Jeremy Siegel on the Stock Market Under Covid-19 (Podcast)

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 sixty forty portfolio is dead, and why you should have a little bit of gold in your long term investments. You know we I've spoken to the 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 favored professor at University of Pennsylvania, the Wharton School. He I'm just gonna stop gushing and say, with no further ado, my conversation with Jeremy Siegel vis is Master's in Business with Barry Ridholtz on Boomberg Radio. 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. Thank you, Barry. Happy to be with you today, 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 the macro economy. Yeah, and this is important. As you know, Bury, My background is kind a PhD in economics with the specialty and monetary theory and policy.

I went into finance afterwards because it was an interest, but actually my training was money debt, Federal Reserve, aavior 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, um,

we've had unprecedented stimulus by the Federal Reserve. But this is what's very very important, um uh, in terms of shaping how I look at what our future is going to be macro economically, then we can take a look at the structures of jew which industries are going to do better. Before the financial crisis, the two thousand seven eight banks held zero excess reserves. They were tied against the limits, and it was very little by the way

we're talking, you know about fifty billion dollars research. They basically went the crisis basically said hey, you can't do that anymore. And because of requirements and on all the rest, 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 M one, M two um and I'll talk a little bit about that later. The big difference this time is not only has there's been a huge increase in the balance sheet again of

the FAT, but to a much greater extent. This money is going right into checking accounts, right into transactions accounts, right into payroll accounts, right into the bank accounts of individuals of businesses in a way that I have never seen before. And I mean, I'm a historian of monetary statistics. Now, I brought up just a moment ago, M one, M two. They're not talked about very much anymore, but when I was going through school, they were like things you looked

at and when we're having big inflation. M one is basically all transactions accounts that are held by people, their debit accounts. They're checking accounts there you just be called now accounts, their transactions accounts, and it also includes all the currency outstanding. But that's a pretty stable amount. Those accounts are very very uh important. Those accounts in the eight weeks after the virus hit, from the middle of March the next eight weeks increased by almost I had

never seen that before. In the entire year that followed the Lehman crisis, the increase in the M one money supply was that year. That's amazing. So so let me ask you the other side of that question. The Fed obviously cut rates to zero. They injected three trillion dollars in liquidity, but we also saw on the fiscal side three trillion dollars in stimulus passed by Congress how impactful was the combination of fiscal plus monetary students? Absolutely huge.

You know, I was privileged. You know, my first teaching job after I got my pH d was at the University of Chicago, and I was I was, as we talked about earlier, a colleague of Milton Friedman, and um, I remember you know him saying to me, he said, you know, excess reserves are good. You know, it's good stimulus for the economy. But if those excess reserves get pushed in either M one or M two, they're going

to be far more potent, far more potant. And that is exactly what is happening this time that did not happen last time. And I think that as we get therapeutics, vaccines, as our economy opens up, this liquidity that is in this economy there, the fact is not going to get rid of it. I mean, it basically committed to zero rates of fit and the government is not going to put a taxi increase on to absorb 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 a word going to see inflation. That has been a bugaboo for a while. We've seen more people start to talk about that. We're recording this Tuesday, May sixteen. What did you make of the May retail sales report? Up right? And liquidity? Hey, you know how many people got you know, all those canceled planes, so

they all got credited. They're checking. I've had people tell me for the first time they have credit balances on checking. Savings rate is what double digits now for the first time. You know. About three weeks ago, Brian Moynernion had a b o A. He was there and he said, are small we We've seen a increase in people's checking account These are small people. These are these are people that had less than five thousand hours, he said, compared to last time, We've never seen such an increase. I mean

it was extraordinary. Now again, we can't mean most people don't want to travel now, restaurants our very beginning to open.

All of this is suppressed purchasing power. My feeling is this is 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 and all the rest, and I remain from also, I made the call in in April I said that the low bond rate that we saw in the tenure bond in March is going to be the lowest in our lifetime. It end, it's going

to end the forty year bull market in bonds. I made some very bold calls um, and so far, so good. In fact, one's got to, uh, you know, be modest um. You know, things start going your way and you think you're a genius until they don't. Well, Mr, market is very good. I think that that we're going to look back, all of us are going to look back at two thousand and twenty and say, wow, we those that was the low of interest rates, not for a decade, a

generation and maybe forever. Wow, that's quite that's quite a forecast right there, generational, if not eternal bonds. Yeah. Well, I don't know any of it's gonna be around eternally. Maybe maybe even human kind won't be around there. But you know, in summary, this huge amount of debt and money and liquidity is Yeah, let me tell you a really interesting story which I've told to non experts. They say that that they say really helps them to understand

