00:00:04
this is basically 30 years Professor after your original research we're going
00:00:10
to talk a lot about the new material a lot of there's a lot of new material but
00:00:14
maybe the central premise uh in years like days like today yours like 2022 is it still stocks for the long run well
00:00:22
it's interesting because the first edition which came on May 1994 used data through the end of uh 1992.
00:00:33
and I looked back and what was the long-term real return as you know I began 1802 onward it was 6.7 percent
00:00:40
real and then I updated it till June of this year and it's 6.7 real exactly the same last
00:00:51
30 years despite all you know the financial crisis the coveted the real return with 6.7 per year it's
00:01:00
remarkably durable um and then we also know it's remarkably volatile in the short run but the
00:01:09
durability of the Equity or Equity premium as you might say although then you have to subtract
00:01:14
what you think about bonds um is is really quite remarkable I think one of the the big new chapters
00:01:22
in the book and the most important thing may be arguably for the market this year
00:01:26
is the real rate on bonds uh and should we talk about the equity risk premium talk about the historical equities
00:01:34
premium bonds real rates what are driving bonds lower yeah for longer yeah well actually there's five new this is
00:01:41
the biggest revision of all of them it's also the most time between them have
00:01:45
actually five new chapters and one of them just on uh on the interest rates and stock prices and
00:01:52
uh what I find and others have found um although sometimes I don't know whether the Federal Reserve recognizes
00:02:01
it is how much of a drop in real interest rates I'm not talking about exposed I'm
00:02:07
talking about exante but I'm looking at tips bonds as a global phenomenon uh tips were floated in the United
00:02:16
States in January of 1997 at three and a half percent real in 2000 they went almost to four and a
00:02:25
half percent real and by the way that was the real around the world um I was four to five percent real
00:02:34
ex-anti um until the latest tightening they were all negative they all dropped negative and I'm
00:02:43
talking about 10 years this is not short term uh and it's been steady I ascribe it
00:02:50
really to to four different causes of the collapse of real yields around the world
00:02:57
um one is slower growth and that's composed of two things first of all slower population growth and
00:03:05
slower productivity growth um I mean this year productivity is totally collapsed in in a way that is
00:03:12
we've never seen before in the United States actually uh it's not discussed
00:03:17
much but uh the figures are almost unbelievable how bad productivity has been uh this year
00:03:24
um but productivity is down real growth is down population growth is down listen
00:03:28
you know you do any real rates follow growth take your oil equation and remember it's the uh first derivatives
00:03:37
are our growth rates so that's one of the factors I also think there's increasing risk aversion I think that
00:03:43
may be due to the we're Aging in the population um uh becomes more risk-averse uh that
00:03:50
holds wealth um not too sure the magnitude on that but I think that that's certainly one of
00:03:56
the factors but one of the biggest factors uh and again until this year is the tremendous flip in the
00:04:06
correlation between stock and bond returns um during the 50s 60s and 70s even early
00:04:15
80s the the beta was positive of of bond in stocks um since really uh the 90s it had went
00:04:25
to zero and then it went negative um and and that's as you as you know I mean a negative beta asset is going to
00:04:31
have a lower rate of return and uh stocks are uh treasuries are negative beta assets they they really
00:04:39
are now they're not this year we'll talk about that but um and certainly you've had they've
00:04:45
correlated with stocks but in the past during all the crisis the financial crisis treasuries were up covet crisis
00:04:52
treasuries were up whenever there's a shock to demand um and stocks go down treasuries go up
00:05:00
well factor in a negative beta from a positive beta and you know tell me what what the
00:05:08
return should do and it goes down as it should and that's a major factor if you
00:05:14
actually just take some of the raw betas and look at it you can explain the two two to three percentage points of the
00:05:20
decline in real yields from that so you have all these factors that are making for the decline in in in
00:05:27
in in the real yields and it's really quite persistent and quite worldwide so
00:05:33
you started the year uh at negative one percent the tenure tips you're getting
00:05:37
back to one one now and and when you said tips start at three and a half that was like the 200 year real return on
00:05:43
bonds that was exactly what is so what is your expected return for bonds going forward at one percent on the 10-year
00:05:49
tips are we where do you think we are well it's interesting because just before tips came out because I had done
00:05:55
stocks for the long run I got a call from the media and they said uh Dr Siegler the treasury is going to float
00:06:00
tips what do you think they're going to float at I said well I guess three and a
