In fact, the PPP program is go to the bank and get your loan and put in your account. The government is cutting checks, giving people money. Put it in your account. That’s the difference today and I think that’s the difference that people didn’t catch.

And maybe I caught (ph) it because this is something I — this was something I have studied so intensely for years and, again, had the benefit of the great mentor Milton Friedman to teach me. He said, excess reserve is stimulatory and that’s what the Fed should have done in the Great Depression but more potent. If that gets pushed into M1 and M2, you’re going to see a much, much stronger effect and that is what I am seeing today.

So, let me ask you a related question because I remember having conversations with you in the middle of the financial crisis on television and elsewhere, did Congress miss the opportunity for a big fiscal stimulus in ’08, ’09? Might that have helped the recovery and perhaps avoided some of this increasing gap in income and wealth?

SIEGEL: That’s a good question. I mean, there are many those that thought there — that we needed more push on actual tax cuts, on more stimulus. I mean, there was a cash for cars …

RITHOLTZ: Cash for clunkers, I remember that

SIEGEL: Yes. Cash for clunkers that did actually — that was funded and that did cause a little bit of a spark. One thing is very important though, Barr. Remember what sparked the financial crisis was, first, an oversupply of housing.

Too many people got in the housing and bad — there was all that bad lending that enabled people with no money down to get into that. So, what — we had to do back in 2009 and ’10 which we had to work off a tremendous amount of excess supply of housing. There were really no excesses in terms of production before this COVID crisis.

RITHOLTZ: Right.

SIEGEL: We don’t have to work that out. Remember, housing starts fell to the lowest point in 70 years following the financial crisis. I don’t think we’re going to get very much of a fall at all now.

Not only that, people’s home equity was wiped out with the biggest crash in home price. Who’s going to have any of that now? None of that. So, we have …

RITHOLTZ: So, it’s actually going the opposite direction with single home prices rise.

SIEGEL: We have impediments working out — working off huge excess inventory in housing, wipe out of home equity for millions of American, I don’t know, 10 million of Americans soaring bankruptcies of housing.

I mean, yet, we’re having the business problem now. But back then, we had the problem of the biggest asset is still home equity in individuals more than stock. That was wiped out for so many people or diminished dramatically. Not today. Not.

RITHOLTZ: So, let’s stay with the Fed for another moment. What do you think of Powell’s actions, first, working with Blackrock, buying ETFs and now, buying specific bonds, where does this end?

SIEGEL: Well, put out all the stops. Just the Fed saying I’m going to do something, it doesn’t.

RITHOLTZ: Right.

SIEGEL: It’s almost like — if people think the Fed could do it then all of a sudden said, I want the rate to be there, the market will push the rate there. So, the fed says, I want to lower spreads which did got align in February, we do know dysfunctional market.

I’m going to make sure that they don’t — once they said they’re going to do that, actually, the spreads are going down. Did they really need to do the announcement we saw yesterday? Not really.

They want — listen, they have to go through on credibility. They said they’re going to do it, so, they do it a little better. I assure you that they’re going to get rid of it. Once things normalize, they — just like they’re getting rid of the mortgage backs, their goal …

RITHOLTZ: Right.

SIEGEL: … was to get it back to an all treasury portfolio. They’re going to eventually get rid of all these as they did during the financial crisis and terms of lending and all that. They got — they had other positioning. They had an equity position in AIG back then.

RITHOLTZ: Right.

SIEGEL: Yes. So, I think it’s a matter of credibility. I said I’m going to do it. I don’t really need to do it now. It doesn’t really matter now. What really matters is what happened to those checking accounts, not so — the excess reserves are plentiful.

They give and give another trillion excess reserves. These extra reserves are not going to do much. If it gets into the pockets of individuals, that is a different story.

RITHOLTZ: And my final question on bonds and inflation, you recently said the 40-year bull market in bonds is over. Does that mean we’re looking at a bear market in bonds?

SIEGEL: Yes.

RITHOLTZ: And where can — let’s use a 10-year treasury yields, where can that yield go? Are we ever going to see five, six, seven percent yield on that?

SIEGEL: No, not for a while.

RITHOLTZ: What does it mean for inflation? So, what do you see happening with bonds for the next decade or so?

