Jeremy Siegel: Guru, Shill or Just Plain Wrong

Siegel: Emperor WIth No Clothes
This won’t be a long piece about Siegel, I’ve touted him in the past on this blog while under the spell of the Stocks for the Long Run mantra, but in recent years as the haze lifted I realized who Siegel was, a shill for the stock market bulls. Jeremy Siegel is the Wharton Professor famous for his book, Stock for the Long Run. It is actually a wonderful read with great information, the conclusions are just wrong.

These days it seems Siegel will work to find ANY justification for why stocks should go higher (and continue to return 6 – 7% real forever regardless of starting valuation).

In his latest interview with Index Universe (here) Siegel gives away his ignorance of monetary policy and finally lays bare for all to see – the emperor has no clothes.

I won’t critique the entire interview, I’ve got better things to do, but here are a few snippets:

Ludwig: When Bernanke said “monetary policy is no panacea,” was that code that stimulus is over?

Siegel: You have to be careful. He actually said other things could be done, but he said this is just not the time to do them yet. But you are right: He did say the situation is very different this time with core inflation rising instead of falling as it was nine months ago. He definitely did stress that difference, but he also mentioned things that could be done. I’ve actually been saying that rates on reserves should be reduced to zero if we want to get banks to lend them out more. And he even mentioned that right in his press conference as something that could be done.

Critique:

First, inflation has actually been falling the past few months according to the ECRI, but over the year it is up – so we’ll let that slide. More importantly though is Siegel’s view that he is somehow behind the Zero Interest Rate Policy and that the reason for the low rate policy is so that banks will lend out reserves. On its face this represents a complete misunderstanding of how our banking system works. Banks don’t need reserves to lend, they need good credit prospects (for the reason why banks don’t need reserves to lend please read Bill Mitchell’s blog Building Bank Reserves Will Not Expand Bank Lending. You can lower the interest rate to zero and banks will still not lend if they don’t see good economic and credit prospects.

Ludwig: But that rate is already approaching zero, isn’t it?

Siegel: Yes, it’s only a quarter percent. But there’s even talk that you could make the rate negative and really get the banks interested in lending. They have over $1 trillion in excess reserves.

Critique: Siegel continues with his notion that we can simply get banks to lend by making interest rates negative…it is just not true. The amount of excess reserves is meaningless when talking about loan creation.

Ludwig: Do you think banks will actually lend with the proper coaxing? Some say banks are most interested in building up their balance sheets to conceal whatever bad assets are still there. Do you buy that, or is that exaggerated?

Siegel: There’s not $1.5 trillion of bad assets, let’s be realistic. The major write-downs have been taken. But you’re right. They’re very risk-averse now; they want to keep a lot of reserves.

Critique: Siegel is probably right here, there’s not $1.5 trillion in bad assets – its probably much higher than that. It’s like he doesn’t even attempt to look at residential and commercial property asset prices versus what they are valued at on bank and insurance company balance sheets. Then he makes a bigger ass of himself by stating that banks aren’t lending because they are risk-averse…so which is it? Banks will lend if interest rates are zero or negative….unless they are risk averse – this is a contradictory statement. Either what you just said is correct or it isn’t – you can’t have it both ways.

Ludwig: So where does that leave the economy?

Siegel: The position of Bernanke and the Fed at the present time is that QE2 actually worked to the extent that it reversed the core deflation in the economy. It also looked very promising early on, as jobs were created right away. That has sagged recently, but not stopped.

Critique: This may be the position of the Fed, but there is no evidence at all that QE2 worked, in fact all the evidence points to the exact opposite, it was an utter failure. Siegel further demonstrates his ignorance of monetary policy when he asserts QE2 could counteract core deflation – it can’t, QE is a deflationary event in and of itself as it sucks interest payments out of the economy. If he had said that QE releases the animal spirits….well, maybe. It’s clear he doesn’t understand QE and monetary policy (he’s not alone).

Ludwig: So in the best of all possible worlds, Peak Oil may be a fact, but it may also become irrelevant quite soon?

Siegel: That’s correct. Peak Oil contains the seeds of its own destruction, because once oil prices get high enough, you know there’s going to be a switch.

Critique: Really? I hope somebody will dig these quotes up someday. So if peak oil is real, its okay because its easy to switch the global economy over to something else…pure ignorance.

Siegel: Well, as I’ve been saying, stocks have nearly doubled in price since March of ’09. But we are still very cheap on a historical basis, relative to price/earnings ratios and based on current expectations of this year’s earnings on the S&P 500—even trimmed expectations.

Ludwig: Do P/E ratios still have the same significance after what went down in 2008 and 2009?

Siegel: Interestingly enough, if you’re going to peg P/E ratios to anything, they’re pegged to interest rates. When we had double-digit interest rates, we had single-digit P/E ratios; now we have near-zero interest rates. I did some analysis for the post-war period, that when you’re in the low or middle interest-rate range—and we’re in a very low range right now—the average P/E ratio is 19. It’s not even 15, which is the average number over the last 50 years.

Ludwig: So, stocks are still worthwhile?

Siegel: Relative to interest rates, stocks are among the most attractive I have ever seen them.

Critique: I can only point out the work of Siegel’s good friend, Robert Shiller to dispute his notion that stocks are somehow cheap. Its laughable and what is required in order for him to continue to push his thesis that stocks will always win out – despite clear evidence to the contrary.

For those of you looking to Siegel as a guru to follow, my advice is to not do that. Instead, follow his buddy, Robert Shiller – an academic who has actually been correct.

Scott Dauenhauer CFP, MSFP, AIF
Meridian Wealth Management

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