Jeremy Siegel on MiB Podcast: 60/40 is risky and more

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Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Sat Jun 20, 2020 8:26 pm

Just listened to Jeremy Siegel (Professor of Finance at Wharton, author of “Stocks for the Long Run”) on the Masters In Business podcast (non-Apple Link), he makes a good case for a few things:

1. CAPE is giving off the wrong signals, far too bearish
2. Mathematically, even if we zero’d out 12 months of earnings, the stock market should have dropped maybe 5-6% vs >30%
3. He anticipates an very strong 2021 if we get good therapeutics, and/or vaccine. Especially because so much of the stimulus went directly to consumers vs 2008 when it did not AND there is no excess supply to absorb as there is typically in most recessions (e.g. housing in 2008).
4. Warns of 3-5% inflation from 2021-2023, leaving bond holders holding the bag for COVID QE infinity ala WW2
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
6. JPOW in 2020, and Bernanke in 2008, both basically prevented great depressions, each learning from history and improving the Fed response.
7. He sees interest rates staying low for an extended period of time, and topping out in the medium term around 2-3% (10yr treasuries).

TLDR, stocks stand to do very well in 2021 due to all the liquidity pumped into the markets. Be bond heavy at your own peril — this recovery will happen on the backs of bond holders (modest interest rake hikes plus inflation causing loss of capital).

I encourage my fellow Bogleheads to listen to the interview, and come back here to share their thoughts!
Last edited by mrspock on Sun Jun 21, 2020 1:48 pm, edited 3 times in total.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by TheTimeLord » Sat Jun 20, 2020 8:39 pm

mrspock wrote:
Sat Jun 20, 2020 8:26 pm
Just listened to Jeremy Siegel (Professor of Finance at Wharton, author of “Stocks for the Long Run”) on the Masters In Business podcast, he makes a good case for a few things:

1. CAPE is giving off the wrong signals, far too bearish
2. Mathematically, even if we zero’d out 12 months of earnings, the stock market should have dropped maybe 5-6% vs >30%
3. He anticipates an very strong 2021 if we get good therapeutics, and/or vaccine. Especially because so much of the stimulus went directly to consumers vs 2008 when it did not AND there is no excess supply to absorb as there is typically on most recessions (e.g. housing in 2008).
4. Warns of 3-5% inflation from 2021-2023, leaving bond holders holding the bag for COVID QE infinity ala WW2
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
6. JPOW in 2020, and Bernanke in 2008, both basically prevented great depressions, each learning from history and improving the Fed response.
7. He sees interest rates staying low for an extended period of time, and topping out in the near term around 2-3% (10yr treasuries).

TLDR, stocks stand to do very well in 2021 due to all the liquidity pumped into the markets. Be bond heavy at your own peril — this recovery will happen on the backs of bond holders (modest interest rake hikes plus inflation causing loss of capital).

I encourage my fellow Bogleheads to listen to the interview, and come back here to share their thoughts!
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Stinky » Sat Jun 20, 2020 8:51 pm

That was a really, really interesting podcast.

I highly recommend it to others. It’s in line with the way that I see the world.

By the way - good summary, Mr Spock.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by tetractys » Sat Jun 20, 2020 9:05 pm

If it’s about inflation, why not allot TIPS?

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by nedsaid » Sat Jun 20, 2020 9:46 pm

mrspock wrote:
Sat Jun 20, 2020 8:26 pm
Just listened to Jeremy Siegel (Professor of Finance at Wharton, author of “Stocks for the Long Run”) on the Masters In Business podcast, he makes a good case for a few things:

1. CAPE is giving off the wrong signals, far too bearish
2. Mathematically, even if we zero’d out 12 months of earnings, the stock market should have dropped maybe 5-6% vs >30%
3. He anticipates an very strong 2021 if we get good therapeutics, and/or vaccine. Especially because so much of the stimulus went directly to consumers vs 2008 when it did not AND there is no excess supply to absorb as there is typically on most recessions (e.g. housing in 2008).
4. Warns of 3-5% inflation from 2021-2023, leaving bond holders holding the bag for COVID QE infinity ala WW2
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
6. JPOW in 2020, and Bernanke in 2008, both basically prevented great depressions, each learning from history and improving the Fed response.
7. He sees interest rates staying low for an extended period of time, and topping out in the medium term around 2-3% (10yr treasuries).

TLDR, stocks stand to do very well in 2021 due to all the liquidity pumped into the markets. Be bond heavy at your own peril — this recovery will happen on the backs of bond holders (modest interest rake hikes plus inflation causing loss of capital).

I encourage my fellow Bogleheads to listen to the interview, and come back here to share their thoughts!
Add to this, Siegel is forecasting an end to the bull market in bonds and a bottom in interest rates. Siegel's comments on bonds reminds me of a couple stories I heard regarding the purchase of War Bonds during WW2, those people suffered a loss of 50% of purchasing power. This purchase was motivated by patriotism but the War Bonds were a very poor investment. I suspect as Dr. Siegel does, that we will pay for all of this stimulus by inflation which is called the hidden tax.

The implication for TIPS are obvious, I think I will be buying them. I will not, however, be going back to 75% stocks.