00:06:04
half percent that's their 150 year average um and indeed they floated at three and
00:06:09
a half percent um and then continue to Rise um for the next uh three and a half years and then began and by the way
00:06:18
again Meriden we were actually late as a country coming to tips most other countries in the world had them and even
00:06:25
European countries did not have systematically high inflation but the tips just then steadily just down in
00:06:32
down and down 20 30 basic points a day excuse me a year a year a year a year down to minus one minus one and a half
00:06:39
at one point actually you can almost explain the whole decline in the stock market just
00:06:44
by the rise in tips I mean if you think there's a five percent six percent real
00:06:47
Equity premium and you raise the real rate by two percentage points you don't
00:06:51
do the math uh it's not that earnings have changes that that discount rate is is really
00:06:56
changed but I think what's I I think I think it I think the real rate actually is going down I think it's this
00:07:05
tightening the market thinks the FED has got to produce a really strong real rate
00:07:11
to stop the inflation um now the interesting thing about the real raid let's go to the short term your way when
00:07:19
we have the tips long-term real way so what what is what is real rate going forward well
00:07:25
I mean the the treasuries are three and a half the nominal treasuries are three and a half so what do you think the
00:07:31
average rate of inflation is going to be um if you think it's two and a half to
00:07:35
three you get you know you know about a half percent on that I think it's actually short uh it's my feeling
00:07:43
actually that the short-term real rate equilibrium short-term real rate and I think is minus one half percent
00:07:51
um and it's gone down over the period uh so you have a term structure on on real
00:07:56
rates and I think it's about minus so what's really important about this is
00:08:02
the Fed thinks it's plus 0.5 percent um so they're gonna they think that
00:08:07
they're gonna have to tighten a lot more to get a pinch on the economy where I
00:08:12
mean I think they don't have to tighten as much as um they think they do I mean you know in
00:08:20
terms of of getting that pinch on the economy and I think if they tighten too much they're going to really
00:08:27
um precipitate a recession but that's just an interpretation by the way if you
00:08:32
take a look at long-term fed funds what they think is the neutral rate you know since they've been doing the Dot Plot
00:08:38
next week we're going to get the dot pot I mean if you go all the way back you
00:08:41
know when they started these uh 25 years ago uh they thought the um for two percent inflation the right fed funds
00:08:48
rate was four and a half percent which is a two and a half percent real rate um now they think it's half so they
00:08:57
themselves have realized but I actually think that the real rate has dropped even more
00:09:03
than what they think and that does have consequences obviously for their their Titan out
00:09:08
so if you haven't been following the professor's views he came into this year
00:09:12
the most hawkish on the street calling for the most aggressive rate hikes and coming back to behind the markets we had
00:09:17
Don Cohn former fed Vice chair in December when the market was saying three hikes he was saying eight hikes
00:09:23
way more aggressive he's been spot on the whole bed cycle now there's a chapter in stockstrong run on the
00:09:31
pandemic and the money supply Jay Powell has said the money supply has not been predictable of inflation
00:09:38
you're the exact opposite view what's he getting wrong what what is this oh boy
00:09:43
yeah I mean so I I I've been calling Jay Powell's monetary policy the third worst in the
00:09:50
his 110 year history of the FED I may actually raise it to the second worst but um we'll see what happens the worst of
00:09:58
course is the Great Depression where we all know they let all the banks failed when they
00:10:03
were actually formed to prevent exactly that from happening um but uh it you know it was actually
00:10:10
incredulous to me I mean Craig knows I mean people weren't new I mean I I was
00:10:15
when when the pandemic hit and the money supply exploded I said this is a cause inflation I've never you've never seen
00:10:20
in that 25 M2 money supply increase Milton Friedman did from you know from uh 1870 onward there has never been a
00:10:30
money supply increase that fast ever ever and and then in 2021 they increased by
00:10:39
12 or 13 I said this is this is just absolutely crazy um this is just going to produce a
00:10:47
tremendous amount of inflation and it did um I was definitely the hawkish by the
00:10:52
way saying eight increases that's two percent well now they're talking about
00:10:55
four percent by year in that's 16 increases right I remember when I called on CNBC back
00:11:02
then for three or four increases he said oh my God you know the that there will never be by the way in
00:11:09
we're going to have a meeting next next week in the September 2021 meeting this was their projection for this
00:11:18
December's fed funds rate being fomc members gave their opinion as they're supposed to