what's going on. Everyone, you know, I talked about the last pandemic nineteen eighteen, and everyone, of course now knows the story that it was worse than in the city of Philadelphia, where I'm now sitting right here talking to I live right in the city. We all know that the pandemic exploded because there was a bond sale, liberty bond for World War One, 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 were on a gold standard that said you can't buy bond unless you've got a gold to back up every dour. So the feed said, no, sorry, I can't buy your bond and love to help. You got to sell them to the public. Now, what's the difference today, Well, we didn't have three trillion dollars. Is the fight the

war against COVID? Did you see any bond sales? Did you see any you know, calls to patriotism by COVID bonds so we can fight this epidemic and keep people income and food and all the rest. You didn't see what not only did you not see? You one you saw the government cut taxes by over a trills to get even less revenue. And well that's possible because the

Federal Reserve bought all those bonds. As that's quite fascinating. Yeah, but that history is critical because to make the long story trying and people say, which is the man who is paying for this war on the COVID nineteen and I say, you don't see it now, but it's going to be the bondholder. 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 seemed to be dominating. What's it going to take for the rest of the market to catch up to the giant tech companies. Well, I don't know if they were going to catch up all the way, but obviously as as the economy opens up, as therapeutics and and or vaccines get developed, that reduced that fear.

You will see the so called cyclical economy sensitive stocks do better than 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 technology actually uh has made out some outcomes better. Uh. Then if we could make a wave a magic wine and the virus disappears, and we could go back to the old ways. But but hey, why should we you know, why why shouldn't we not have a zoom meeting? Isn't

it isn't it better than h It's simpler and easier. Yeah, I could, you know, go down to the office and and 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, uh, I mean all this accelerated this this this shocked us into a new mode that things that some things are just better. It's not just the virus.

So in some ways, and the market is recognized that that's why, you know, basically, the the fang did better. Now the thing also did because we had to rely on the technology. It was good thing that will really derail fang um in a way. And you honestly, I think it's it's antitrust, government action, et cetera, one way or another. Again, I think the whole market is going to do well. As I said, you know, the feeding of the liquidity in and I think we're going to

snap back. But you know, and I think relatively during this snap back, you know, the fang will tend the leg. But you know, when we look at the relative fang tech and let's say the end of two thousand twenty one, we have there everything else relative and now they're they're they're gonna be they're gonna be um up. Now they're already up, but there's this is a this is a step function that gave them a huge boost, which um in a way. You know, I don't see it easily derailed.

So given all that, what did you make of the violent move in March? It was the fastest drop down. March was one of the twenty worst months in market history. Why did we have such a violent overreaction? What was the market seeing? Then? You know, it was a reaction from oh, this is just a virus in China to oh my god, this could be the pandemic of and it went from complacency to panic, and it it went to panic also because we weren't we had resulently running

on a sanitizer. We ran out of mask. We got terrible advice from the c d C, 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 closed downs and and why it was done was dreamily destructive in the way that it was done, done in the pendulum, just one the other way, and the market just absolutely in tainted with it. So

I'm gonna guess. I'm gonna guess, given what you said about the combination of fiscal and monetary stimulus and how it all found its way into M one and M two, you probably weren't surprised that the market began to recover. But this has been like a two months forty something percent snap back. Did the speed and strength of this recovery surprise you, Well, it's very interesting, you know. And you asked that when before the March fourteenth, and I

called that weekend the crash weekend. I think we all have a story where all of a sudden started developing, everything and things closed down, and but things were getting a little dicey, and the market head to a couple of spills in February, and I was on all the media and I was asked about, oh my god, you know what will affect on the market, And I said the following. I said, stocks are the longest term assets

that we have. You know, theoretically they go on forever, or they get absorbed by another firm that keeps on going on. If you would wipe out a hundred percent of their earnings over the next twelve months, and then in any you know, listen, I'm a professor, any valuation model you use, how much would the stocks go down?