SIEGEL: I think bonds — as I say, I think this is — you and I see them creeping up continuously. There’s still an — treasuries are viewed as an excellent short round hedge asset. They become — they cushion the portfolio and the Dow drops 2,000, your treasures are up and people like that.

So, there’s a huge demand so that’s called for hedge demand. Negative beta for those technicians.

RITHOLTZ: Right.

SIEGEL: The new portfolio analysis. But — so, there’s a huge demand. But with this liquidity in the economy, as we say, I expect moderate inflation, not — I’m not talking about hyperinflation. And so, I’m nowhere near that. I expect inflation to move up next year to two, three, four percent, five percent and maybe run again in 2022 the same way.

So, cumulatively, I expect inflation may be to go up — the price level, consumer price level go up 10, 12 percent over the next few years, maybe 15. Now, back — don’t forget, we had almost 15 percent inflation in one year back in the terrible years, of the late ’70s.

So, again, this is what I call moderate inflation. I expect bond yields to rise from the current half percent to one, one and a half, two, two and a half, three. They’re still great hedge, short-term hedge. Three, three and a half on treasuries, maybe four. You’re going to do worse than inflation. So, you’re not going to keep up on inflation. And you’re going to end …

RITHOLTZ: But you’re not expecting …

SIEGEL: You’re going to have capital losses if you will. That’s all I remember (ph).

RITHOLTZ: But you’re — I don’t get the sense that you’re expecting the sort of persistent inflation we saw in the 1970s. Once all the stimulus — once the pig is through the python so to speak, everything should sort of slide back to normal and inflation should ease.

SIEGEL: Yes. And let me give you just a couple of figures. We talked about this $3 trillion or whatever about that war on COVID and everything like that. Well, we have $20 trillion worth of government. If we have 15 percent inflation, you wipe out $3 trillion and we value.

So, basically, you’ve — that’s how you paid for it. Inflation is another way to tax people. It’s a tax on the bondholders.

RITHOLTZ: Sure.

SIEGEL: Other way actually to tax people and maintain the bondholders. But my belief is it’s going to be the former. So, basically, with this $3 trillion, et cetera and so on, basically, 15 cumu (ph) percent and, again, this is over several years. Rate of inflation will wipe out the $3 trillion of that excess amount and bring you back down to levels that you had before.

SIEGEL: Let’s talk a little bit about what’s been going on in the marketplace lately because it’s been a little crazy especially with the return of the day traders.
RITHOLTZ: Robinhood does free stock trades. We’ve seen this become a new pastime for the under 40 set, for the millennials and others. Do you see any parallels between today and 1999?



SIEGEL: Not really. I mean, if you want to know the truth. I mean, don’t forget, sports betting is shut down.

RITHOLTZ: right.

SIEGEL: Where are they going? Let’s go to the stock market. Casinos are just reopening. Where can I gamble? Let’s go to stock market. I see a lot of that. I mean …

RITHOLTZ: So …

SIEGEL: Yes. Some of them are going to stay but most of them are going to — most of them are going to lose some money and they’re going to say, hey, I’m going to go better on sports …

RITHOLTZ: People who are determined to lose money gambling are going to find some outlet for it one way or another.

SIEGEL: I mean, people go to casinos not only to — with the hope of winning but having fun. I mean, they’re willing to lose a certain amount. A lot of people go and say I have $500, I’m going to have fun, I’m going to spring that out as much as I can and I hope to see all that and all the rest.

Maybe some of these day traders are also thinking in terms of that. We often — even I and others say, hey, take 10% of your portfolio and have fun to play with it and see how you do. But the rest should be long term invested.

RITHOLTZ: Makes sense.

SIEGEL: So, these are players — we are nowhere near. So, Barry, really important, we’re nowhere near ’99. I mean, ’99 and we talked about — I mean …

RITHOLTZ: it was a national pastime.

SIEGEL: I was recently in CNBC and I was asked, Dr. Siegel, you’ve been right, you’ve been bullish, but aren’t you always bullish, and I didn’t say it that time because they also has a question about — and I told them when I wrote my book what I learned on “Stocks for the Long Run.” Back in 2000 …

RITHOLTZ: I remember this, I …

SIEGEL: … I read one of those op-eds that was one of the most read on “Wall Street Journal” which is get out (ph) of tech stocks.

