00:00:00
Dan Loney: Well as we start our
year-end recap, pleasure to be
00:00:02
joined by Wharton Emeritus
Professor of Finance, Jeremy
00:00:05
Siegel. Jeremy, thanks for your
time today.
00:00:09
Happy to be here, Dan.
00:00:11
- All right, let's start with
2023. And kind of give us a
00:00:14
recap of what happened in
regards to the expectations I
00:00:19
guess you had a year ago of what
we might see play out.
00:00:22
Right. Well, I was right on some
things, not on others.
00:00:30
I was right that the economy
would rebound. That I thought
00:00:37
productivity would come back,
which it did. I was also right
00:00:41
this— I was bullish on the
stock market. And that was way
00:00:47
out of line with consensus,
which was, for the first time in
00:00:50
20 years, actually predicting
negative. What I was out of line
00:00:54
with is I thought the Fed would
start lowering rates by the
00:01:00
middle of the year, and it
certainly didn't. It kept on
00:01:02
raising them. We're in a pause
now, which I think we are in. So
00:01:11
I was right on the stock market.
I think I was right on the
00:01:12
rebound on the economy. But I
didn't— what I didn't appreciate
00:01:18
was how much internal strength
this economy had. And everyone
00:01:22
was surprised. The Fed, private
forecasters. They all thought
00:01:27
that if interest rates would
stay this high, that we would be
00:01:30
in a much slower economy than we
did. We're going to have an
00:01:33
economy that is going to rise
more than 2%. Way out of
00:01:38
consensus. However— and this is
important as we look forward
00:01:43
to 2024, Dan— we do have a
really slowing economy now. So
00:01:49
we do have to watch out for
2024.
00:01:52
The expectation is, I think, that
after we had the 5.2% GDP in Q3,
00:01:58
that we were going to see a
slowdown. To what level, I guess,
00:02:02
we're still to be determined.
And is your expectation that
00:02:06
we'll probably see that
carry over at least through the
00:02:08
first quarter of next year?
00:02:10
- Oh, absolutely. So current
expectations are between one and
00:02:15
two. And they're going down. We
actually do have the Atlanta Fed,
00:02:20
now, which actually tends to be
on the whole overly optimistic,
00:02:25
down to 1.2, which would be the
slowest quarter this year if in
00:02:30
fact that is realized. Of
course, it all depends on
00:02:33
Christmas sales. December's
really important, how does
00:02:36
sentiment hold up or not? So the
whole year certainly is way
00:02:41
above expectations. But we're in
the slowest quarter. And it
00:02:45
seems to me that unless the Fed
starts realizing that all its
00:02:51
tightness is— is in the pipeline
and will press on the economy in
00:02:56
2024, they have to start
thinking about lowering rates.
00:03:01
Inflation is beat, basically
beat. There will be core elements
00:03:06
that will continue to rise
institutionally, determined
00:03:08
elements that take months to
flow through. But to crush those
00:03:12
would mean crushing the economy
to an extent that I think would
00:03:16
be unadvisable from an economic
standpoint.
00:03:19
Your expectations, then, from this
past year in terms of the
00:03:24
stubbornness of the economy— is
it more around the labor market?
00:03:29
Is it around the spend that the
consumer had?
00:03:31
What— where were the areas
00:03:32
that— that maybe caught you off
guard?
00:03:35
Certainly the consumer spending.
And that's the area I was pointing to
00:03:38
that was much stronger than
anticipated. There was still a
00:03:45
lot of pandemic money that had
to be absorbed. And it isn't— I
00:03:52
think being in the last stages
absorbed right now, but that—
00:03:57
that definitely had a stronger
effect. Also, the higher
00:04:00
interest rates are not having
quite the negative effect that
00:04:09
many of us thought. Housing has
remained— not thriving but not
00:04:18
collapsing. Although recently,
the Homebuilders Sentiment Index
00:04:23
has gone back down again. People
still view homes as great long-
00:04:29
term hedges against inflation.