If it's telling for they should go down by five So if a hundred percent wipe out in the year, if you get that normal in a year, and we could debate that obviously, but at that time, you know, that was not an unreasonable and still is not. But even before the set act at all this, I said, if we have a terrible year that wipes out S ANDP earnings to zero by the way, the current estimate decline in SMP. But let's say I even said, let's

go terrible. This is so bad it wipes out a spre But let's assume in one we get back to only twenty nineteen levels. Stock market should go down five. I think that's what the mat shows. That's impressively. Yeah. And 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, you know, a V that you can see coming up, and we can talk about V and W and all that, but you know that that that recovery there should not cause a thirty four decline in the S and P, which of course happened between you know, February and March. Let's talk a little bit about inflation. You know, we we've heard right after eight o nine we're gonna see it up tick 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 warning of hyper inflation 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? Yeah, and that this is really important, and these distinctions are

really important. Yeah, you have very famous, people like John Taylor was Under Secretary Treasury, often mentioned to be FED chair. You know, 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 signing that letter? The QI we've never seen 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 bank. They're

just not lending it interest rates or zero. So I mean, I don't think this is going to feed into it. So let me stop you. I said, I'm just not signing because I just I don't think this is right now. So let me let me just clarify what you're saying so people understand exactly what you mean. So in O eight oh nine, the FED introduced all of these new policies TAMP and TARP and all these different things to help banks stabilize, deal with bad 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. Exactly. They kept it at what we call access reserves, way above what there are mandatory requirements against accounts.

They were trillions above it, and they just want didn't want to go like it happened in two thous They didn't want to be caught short, everyone wanted liquidity, and the banks wanted it, the regulators wanted it. They all wanted it was not lent out. That's the critical difference what I see today is it's lent out in fact that the PPP program is go to the banks and get your loan and put in your account. You know that the government's cotton checks giving people money putting in

your account. That's the difference today. And I think that's the difference that that people didn't catch and maybe I caught it because this is something I this was something I had studied so intentionally intensely for years and again had the benefit of the great mentor Milton Friedman to teach me. He said, excess reserves a stimulatory and that's what the FETE should have done in the Great Depression. But more potent is if that gets pushed into M one and M two, 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 O eight oh nine. Might that have helped the recovery and perhaps avoided some of this increasing gap in income and wealth. That's a

good question. I mean, there are many those that that thought there, you know, that we needed more push on an actual text cuts on more stimulus. I mean there was a cash for cars um cash for clunkers for clunkers that did actually that was funded, and that did cause a little bit of a spirit. One thing is very important, though, very remember what sparked the financial crisis

was the first and oversupply of housing. Too many people got into housing and bad you know, that was all that bad lending that enabled people with no money down to get into that. So what we we had to do back in two thousand and nine and ten, which we had to work off a tremendous amount of excess supply of housing that there there were really no excesses in terms of production before this COVID crisis. We don't

have to work that out. Remember how starts fell to the lowest point in seventy 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. We're not going to have any of that now, none

of that. It's actually going the opposite direction with seeing we had impediments working out working off huge excess inventory and housing wipe out of home equity for millions of Americans, ten millions of Americans, you know, soaring bankruptcies of housing. I mean, yes, we're having the business problem now, but then we had the problem of the biggest asset is still home equity and individuals more than stocks, that was wiped out for so many people or diminished dramatically. Not today.

So let's stay with the FED for another moment. What do you think of Powell's actions, first working with Black Rock, buying ETFs and now buying specific bonds where does this end well, put out all the stops, you know, just the FED saying I'm going to do something. Does it you know, I know about that. You know, if people think the FACT could do it, then all of a sudden says I want the rate to be there. The

market will push the rate there. So the PET says, I want to lower spreads, which did get out aline in February. We do no dysfunctional market. I'm going to make sure that you know, they don't. Well, once they said they're going to do that, actually the spreads are going down, and so did they really need to do you know the announcement we saw yesterday and not really they want to listen, they have to go through incredibility,

said they're gonna do it. So to do a little bit, I I assure you that they're going to get rid of it, you know, once things normalise. They just like they're getting rid of the mortgage backs. Their goal was to get back to an all treasury portfolio. They're gonna eventually get rid of all these um as they did during the financial crisis and in terms of lending and all that, you know, they got and they had other positions overmat they had an equity position in a I

g um back then. So yeah, so so you know, I I think it's a matter of credibility. I said, I'm gonna 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 and not so. The access reserves are plentiful. They even give another trillion access reserves stays. The next reserve is not gonna do much. If it gets into the pockets of individuals, that is a different story. And my final question on bonds and inflation.