RITHOLTZ: I have a very vivid recollection of you writing that up. I want to say it was January or march.

SIEGEL: It was March actually. It was almost to the day that NASDAQ peaked at 5,000 and that was, of course, dumb luck. But, I mean, it was entitled, “Big-Cap Tech Stocks are a Sucker Bet” and …

RITHOLTZ: I have …

SIEGEL: … we got hate mail, Barry, after that.

RITHOLTZ: That’s how you know you were right. When you get all that hate mail, that’s how you know you’re right.

SIEGEL: Yes. That’s — I’m not always bullish, this is important, and the Internet stocks, of course, were crazy. But the tech — so, just to give you an idea, the tech sector of the S&P 500, these were not Internet companies, AOL was the only one that was on there that was making money back then.

These are the IBMs. These are the Intels and the Microsofts and all the rest. The tech sector was selling for 90 times earnings.

RITHOLTZ: Wow.

SIEGEL: I mean, what is it today, 25? I mean, 30. And by the way, interest rates were mammothly higher than they are today. I remember one investor said, I’m getting you out of the speculative stocks, I’m putting you in IBM which is only selling for 50 times earnings consider the conservative stock at that time.

So, anyone who come — tries to compare today with 1990 is not looking at what the valuations are. I was very cognizant that — I said there’s no big cap companies — you had these multi — today, of course, they’re trillion dollar companies when I was looking at anything over 100 billion back then 20 years ago and I said, these companies are not worth 150, 200, 250 times earnings. History told you they’re just not worth that.

RITHOLTZ: I recall something you had said, maybe it was in the late ’90s or early 2000s. But given the spike we’ve seen in IPOs, I have to ask you the question again, you have written, IPOs typically disappoint. Do you still believe that’s true?

SIEGEL: I think — you know what — and that included that data there, IPOs have done a little better in the last 20 years. But don’t forget IPOs, there’s two things. They’re getting it at the IPO price …

RITHOLTZ: Right.

SIEGEL: … which is almost always good and then they’re getting it when it starts trading and that ain’t so good. It’s good sometimes, not good others. Right now, I think and I’m — this is off the top of my head. But probably since the bubble, let’s say 2002, 200,3 if you got it when they’re first trading, you probably — are still probably match the S&P may be a little bit better.

Before then, you underperform if you started buying them when you could. If you got them at the IPO, you knew the broker and you could allocate, you did good business with them, then you were winners.

RITHOLTZ: Quite interesting.

SIEGEL: Yes.

RITHOLTZ: Let me ask you this question …

SIEGEL: (Inaudible) with Google, I remember when Google went public, no one really want it because they refused to do a roadshow and …

RITHOLTZ: That’s right.

SIEGEL: … no one pushed it, could (ph) get it, I think what was it, opened at ’80. So, there had been good ones then. But those were — there’s — up to that point, it was a loser’s game.

Today, I would say if you look back 15 or 20 years even if you bought them when they first trade because they were concentrated in tech and tech did well, you probably are ahead of the S&P.

RITHOLTZ: Pretty interesting. Let’s stick with valuation …

SIEGEL: Yes.

RITHOLTZ: … for a minute. You have written a lot about CAPE, which was essentially the cyclically adjusted price-to-earnings ratio, created by your pal, Bob Shiller.

SIEGEL: Correct.

RITHOLTZ: What do you think of — where CAPE stands today? It hasn’t worked especially well as a timing tool, maybe it gives you some insight into future expectations, what are your thoughts?

SIEGEL: Well, and, yes, Bob Shiller is one of my oldest friends I’ve known (ph) over a half-century. Great economist, won the Nobel Prize, completely deserved, his work is great.

As I’ve mentioned before and I think may be in our previous one, I wrote an article published in FAJ. I said, the CAPE is giving off wrong signals now and I said it’s giving off wrong signals because it uses a 10-year average of reported earnings and back in 1999, the FASB changed how it does reported earnings.

RITHOLTZ: Right.

SIEGEL: And so, as a result of that, it caused much more fluctuation in earnings and particularly crashed earnings during the great financial crisis and that’s why it’s been bearish almost every year since 1990 and …

RITHOLTZ: So, 93 percent of the time, something like that?

