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I want to welcome Jeremy seagull a finance Professor here at Wharton and we're going to talk about the recent
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termoil in markets around the world thank you for joining us Jeremy just as quick context I want to note that uh the
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future's Market is up today it looks like stocks are going to recover from the big drop on Monday but on Monday uh
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US Stocks hit a four-year low biggest sorry biggest drop in four years your a and stocks had their worst day in seven
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years I'd also note that Commodities are at a 16year low and this uh on Tuesday
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in China there was another down Market Day the Shanghai index was down about 7% so uh welcome Professor what's going on
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out there well I mean China is is a major story uh and the decline in China which
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everyone believes is far worse than they officially have admitted uh is really putting downward pressure on
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Commodities and on oil and I think it's important uh to note many people said yeah but Jeremy
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doesn't you know lower we're an importer of oil doesn't lower oil prices help the
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United States and the answer is yes it does but don't forget the SNP 500 has many International oil companies
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that have reserves that Supply the oil manufacturers it's it's not just a us uh
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uh uh uh index of us purchases so yes US economy is help but uh many of these oil
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uh suppliers and owners of reserves are really going to be hurt the slowdown in China the slowdown in China the drop in
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oil prices and the tremendous rise in the dollar have put tremendous pressure on uh the earnings of corporations in
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fact the earnings revisions downward this year in 2015 have been the steepest I have ever seen outside of a recession
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uh down about 10 to 15% so three weeks ago I looked at this market and I said it ain't going nowhere I'm I think we're
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going to finally have the first uh real correction in in four years and indeed with yesterday's drop we we breached the
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10% uh limit of Correction and uh uh we have one that raises the question of course is this a correction which is
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usually thought of as around 10% or is it going all the way to a bare Market which is usually def 20% I don't think
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it's going to get to a bare Market uh I think we're going to see maybe 15 and by
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the way we all know how hard it is to actually say where you know how much it's going to be I predicted about 12 to
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15 I mean this morning will'll be less than 10 with with a rally but if you look at the history when there's a sharp
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Decline and then a rally it's usually you'll get another downward leg that
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will test that decline so you know if you're a short-term Trader and it's very
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hazardous to be one uh I don't know if this rally is is going to last that long
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before we test the lows but as far as a bare Market is concerned since I don't
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see a recession in the United States I don't think we're going to have a bare
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Market in the US so what would your advice be for investors given your outlook definitely long run I'm I'm I'm
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favorable uh in fact fact when I gave that bearish projection on CNBC several weeks ago I said the fourth quarter
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could be very very good we get September out of the way of course three weeks ago
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everyone thought September was going to be the date the Fed was going to move now that probability has gone way down
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although not to zero I mean there's still almost a month until that decision
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is made uh uh but I said once that is out of the way and if we could get stability in oil
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and the Dow uh we could see a very good fourth quarter that in fact could bring us to new highs in the market uh the two
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other years that we had the corrections in 2010 2011 uh we actually saw very very good fourth quarters uh develop
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after that you mentioned at the outset that China is Central to everything that's happening so what do you think is
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happening in China their their books are opaque it's not transparent we're really
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not sure um the authorities seem to have let the the market uh respond to to what
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the market wanted to do dropping 7% that surprised some people doesn't seem to
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have been any intervention but overall in their economy the fundamentals uh what are what are we to think about
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what's happening there and what are the implications for the US I think one of
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the problems for World investors today is they've lost confidence in the Chinese government's ability to control
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and guide their economy it was always thought of you know when there was a downturn the Chinese would pour money in
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one way or the other and things would get straightened out they've been very
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uh what left footed and awkward uh with the stock market they first talked it up above its uh what it
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should have been uh and then it started going down and then they made some desperate attempts uh to to to repair it
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we even know that after you know the close they've now cut the rates uh the Reserve rates and lowered the interest
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rate they've got some s some silver bullets in their holster in in contrast to the US Europe and Japan who have
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interest rates down to zero their interest rates are still 5% they have a lot that they could cut so they still
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have room to uh actually encourage the market but there there's been this feeling that they have just not done
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this well the uh and there's a loss of confidence in China uh in its ability to
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to control the markets and I think that is one of the uh is perhaps just as important if not more important than the
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slowdown in the economic activity I mean a lot of people think that China is really only going three to 4% right now
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instead of the official 7% that came out in in the last quarter something else that's a little disturbing about China
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is that in the earlier years China would grow because of productivity growth tremendous increase in productivity now
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they seem to have to build Bridges and D and all the rest they want to stimulate
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the consumer but the only way you're going to stimulate consumer is productivity they're trying to get the
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consumer to buy more and and he and she are not doing that so they're sort of
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doing a last resort type of stimulus all these things are adding to this idea that China which again is either the
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biggest economy in the world or second to the United States we just about co-equal uh is faltering and that