You recently said the forty year bullmarket in bonds is over. Does that mean we're looking at a bear market in bonds? And where can let's use a ten year treasury yields? Where can that yield go? We ever gonna see five yield on that? What does that mean for inflation? So what do you see happening with bonds for the next decade or so? I see bonds as I say, I think this is low yield, and I see them creeping up continuously. There's still and you know, treasuries are viewed

as an excellent short run hedge asset. They become they a cushion the portfolio and the Dow drops two thousand, your your treasuries are up, and people like that. So there's a huge demand for that's called the h demand negative beta for those technicians and that that do portfolio and analysis. Um. But so there's a huge demand. But with this liquidity in the economy, as we say, I expect moderate inflation. I'm not talking about hyper inflation, and

so I'm nowhere near that. I expect inflation to move up next year to two three, four five percent and maybe run again in the same way. So cumulatarly, I expect inflation maybe to go up the price level, consumer price level go up ten twelve percent over the next few years, maybe fifteen now you know, back and don't forget, we had almost fifteen percent inflation one year back in the terrible years of the light seventies. So again, and

this this is what I call moderate inflation. I expect bond yields to RNs from the current half percent to one one and a half, two, two and a half, three, there's still a 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 to keep up on inflation, but you're not expecting and you're going to

have capital losses if you rule those long term. Huh, but you're I don't get the sense that you're expecting the sort of persistent inflation we saw in the nineteen seventies. 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. Yeah, and then then we give you just a couple of figures. You know, we talked about the three trillion dollars or whatever you know

about that war on COVID and everything like that. Well, you know, we we have twenty trillion dollars worth of government death. If you have fifteen inflation, you wipe out three trillion dollars and revalue it. So basically, you that's how you paid for it. You know, Inflation is another way to tax people. It's it's it's attacked on the bond holders. Other ways actually the tax people and maintain the bond holders. But you know, my boys, it's going

to be the former. So basically what what you know, what the three trillion dollars etcetera, And so on, basically a fifteen kumo percent. Again, this is over several years rate of inflation. We'll wipe out the three trillion dollars of that excess amount and bring you back down to levels that you know, that you that you had before. 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. Robin Hood does free stock trades. We've seen this become a new pastime for the under forty set, for the millennials and and others. Do you see any parallels between today? Uh? Not. I mean it's fun, I know the truth. I mean, don't don't forget sports. Betting is shut down. Where are they going? Oh let's go to the stock market. Casinos are just reopening. Oh where can I work in a gamble? Let's go to the stock market. I see a lot

of that. I mean, um, yes, some of them are going to stay, but most of them are, you know, gonna you know, most of them gonna lose some money and they're gonna say, hey, I'm gonna go go better on sports. People who are determined to lose money gambling are going to find some outlet for it. Or I mean people go to casinos not only to you know, with the hope of winning, but having fun. I mean they're willing to lose a certain amount, you know. You know a lot of people go and say, you know,

I have you know, five dollars. Yeah, I'm gonna have fun. I'm gonna have spring that out as much as I can. And you hope that you know that, and and and and all the rest. I mean maybe some of these day traders are also thinking in terms of that. We often, even even I and others say, hey, take take ten percent of your portfolio, have fun, play with it, see how you do. But you know the rest should be long term invested. So you know, these these are players

we are nowhere near. So Barry were really important, but nowhere near. I mean, uh, and and we talked about you know, I mean, I you know, I mean recently, I was recently in CNBC and I was asked, what, Dr Siegel, You've been right to big Bush, but aren't you always Bush? And I didn't say it at that time because they asked to asked a question about and I told him when I wrote my book and what

I learned on stocks for the long run. Back in two thousands, I remember this one of those opeds that was one of the most red red in Wall Street Journal, which is get out of tech stocks. I have a very vivid recollection of you writing that up. I want to say it was January or Mark it was actually was. It was almost to the day that nasdack peaked at five thousands, and that was of course dumb luck. But I mean it was entitled big cap tech stocks are a sucker's bat and I have get hate mail berried

after that. That's how you know you're right, when you get all that hate mail, that's how you know. Yeah, so you know I'm not always boys. This is important. And the internet stocks, of course we're crazy. But the tech So this to give you an idea, the text sector of the S and P five, these were not Internet companies. They O L was the only one that was on there and was making money back then. Then this these are the IBM s. These are you know, the Intels and and and and the Microsoft and all

the rest. The tech sector was selling for ninety times earnings. Wow, I mean, what is it today? I mean, you know, and by the way, interest rates were, you know, mammothly higher than they are today. I remember one investors said, I'm getting you out of these speculative stocks. I'm putting you uh in IBM, which is only selling for fifty times earnings, considered a conservative stock at that time. So anyone who tries to compare today is not looking at

what the valuations are. I mean, I was very cognizant that, you know, I said, there's no big cap companies and they you had these multi today. Of course they're a trillion doar companies, but I was looking at anything over a hundred billion back then, twenty years ago, and I said, these these companies are not worth a hundred and fifty times earnings. History tells you they're They're just not worth that.

