Credit deflation could happen next month, could be violent and fast, may be a slow managed leak that takes years to work its way through the system - the "engineers" will see to that the best of thier ability no?
Siegel was on Kudlow friday - here is a nice podcast for you to listen to by him:
knowledge.wharton.upenn.edu
Podcast: Jeremy Siegel on Dangers of the Commodities Bubble
Jeremy Siegel on the Fed, Commodities and Global Markets
Knowledge@Wharton
The cover photograph in the latest copy of The Economist says it all. The May 25 edition has a picture of a bear peeping out of the woods, with a headline that asks, "Which Way is Wall Street?" The magazine notes in an editorial that after nearly three years of gains, international stock markets tumbled by more than 10% during the past couple of weeks. Emerging markets have been volatile, as have markets in Europe. Is this likely to lead to the kind of bearish slump that followed the dot-com bust in the spring of 2001? Or will the volatility pass? Jeremy Siegel, a finance professor at Wharton and author of the book, The Future for Investors, spoke with Knowledge@Wharton's Mukul Pandya and Robbie Shell about the commodities market, the appointment of Henry Paulson as the new Treasury Secretary and the challenges faced by Fed chairman Ben Bernanke, among other topics.
If you have iTunes, you can subscribe with one click: knowledge.wharton.upenn.edu
If you have your favorite podcast source, the url is: knowledge.wharton.upenn.edu
For your convenience you may play or download with the links under the title.
Some relevant quotes:
When I said the markets are testing him right now, as I look ahead, there are two bubbles that the Federal Reserve needed to puncture. One was the real estate bubble, which has been punctured. There is just no question now when we look at the data that real estate has slowed significantly, that price increases in fact have turned into price decreases in the hot coastal areas of our country. This is basically what the Fed wanted to do.
What has not yet been convincingly popped is the commodity bubble --typically oil, the metals, copper, zinc, aluminum, etc. Yes, in the last week or two we've had a reaction downward, but we've had such reactions in the past and they've been followed by upward surges.
The test will come if these commodity prices and oil prices surge to new highs. They're going to say to Bernanke, what are you going to do about this, are you really committed to a very strong dollar and a firm monetary policy, or are you going to be weak and not raise rates? So far, we haven't had that confrontation, but it might happen. It might happen relatively soon.
A longer-term factor is unemployment and the economy. That's looking much better. You know, everyone talks about gas prices. It's almost like the weather nowadays, what you chat about. I think that if you start realizing we just came back from Memorial Day, people had to fill up their tank several times, and you do feel that pinch. The consumer's going to slow down, there's no question, in the second half of this year. We're going to have to rely on corporate capital expenditures to keep the economy moving at least at a moderate pace.
Knowledge@Wharton: Speaking about corporate, what's going to happen on the corporate side? Walmart stock prices have come down because the retail giant has just reported disappointing sales. Again, the company has blamed the high gasoline and utility prices for its performance. Should investors be concerned that in addition to consumer confidence, corporate profits will be tepid or depressed because of the commodity bubble that you talked about earlier?
Siegel: This is the one-two here. One from the energy costs, two from the interest rates. We have a fancy term called MEW, mortgage equity withdrawal, MEWs, which is how much people take out on second mortgages, on home equity loans, which has been huge. Two years ago they were giving home loan rates as low as 4%, sometimes 3.5%. These were not teaser rates, these were home equity rates, but they were variable rates. Now those same rates are 8% or higher. That's a huge change. So those people have been using, as we say, their homes as an ATM machine to cash out.
Obviously we are going to be crimped dramatically. That's the second source of the slowdown, and that's why I think in the second half of this year, consumer spending could slow down to only a 2% rate. The only way that we would get to 3% GDP which is minimal growth -- most economists think 3.5% is what we're capable of -- would be capital expenditures rising and maybe exports rising. If we just had to rely on the consumer in the second half of the year, I think we would have a significant slowdown.
Knowledge@Wharton: Someone said recently, and I believe it was you, Jeremy, that a low dollar is favorable for the equity markets but the anticipation of a falling dollar is unfavorable to both stocks and bonds. Do you think the Bush administration is amenable to a decline in the dollar, and what could be the impact of that?
Siegel: We're going to obviously get statements here from Mr. Paulson, designated Secretary of Treasury, that the official position is still a strong dollar, although interestingly enough, today the dollar has actually weakened. This is another form of the test that I think that Bernanke might be put to. A falling dollar and rising commodity prices. If the dollar can hold around this level and commodity prices don't move, I think I'm very favorable. If they surge and the dollar falls, Bernanke may have to hike again and maybe even by more than just a mere 25 basis points and say, listen, I'm really serious about this. I'm not soft on inflation, I'm not going to let the dollar just slide anywhere ... It would be a cold bath for stocks and bonds and commodities particularly.
We did talk a little bit about the foreign markets. I do want to get that in. Those were almost straight-up markets, particularly the emerging markets. I've long lectured that whenever you have markets that go up almost every day as they have for the last three or four months, when they go down they're going to go down fast and big. That's always been the case. People say, oh my god, there's a 20% drop in the emerging markets. They're still 30% ahead of where they were a year ago. The increase had been extremely strong and actually, that's another bubble.
I think the emerging markets were in a bubble, the foreign markets somewhat but not as much. That is actually healthy if they break, because no market can be up every day ... Eventually when there's a wobble it's going to be a big one. Is it the start of something major? No. I don't think so. This is a question of how high we have to go in order to control the second bubble, the commodity bubble in the economy.
Knowledge@Wharton: We've talked several times about the commodity bubble. What is the appropriate response, and how can that bubble be burst without causing damage?
Siegel: The balancing act that Bernanke has today is, we know that housing has slowed. Commodities, we're not convinced that we've seen the lows. The worry is, if he really puts a strong move on the commodities by raising interest rates, would he tip housing into such a decline that it could tip us into a recession? That is the major balancing act that he has to do at the present time. But my feeling is that, if commodities rise, if they test them and the dollar falls and he comes in very strong, it'll be, as I say, a real cold bath right at the beginning, but I actually think that interest rates, long-term interest rates, could start downward, because they could say, wow, he's serious about inflation control and he's not worried about how much he has to slow the economy to do that.
Right then, I would maybe want to be a buyer of long-term bonds ... In other words, even though he'll jack up the short rate, it's basically to show he's serious. It might cause a decline in the long rate. By the way, that's the first sign, which is usually all you have to do. Back in 1994, 12 years ago, when Greenspan sent that rate up half a point at the very end to 6%, that was all that was needed. The bond market started rallying, and from that point on there were no further increases.
Knowledge@Wharton: Let's end with the one question we always ask you. What do you think investors should do now?
Siegel: I think actually, I say sit tight, certainly don't bail out. Right now, I think for those of you who didn't get in this year and maybe you've regretted it, you are now back to January levels. My feeling is that positioning in stocks at the present time is appropriate. The international stocks are down. Position yourself there. I think that long run, investors are getting better returns now than they were just a month ago. |