SIEGEL: It is — I said it’s way too bearish and I gave other reasons. It’s also a change in dividend, behavior that also changes earnings growth and there’s other problems with it.

So, I don’t think it’s a great tool. However, valuation matters and I do look at what I think is normal earnings and I do think that the P/E ratio — I think a normal P/E ratio today on normal earnings is 18 to 20. That’s above the historical average.

But I believe given — not only low interest rates, not only that, but the ability to index and get a zero across totally diversified portfolio spreads risk around such that 18 to 20, 20 is the new normal P/E ratio. It doesn’t mean it can’t go down to 15, 13, 12 and doesn’t mean it won’t go up to 25, 28, 30.

Obviously, this year we’re talking really high because earnings are going to be down 30 percent. But then, again, they’re going to be bouncing back 2021.

RITHOLTZ: Quite fascinating. Let me mix it up with you a little bit with two other related questions. So, I know you’re not a believer in hyperinflation but one of the things some of the, let’s call them inflationistas have been worried about has been the overall level of U.S. debt, now annually in the trillions. The cumulative debt is about 106 percent of GDP.

What do you think of all this debt? What does it mean for stocks? What does it mean for private capital? We used to fear crowding out but we really haven’t seen much of that, have we?

SIEGEL: The big increase in debt had coincided with the tremendous increase in demand for the debt as the hedge asset. Some — John Campbell and others, economists and others and I actually was a believer in this many years ago, the biggest reason for the decline in long-term bond, yes, it’s low inflation and liquidity and all sort of — and life expectancy, I mean, I can go into those.

But actually that now treasury debt is the hedge asset of choice to cushion shocks in that. By whole (ph) treasury debt, it will go up when bad things happen and that causes huge demand and that’s eaten up all that increase and it’s kept the interest rates really down.

However, as I’ve said at the early part of our discussion, today, this big increase in debt and money is going to feed into inflation, moderate inflation. Barry, it reminds me like what happened in World War II. We got to 100 percent debt to GDP ratio.

We also increased the money. So, the Fed was back then, we were off the gold standard road, so it helped us out. It was buying a lot of that debt, too. There was no inflation because we were on rationing in all the risks.

And then all of a sudden afterwards, we got inflation and we got a boom and …

RITHOLTZ: Right.

SIEGEL: … people are saying, why is this happening, and it was debt and money and we got debt and money and that’s going to be, again, not hyperinflation, again, I’m not predicting any, I’m not even predicting double digit. I’m not even predicting high single digits although no one can be exact.

But I’m predicting inflation rates that we haven’t seen for several decades and that is one of the, again, the classic reasons of, well, how do you pay for the war on COVID. Well, you inflate away some of the debt that has been floated to pay for it.

RITHOLTZ: So, people have been fearful of deflation of three to four percent inflation rate, that doesn’t sound like it would be the worst thing in the world.

SIEGEL: It isn’t. I mean, deflation is really harmful and Fed is really committed and everyone else and we saw what happened in the ’30s, that was terrible failure policy that prevent — if they just did the reserves and kept the banks alive, they would have prevented that deferred (ph) with 30% decline in the CPI index between 1929 and 1933 (ph). That was terrible. Everyone with debts and they’re all denominated in dollars and they were unemployed, there were bankruptcies everywhere.

You got to avoid that deflation. But you know what, moderate inflation, we had those little screams, hey, Fed, you’re not — you got a two percent target, why aren’t you doing it? They didn’t list listen for years. We were below and now we’re go a little above, we need to absorb some these unemployed people, will there still going to be high employment by the way even though the economy is going to be strong.

Firms are permanently going to be letting off people because they’re going to see that they just need less and they’re going to let that inflation rate go above target I think for quite a number of years.

RITHOLTZ: You mentioned employment and firms hiring. What did you make of the maze employment situation report? That seem to surprise a lot of people. BLS get it wrong or did everybody else get it wrong?

SIEGEL: No. I mean, it’s really hard to classify and honestly, I didn’t get that excited about it. I mean, all the data we’re getting is rear view mirror.

RITHOLTZ: Right.

SIEGEL: Yes. I mean, I — when I get up in the morning, what I do is I look at all the virus reports. I look at every country in the world. I look at the states. I see the trends. I read all the reports and I see what kind of reopenings.

