Jeremy Siegel on 2010: Good for Stocks, Bad for Bonds -- and Why Interest Rates Will Go Up - Knowledge@Wharton

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Understanding the rules for 2010. Interview by Knowledge@Wharton of Wharton Professor Jeremy Siegel.

Jeremy Siegel on 2010: Good for Stocks, Bad for Bonds -- and Why Interest Rates Will Go Up - Knowledge@Wharton


Knowledge@Wharton: What is inflation going to do?

Siegel: Inflation is going to be under control this year and probably into 2011. However, we will have an upward tilt to inflation, which means the longer-run trends point to a 2%-to-4% range of inflation rather than zero to two, which unofficially is what most central banks and the Fed have targeted.

The scaremongers, who worry that the ton of money the Fed created to fight off the crisis is going to fuel the next [period of] inflation, are wrong.

Knowledge@Wharton: But the 2%-to-4% range is standard over the long run, right?

Siegel: It's not. I remember when I was studying economics, we talked about what a victory it would be if we could get down to between 2% and 4%. We've been spoiled with very low rates. Most central banks use zero to two. They come closer to two.

We'll move closer to between 2% and 4%, particularly in the United States, given the large deficits that we have and the liquidity that was created. But just as Bernanke acted very responsibly in providing the liquidity necessary to prevent [a repeat of] the Great Depression, he is also an excellent enough economist to know that money is what fuels inflation. The Fed is really solely responsible for inflation. He will not let it go above five, and probably not even four. He will raise interest rates to whatever level is necessary if inflation starts running into the mid-single digits or higher.

Knowledge@Wharton: When we talk about inflation, we also often talk about commodities. There has been a pretty good run in some commodities, especially gold. What do you see happening there?

Siegel: The commodities cycle has followed the world economy. It had hit its low very close to the same time the stock market did. Now that the world markets have recovered, we see oil has recovered. I would love to see it in the 70-to-80 range.

Commodities are fully priced. Gold ... is priced for an inflationary scenario that is much worse than will be realized. Gold is a risky investment now.... That is not going to be a good investment throughout 2010 and the longer term.

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Commodies Likely to Continue Fall

Oct. 13 (Bloomberg) -- The record 39 percent decline in commodities since July 3 is nowhere near finished, if history is any guide.

The Reuters/Jefferies CRB Index of 19 commodities from coffee to silver would have to drop another 37 percent to reach the trough of the 2001 recession and 35 percent for the 1998 slide, when crude bottomed at $10.35 a barrel. The measure is 28 percent above its lowest during the economic contraction that ended in November 1982. Copper, after its biggest weekly loss in two decades last week, is still triple 2001 levels.

While tumbling prices of oil, nickel and soybeans already crippled stock markets from Moscow to Sao Paulo and sliced Alcoa Inc.'s profits by 52 percent, investors say rising stockpiles of copper and slowing energy demand mean prices will continue to fall. The U.S. slowdown will last more than a year and be deeper than any in three decades, according to Harvard University economist Martin Feldstein, a member of the committee that charts American business cycles.

``This downturn is going to make 2001 look like a walk in the park,'' said Tim Mercer, chief investment officer of Hong Kong-based hedge fund Musashi Capital Ltd., who sold all his commodity investments in July. ``This is the bursting of a 25- year asset-credit bubble. People have really stopped spending money, everywhere.''

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Tech sales down $170B next year?

Oct. 13 (Bloomberg) -- Intel Corp., Microsoft Corp. and the technology companies that so far have escaped the credit crisis relatively unscathed will lose out on as much as $170 billion in sales next year as the crunch catches up with them.

Corporate spending on computers, software and communications equipment may be little changed or fall as much as 5 percent next year as the lending freeze spooks clients, said Jane Snorek, an analyst at First American Funds in Minneapolis who has followed the industry for 13 years. It would be the first decline in the $3.41 trillion market since 2001 after the dot-com bubble burst.

``Business kind of stopped dead in the last two weeks,'' said Snorek, whose firm owns Microsoft and Intel stock among more than $100 billion in assets. ``People are pushing off orders and saying, `I have no idea if we're going to have a global meltdown, so I'm not going to buy anything right now.'''

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Still Holding Back - Barrons.com

Still Holding Back - Barrons.com: Interview with Jeremy Grantham, Chairman, GMO

"What about some other trades [that might provide opportunity in this falling market]?

I'm speaking for the asset-allocation unit at the firm. We have been substantially long the safe-haven currencies. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar. One of the paradoxes is, if the world is worse than people expect, the U.S. dollar will outperform."

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Switch to Cash?

Your Money - Switching to Cash May Feel Safe, but Risks Remain - NYTimes.com: "It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?"

Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September.

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

If you missed that opportunity, you’re hardly alone.

But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.