I recall something you had said, maybe it was in the late nineties or early two thousand's, but given the spike we've seen in I p O S, I have to ask you the question again. You have written I p O s typically disappoint Do you still believe that's you know what and and and that included that data there. I POS have done a little better in the last twenty years, But don't forget the I p O. There's

there's two things. They're getting it at the I p O price, which is almost always good, and then there's 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 just off the top of my head, but probably since the bubble, let's say some two thousand to two thousand three, if you got it when their first trading, you probably are still probably match the SMP, maybe a

little bit better. Before then you underperformed if you if you if you started buying them when you could, if you if you got them at the you know I p O, if you knew the broker and he could allocate, you did good business with him, then you were winners. Quite interesting. I mean, let me ask you this question, was was Google remember? No? No? I remember when Google went public, no one really wanted because they refused to do a road show and get it. I think, what

was it opened at eight? You know, so there have been good ones then, but those were you know, there's you know, up to that point, it was it was a loser's game. Um. Today, I would say if you look back fifteen or twenty years, even if you bought them when they first traded because they were concentrated and tech intected, will you probably are ahead of the S and P. Pretty interesting. Let's let's stick with valuation for

a minute. You have written a lot about CAPE, which was essentially the cyclically adjusted PE price to earnings ratio created by your pal Bob Schiller. 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? Well, you know, and yeah, Bob Showers of my oldest friend, Oh no, no, over a half a century great economists, when the Nobel

Prize completely deserved. His work is great, as I've mentioned before, and I think maybe in our previous one I wrote an articles in F A J. I said the CAPE is giving off wrong signals now, and I said it's giving off wrong signals because he uses a ten year average of reported earnings and back fast by we change how it does reported earnings, 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 bearished almost every year since it is. I said, it's way too bearish, and um uh, and I gave other reasons. It's also change in dividend the behavior that also changes earnings growth, and there's there's a 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 and I do think that the PE ratio. I think a normal PE ratio today on normal earnings is eighteen to twenty.

That's above the historical average. But I believe, given not only low interested not only that, but the ability to index and get a you know, zero cost totally diversified portfolio spreads risk around such uh, that eighteen is the new normal PE ratio. Doesn't mean it can't go down to fifteen twelve, and doesn't mean it won't call up. Obviously this year we're talking really high because he's gonna be down, but then again they're going to be bouncing back.

Quite fascinating. Let me let me mix it up with you a little bit with two other related questions. So I know you're not a believer in hyper inflation, but one of the things some of the let's call him inflationistas, have been worried about. Has been the overall level of US debt now annually in the trillions. The cumulative debt is about a hundred and six 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. The big increase in debt has coincided with the gremendous increase in demand for the debt has a hedge asset. The some of 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 bonds, he yes, his low inflation

and liquidity in all sorts of life expectance. I mean, I can go into those, but actually that now treasury debt is the hedge asset of choice to cushion shocks, and that by whole treasury debt, it will go up when bad things happen, and that is causes huge demand, and that that that's eaten up all that increase and has kept the interest rates really down. However, as I you know said at the Euroy part of our discussion today, this big increase in debt and money is going to

feed into inflation, moderate inflation. Um, you know very it reminds me like what happened world Ward two. We got to that the GDP ratio. Um. We also increased the money to buy the FED was back then, you know, we were off the gold standard roses help us out. It was buying a lot of that debt too. There was no inflation because we were on rationing and all the rest. And then all of a sudden afterwards we got inflation, and we got a boom, and people saying,

why is this happening? And it was debt in money, and we got debt in money, and that's going to be again not hyper inflation again. I'm 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 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. So people have been fearful of deflation. A three to four percent inflation rate. That doesn't sound like it would be the worst thing in the world. It isn't. I mean, deflation is really harmful, and you know the feed is to be committed and everyone else. When we saw what happened in the thirties, that was, you know, that terrible failure

of policy to prevent that. If they if they just did the reserves and kept the banks allied, they would they would have prevented the defoet we decline in the CPI index. Wow, between thirty three, I mean it was terrible. Everyone with debts and they're all denominate indowers just and they were unemployed. There was bankruptcies everywhere. You've got to avoid that deflation. But you know what moderate inflation, Yeah, there'll be those little scream hey, fad, you're you're not

you got to present target. Why don't you do anything? Listen, for years we were a little below and now you know, we'll go a little above. We need to absorb some of these unemployed people and it's still going to be high unemployment. 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 you mentioned employment and firms hiring. What did you make of the MAZE Employment Situation report that seems to prize a lot of people by else now, I mean, it's really hard to classify and and honestly, I didn't get that excited about it. I mean, you know, it's all all the data we're getting in is rear view mirror. Yeah. I mean I when I get up in the morning, what I do is I look at all the virus reports. I look through every country in the world. I look

at the states. I see the trends. I read all the reports, and and and and and I see what kind of reopening is. I look for what's happening there. That is the forward looking it makes getting that confidence back and getting getting the therapeutics in the vaccines that excites me. The rear view mirror, Yeah, it was better than expected. Retail sales bounce like we got today did surprise me. The main bounce from the april's crater um.

