Before the Federal Reserve announced its most recent 75 basis points hike, a former hedge fund investor told me “If they increase rates by another 0.75%, I’m going all in on 2 year Treasury notes”. He believed such a hike would crush the economy, and he is not alone. A well-respected professor from arguably the top finance school in the world agrees.
After all, 2-year Treasuries paid a paltry 0.73% at the start of the year but today offer a yield of 4.2%. It doesn’t seem like a good deal when inflation is at 8.26%. But losing 8% to inflation and getting paid 4% from Treasuries seems a lot more compelling than holding the S&P 500 which is down 22.98% for the year.
And that lose-lose proposition facing investors is perhaps an ingredient that triggered an Ivy League Professor to go on a tirade against Jerome Powell and his Federal Reserve colleagues that rivaled Jim Cramer’s epic meltdown in 2008, when he blasted the Fed with the outburst “they know nothing.”
Ivy League Prof Channels Jim Cramer’s EPIC Meltdown
To understand the significance of the outburst, you have to know the character involved: Jeremy Siegel from the Wharton School of the University of Pennsylvania.
Prof. Siegel is the author of a must-read book on investing “Stocks for the Long Run” and is an astute market analyst, who has repeatedly forecast market directions correctly. It’s important to note that, while Jim Cramer is widely viewed as an entertainer, Prof Siegel is well-respected among the investing cognoscenti.
And what Prof. Siegel said should rattle even the most “diamond-handed” investor. He began by eviscerating the Fed for its policy both last year and this year.
Last year when housing prices were rising at the fastest rate in post-war history and commodities were booming, he noted Chairman Powell observed that “we (the Fed) don’t see any inflation. We see no need to raise interest rates in 2022.”
Now, when all those same commodities and asset prices are going down, Siegel says Powell sees “stubborn inflation that requires the Fed to stay tight all the way through 2023”
In Siegel’s own words: “it makes no sense to me whatsoever.”
Slamming the Fed for maintaining low rates when prices of housing and commodities were spiraling higher and hiking rates when they are falling was just his opening attack.
Prof. Siegel went on to say that the Fed policy is “way too tight” and we “don’t need to get anywhere near that level to stop inflation” because oil prices have fallen to pre-Russia invasion of Ukraine levels while the Case-Shiller home price index is forecast to show a decrease for the first time in years.
The only thing not going down in the Professor’s view is wages, which are in catch-up mode, meaning they are lagging inflation.
“We’re Going to CRUSH The Economy”
Siegel didn’t hold back. The Fed is making “precisely the same mistake on the other side that they made a year ago”, meaning last year they kept rates too low and now the pendulum has swung entirely in the other direction, in error.
What does this mean for stocks?
Prof. Siegel was clear as day answering this question. His view is that until Chairman Powell sees the light (stops raising rates), downward pressure on stocks will continue.
It became clear that Siegel is almost in disbelief that the Fed is not paying attention to how high rates have gone and that the dollar is at the highest level in decades. Add to that the greatest decline in money supply in a 5 month period since the post-war period, and the incredulity of Fed policy is apparent.
If the Fed looked at “ANY of the monetary or financial indicators” the Fed cannot keep raising rates.
Prof. Siegel went on to skewer Chairman Powell, who stated during his mid-week conference that he wanted real rates positive across the yield curve. But they are positive, claimed Siegel, across every maturity.
The epic rant expanded to those who were in the room asking Powell questions. Why didn’t any single reporter ask the hard questions:
- Why do we have 3.2 million new workers and GDP going down? What does that mean?
- What does a record decline in the money supply mean?
- What does the collapse in commodity prices mean?
There were NO hard questions, according to Prof. Siegel. 50 reporters in the room and they said “repeat the statement you made in the beginning” – why not ask Chairman Powell “what are you looking at?”
Is Powell looking at 3-month core inflation that is lagging, while observers like Siegel are looking at markets that discount the future? Prof. Siegel made it clear the Fed should be looking at “market-oriented data.”
He concluded: “I am very upset” and what might have been missed by many is he almost completed the sentence “I’m afraid” because the pendulum has swung “waaaayyy” too far.
The capstone was Siegel’s comment that the Fed is now claiming “we’re the tough guys, we’re going to CRUSH the economy.”
His final word on the matter: Poor monetary policy would be an understatement”