Builders are buying down
00:04:32
mortgages to five and 6%. And
home— homeowners are continuing
00:04:38
to put their money in that. Same
thing as far as consumers. They
00:04:42
still have excess money. If you
have your home, you have a lot of
00:04:45
excess equity. Home prices have
gone up 50% in the last three
00:04:49
years. So there's a lot of home
equity that is built up also
00:04:54
that's supporting consumer
spending. So— and corporations
00:05:00
now regard, you know— the debt
is— is more costly than it was.
00:05:04
But, you know, debt is "promise
to pay" dollars. And if we're
00:05:07
going to have inflation in the
future, there's hope that those
00:05:10
dollars will be worth less.
They're more willing to take
00:05:13
that on than they had before.
00:05:15
Are you expecting to see, then, some
sort of labor contraction as we
00:05:19
move forward? I mean, we've
obviously seen companies,
00:05:22
anecdotally, over the course of
the year, announce job cuts. It
00:05:27
hasn't seemed to be kind of this
wide swath that maybe some
00:05:31
people had believed that it
would be, but it still feels
00:05:33
like even as we enter the end of
the year and head into the new
00:05:37
year, that that is still a
possibility of occurring.
00:05:41
Yeah, absolutely. I mean, you
know, as we're recording, now,
00:05:44
we're going to get, you know,
another labor report Friday. And
00:05:47
we're gonna get the JOLTS
report, which is a job openings
00:05:51
and labor market turnover
report. These are also going to
00:05:56
be important. But there is
definitely a slowdown, there is
00:05:59
no question. And the real data
has really become almost
00:06:03
consistently on the weak side—
weaker than expectations over
00:06:09
the last six weeks. So—
00:06:15
and you're beginning to hear
00:06:17
anecdotal statements about the
job market that are more
00:06:24
negative than I've heard since
the pandemic. You know, even in
00:06:30
the erstwhile hot areas such
as biotech, people are saying it—
00:06:36
it isn't the way it used to be. So
we have to be on— on the lookout
00:06:41
there. We also have to realize
that employment has gone down— up
00:06:44
from 3.4 to 3.9%. Could reach
four. That's generally a trigger
00:06:50
for an— a recession watch,
once it goes up by one half
00:06:56
percent. So we are near a
recession watch at the present
00:07:01
time. I don't expect a recession,
if we have it, to be severe.
00:07:06
However, certainly, we do not
have the robustness that we've
00:07:12
had for two years. Firms are
finding people, even in the high
00:07:16
tech area. A lot of high tech
was let off. Across the board, the
00:07:21
labor market is far more normal
now than it has been for several years.
00:07:26
But it still seems like we're at a
point right now, where as we go
00:07:30
into next year— that even though
there is that concern, that
00:07:35
there is still a strength in the
labor force in general. That,
00:07:41
you know, the mass layoffs that
I think a lot of people expected
00:07:45
just have not come to the level
that a lot of people expected.
00:07:49
Absolutely. And I thought we
would begin to see much more
00:07:53
labor softness early, although I
wasn't as pessimistic as a few
00:07:57
economists— Larry Summers
and others— who predicted, you
00:08:00
know, a deep recession by the
second half of the year. And we're almost
00:08:04
of course, done with that.
But even the Fed, in predicting
00:08:08
the unemployment, way over-
predicted— everyone over-
00:08:12
predicted what the unemployment
rate would be. So everybody did
00:08:17
not expect the economy to be as
strong, and the labor market to
00:08:21
be as strong. So, you know—
and this is positive. At the
00:08:25
same time inflation has gone
down quite well. Hasn't been
00:08:31
vanquished 100%. It's a long
process. My big hope is that the
00:08:38
Fed doesn't get stuck on the
downside and delay the way it
00:08:44
did on the upside, as we had
talked about last year and even
00:08:48
before that, tightening way too
late. The Fed has to be pre-
00:08:54
emptive, they have to start
thinking about lowering it even
00:08:58
if they're not going to lower—
certainly not at this December
00:09:01
meeting. But even if they don't
lower it at January, they may
00:09:05
have to lower it at— in the
March meeting.