I also wonder if the massive monetary and fiscal stimulus will finally wake Value out of its slumber. It seems to me that the FAANG stocks will continue to do well as our economy and our society is very dependent upon Technology. I suppose what will happen is that Value will outperform Growth but that doesn't mean that Growth will do badly, just that it will lag Value. Let's see what happens.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by boogiehead » Sat Jun 20, 2020 10:01 pm

Isn't Siegel a perma-bull?

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Sat Jun 20, 2020 10:08 pm

boogiehead wrote:
Sat Jun 20, 2020 10:01 pm
Isn't Siegel a perma-bull?
This is actually a topic covered in the podcast, he wrote a rather famous piece in 1999 saying to bail from tech stocks. So not quite perm, I would describe him as an advocate for holding stocks for long periods of time, and not attempting to time the equity market.

Most of what he says is pretty well aligned with Boglehead thinking, though he is challenging many of us to think through our bond strategy carefully. He makes many good points.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Blue456 » Sat Jun 20, 2020 10:10 pm

You could just replace bonds with T bills or TIPS and keep up with inflation while still holding lower allocations to equities

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mbasherp » Sat Jun 20, 2020 10:14 pm

Thank you for pointing this out. I look forward to listening, but judging from your summary, I mostly agree with his take on where things stand now.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Sat Jun 20, 2020 10:14 pm

nedsaid wrote:
Sat Jun 20, 2020 9:46 pm
Add to this, Siegel is forecasting an end to the bull market in bonds and a bottom in interest rates. Siegel's comments on bonds reminds me of a couple stories I heard regarding the purchase of War Bonds during WW2, those people suffered a loss of 50% of purchasing power. This purchase was motivated by patriotism but the War Bonds were a very poor investment. I suspect as Dr. Siegel does, that we will pay for all of this stimulus by inflation which is called the hidden tax.
...
Precisely, I’m hearing this WW2 scenario/comparison more and more now, so I’m thinking there’s some wisdom here. Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side. Also acquaint yourself with how the inflation is calculated on TIPS and be at peace with it; the capital appreciation (IIRC) on TIPs is taxed as income by Uncle Sam, buy in tax advantaged accounts if possible.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by nedsaid » Sat Jun 20, 2020 10:46 pm

mrspock wrote:
Sat Jun 20, 2020 10:14 pm
nedsaid wrote:
Sat Jun 20, 2020 9:46 pm
Add to this, Siegel is forecasting an end to the bull market in bonds and a bottom in interest rates. Siegel's comments on bonds reminds me of a couple stories I heard regarding the purchase of War Bonds during WW2, those people suffered a loss of 50% of purchasing power. This purchase was motivated by patriotism but the War Bonds were a very poor investment. I suspect as Dr. Siegel does, that we will pay for all of this stimulus by inflation which is called the hidden tax.
...
Precisely, I’m hearing this WW2 scenario/comparison more and more now, so I’m thinking there’s some wisdom here. Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side. Also acquaint yourself with how the inflation is calculated on TIPS and be at peace with it; the capital appreciation (IIRC) on TIPs is taxed as income by Uncle Sam, buy in tax advantaged accounts if possible.
The great bulk of my investments are in tax deferred accounts and any more TIPS would be there. I am keeping what I have in REITs, I noticed that a managed IRA account at American Century recently did a minor rebalance from Bonds to Global Real Estate. I wonder if they think an increase in Global Real Estate will help with a possible increase in inflation. Knowing that inflation expectations are built into the markets and that TIPS protect from unexpected inflation, I don't plan on big shifts in the bond portfolio. I also am looking at shorter term TIPS. Still thinking this over. This was a very good podcast by Professor Siegel.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by duricka » Sat Jun 20, 2020 10:48 pm

This podcast is 40 days old, in time of pandemic it's historical.
I have one question: if bonds are such a bad investment and everyone know we will have inflation, why are rates so low?

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by bog007 » Sat Jun 20, 2020 10:52 pm

boogiehead wrote:
Sat Jun 20, 2020 10:01 pm
Isn't Siegel a perma-bull?

Yes

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by flyingcows » Sat Jun 20, 2020 10:54 pm

That was a good podcast, easy to follow and pretty interesting, thank you for sharing Mr. Spock! I was most surprised by the comment you already called out:
Mathematically, even if we zero’d out 12 months of earnings, the stock market should have dropped maybe 5-6% vs >30%
I'll also add a few of my takeaways:

- P/E 18-20 feels like an acceptable "new normal" given the efficient low cost diversified investment vehicles we have today. (That doesn't mean it won't dip to 13-15 from time to time)
- Valuations of tech companies in 99/2000 were FAR in excess of what they are today, 80-90 P/E was typical with IBM considered a value play at 50!
- He has a moderate position in Gold now, and from what I understood, he has never been a fan of gold previously (someone correct me if I'm wrong)

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Longtermgrowth » Sun Jun 21, 2020 1:58 am

Anyone able to list the Siegel partnered WisdomTree "ETF Model Portfolios", "Rethinking the 60/40 Approach"? WisdomTree requires login as financial professional to see them.

