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