00:11:25
eight of the 16 said there is no increase for rates whatsoever this year this was last September when inflation
00:11:35
was already heating up speculation was rampant in all asset markets eight of the 16 said no increase five
00:11:46
said we'll need one 25 basis point increase and three the most hawkish Venture that we might need 50 basis
00:11:57
points by December of this year could you be more wrong than that it's impossible to be more wrong than that it
00:12:06
it amuses me when people are so oh my God the FED is going to stay tight this long and this long as if they know what
00:12:13
they're doing as if they have any concept of what they're going to do in
00:12:18
2023 clearly in 2021 they had zero concept of what they were going to do this year
00:12:25
um they just followed the data but but going back to your old question because I wrote an article back then saying how
00:12:31
much inflation to have and ignore it I mean maybe you know I was four years of University Chicago my first teaching
00:12:37
position uh last four years Milton Friedman was there and I you know read all the monetary and yeah year to year
00:12:43
there's not a close relationship well when you have 20 increase 25 and then follow it by 12 you take a look at the
00:12:52
data you're always going to have it in place always and he denied that there was going to be
00:12:56
the he said there's relation between the two and yes that's true and not on a
00:13:02
year by year year basis but when you explode it you know Friedman said to me 18 to 24 months later you explode the
00:13:08
money supply you're going to have that inflation and what really upsets me so so much
00:13:14
about this policy is okay Jay Powell is not a monetary Economist you know he came from private Equity actors Etc
00:13:23
okay other fomc members dissented the staff gave very you know oh yeah there's not going
00:13:36
to be inflation and everyone bought it I mean uh it it shocks me the Texans were not learned uh and that
00:13:44
maybe one or two of them said this is crazy I mean they were we all we all know I
00:13:50
mean they were buying mortgage-backed Securities in the biggest housing boom in history by the way I was in boom in
00:13:56
the last two and a half years in the case Schiller index is greater than preceded the Boom receded the
00:14:05
financial crisis to show you how rampant that was and the FED still felt compelled to buy billions of dollars to
00:14:16
of mortgage-backed Securities I mean the policy that was founded was in my opinion inexcusable I think we hit the
00:14:23
inflation topic uh okay yeah I'm I'm just upset about a guy so I you know I
00:14:29
am he gets fired up he definitely gets fired up so we talked about Bond returns being below average
00:14:36
um yeah we were at this conference a few years ago with Bob Schiller and we had the cape discussion yeah talk about
00:14:42
where you see our stocks in the book we talk about the cape ratio uh yeah four four months of the last 40
00:14:51
years did the cape ratio have a prediction the cape ratio is we all know it's been over we bearish
00:14:59
um there are several reasons I talk a lot about it and many of you know about my
00:15:03
article in the faj where I said a cape ratio a new look I talk about the deficiency of the cape ratio I talked
00:15:09
about the the deficiency of using reported earnings under the news fa fasbi standards that way understated earnings
00:15:21
and therefore as a result overstated the valuation of the market I've also and this is not just the first
00:15:29
edition I've talked about what I think is I think the equilibrium it's funny
00:15:35
I'd say six and a half percent six and a half percent the inverse of that is a 15
00:15:38
p e ratio right um I actually think the right p e ratio for the market is 20 in equilibrium
00:15:46
and I do it not because the real interest rates are lower although they are and you could make an argument that
00:15:53
way unless you think it's just risk if it's just an increase in risk aversion
00:15:57
then you wouldn't necessarily make that argument but nonetheless I've often made
00:16:01
the argument that uh transaction costs for an index portfolio are basically zero noun and as a result
00:16:09
um the equilibrium price of Securities should be higher um just to be more concrete back in the
00:16:17
19th century and you're getting six and a half percent you weren't getting six
00:16:20
and a half you probably had one and a half percent of transactions costs just to try to keep a diversified portfolio
00:16:26
that's five percent real five percent real is a 20pe so now you can since since indexation is
00:16:34
Costless you can now really you're just getting the same return so really what's
00:16:38
demanded is a five percent real in a zero cost world that's a 20 p e of the market it's certainly not a 15p of the
00:16:45
market which is a lot of people that's another failure of the capriatios it is
00:16:50
a number there's many failures of the cape ratio um that I pointed out that's
00:16:54
just another one another there's also the the BuyBacks and the earnings General Trend and all that that's
00:17:00
another issue there's also something called the aggregation effect I won't go
00:17:05
into all these separately but yeah and then with that to Jacob Levy conference where we argued about whether stocks