I did find an article on it mentioning one portfolio holds some non-WisdomTree ETFs, listing two Vanguard High Dividend Yield ETFs and a Hartford ETF: https://www.thinkadvisor.com/2020/02/03 ... -products/

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by nisiprius » Sun Jun 21, 2020 7:12 am

mrspock wrote:
Sat Jun 20, 2020 10:14 pm
Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side.
What does this even mean? Are you suggesting the Treasury is likely to default on TIPS? Bonds don't "lose capital" unless there is a default, and changes in the interest rate available for newly issued bonds do not change the numbers of dollars paid out by existing bonds. A sudden sharp rise in interest rates is unfavorable for short-term speculators, but roughly neutral for someone holding a bond fund for a period of time roughly equal to its duration.

Between the people saying bonds suck because interest rates are going to rise and the people saying bonds such because interest rates are never going to rise, I just shrug and tune out the noise.

And changes in interest rates affect stocks as well as bonds, it's just harder to identify it in all the other noise. If the dividend discount theory of stock valuation is correct, interest rate changes affect stock values for exactly the same reason as they affect bonds--if interest rates rise, the value of future dividends or coupon interest is lower.
Also acquaint yourself with how the inflation is calculated on TIPS.
They are calculated according to CPI-U, and, although it may be an empty promise, if the CPI-U is changed in a way that would disadvantage TIPS holders, the Secretary of the Treasury is obligated, in writing, to find an alternative index that doesn't.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by goodenyou » Sun Jun 21, 2020 8:07 am

Too bad electronic I-Bonds are limited to $10,000/person/year.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Leesbro63 » Sun Jun 21, 2020 8:17 am

I lost some respect for him when he went commercial and started “huckstering” equal weighted index ETFs or whatever Wisdom Tree was paying him to sell. But he may be right about the analogy to the Post WW2 inflation. What was the inflation 1946-50? I seem to recall some high-inflation years

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Colorado Guy » Sun Jun 21, 2020 9:11 am

mrspock wrote:
Sat Jun 20, 2020 8:26 pm
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
....stocks stand to do very well in 2021 due to all the liquidity pumped into the markets. Be bond heavy at your own peril — this recovery will happen on the backs of bond holders (modest interest rake hikes plus inflation causing loss of capital).
From a recently retired perspective with a 50/50 (or close) portfolio, not yet having listened to the podcast (available for non-Apple users?), and having just weathered the recent pandemic, 75/25 seems pretty aggressive. 60/40 seems aggressive as well, but at least something I could consider. Hard to correlate these %s with the knowledge that a number of Bogleheads are in the 25/75 portfolio range. Just trying to understand the logic of each approach, and telling myself KISS.

Did Jeremy S. provide any thoughts on using dividend stocks/bonds instead of straight bonds?

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by BlueEars » Sun Jun 21, 2020 9:46 am

Isn't there an elephant in the room? The virus cases are now running at over 30k per day. This situation is characterized by an exponential that is only suppressed by good health management. Very dangerous for investors I think.

I agree with the 75% stocks idea and came to that conclusion independently. But I'd like to get somewhere into the fall before pulling any triggers.

I will listen to the podcast today. Thanks.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by goodenyou » Sun Jun 21, 2020 9:50 am

After listening to the Podcast, I am renewing my interest in learning more about low-cost annuities.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Triple digit golfer » Sun Jun 21, 2020 10:02 am

Interesting podcast.

I'm staying my 80/20 three fund portfolio course. Age 35, 10x expenses saved.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by TechGuy365 » Sun Jun 21, 2020 10:09 am

Great podcast - thanks for the intro. I listened to it a couple of times to get a deeper understanding. It's the first time I've heard that the QE will be paid for by inflation and bond holders. This makes a lot of sense since there should be a cost to safety for those who seek it in times like this. I'm just staying on my course.
Last edited by TechGuy365 on Sun Jun 21, 2020 10:12 am, edited 1 time in total.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Toons » Sun Jun 21, 2020 10:12 am

Triple digit golfer wrote:
Sun Jun 21, 2020 10:02 am
Interesting podcast.

I'm staying my 80/20 three fund portfolio course. Age 35, 10x expenses saved.
Kudos :thumbsup
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by columbia » Sun Jun 21, 2020 10:14 am

If I were worried about future total return of intermediate treasuries (and I am), I’d move that money to cash rather than equities (which I did); note: my treasuries were a very small percentage of my fixed income, as it’s almost all in TIAA Traditional. Your mileage may vary, of course.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by nisiprius » Sun Jun 21, 2020 10:20 am

It is important to remember the warning Jeremy Schwartz and Jeremy Siegel issued in 2010 and what became of it. What's important is that in terms of numbers, everything they said came true, and yet the impact on a typical Boglehead investor, or someone in a target date fund in a 401(k) plan, was so small few people even noticed it.

Do you remember how awful it was when the Great American Bond Bubble collapsed in February, 2011?

In the Wall Street Journal on 4/25/2010, they wrote:
[circa 2000] we experienced the biggest bubble in U.S. stock market history—[a] mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more…. A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds….
Their feared scenario was:
If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield.
So, they were talking about what would happen if the ten-year rate rose to some number between 3.15% and 4%.

It actually rose to 3.75% on 2/8/2011. That was not only in their danger range, it was closer to their high end than their low end.

And here is what actually happened, starting on the data of publication of "The Great American Bond Bubble," to the Vanguard Total Bond Market Index fund (blue), and to the bond-heavy Vanguard Target Retirement 2015 fund (orange). Since Vanguard suggests that Total Bond "may be" suitable for investors with a 4-10 year time frame, and since it has a duration of around 6 years, I decided to look at a period of 6 years after the warning.