I look for what’s happening there. That is a forward looking. I mean, getting that confidence back, getting the therapeutic feed into vaccines, that excites me. The rear-view mirror, yes, it was better than expected.

Retail sales bounce like we got today did surprise me, the main bounce from the (inaudible) and this shows that people want to get back out. If they social distance and we protect the vulnerable groups, we can do this and with the better treatments, the death rate is way down, the mortality rate is way down even from people that have to go to the hospital.

RITHOLTZ: We definitely seem to be …

SIEGEL: And, of course, we also got this report that — this morning about the steroid that actually can reduce death by 30 percent of those people on ventilators. But this is just the beginning of many, many types of therapeutics that’s going to reduce this death rate and we get this death rate back down to what is the seasonal flu, which is no 0.1 percent, maybe 0.3, 0.4, 0.5 percent certainly for the more elderly, it’s still higher maybe one percent for vulnerable.

I mean, I don’t know if we can get it quite that low. But if we get it close to that low, then, hey, there’s no reason why we can’t return to those activities. But this shock and what we’ve experienced is not going to fade even with all these medical advances.

RITHOLTZ: What do you make of some of the increases we’ve seen in the Sun Belt and out West? If you look at the areas that were hardest hit first …

SIEGEL: Yes.

RITHOLTZ: … New York, New Jersey, Connecticut, Massachusetts, Pennsylvania, back out to Northeast, the rest of the country is starting to see not so much on the morbidity but on the infection rates really moving up.

SIEGEL: Yes.

RITHOLTZ: Florida, Arizona has become really …

SIEGEL: Yes, Arizona, and the very reason that again is down, they never — they said they caught a second way. It’s not really. It’s kind of a first wave going through there and it hits vulnerable and susceptible people really first. It’s not really second wave but first.

It started in Northeast, they’ve gone down dramatically and I am not surprised when they opened up and they don’t have good social distancing. But their wave is first wave and it is not as severe as what are — Pennsylvania actually did fairly well. We, if you take a look, were extremely well now.

But New York, New Jersey, Massachusetts were the biggest — have the biggest peaks. I don’t think we’re going to have that wave. And by the way, some of the very, very recent data is it’s actually — again, it could change, it’s encouraging.

That big spike over the weekend seems to be — again, we’re going to have to look at them. You’re going to have it. This COVID-19 is going to be in the background. It’s coronavirus, there’s millions of them out there. It’s going to be for years.

The question is to be able to treat it, it gets down to levels that, hey, this is any other disease. My feeling is there will be no more shut down. There will be emphasis on distancing. There should be enforcement because many of these states have rules about people inside wearing mask whether they choose to enforce them. Well, if it spikes, you better enforce it.

But you’re not going to shut down the way you did back in March. I — there’s no reason for that and there’s no appetite for that.

RITHOLTZ: Well, I hope you write about that. I have to ask you a question about colleges. You’ve been teaching college students for quite a long time now and some people have come out and saying, this has been a wake-up call for colleges, this will be the death knell for many second and third tier schools.

Obviously, you teach at an Ivy League school. People like Professor Scott Galloway at NYU Stern have said a huge percentage of schools out there are going to see hard times and there are going to be closures. What do you think the future of education looks like post-pandemic?

SIEGEL: Well, I agree, second and third — third and fourth-tier schools and maybe in second-tier are going to really have trouble. I think first-tier schools are going to do fine.

But the truth of the matter is that a lot of the second, third and fourth-tier schools boomed because of the student loan program …

RITHOLTZ: Right.

SIEGEL: … which I think was not done correctly and burden people too much and we won’t go into it. But at that time, a lot of schools say, yes, I can charge delusion like Harvard, guess what, they get the loans. And then all of a sudden, these people, say, yes but I’m not getting the type of — when I graduate from here, I’m not getting the type of wages. I can — that differential I was promised would allow me to pay it back in three or four years.

There was misinformation about that. They extrapolated those from the first and second tier and then there were other problems. And so, yes, they’re going to have to reduce dramatically in all — some of those will go out of business.

I think the first-tier schools are going to be as strong as ever and I still think that people want to be on campus. The students love to be on campus. There will be distance learning.