00:09:10
That's— that's the interesting thing, because
00:09:13
there's more and more. I hate to
00:09:16
use the Las Vegas term, but it
seems like the betting money is
00:09:20
saying that March would be a
possibility. I think it's almost
00:09:23
a lock that a rate cut at
May would occur. But March may
00:09:28
come into the radar a little bit
more. And is your expectation
00:09:31
that when they cut, that it's
probably going to be fairly
00:09:34
incremental, like quarter point,
for the most part?
00:09:37
Oh, yeah, I think so unless the
data falls off the cliff. Which
00:09:45
I don't expect. Not impossible.
But, you know, a slow creep up
00:09:51
would first be a quarter— be
just changing direction has a
00:09:54
tremendous psychological effect.
If Powell just states, at the
00:09:59
December meeting, you know,
"We began talking about
00:10:02
possibilities if the economy
further weakens. However, if
00:10:06
inflation strengthens, we still
have the option of going up." A
00:10:09
real two-sided debate must begin,
not just one-sided. Remember, at
00:10:15
the November meeting, he said,
"We're not even talking about a
00:10:18
rate cut." He should start
talking about a rate cut. We
00:10:23
should also realize that the Fed
is really totally data-
00:10:26
dependent. At their September
meeting, which is less than
00:10:30
three months ago, a majority of
the Federal Open Market
00:10:33
Committee expected one more
increase by December. Now, it's
00:10:40
virtually certain there will be
no increase by December. So
00:10:44
there was— 10 weeks ago, the
majority got it wrong.
00:10:48
Certainly, there's going to be a
lot of buzz about the dot plot
00:10:52
and looking ahead for 12 months.
But one has to realize how
00:10:57
tenuous those estimates are,
just by looking at the last
00:11:01
three months— how wrong they
could be, just like they were
00:11:05
wrong on how many times they
would have to hike it in 2022
00:11:09
and 2023, way underestimating
it. And the reason is, because
00:11:13
no one really knows what's going
to happen until it happens. And
00:11:19
the Fed is not any better.
There's a debate about whether
00:11:24
they're worse, but not any
better than the private sector,
00:11:28
in terms of really knowing when
a recession is going to come on.
00:11:33
And so they've got to be
completely wedded to the data.
00:11:38
I've talked with you in the past
about this, but I'll bring it up
00:11:41
as we're heading into the new
year, is kind of how unique this
00:11:46
time is in terms of economic
history and obviously, what we
00:11:51
went through the pandemic. But
making the adjustments and being
00:11:54
able to, you know, try and bring
this plane in for a soft landing
00:11:59
with all these different
dynamics at play.
00:12:02
Yeah, I mean, it is really
difficult. I mean, we— you know,
00:12:05
we really haven't had a
pandemic. Only 100 years ago,
00:12:07
really. The economy didn't shut
down. So we've really never
00:12:11
experienced what happened
before. So that automatically
00:12:17
means that there could be
unorthodox things happening. I
00:12:22
hear a lot of people praising
the Fed. My goodness, we get a
00:12:24
soft landing, it'll be the first
one and how great Chairman
00:12:28
Powell is. Before one praises
him so fulsomely, one should
00:12:35
realize, in my opinion, he
was the one that let it go too
00:12:42
late, even caused the inflation.
So it's almost like when we
00:12:47
ran over the pedestrian, now
we're praising the car owner for
00:12:52
driving him to the hospital so
quickly that he survives. We
00:12:56
didn't have to have as much
inflation as we had, had the Fed
00:13:00
start raising in early '22,
instead of early 2023. We,
00:13:07
in my opinion, would have had
much less inflation. So yes,
00:13:11
it'd be great if they could get
into a soft landing. I'm not
00:13:15
discounting it, it could happen.