Source

Image
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Sun Jun 21, 2020 10:26 am

If inflation gets out of hand, the Fed can always reduce the money supply, shrink their balance sheet or just announce that they don't like inflation. Major central banks are, at heart, inflation hawks.

Rising interest rates, or at least real rates, would be a good thing. They would most probably be a sign of a stronger economy. Bond holders would be better off in the long run (where long run is defined relative to bond duration).

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by daacrusher2001 » Sun Jun 21, 2020 10:36 am

TechGuy365 wrote:
Sun Jun 21, 2020 10:09 am
Great podcast - thanks for the intro. I listened to it a couple of times to get a deeper understanding. It's the first time I've heard that the QE will be paid for by inflation and bond holders. This makes a lot of sense since there should be a cost to safety for those who seek it in times like this. I'm just staying on my course.
Could you explain what this means - "the QE will be paid for by inflation and bond holders."

I honestly don't understand what this means for a bond holder...

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Sconie » Sun Jun 21, 2020 10:50 am

daacrusher2001 wrote:
Sun Jun 21, 2020 10:36 am
TechGuy365 wrote:
Sun Jun 21, 2020 10:09 am
Great podcast - thanks for the intro. I listened to it a couple of times to get a deeper understanding. It's the first time I've heard that the QE will be paid for by inflation and bond holders. This makes a lot of sense since there should be a cost to safety for those who seek it in times like this. I'm just staying on my course.
Could you explain what this means - "the QE will be paid for by inflation and bond holders."

I honestly don't understand what this means for a bond holder...
I believe what Siegel is saying is that by letting inflation creep up to the 3%-4%-5% level for several years-----let's say 15% total inflation over a number of years----the relative value of the dollar will be reduced by an equivalent amount. What would result would be (assuming) $20 trillion of debt x 15%=$3 trillion dollars of "less value" to theoretically be paid-off to bond holders. Ergo, "QE ($3 trillion +/-) will be paid for by the bond holders."
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Sconie » Sun Jun 21, 2020 10:53 am

Seasonal wrote:
Sun Jun 21, 2020 10:26 am
If inflation gets out of hand, the Fed can always reduce the money supply, shrink their balance sheet or just announce that they don't like inflation. Major central banks are, at heart, inflation hawks.

Rising interest rates, or at least real rates, would be a good thing. They would most probably be a sign of a stronger economy. Bond holders would be better off in the long run (where long run is defined relative to bond duration).
Yes, you're right----in the long run. However, in the short term, bond holders could end up being crushed.
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by One Ping » Sun Jun 21, 2020 11:11 am

Leesbro63 wrote:
Sun Jun 21, 2020 8:17 am
What was the inflation 1946-50? I seem to recall some high-inflation years
Here ya go ...
1946 18.1%
1947 8.8%
1948 3.0%
1949 -2.1%
1950 5.9%
Historical Consumer Price Index for All Urban Consumers (CPI-U)
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Sun Jun 21, 2020 11:27 am

Sconie wrote:
Sun Jun 21, 2020 10:53 am
Seasonal wrote:
Sun Jun 21, 2020 10:26 am
If inflation gets out of hand, the Fed can always reduce the money supply, shrink their balance sheet or just announce that they don't like inflation. Major central banks are, at heart, inflation hawks.

Rising interest rates, or at least real rates, would be a good thing. They would most probably be a sign of a stronger economy. Bond holders would be better off in the long run (where long run is defined relative to bond duration).
Yes, you're right----in the long run. However, in the short term, bond holders could end up being crushed.
If you're holding bonds with a duration appropriate to your investment horizon, then you should be fine.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Kevin M » Sun Jun 21, 2020 11:54 am

One Ping wrote:
Sun Jun 21, 2020 11:11 am
Leesbro63 wrote:
Sun Jun 21, 2020 8:17 am
What was the inflation 1946-50? I seem to recall some high-inflation years
Here ya go ...
1946 18.1%
1947 8.8%
1948 3.0%
1949 -2.1%
1950 5.9%
Historical Consumer Price Index for All Urban Consumers (CPI-U)
Or we can view it graphically. Below shows year over year percent inflation monthly. I expanded the time horizon for some additional context--we see some relatively high inflation in years before and after the mentioned period.
Image

You will see the numbers quoted above if you click on the graph, then hover mouse over December of each noted year.

The highest inflation was 19.7% in March 1947.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Kevin M » Sun Jun 21, 2020 12:11 pm

nisiprius wrote:
Sun Jun 21, 2020 10:20 am
It is important to remember the warning Jeremy Schwartz and Jeremy Siegel issued in 2010 and what became of it. What's important is that in terms of numbers, everything they said came true, and yet the impact on a typical Boglehead investor, or someone in a target date fund in a 401(k) plan, was so small few people even noticed it.
It's great that you put this into context, but technically what they said is correct if considering a constant-maturity 10-year bond (not "bondholders" overall).
nisiprius wrote:
Sun Jun 21, 2020 10:20 am
Their feared scenario was:
If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield.
So, they were talking about what would happen if the ten-year rate rose to some number between 3.15% and 4%.