And even before COVID-19, there was discussion what’s called the flipped classroom, which is that …

RITHOLTZ: Right.

SIEGEL: … you would get the basic instruction online, you would come into lecture hall then ready to discuss rather than standard learning module. I mean, that began before COVID and it’s possible that the virus will accelerate that trend.

RITHOLTZ: Sounds like a much more efficient use of the professor’s time.

SIEGEL: Absolutely.

RITHOLTZ: Don’t have them just tell the students something that couldn’t read before name …

SIEGEL: Yes. I mean, I have to repeat myself three times. I mean, I have these three classes and I had a lunch break but, man, I was effective on that and I had energy to do that. But in many ways, I said, gee, if I could record this one and they could watch at any time they want and we could just come in here, having read it and discuss the real meaning, it would be more enriched experience.

And, again, that was already beginning to be in play before COVID. I think you might expect that definitely to accelerate.

RITHOLTZ: Makes a lot of sense. Before we get to our speed round with our last five questions, I have one last question about stocks. You have said that the average real return on stocks, real total return, is about seven percent per year over two centuries. Do you …

SIEGEL: Six and a half to seven is the long run average. Correct.

RITHOLTZ: All right. So, I know you’re not a big fan of forecast but what do you see as the average real total return of stocks for the next two centuries?

SIEGEL: Less.

RITHOLTZ: Yes.

SIEGEL: But at 25 percent, five and a half maybe real.

RITHOLTZ: Wow.

SIEGEL: Yes.

RITHOLTZ: Quite fascinating.

SIEGEL: Yes.

SIEGEL: I’m glad I …

SIEGEL: But I was talking about — comparing that to bonds.

RITHOLTZ: Right. Vastly superior to bonds.

SIEGEL: it’s even better than — compared to bonds, it’s even better than when it was between six and a half and seven.

RITHOLTZ: Does that mean that the people who are using treasuries and high-grade corporates in their portfolio to offset the volatility of stocks should have a little more equity and little less bonds?

SIEGEL: Absolutely. I mean, absolutely. And in fact, and I wanted to avoid any — why don’t we — with some free advertising here because I want to give you …

RITHOLTZ: Go ahead.

SIEGEL: … pure economics. But I just want to say that we — the old 60-40 is not going to do it.

Forty percent bond is way too much and returns are going to be bad and we’re now recommending 75-25 and we think that the profession will evolve as retirement portfolio towards the 75-25 proportion.

RITHOLTZ: So, 75-25 is the new 60-40.

SIEGEL: Exactly.

RITHOLTZ: It’s funny because in my shop, and I don’t want to do an advertising, but we’re close to 70-30 for what was 60-40.

SIEGEL: Yes.

RITHOLTZ: People’s lifespans are longer. You have to — it’s not retire at 68 and dropped dead at 72. There’s an expectation that people are living into their 90s and they don’t want to run out of money.

SIEGEL: Absolutely. Nowadays, when you reach 60, 65, I mean, many people are going to have that 30 years which stocks beat bonds 98 percent at a time.

RITHOLTZ: So, one last question I have to ask you related to that, we’ve seen a pretty substantial rally in gold over the past five years. What do you think about gold within a portfolio?

SIEGEL: Well, for the first time, we will — WisdomTree and part of — there’s something called the single (ph) portfolio which we’re using my recommendations and then we’ve added some gold, a small slice, and long run, because of my moderate inflationary scenario and I think that that protection, that inflation protection, I think stocks are really good as also moderate inflation but we added gold.

So, yes, I — and that’s the first time ever that happened and that just happened in the last few months. And I think it’s a good balance and give you good returns.

RITHOLTZ: I’m confirming my priors. We did something very similar because it was pretty clear. You’re not going to see the sort of return from tips and treasuries that we’ve seen for the past 40 years and while we don’t think bitcoin is an investable asset, there is something to be said for gold at least as a trading vehicle.

SIEGEL: It’s more — it’s even more than trading vehicle now but I agree with you. I’m not a fan of bitcoin but I have moved towards modest gold position, yes.

RITHOLTZ: Quite fascinating. All right. So, let me jump to my five favorite questions I ask all our guests. You can feel free to go short or long as you like on any of these and let’s start with since you’ve been sheltering in place and lockdown at home, what you streaming these days, tell us what you’re either watching or listening on Netflix or podcasts or whatever.