00:17:12
would still outperform bonds yeah we there's a lot of talk on factors momentum is a factor that you get some
00:17:19
coverage um you have a whole four new chapters on value uh and is value investing dead you
00:17:26
want to give an update on what you thought about that I expanded I had I had one on value and size premiums about
00:17:33
four now basically on that um and uh in in bowing my head to John Cochrane I have a chapter called the
00:17:41
factor Zoo um and I I talk about momentum and all the other factors and one of the really
00:17:50
yeah and and you guys have been talking about this I know in the conference um also but one thing that I really
00:17:57
found is how much things have changed since 2006. in other words the last 15 years
00:18:05
basically the factor effect on virtually all of them has disappeared there's been virtually no fact or effect
00:18:16
from 2006 onward now I'm not saying that's it true in every Market in every
00:18:20
single time period but it is really Stark what has happened we all know what happened to value and size didn't you
00:18:27
know haven't worked many of those related to the value didn't work but even momentum if you take it from you
00:18:33
know if you accumulate that factor you see the graph and all that basically it's level many others are trending
00:18:40
downward so a lot of things seem to change I don't know why I mean is it it was you know it started of course the
00:18:48
crash in value with the financial crisis and it hit the banks and that really put
00:18:53
them behind and I don't know if it infiltrate it into others and then of course it was the big growth stocks now
00:18:58
we have had a resurrection this year certainly in value stocks but it's only
00:19:02
honestly retraced half of what value stocks lost [Music] over the last three or four years I mean
00:19:11
so I mean it has retraced some of it I mean there are some like asthma that was oh it's just you know still one of the
00:19:18
biggest gaps and it's going to do that but it just retraced the approximately
00:19:22
half of that but it's really interesting in the pre-2006 strong factors after
00:19:29
2006 not strong I think the only one that maintained itself and by the way this is around the world
00:19:35
uh because I did the international factors too since 2006 not as strong as the United States but around the world
00:19:43
Emerging Market was only one that actually retained a lot of a lot of the factors
00:19:48
um but there was a big Market difference then so you talk about in the book growth is
00:19:54
not return as a concept is that so given the the the the 15 years change anything
00:20:00
for you I had I had the big story which I've used in several editions about IBM
00:20:05
and and uh Center of New Jersey uh had you bought them in the fifth before IBM became famous and did the computer and
00:20:13
sort had you bought them then and held them to the day IBM had much faster Revenue growth per share
00:20:21
earnings growth per share and and margins and every other factor that Wall Street did the standard of New Jersey
00:20:28
now Exxon Mobil beat it in total return over the period um valuation trumps growth in the long
00:20:37
run it also works with with countries this has been pointed out I actually put on the second edition I expanded it uh
00:20:44
then there's been articles Jay Ritter wrote an article on and several others
00:20:47
did um the country with the best stock returns of the last 120 years the South Africa sazo had the slowest GDP growth
00:20:55
of all the countries the reason why it had the best returns is because it had the lowest valuations so I mean it's
00:21:01
it's you guys know this but in long run the valuation just trumps the the growth
00:21:08
um in other words growth stocks just become too expensive on average to support the fact the their valuation so
00:21:16
I I just I want to make that lesson clear so people know about that still occur maybe we'll get one final question
00:21:24
then open up to the audience so is that in terms of allocation questions um U.S somewhat like the growth Market
00:21:31
International is sort of like the value market is is yeah I mean that's basically you know what what happened to
00:21:37
Europe and the rest of the world where they were valued stocks I mean that you know when you talk about why did
00:21:42
International underperform um as much as it did uh now Europe has special problems right now but up till
00:21:51
then really you could almost all explain it by just the values and growth phenomena
00:22:11
with the did you say vix yeah um first part was the 60 40 portfolio 60 40 portfolio I mean Jeremy and I we've
00:22:20
been working on 75-25 because the gap between stocks and bonds is just is this higher than than average
00:22:28
much higher um so even with the extra volatility on stocks short run volatility on stocks
00:22:34
we've actually done simulations that show the probability of running out of money it's actually less with a 75-25
00:22:40
portfolio than is with 60 40. under reasonable assumptions forward-looking assumptions real rates on stocks and
00:22:47
bonds five percent real on stocks zero on bonds now bonds are one stocks are probably five and a half to six right
00:22:54