It actually rose to 3.75% on 2/8/2011. That was not only in their danger range, it was closer to their high end than their low end.
For a constant-maturity 10-year bond bought at par, an increase from 2.8% to 3.75% results in a capital return of -7.86%, which is a loss of about 2.8 times the initial yield.

=PRICE("1/1/2000", "1/1/2010", 2.8%, 3.75%, 100, 2) / 100 - 1

An increase to 4% would result in a capital return of -9.81%, which is 3.5 times the initial yield; i.e., "more than three times the current yield").

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Clever_Username » Sun Jun 21, 2020 12:12 pm

nisiprius wrote:
Sun Jun 21, 2020 10:20 am
Source

Image
I feel like I'm missing something here, but how did the two funds make the same money over the same period but have different CAGR?
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by JBTX » Sun Jun 21, 2020 12:33 pm

That was an interesting listen. I am little skeptical of the wisdom of going 75% stocks in retirement. I did find interesting his statements about the fed 2008 qe going into reserves and this time around more directly going into M1. Id like to understand the "why" to that more. Also found his statements regarding moderate inflation interesting and seemingly very plausible. I'm not sure I buy the 2021 rebound scenario to the degree he does but only the future has an answer to that.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by nisiprius » Sun Jun 21, 2020 12:34 pm

Kevin M wrote:
Sun Jun 21, 2020 12:11 pm
...technically what they said is correct...
That is exactly my point. They were quite accurate. The interest rate rise they warned about occurred and fell well within the range they warned out. And the effects, expressed as numeric values, were just about what they said they would be.

But their rhetoric was exaggerated, deceptive, and if I remember correctly actually deceived some forum members. They said that a bond bubble was expanding today that "might" have "far more serious consequences for investors" than the collapse of the tech bubble of the late 1990s.

Do you remember the collapse of the tech bubble? Do you remember the collapse of the bond bubble in early 2011?

In my experience Siegel has been punctiliously accurate in his facts. One of the more interesting examples is his revision of a statement that appeared in first four editions of Stocks for the Long Run. In the fourth, it was
never in any of the past 175 years would a buyer of newly-issued 30-year bonds have outperformed an investor in a diversified portfolio of common stocks held over the same period.
In the fifth:
In the first four editions of Stocks for the Long Run, I noted that the last 30-year period when the return on long-term bonds beat stocks ended in 1861, at the onset of the Civil War. That is no longer true. Because of the large drop in government bond yields over the past decade, the 11.03 percent annual returns on long-term government bonds surpassed the 10.98 percent on stocks for the 30-year period from January 1, 1982, through the end of 2011.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by JBTX » Sun Jun 21, 2020 12:41 pm

Seasonal wrote:
Sun Jun 21, 2020 10:26 am
If inflation gets out of hand, the Fed can always reduce the money supply, shrink their balance sheet or just announce that they don't like inflation. Major central banks are, at heart, inflation hawks.

Rising interest rates, or at least real rates, would be a good thing. They would most probably be a sign of a stronger economy. Bond holders would be better off in the long run (where long run is defined relative to bond duration).
Two problems with raising interest rates:

1. With growing federal debt your debt service costs can become quite burdensome. 20 trillion debt times 5.0% is a trillion $ per year.

2. Right now our economy is partially propped up by the stock market and the wealth effect. A rate hike could hurt the stock market. I understand you can have stronger markets and higher rates but that usually is based upon a very strong underlying economy.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by One Ping » Sun Jun 21, 2020 1:16 pm

Kevin M wrote:
Sun Jun 21, 2020 11:54 am
Or we can view it graphically. Below shows year over year percent inflation monthly. I expanded the time horizon for some additional context--we see some relatively high inflation in years before and after the mentioned period.
Image

You will see the numbers quoted above if you click on the graph, then hover mouse over December of each noted year.

The highest inflation was 19.7% in March 1947.

Kevin
Nice! Thanks, Kevin M. :beer

Looks like those are trailing 12 mos numbers (i.e., March '47 number is the inflation from April '46 through March '47.)
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Always passive » Sun Jun 21, 2020 1:45 pm

nisiprius wrote:
Sun Jun 21, 2020 7:12 am
mrspock wrote:
Sat Jun 20, 2020 10:14 pm
Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side.
What does this even mean? Are you suggesting the Treasury is likely to default on TIPS? Bonds don't "lose capital" unless there is a default, and changes in the interest rate available for newly issued bonds do not change the numbers of dollars paid out by existing bonds. A sudden sharp rise in interest rates is unfavorable for short-term speculators, but roughly neutral for someone holding a bond fund for a period of time roughly equal to its duration.

Between the people saying bonds suck because interest rates are going to rise and the people saying bonds such because interest rates are never going to rise, I just shrug and tune out the noise.

And changes in interest rates affect stocks as well as bonds, it's just harder to identify it in all the other noise. If the dividend discount theory of stock valuation is correct, interest rate changes affect stock values for exactly the same reason as they affect bonds--if interest rates rise, the value of future dividends or coupon interest is lower.
Also acquaint yourself with how the inflation is calculated on TIPS.
They are calculated according to CPI-U, and, although it may be an empty promise, if the CPI-U is changed in a way that would disadvantage TIPS holders, the Secretary of the Treasury is obligated, in writing, to find an alternative index that doesn't.
I think that if Siegel is right, bonds will lose value in "real" terms. Is that not possible?