And and this shows that you know, people want to get back out if they you know, social distance and we protect the vulnerable groups. We can do this. And and with the better treatments to death rate is weigh down. The mortality rate is way down, even from people they have to go to the hospital. We definitely this report that this morning about uh, you know, the steroid that actually can reduce deaths by thirty 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 you know, we get this death rate back down to what is what the seasonal flu, which is you know, point one percent maybe point three point four point five 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 you know, return to those activities. But this shock and what we've experienced is not going to fade even withal these medical advances. What 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 New York, New Jersey, Connecticut, Massachusetts, Pennsylvania, back out to the northeast, the rest of the country is starting to see not so much on the morbidly

but on the infection rates really moving up. Florida, Arizona has become really and though the very recent debt again is down, they never they caught a second way. It's not really it's a 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 started Northeast. They've gone down dramatically, and I am not surprised when they opened up and and they don't have good social distancing.

But their wave UM is the first wave, and it is not as severe as what are the Pennsylvania actually did fairly well, we should take a look and extremely well now. But New York, Jersey, Massachusetts where the biggest act of the biggest peaks. I don't think we're gonna have that wave. Uh. And by the way, some the very very recent data is as actually UM again it could change, is encouraging that big spike over the weekend seems to be again, we're gonna have to look at that. Uh,

you're gonna have it. This COVID nineteen is gonna be in the background. It's a coronavirus. There's millions of them out there. It's going to be for years. The question is to be able to treat it, to get down to levels that hey, this is any any other disease. My feeling is there will be no more shutdown. There will be emphasis is on on distancing. There should be enforcement because many of these states have rules about people inside way or masked, 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 that there there's no reason for that. Uh, and there's no appetite for them. Well, I hope you're right about that. I have to ask you a question about colleges. You 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 and what you stern have said, a huge percentage of schools out there are going to see hard times and they're gonna be closures. What do you think the future of education looks like post pandemic? Well, I agree, second and thirdain fourth tear tier schools and maybe in the second tier school gonna really have trouble. I think the first tier schools are

going to do fine. But you know, you know the truth that the matter is that a lot of the second, third, and fourth year certain fourth tier schools boomed because of the student loan program, 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, hey, I can charge tuition like Harvard, guess what they get

the loans? And and then all of a sudden, these people say, yeah, but I'm not getting the type of you know when I when I graduate from I'm not getting the type of wages I can. You know that differential I was promised that would allow me to pay it back in three or four years, and that was misinformation about that. They extrapolated those from the first and second year, and then there were other problems and so yeah, they're going to have to reduce dramatically and some of

those will go out of it. I think the first year the first tier schools are going to be as strong as ever. And I still think that people want to be on campus as students love to be on campus. There will be distance learning, and even before COVID nineteen, there was a discussion what's called the flip classroom, which is that you would get the basic instruction online, you would come into lecture hall than ready to discuss rather

than uh standard uh you know, uh learning module. I mean that began before COVID, and it's possible that the you know, the the virus will accelerate that trend. Sound sounds like a much more efficient use of the professor's time. Don't don't have him just tell the students something they could have read before. I mean I had to repeat myself three times. I mean, you know, I had to do three classes and I had a lunch break. But you know, man, I was effective on that and I

had energy to do that. But um, and in many ways, I said, gee, if I could record this once and they could watch it any time they want, and we could just come in here having read it and discussed the real meaning it would be. It would be a more enriched experience. And again that was that was already beginning to be in play before covid um. I think, well you might, you know, expect that definitely. To accelerate

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, and the long run average correct. Alright, so 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? Um? Five, five and a half? Maybe real? Wow,

quite fascinating. I'm glad. I'm glad. I uh. Comparing that the bonds right vastly superior to bonds, it's it's it's even better than compared to bonds. It's even better than when it was between six and a half and seven. Does Does that mean that the people who are using treasuries and and high grade corporates in their portfolio to offset the volatility of stocks should have a little more

equity and a little less. Absolutely, I mean absolutely, and in fact, you know, and um, you know, I wanted avoid any I don't want to we uh with some tree advertising here because I you don't want to give you comics. But I just want to say that we the old is not gonna do it. Bonds is way too much and the returns are going to be bad. And you know, we were now recommending and we think that that the profession will evolve as a retiem in portfolio towards the proportion. So is the new sixty exactly.