SIEGEL: Yes. I mean, as I said, in the morning, I get up and I actually check all COVID stories and I look at the websites, I look at John Hopkins, I look at the world things, I check all deaths. I mean, to me, I devour all that data for trends.

I listen to Scott Gottlieb. I think he’s great and, I mean, he’s one of the best minds, better than Faucci in my opinion, in terms of really understanding what’s going on. STAT is a service that …

RITHOLTZ: Sure.

SIEGEL: Yes. That looks at a lot of this. Although I don’t like — some of their articles seem a little slanted but they keep you in the forefront there. Yes. We got Netflix. We watch Spike Lee’s “5 Bloods” new release yesterday.

RITHOLTZ: How was it?

SIEGEL: I love documentaries. So, I watch them whenever I can and for a new, yes, something we’ve done which is totally unlike us but we never — “Friday Night Lights” that …

RITHOLTZ: Sure.

SIEGEL: Yes. We never saw it when it came out and I’m kind of a football fan, my son is, and I asked my wife, I said, would you — and she watched a few and she said, I don’t get the football part of it but I like the series. So, after all the bad news that you get about viruses, 45 minutes, we watch an episode in the evening.

RITHOLTZ: Nothing …

SIEGEL: Throughout the reason, what we are — no, I think we’re in Season 3 now.

RITHOLTZ: Nothing like a little pure escapism to help you forget the craziness. You mentioned Milton Friedman. Tell us about your mentors, who influenced your career and led you to becoming the Jeremy Siegel we know and love today?

SIEGEL: Well, thank you. Yes. Milton Friedman, I mean, I was at Columbia as an undergraduate and I read “Capitalism and Freedom” which I didn’t know him, of course, and I said, my God, yes, and then when I was at MIT and I’ve read, “A Monetary History of the United States” which is such an influential book for me, it’s chapter the great contraction which is also you — when — we talked to Ben Bernanke and he said that chapter also influenced me so much and, of course, he used the lessons of that chapter to save us from another great depression in my opinion in his actions just 10 years ago during the financial crisis.

RITHOLTZ: Right.

SIEGEL: So, I mean, that was unbelievable in terms of a book. And, of course, one of the things cited by the Nobel Prize committee and giving him the Nobel Prize. So, Milton Friedman is sort of my intellectual mentor.

I mean, I think my — going back is my family and my mom. She was always very academic, always stressed academics and introduced me to the world and traveled with me at a very early age back in the 19 — early ’60s around the world which was not done back then and it opened my eyes, and I think my interest in the world really was –is — was really increased during that period of time.

But I’ve had a lot of people who have been — Paul Samuelson, one of my advisors at MIT and I just wrote a Festschrift article about his works in finance. Reviewing him, I mean, he’s always been someone I’ve idolizes, probably the best pure economist of the 20th century.

RITHOLTZ: Wow.

SIEGEL: Yes.

RITHOLTZ: So, let’s — you mentioned a few books. Let’s talk about what are you reading these days and what are your favorite books that you might want to recommend to listeners?

SIEGEL: Well, I tend to read — more than books, I do read a tremendous amount of newspapers and magazines and ads and all that to get opinion. I really enjoyed Chernow’s “Hamilton” book. I mean, I happen to live in a high-rise in Philly where I look onto the First Bank of the United States out of my window and I said, wow, he had the foresight to know we needed one.,

And then we gave it up and we had a second bank and we gave that up and finally, we had the Federal Reserve. But that’s my subject matter and that book — he’s genius I think was so important and, of course, became a Broadway hit play. But his life was definitely an inspiration.

RITHOLTZ: If you are going to recommend one Milton Friedman book to somebody who wants to learn more about his writing and his philosophy, which one would you recommend?

SIEGEL: Wow. There’s so many — there’s so many anthologies — I mean, there is — if you want to know what really changed history, what Bernanke acted on and prevented that, if you really that — they take — “A Monetary History of the United States” is like 800 pages.

RITHOLTZ: Right.

SIEGEL: But there’s a chapter taken out of that called the great contraction that went into paperback, I don’t know if it’s still printed but probably can get it, which said this was their failures, we could have prevented the Great Depression and the world would have changed.