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Sun Jun 21, 2020 1:58 pm

nedsaid wrote:
Sat Jun 20, 2020 10:46 pm
mrspock wrote:
Sat Jun 20, 2020 10:14 pm
nedsaid wrote:
Sat Jun 20, 2020 9:46 pm
Add to this, Siegel is forecasting an end to the bull market in bonds and a bottom in interest rates. Siegel's comments on bonds reminds me of a couple stories I heard regarding the purchase of War Bonds during WW2, those people suffered a loss of 50% of purchasing power. This purchase was motivated by patriotism but the War Bonds were a very poor investment. I suspect as Dr. Siegel does, that we will pay for all of this stimulus by inflation which is called the hidden tax.
...
Precisely, I’m hearing this WW2 scenario/comparison more and more now, so I’m thinking there’s some wisdom here. Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side. Also acquaint yourself with how the inflation is calculated on TIPS and be at peace with it; the capital appreciation (IIRC) on TIPs is taxed as income by Uncle Sam, buy in tax advantaged accounts if possible.
The great bulk of my investments are in tax deferred accounts and any more TIPS would be there. I am keeping what I have in REITs, I noticed that a managed IRA account at American Century recently did a minor rebalance from Bonds to Global Real Estate. I wonder if they think an increase in Global Real Estate will help with a possible increase in inflation. Knowing that inflation expectations are built into the markets and that TIPS protect from unexpected inflation, I don't plan on big shifts in the bond portfolio. I also am looking at shorter term TIPS. Still thinking this over. This was a very good podcast by Professor Siegel.
Very interesting on the REIT rebalance. I'm trying to find something between bonds and stocks, so I've been pondering adding a 10% REIT allocation as well, I backtested this and it appears not bad (portfolio 3). The rationale here is they have historically been less volatile than Stocks, and have good income stream I could use in retirement. There's a couple problems though:

1. REITs have been newly added to the S&P500, and I think they are represented in total market ETFs, so this would overweight me in REITs.
2. The pandemic proved they are less volatile, right up until they aren't, that said, I should probably focus on the long term data vs this one instance.
3. They are generally tax inefficient due to capital gains and dividends, I'd have to think about the tax implications of this, and see if I have enough room in my tax sheltered accounts.
4. My backtest is pretty weak, only 18 years, I'd much rather a 30-40 yr backtest looking at performance through a number of investment environments.

... thus its still pondering vs. action.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Kevin M » Sun Jun 21, 2020 2:22 pm

One Ping wrote:
Sun Jun 21, 2020 1:16 pm
Nice! Thanks, Kevin M. :beer

Looks like those are trailing 12 mos numbers (i.e., March '47 number is the inflation from April '46 through March '47.)
The term FRED uses is "Percent Change from Year Ago". So I think the 19.7% figure is for March 1947 compared to March 1946.

If I change the display to "Index 1982-1984 = 100", and zoom in on the period of interest, we see this:

Image

Hovering my mouse over Mar 1947 I see 21.900, and for Mar 1946 I see 18.300. Calculation: 21.9/18.3 - 1 = 19.7%.

An even easier way to do it is to set units to "Index (Scale value to 100 for chosen date)", then enter 1946-03-01 as the date. Setting start and end dates to exactly the ones of interest, we see this:

Image

Hovering my mouse over the far point on the right, Mar 1947, I see 119.7, which of course is 19.7% year over year inflation.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Sun Jun 21, 2020 2:25 pm

nisiprius wrote:
Sun Jun 21, 2020 7:12 am
mrspock wrote:
Sat Jun 20, 2020 10:14 pm
Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side.
What does this even mean? Are you suggesting the Treasury is likely to default on TIPS? Bonds don't "lose capital" unless there is a default, and changes in the interest rate available for newly issued bonds do not change the numbers of dollars paid out by existing bonds. A sudden sharp rise in interest rates is unfavorable for short-term speculators, but roughly neutral for someone holding a bond fund for a period of time roughly equal to its duration.
You are quite right that if you keep your bonds to duration you will be made whole again. However, for the intervening years there is capital loss until then, and this assumes they don't touch a dime of that money in the intervening years for spending purposes (which I find unlikely for those who are retired).
nisiprius wrote:
Sun Jun 21, 2020 7:12 am
And changes in interest rates affect stocks as well as bonds, it's just harder to identify it in all the other noise. If the dividend discount theory of stock valuation is correct, interest rate changes affect stock values for exactly the same reason as they affect bonds--if interest rates rise, the value of future dividends or coupon interest is lower.
A fair point. I'd only add that equities have earnings growth which allow them to "paper over" some of this effect (i.e. part of the noise), you don't get this with bonds.
nisiprius wrote:
Sun Jun 21, 2020 7:12 am
Also acquaint yourself with how the inflation is calculated on TIPS.
They are calculated according to CPI-U, and, although it may be an empty promise, if the CPI-U is changed in a way that would disadvantage TIPS holders, the Secretary of the Treasury is obligated, in writing, to find an alternative index that doesn't.
I'm just saying to be "at peace" with what is included in the CPI-U and it's pitfalls, even the BLS is quite forthcoming about it's weaknesses. The last thing anyone wants to to invest in something which is supposed to protect them from inflation, only their own "personal inflation" looks very different, or tinkering with the metric begins to disadvantage the bond holder. And yes, the Secretary is indeed obligated, but obligated (even required) and actually doing something can be two very different things as we've seen in recent history. Eventually the judicial branch might right any wrong if the treasury was sued by TIPS holders, but this could takes a very long time to work it's way through the system.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by mrspock » Sun Jun 21, 2020 2:36 pm