May not. But it still does not,
00:13:22
to me, give a let's— let's
give Jay Powell the Nobel Prize
00:13:28
So here in Economics for what he's
accomplished over the last three years.
00:13:33
So what's your expectation, then, we
will see play out with the Fed
00:13:36
that over the course of the year? How
many times do you think that
00:13:39
they are going to cut? And is it
going to get to a point where—
00:13:43
and again, a lot of this is data
dependent, that it's going to
00:13:46
have to be kind of a a normal
routine to make these quarter
00:13:50
point rate cuts, three, four or
five times
00:13:53
over the course of next year?
00:13:54
One has to remember, Dan, debt
that normally, the term
00:13:59
structure dictates that we have
higher long-term rates than
00:14:04
short-term rates. Right now the
Fed funds rate is between five
00:14:09
and a quarter and five and a
half. While the long term bond
00:14:13
is fully a point or— or more
below that. That's called an
00:14:18
inverted term structure. It is
unusual. It has, over the last 60
00:14:23
years, predicted recession with a
very high probability. We don't
00:14:28
want to keep that curve inverted.
So we— my feeling is that we
00:14:34
got to bring that short rate
down. I would prefer to bring it
00:14:37
down 50 basis points below
the long rate— which, if it
00:14:42
stays at the current level would
mean bringing it down to 3.75.
00:14:45
And I'm not talking about doing
it tomorrow or— or the next
00:14:49
month. But over the course of
the year, we should see the Fed
00:14:54
funds rate in the three area as
the long bond
00:14:59
stays near to 4%.
00:15:03
We're joined by Wharton
Professor Jeremy Siegel, talking
00:15:06
about what we've seen play out
in the markets in 2023, and what
00:15:10
we head for in 2024. I remember a
few years ago, talking with you,
00:15:16
around Dow 30k. Is it time to
even start to consider
00:15:21
Dow 40k at this point?
00:15:23
Yeah. I mean, let's put it this
way, if the Fed responds quickly
00:15:28
to a decline with the drop in
interest rates, I'm— I think we
00:15:33
could get another 15% next
year or even higher, with the
00:15:38
small and mid caps
participating more fully,
00:15:42
because of the fear of recession
being obviated. We have to get
00:15:49
our money supply growing again,
we've got to get the reserves of
00:15:52
the banks going again. They've
been stagnating. Money supply has
00:15:56
gone nowhere in two and a half
years. You need money to grow at
00:16:00
about 5% a year to give you two,
two and a half percent real
00:16:04
growth, and then two to two and
a half percent inflation, which
00:16:08
is the Fed target range. If you
keep money stationary, as it has
00:16:14
been over the last two to three
years, I think you are really
00:16:18
looking a recession right in the
face. So we need to get that
00:16:23
going. But if he does get that
going, and you get that going
00:16:26
by lowering rates, because
that encourages loan activity,
00:16:29
banks, then can loan more. Build
up deposits. I think we could
00:16:34
have an excellent year next
year. I think the productivity
00:16:39
rebound that we see this year
can continue next year. I can
00:16:45
make a positive contribution to
that productivity. We could have
00:16:49
higher labor force
participation. And the reshoring
00:16:56
of many production processes
would be another positive for
00:16:59
the United States. Going
forward, we could definitely get
00:17:06
to 40,000. I'm not saying, you
know— you know, by the end of of
00:17:10
the year. But, you know, ten to 15
and even 20%, not out of the
00:17:15
question. If the Fed is
stubborn, and says "I'm just
00:17:20
going against inflation, even if
the data gets soft," you know,
00:17:23
those— those goals would have to
be modified greatly.
00:17:28
Jeremy, always great to talk to you.
Thanks for your time today.
00:17:31
All the best.
00:17:33
Thank you and happy new year.
Dan.
00:17:34
Happy New Year to you too, as
well. Professor Jeremy Siegel
00:17:38
Wharton Emeritus Professor of
Finance.