It's funny because in my shop and I don't want to do an advertising, but we're closer to seventy thirty for what was sixty. People's lifespans are longer. You have to it's not retire at sixty eight and drop dead at seventy two. There's an expectation that people are living into their nineties and they don't want to run out of money. Absolutely, you know, yeah, you know nowadays when you reach sixty sixty five, I mean many people are going to have that thirty years you know, which stock

speed bonds and then at a time. So 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. Well, for the first time, we will with some tree and it's part of you know, there's somebody calls the sea called portfolio which we're using. My recommend dations have have been we've added some gold, um A slaw a small flies and long run because of my

moderate inflationary scenario. Um. I think that that protection, that inflation protection. I think stocks are really good as also moderate inflation. But we added gold. So yeah, um I uh and that's the first time cover that's happened, and that's just happened last a few months. Um and um um. I think it's a it's a it's a good balance

and I'll give you good returns. 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 forty years. And while while we don't think bitcoin is an investable asset, there is something to be said for gold, at least as a as a trading vehicle. It's more, even more than trading vehicle now. But I agree with you. I'm not a fan of bitcoin, but um, you know I

have moved towards modest gold position. Yes, quite fascinating. All right, So let me jump to my five favorite questions. I ask all our guests. You can feel free to go as short along as you like on any of these. And let's start with, since you've been sheltering in place and lockdown at home, what are you streaming these days? Tell us what you're either watching or listening on Netflix or podcasts or whatever. Yeah, I mean, well, as I said in the morning, 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 debts. I mean, I to me, I I devour all that data for trends. Um. I listened to Scott got Leave. I think he's great, And I mean, and it's one of the best minds better in Fauci in my opinion, in terms of really understanding what's going on. STAT is a service that that Yeah, that looks at a lot of this, Although I don't like some of

their articles. Seen the little slanted but they keep keep you on the forefront there. Um um yeah, we we we got Netflix. Uh, we watched Spike we'se um um five Blood uh new release yesterday. Um. I love documentaries. Uh, so I watched them whenever I can. And for news. Yeah, something we've done which is totally unlike us. But we never when Friday Night lights remember that, you know that? Yeah,

we we never saw it when it came out. And I'm kind of a football plan my son is um and I asked my wife, I said, would you Yeah, and she watched a few and she said, you know, you know, I don't get the football part of it, but I like the series, so you know, after all the bad news when you get about viruses forty five minutes. Um, we watched an episode in the evening. Nothing what we are now. I think we're in season three now. Nothing

like a little pure escapism to help you forget the craziness. Um. You mentioned Milton Friedman, tell us about your mentors who influenced your career and lend you to becoming the Jeremy Seagull we know and love today. Well, thank you, Milton Friedman. I mean I was at Colombia's an undergraduate and I read Capitalism and Freedom, which I didn't know him, of course, you know, and I said, oh my god. Yeah. And and and then when I was at M I t and I read Monetary History of the United States, which

is such an influential book for me. His chapter The Great Contraction, which is also you know when you know he talked to Ben Bernankey 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, and in my opinion, in his actions, uh, just ten years ago during the financial crisis. So I mean that that 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, in my intellectual mentor, I mean, I think my going going back is my family and my mom. She was always very academic, always stressed academics, and introduced me to the world um and and traveled with me at the very early age, back in the nineteen early sixties around the world, which was not done back then, and it opened my eyes and I think my interests in the world really was was was really you know, increased during

that period of time. UM. But I've had a lot of people who have been Paul Samuels and uh, one of my advisors m I T and I just wrote a a fast rift the article about his works and finance reviewing him. I mean, he's he's always been someone I've idowis is probably the best pure economists of the of the twentieth century. UM. Yeah, 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. But yeah, you know, I I tend to read more than more than books. I do read a treminous amount of newspapers and magazines and op heads and all that to get opinion. UM. I really enjoyed Churnow's Hamilton's book. UM. I mean I happened to live in an I rise in Philly where I look on to the first Bank of the United States out 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. Um. But you know that's my subject matter. And UM, you know that book His Genius, I think was was so important. UM and of course became the you know, a Broadway hit play. UM. But you know, his his his life was definitely an inspiration. If if you can recommend one Milton Friedman book to somebody who wants to learn more about his writing and his philosophy, which one would you recommend?

