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