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obviously is going to affect World Outlook it's interesting you said the people are worried that the Chinese
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authorities may have lost control which does that mean the markets are taking over and they're afraid that China may
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be going more capitalist uh well I I I think there was always the idea we have a spigot that we can always turn out we
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kind of believe in markets um you know I mean obviously the whole economic reform the beginning of a
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stock market uh there was talk of a move towards a a Yuan an R&B that was more
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flexible although believe it or not all they've done is is after that uh you
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know 2% devaluation is they fixed it again versus the dollar they haven't really freed that up um I thought that
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their restrictions on short sales you don't want to invest in any Market that'll prevent you from selling when
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you want liquidity if they knew anything is one of the Prime reasons people like
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to buy assets and if they don't have liquidity they're going to be discounted
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this idea about we're not going to let big holders sell we're prohibit short
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sales all those restrictions I'm not the only one to say this many other economists have said that was really a a
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wrong uh prescription to try to control well you know well try to control prices
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by preventing people from selling and uh that was that also engendered a loss of
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confidence in in the Chinese uh uh management more generally when it comes to global economic fundamentals uh we
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know China's slowing as we just discussed you're saying even as uh GDP could be as low as 3 to 4% which is very
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low for China yes uh also um Emerging Markets have been slowing a lot largely probably in response to China and
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commodity prices reflect that for example so is what's happening in global Equity markets to some extent uh
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recognizing that markets got oversold too far out ahead of what Global fundamentals are and of course the US is
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a special case but but but something similar may be going on here there certainly we've had a incredible selloff
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I mean Emerging Markets are in bare Market territory there's just no question about that I you know I believe
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and I made a to early call on that although we'll see that three to five years hence right now people who have
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the guts to go in and there could be more volatility are are going to be pleased because the currencies have been
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battered as well as the stock markets now again the the best performing is now India because it's not commodity based
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because China has gone down every emerging market that has Commodities and as major part of exports is being hit
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and of course there's even some developed countries like Australia or take a look at Canada take a look at the
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Canadian dollar uh which is depreciate almost 30% I mean it's basically a petroc currency now Australia again
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Australian dollar is down the Australia stock market is down because so much of that uh you know the uh uh uh the
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minerals and the other uh the mining and all the the all those raw materials that
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China used to build up its infrastructure are are down but if you take a look at India which has had some
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quarters of 7% growth and they are importers of oil and raw materials have actually um they may be the new leader
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in the next four five six years on the Emerging Market again they have more people in the world than any other but
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they don't don't have the GDP uh that China does uh but they they certainly
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are now the the the the one country that is holding the banner for the Emerging Markets so in addition to India uh would
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you which countries would you recommend people invest in or Andor which Industries well I I haven't been one
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generally to to recommend countries or Industries or often people say sectors because I like to look at the macro
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approach and my belief is that uh the broader your portfolio in the long run the better off you will be so a lot of
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these I mean take even the Chinese economy I mean it's with with its decline that it suffered its price
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earnings ratios are now back to 12 13 14 not unreasonable at all the Emerging Markets are selling for about 13 14
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times earnings as a group uh you know Brazil has been battered badly it could again turn around even though they have
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problems uh remember you don't you want to buy uh the the the countries if you
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play individual countries not those that have the best story but those who have had the worst story that everyone now is
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giving up on uh you know Brazil will is probably going to come back they're in
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maximum tension now uh uh with the raw materials and politically and you know uh the the corruption that's going on
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there they could be a winner in the next three to five years that's why I don't
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pick countries so I really think if there are many Emerging Market funds that you can diversify in and there
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yields emerging market by the way are very very good you can get 3 4% yields on Diversified portfolio I'm talking
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about dividend yields um I think that they I think they were attractive now I'm increasing ing my allocation in
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general to the Emerging Markets one last question where do you think the Dow will
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be at the end of this year Well I you know my my feeling is is that we we definitely could get uh to Dow 19,000 I
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mean it certainly seems like that's uh really far away now but we've had 20%
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increases from the sell offs in in late August and September don't forget late
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August and September are historically you know weak months thin markets what thin markets for example well thin
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markets um hey the summer is over we got all these bills the kids are going back
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to school we have no liquidity um the days are getting shorter and you know by the way we know
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September and October September is the only month and uh that has negative returns uh this including dividends uh
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going all the way back a 100 years it's the worst month in the market and that
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has sort of moved to August because everyone now fears September they start selling at the end
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of August has now become the worst problem July by next year maybe well it takes a little longer to migrate but uh
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yeah that's what's that's what's happening thanks very much for joining
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us happy to be here [Music]