Colorado Guy wrote:
Sun Jun 21, 2020 9:11 am
mrspock wrote:
Sat Jun 20, 2020 8:26 pm
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
....stocks stand to do very well in 2021 due to all the liquidity pumped into the markets. Be bond heavy at your own peril — this recovery will happen on the backs of bond holders (modest interest rake hikes plus inflation causing loss of capital).
From a recently retired perspective with a 50/50 (or close) portfolio, not yet having listened to the podcast (available for non-Apple users?), and having just weathered the recent pandemic, 75/25 seems pretty aggressive. 60/40 seems aggressive as well, but at least something I could consider. Hard to correlate these %s with the knowledge that a number of Bogleheads are in the 25/75 portfolio range. Just trying to understand the logic of each approach, and telling myself KISS.

Did Jeremy S. provide any thoughts on using dividend stocks/bonds instead of straight bonds?
Added a direct non-Apple link. He did not talk about dividend/bonds as a substitution, just purely from an AA perspective. This along with REITs (in tax sheltered) are two middle ground options I'm looking at, so far REIT funds look the most promising, but my backtest is pretty weak. And there's some problems with REIT funds as I have noted in a post above.

Currently I'm just doing the KISS principal and have refused to move to 60/40 and my IPS states my target AA to be 70/30, which admittedly it isn't right now due to dragging my feet rebalancing back into bonds after the recent run-up. I'll work my way back there with new money.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Ferdinand2014 » Sun Jun 21, 2020 2:47 pm

mrspock wrote:
Sat Jun 20, 2020 8:26 pm
Just listened to Jeremy Siegel (Professor of Finance at Wharton, author of “Stocks for the Long Run”) on the Masters In Business podcast (non-Apple Link), he makes a good case for a few things:

1. CAPE is giving off the wrong signals, far too bearish
2. Mathematically, even if we zero’d out 12 months of earnings, the stock market should have dropped maybe 5-6% vs >30%
3. He anticipates an very strong 2021 if we get good therapeutics, and/or vaccine. Especially because so much of the stimulus went directly to consumers vs 2008 when it did not AND there is no excess supply to absorb as there is typically in most recessions (e.g. housing in 2008).
4. Warns of 3-5% inflation from 2021-2023, leaving bond holders holding the bag for COVID QE infinity ala WW2
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
6. JPOW in 2020, and Bernanke in 2008, both basically prevented great depressions, each learning from history and improving the Fed response.
7. He sees interest rates staying low for an extended period of time, and topping out in the medium term around 2-3% (10yr treasuries).

TLDR, stocks stand to do very well in 2021 due to all the liquidity pumped into the markets. Be bond heavy at your own peril — this recovery will happen on the backs of bond holders (modest interest rake hikes plus inflation causing loss of capital).

I encourage my fellow Bogleheads to listen to the interview, and come back here to share their thoughts!
Thank you. Long drive ahead, ill listen to it.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by siamond » Sun Jun 21, 2020 2:48 pm

mrspock wrote:
Sat Jun 20, 2020 8:26 pm
5. 60/40 is risky, 75/25 is a wiser AA given the bond environment and risk of inflation. I think a growing group of Bogleheads have already figured this out.
For me (and this is a personal view), purchasing power over our full retirement period is the primary goal. The primary risk is then simple, it's loss of purchasing power (which also includes inability to benefit from upsides). Since purchasing power is a real quantity, inflation (risk) does matter. Drawdowns are certainly emotionally painful, but they are significantly lower on my scale of risks. And yeah, my target AA is indeed close to 75/25, in early retirement. Maximally diversifying the stocks part of it (worldwide) to hedge bets.

This decision was derived from US history and reinforced by the history of other developed countries. Considerations due to the current environment would be much more speculative and time-dependent. I can see the case for such considerations, mind you, but this won't impact my AA. If I *were* 50/50, I would indeed question myself. But then I would have questioned myself way earlier than 2020 and its challenges of the day/year/decade.

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by nedsaid » Sun Jun 21, 2020 3:52 pm

