Wednesday, February 2, 2011

More Dangerous Advice from Jeremy Siegel

Risks abound with inflation-linked bonds

These healthy rates were not a surprise, since economic theory predicted that real yields should approximate real gross domestic product growth, which averaged between 3 per cent and 4 per cent at that time.

During the dotcom bubble? A funny thing happened. Perhaps he did not get the news. It popped. I doubt very much that we will be going back to that fake high growth era, especially as more and more baby boomers begin to retire.

All this means that Tips investors should beware. Although Tips may compensate holders for future inflation, the interest rate that they offer is far too low to offset the risk of rising rates.

Risk abounds? If we buy the 30-Year TIPS and hold it until maturity then we will earn 2.08% over inflation. That's the current rate. No matter what rates do this is what we will earn going forward. As a retiree who values safety, I am completely fine with that. I'm locking it in. I'll be buying the 30-Year TIPS this month in the auction.

Another factor is slowing real economic growth: real GDP growth averaged over 3 per cent in the 1980s and 1990s but has fallen to about 2 per cent since 2000.

But these factors can scarcely explain the magnitude of the decline in real yields.

He didn't seem to have any problems with long-term TIPS paying a real yield of 3% to 4% when real GDP growth was 3% to 4%. In fact, that was the very math he used. So why is it so hard for him to understand that earning a real yield of 2% when real GDP growth has been 2% might not be such a bad thing?

I have a theory. Treasury Inflation Protected Securities tried to run over Jeremy Siegel's dog. What else could possibly explain his ongoing hatred of them? Well, other than the fact they've made him look like a fool for the past decade by outperforming his precious stocks.

It's just a theory of course.

Maybe Jeremy Siegel will someday figure out that retirees should actually value safety. I do. I can't afford to take big risks with my nest egg. I do not have a job to fall back on.

Is now really the time to embrace stock market risk? The S&P 500 has nearly doubled from its 2009 low.

October 8, 2008
Who Crippled Capitalism?

Jeremy Siegel, finance professor at the University of Pennsylvania´s Wharton School of Finance commented, “Two weeks ago was the first time in my life that I was worried about the very stability of the United States financial system.”

It's all biscuits and gravy now apparently. I'll pass.


mab said...

YES! I SOOO enjoy Jeremy Siegel heckling.

From you link:

These stocks have not only offered inflation protection but have participated in economic growth. This strategy will give investors far better long-term protection against inflation than today’s low-yielding inflation-linked bonds. - Jeremy Siegel

No mention of deflation. Apparently deflation is not a risk even though house prices are currently declining rapidly and are still over-priced based on many long term trends.

No mention of the horrid performance of stocks during the inflationary 1970s either.

And no mention of outrageous shareholder dilution by corporate insiders - something that didn't exist in the past.

He does mention the hundreds of millions of Asians that will be entering the middle class though. The same Asians that make ~ $1/hr and will be competing with American workers.

Seriously, if simply projecting the past into the future is all it takes, Siegel wouldn't even have a job. That thought will never enter his head though.

The guy is a joke. He's been wrong for most of his career, but isn't honest enough to admit it. His Wisdom Tree funds were largely designed based on past "performance". Unfortunately, ponzi debt based past performance didn't fare so well.

Jeremy Siegel = FAIL!

Stagflationary Mark said...


I may be biased, but you make excellent points as usual.

"Jeremy Siegel = FAIL!"

I hear that!

You'll be happy to know that I followed it up with another post with some GDP charts and some additional heckling of our most beloved economics guru, lol. Sigh.

mab said...


We could both go on and on about Jeremy Siegel. It's not even sporting.

I can't resist at least one more heckle. Jeremy claims the stock market is fairly valued based on an assumed p/e ratio. I wonder why he didn't mention the current dividend yield which is ~ 1.7%.

Interestingly, we don't have a lot of data about "long run" returns from such low dividend yield levels. I've run simulations based on previous stock market peaks and the real returns would have been even more dreadful than they were if yields had been at 1.7% rather than the ~ 3%.

It's not that hard Jeremy!

The first time the dividend yield for the S&P 500 ever hit 1.7% was in 1997. The real returns since then have been dismal. And they would have been even more dismal absent massive Government intervention.

Incidentally, inflation adjusted oil prices were ~ $26/bbl in 1997. They're much bubblier today - very bullish for stocks apparently!

Stagflationary Mark said...


"And they would have been even more dismal absent massive Government intervention."

If the government stops the intervention as Siegel suggests they will, then I'll still be earning a positive real return on the TIPS I hold until maturity. The government guaranteed me the rate when I bought them.

Any word yet on when the government will guarantee stock dividend yields? I can't seem to find anything about that in the news. ;)