now in my opinion uh Niko we've been there five um so we found that um let me let me say
00:23:02
the following when people said I I remember back 20 years ago when people said what we need
00:23:10
is a security that matches the vix and I said why do you want that and they said oh because it has a negative beta
00:23:18
and it'll it'll stabilize our portfolio and I said don't you know what a Vic Security will
00:23:26
do over time it'll keep on going down and down and down and in fact it did it would
00:23:33
probably I think it went from a million to ten or something like that I've been
00:23:36
in reversible at 25 times so all they were doing to the it was funny how people misunderstood
00:23:46
they went wild for this vix thinking it was a hedge um and they thought it was stable they said
00:23:55
oh vix is 10 to 15. so it's stable it doesn't deteriorate and they of course
00:24:01
didn't understand that the security kept on deteriorating and oh they were doing
00:24:05
really really paying the put premium we all know that we all know the equivalents you can do that I don't I'm
00:24:11
telling you that because that's that's what I remember about the vix anyone else
00:24:17
yes check your like online purchases are we in a recession or could we catch a recession from China and Europe well you
00:24:59
know there's a lot of questions so I've had two opinions on FedEx's problems one
00:25:07
said it's 60 macro 40 FedEx yeah there was 70 macro and 30 percent FedEx they
00:25:15
always the the 70 FedEx they all gave most of the problem to to FedEx but I mean let me mention
00:25:27
because I mentioned this before the the biggest Pro the biggest question today which why did Jay Powell and the FED
00:25:37
never address in Jackson Hole was how we could add three and a half million workers to the
00:25:45
workforce this year as we have through the payroll and the household doesn't matter what
00:25:51
you look at and have negative GDP growth I I find it shocking and yet no one has
00:26:01
talked about it so are we in a recession or not explain to me how that can happen
00:26:12
is the data bad is it that bad that has or is the productivity collapsed by an order of magnitude
00:26:21
greater than it's ever collapsed before in the 75 year history that we've had it
00:26:27
since 1947 is that possible and if so why has that happened isn't that also worthy of
00:26:37
thinking about if you're thinking about monetary policy I don't hear a peep from anyone about
00:26:43
from the administration nor from the FED about this um I don't know how you can run monetary
00:26:50
policy without understanding this because I clearly don't um if you look at the payroll report we're
00:26:58
going on in recession looking GDP we had two quarters of negative and this quarter now looks now under one well
00:27:05
today even um the you know the FED now went down to one half percent even with robust
00:27:12
payroll another unbelievable negative productivity growth after the two biggest productivity negative growths in
00:27:20
history I mean what is happening to the U.S economy is it collapsing or are we just hiring people who are doing
00:27:28
absolutely nothing I think it's worthy of some explanation um before you launch on you know raising
00:27:38
the real rate by more than ever before I think we have one more question and then we have to wrap it up
00:27:49
rates it says for about one year the return is four percent and for the next five to ten years it decreases and
00:27:56
decreases even more further by 3.5 3.4 so does that signify that the government is uh thirsty for the investment but the
00:28:04
rate of returns are so low for the future as well well you know there's there's let me
00:28:12
just put one thing in your mind to think about forward the way the CPI is constructed is so
00:28:20
lagged and so imperfect that even though real estate prices are going down yes going down
00:28:30
you will see real estate and cost of housing which is 43 percent of the core CPI continue to rise for the next 18
00:28:40
months it is that lagged so if chairman Powell is looking at the CPI he's going to get a totally
00:28:49
distorted view of inflation inflation my opinion is very little going forward I think we had a 12
00:28:56
inflation over last year if it was done properly because we had a 40 increase in
00:29:02
housing prices and 25 in rentals go look at the CPI what will you find eight percent
00:29:10
because of the way they do it um so when you talk about what the real rates are you have to talk about what
00:29:18
has inflation been and what is it going to be forward by the official statistic it's going to be much higher
00:29:25
than what it is actually now what it is actually is your true real ray so keep that in mind when you think
00:29:35
about going forward what real rates are they're much closer to the nominal rates
00:29:40
than certainly the rate of inflation would make you think we are going to have to make that the
00:29:45
last question but if you want to keep update with the professors weekly views on the mark behind the market serious
00:29:50
132 there's a podcast listen to behind the markets every week get professors
00:29:55
hot takes first 10 minutes of show every week thank you so much for coming here Professor thank you thanks for for
00:30:01
having us thank you very much enjoyed it thank you