mrspock wrote:
Sun Jun 21, 2020 1:58 pm
nedsaid wrote:
Sat Jun 20, 2020 10:46 pm
mrspock wrote:
Sat Jun 20, 2020 10:14 pm
nedsaid wrote:
Sat Jun 20, 2020 9:46 pm
Add to this, Siegel is forecasting an end to the bull market in bonds and a bottom in interest rates. Siegel's comments on bonds reminds me of a couple stories I heard regarding the purchase of War Bonds during WW2, those people suffered a loss of 50% of purchasing power. This purchase was motivated by patriotism but the War Bonds were a very poor investment. I suspect as Dr. Siegel does, that we will pay for all of this stimulus by inflation which is called the hidden tax.
...
Precisely, I’m hearing this WW2 scenario/comparison more and more now, so I’m thinking there’s some wisdom here. Keep in mind TIPS only protects you from the inflation side, it won’t save you from the loss of capital on the interest rate side. Also acquaint yourself with how the inflation is calculated on TIPS and be at peace with it; the capital appreciation (IIRC) on TIPs is taxed as income by Uncle Sam, buy in tax advantaged accounts if possible.
The great bulk of my investments are in tax deferred accounts and any more TIPS would be there. I am keeping what I have in REITs, I noticed that a managed IRA account at American Century recently did a minor rebalance from Bonds to Global Real Estate. I wonder if they think an increase in Global Real Estate will help with a possible increase in inflation. Knowing that inflation expectations are built into the markets and that TIPS protect from unexpected inflation, I don't plan on big shifts in the bond portfolio. I also am looking at shorter term TIPS. Still thinking this over. This was a very good podcast by Professor Siegel.
Very interesting on the REIT rebalance. I'm trying to find something between bonds and stocks, so I've been pondering adding a 10% REIT allocation as well, I backtested this and it appears not bad (portfolio 3). The rationale here is they have historically been less volatile than Stocks, and have good income stream I could use in retirement. There's a couple problems though:

1. REITs have been newly added to the S&P500, and I think they are represented in total market ETFs, so this would overweight me in REITs.
2. The pandemic proved they are less volatile, right up until they aren't, that said, I should probably focus on the long term data vs this one instance.
3. They are generally tax inefficient due to capital gains and dividends, I'd have to think about the tax implications of this, and see if I have enough room in my tax sheltered accounts.
4. My backtest is pretty weak, only 18 years, I'd much rather a 30-40 yr backtest looking at performance through a number of investment environments.

... thus its still pondering vs. action.
Allocations to REITs are sort of old fashioned, the Academics now say that REITs are nothing special, Larry Swedroe addressed this. In the aftermath of the financial crisis of 2008-2009, interest rates were very, very low and REITs got very expensive because of the chase for yield. There is a formula of yield minus 2.9% and that gives you the forecasted real return for REITs after inflation. If you search through Larry Swedroe's old posts, he explains the rationale behind the formula. The yield on the Vanguard REIT Index is now 4.1%, implying a 1.2% real return in the future with lots of volatility. Lots of folks would say the meager real returns aren't worth the volatility. There is also the aspect of the REIT price vs. the underlying value of the Real Estate. Last I heard, before the Covid-19 pandemic, the Index was at a premium to the underlying Real Estate. Don't know what it is now.

Not in the business of making recommendations, at this point I could take or leave them, pretty much neutral. I have continued to hold them in excess of market weight because I remember the inflation of the 1970s and am an inflation fanatic. If you are an inflation fanatic like me, you might consider these. I will say these aren't the slam dunk they used to be. There is also more correlation with the stock market now than before, at one time they offered stock market returns with low correlations to the stock market, not the case anymore. They once were almost a perfect diversifier to stocks.

The thing is, I have a layman's knowledge of this, not an expert in Real Estate by any means. I would pay attention to what the experts have to say. I know Larry Swedroe used to recommend these but now is neutral, holding only a market weight.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Kevin M » Sun Jun 21, 2020 4:16 pm

nisiprius wrote:
Sun Jun 21, 2020 12:34 pm
Kevin M wrote:
Sun Jun 21, 2020 12:11 pm
...technically what they said is correct...
That is exactly my point. They were quite accurate. The interest rate rise they warned about occurred and fell well within the range they warned out. And the effects, expressed as numeric values, were just about what they said they would be.
Right. You just left out the numeric value for the actual capital return of a 10-year constant-maturity Treasury in your post, so just filling in that blank.
nisiprius wrote:
Sun Jun 21, 2020 12:34 pm
But their rhetoric was exaggerated, deceptive, and if I remember correctly actually deceived some forum members. They said that a bond bubble was expanding today that "might" have "far more serious consequences for investors" than the collapse of the tech bubble of the late 1990s.
Totally agree that the descriptive phrasing was hyperbolic, as well as sloppy (e.g., "bondholders" instead of "return of a constant-maturity 10-year Treasury).

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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Northern Flicker » Sun Jun 21, 2020 4:16 pm

At Friday's close (6/19/20), the 5-yr treasury yield landed at 0.33%.

https://www.treasury.gov/resource-cente ... data=yield

At Friday's close (6/19/20), the 5-yr real yield landed at -0.73%.

https://www.treasury.gov/resource-cente ... =realyield

That puts the breakeven inflation rate 1.06%. Even disregarding the belief that the TIPS breakeven inflation rate tends to overstate expected future inflation, it seems that the market has yet to get the message.

Real yields would have to fall below -3% to align with Dr. Siegel's prediction. This may happen. Real yields fell below -2% when so called rounds of QE were being implemented after the global financial crisis.
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Re: Jeremy Siegel on MiB Podcast: 60/40 is risky and more

Post by Seasonal » Sun Jun 21, 2020 4:21 pm

Northern Flicker wrote:
Sun Jun 21, 2020 4:16 pm
That puts the breakeven inflation rate 1.06%. Even disregarding the belief that the TIPS breakeven inflation rate tends to overstate expected future inflation, it seems that the market has yet to get the message.
Perhaps they got the message and don't agree.

Predicting interest rates other than market rates does not have a great history.

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