There's so many there's there's there's so many anthologies. I mean there is, UM. If you want to know what really changed history, what what Bernankey acted on and prevented that? If you really there, they've taken The Monetary History United States is like eight hundred pages. But there's a chapter taken out of that called the Great Contraction that went into a paperback. I don't know if it's still printed, but I probably can get UM which said, this was

their failures. We could have prevented the Great Depression and the world would have changed. Yeah, in my opinion, I mean to go pack and we could talk about that. Fascism, kinmunism all really rear their ugly head during the Great Depression because of the feeling that a free market economy was a failure and could never be saved. 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. And and if I recall, didn't Ben Bernanke specifically say that to Milton freedmanthday. He he was the you know, the head of ceremonies for his ninetieth birthday party. He stood up there. This is well before the financial crisis, because mon Freeman died two thousand six, before the financials two thousand four. He was ninety, 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 we will not let it happen again. He said that in two thousand six to the face of Milton Friedman two thousand four. Two years later,

Fridden passed away. Two years later, Bernanke had to take the playbook from that Mammoth monetary history and put it into effect and save us from the great Pale. How incredibly precedent in some thousand and four and our final two questions, what sort of advice would you give to a recent college grad who came to you and said, Professor se Siegel, I'm interested in the career in investing and equities and finance. Oh great? What? Everyone everything that.

My My advice is two things. Everyone says, go into what you love, okay, But I think there's a deeper thing you should go into. Go into what you're good at, what you think, what you when when you're talking or thinking or reading. Oh yeah, I get that real fast. Oh 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 your 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 it. And even in the area of finance. I mean, for instance, I'm a macro guy. I look at the big picture. I'm not great to pick an individual stocks that don't try to I'm not even a sector guy. Um, take your specialty, what you're good at what you think. Well, um, and you pursue that area.

That's that's what I tell people. Quite fascinating. And our final question, what do you know about the world of stocks and investing today that you wish you knew fifty years ago when you were a young buck right out of school. Well, I wish I knew everything, and I knew in stocks for the long run that I wrote you know, first came out edition and I guess twenty six years ago, Uh, how good stocks were? Uh, they're not just speculations and their long term investments. Um um?

And uh? Also, how do you control your emotions? Um? And I 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 you know a lot of people this is really important. And I think we've talked about this before. A lot of people who say I'm only going in the index, don't worry, I'm good news. But then when they only go into index and they don't pick stocks, then they go into timing

and they actually do worse. You know. So timing is timing the market, and you can see what's happened. Um, I mean, just to end, you know, with one really important story. Someone I had dinner with somebody, um the first week of March or um actually last week 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 um, I don't. I don't want any part of it. And I said, well, you know I gave my thing. Well we had zero runnings. It's

I wouldn't do that. Well afterwards, I said, oh my god, he was really right. Well he was right for about three weeks. Now, if he got in on mar yeah, that great. But you know what, I haven't checked 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 the name of the book. The name of the book is not stocks for the next three weeks, it stocks for the long Rueah.

I mean, people they praise, Oh my god, I got out, look at how good I was. And then he said, yeah, but did you get back in um um um. You know what I mean? Barry for sure, for sure we've heard, We've heard. Hey, listen, Capitulation takes place when enough people dump stocks. That's how you get a low in March or March two thousand and nine, or or March. Well, that was the peak in March two thousand, But when everybody panics and sells, that's what sets the base for

the next move higher. That's exactly right. Thank you, Professor Siegel for being so generous with your time. If you enjoy this conversation, well look up an inch or down an inch on Apple iTunes and you could see any of the previous three D plus conversations we've done over the past six years. Or go to your favorite podcast supplier Spotify, Google, Overcast, Stitcher wherever finer podcasters are sold,

and you can find any of our prior conversations. We love your comments, feedback and suggestions right to us at M I B Podcast at Bloomberg dot net. Check out my weekly column on Bloomberg dot com Slash Opinion. Sign up from my daily reads at Rid Halts dot com. You could follow me on Twitter at Rid Halts. I would be remiss if I did not thank the crack team that helps put this conversation together Each and every week. Michael Batnick is my head of research. Mike Boyle is

my producer, a teaker. Valbrunn is our project manager. Marufo is our audio engineer. I'm Barry Retults. You've been listening to Master's in Business on Bloomberg Radio