Yes, in my opinion, I mean, if you go back and we can talk about that, “Fascism” (inaudible), all really — really they’re ugly hit during the Great Depression because the feeling that a free market economy was a failure and could never be safe.

And I think to appreciate that it could have been saved and how important that would have been to history and we should never forget it is something you should do.

RITHOLTZ: And I thought I recall didn’t Ben Bernanke specifically saved that to Milton Friedman at some …

SIEGEL: Absolutely. During his 90th birthday. He was the head of ceremonies for his 90th birthday party. He stood up — and this is well before the financial crisis. Milton Friedman died in 2006. Before the financial, it was 2004, he was 90, stood up in front of a group of people. I couldn’t be there because of another engagement and I kicked myself for not being there.

But he said, Milton, the influence of your book and I’m going to promise you, the Great Depression shouldn’t have happened and because of what you did and wrote, it’s not going to happen again. We will not let it happen again.

He said that in 2006 to the face of Milton Friedman — I mean, 2004. Two years later, Friedman passed away. Two years later, Bernanke had to take the playbook from that mammoth monetary history and put it into effect and saved us from the Great Depression.

RITHOLTZ: How incredibly prescient in 2004.

SIEGEL: Wow. Yes. Wow.

RITHOLTZ: And our final two questions, what sort of advice would you give to a recent college grad who came to you and said, Professor Siegel, I’m interested in a career in investing and equities and finance?

SIEGEL: Great. What everyone — everything — my advice is two things, everyone says go into what you love. OK. But I think there’s a deeper thing you should go into. Go into what you’re good at, what you — when you’re talking or thinking or reading, yes, I got that real fast, yes, I get that fast.

Don’t go into what you think you should be or someone else thinks you should be or all that. Where do you mind goes that you say, you know what, I’m pretty good at this. That’s what you should pursue. That’s the area you should go into.

And even in the area finance, I mean, for instance, I’m a macro guy, I look at the big picture. I’m not great at picking individual stocks. I don’t try to. I’m not even a sector guy.

Take your specialty, what you’re good at and what you think well at and you pursue that area. That’s what I tell people.

RITHOLTZ: Quite fascinating. And a final question, what do you know about the world of stocks and investing today that you wish you knew 50 years ago when you were a young buck right at a school?

SIEGEL: Well, I wish I knew everything I knew in “Stocks for the Long Run” that I wrote, first came out edition in 1994, that’s 26 years ago. Yes, how good stocks were, they’re not just speculations, they’re long-term investments.

And also, how do you control your emotions and — listen, I’ll tell you another thing, I think don’t try to time the market, boy. Isn’t that — look at all these guys, I mean, and a lot of people, this is really important but I don’t think we’ve talked about this before, a lot of people who say, I’m only going in index, don’t worry, I won’t go in.

But then when they’re only going to index and they don’t pick stocks, then they go into timing and they actually do worse. So, timing is — timing the market, and you can see what’s happened, that — I mean, just to end, one really important story, someone — I had dinner with somebody the first week of March or actually the last week of February and he said, I sold all my stocks, I’m out, I think this is going to be a total disaster for the economy and I don’t want any part of it.

And I said, well, I gave my thing. Well, we had zero earnings, it’s should only (ph) four, five, six percent, I wouldn’t do that. Well, afterwards I said, my God, he was really right. Well, he was right for about three weeks.

Now, if he got in on March 23rd, yes, that was great. But you know what, I haven’t check with him but I know from what he was saying, I bet he didn’t, and you know what, he’s behind. If he had stayed in stocks, he looked for like a genius for three weeks and now he’s behind.

RITHOLTZ: The name of the book is not stocks for the next three weeks, it’s “Stocks for the Long Run.”

SIEGEL: Yes. I mean, people — they praised, my God, I got out, look at how good I was and then you say, yes, but did you get back in? You know what I mean, Barry?

RITHOLTZ: For sure. For sure. We’ve heard, hey, listen, capitulation takes place when enough people dump stocks. That’s how you get a low in March 2020 or March 2009 or March — when that was a peak in March 2000. But when everybody panics and sells, that’s what sets the base for the next move higher.

SIEGEL: That’s exactly right.

RITHOLTZ: Thank you, Professor Siegel, for being so generous with your time.