Steve Forbes Interview: Jeremy Siegel, Investing Guru And Author (2) ? ~ MAKE MONEY BLOG$

P/Es Could Easily Increase

Forbes: And talking about P/E being at 13, you say you can make a case it should be 18, 19.

Siegel: It would not be surprising on the basis of historical data, yes.

Forbes: So that would mean another 400, 500 points on the S&P.

Siegel: Yes, it would. It would. And I’m not saying it’s going to come today or tomorrow. I’m just saying that if it gets up there.

Forbes: The clouds are parting in the sky.

steveforbes

Siegel: The clouds are parting in the sky. If it actually gets up there, it would be nothing unusual in terms of historical valuation. Steve, one of the things that I find said so much about the market is the market is way ahead of itself. People are saying that. Why? Because it doubled over a two-year period. But earnings have gone up five times.

And really, when I look at price relative earnings, the market is not ahead of itself. In fact, there’s still a lot of risk. There’s a tremendous amount of risk aversion. People ask me, “Well Jeremy, why are stocks so cheap given all these low-interest-rate factors?” And well, it’s the memory of the, you know, I mean, the 57 percent decline in the S&P was the worst since the 1930s. And, you know, those memories don’t disappear overnight.

Is Bond Performance An Anomaly?

Forbes: Stocks versus bonds. Bonds have done very well in recent years.

Siegel: Yes, they have.

Forbes: Is that an anomaly?

Siegel: Well again, when you started out with 10-year Treasurys at 16-and-a-half percent and you got inflation under control, thank goodness to a few people that [Paul] Volcker and a few others that kept it low, you’re gonna get great returns. But I believe forward-looking returns, the bond market’s very dangerous right now.

I wrote an article, lead article I think in the Wall Street Journal last August, called “The Great American Bond Bubble.” And that was when it was two and a half percent on the 10-Years. Now we’re on 3.1 percent. You know, as I say, I’m an academic. I study interest rates. I teach interest rates. There’s two important factors determining interest rates certainly long term.

Fed does a lot with the short term. Long term, it’s inflation and it’s real growth. You add those two factors together and you come close to long term interest rate. Now, I think inflation is going to run two to four percent. I think we’re going to be above Bernanke’s target. Not in six months or a year. But I think he’s going to err on the side of too much inflation.

There’s a lot of liquidity out there. And I think growth is going to come back. And want you to remember, interest rates are not just tied to the U.S. growth. Global growth. And global growth, I mean, I look at a lot of different people’s projection. Around the world, four percent is still the best guess for real growth. So you get inflation two to four. You get global growth at four. I do not see how the German bonds and the American bonds can stay in the three-percent range. I think that their risk is upside yields and a big downside on price.

Forbes: But still a good environment for stocks.

Siegel: Still a good environment for stocks. Again, in the low-to-moderate range and at the beginning of an increase, because remember, the Fed is only going to raise interest rates if it sees the economy pick up. And that’s good for earnings. And that’s why in the early stages of an expansion, stocks are not hurt by rising interest rates.

Because the expansion itself pushes earnings even higher. It’s in the later stage when you’re at the top of a boom — the margins are unusually high, you’re overextended, labor market is overheating. That’s when clamping down by the fed means a warning signal for stocks.

A Muni Bond Bubble?

Forbes: What about muni bonds? Is there a bubble there too?

Siegel: Well, you know, they had a little scare there. Miss [Meredith] Whitney I think certainly rocked the boat and got a lot of attention. I’m not an expert in the muni market. I do know that there’s a lot of unfunded stuff in the pensions of a lot of the bonds. But the experts I talk to said by and large, we are safe in the muni market.

I have some in muni bond funds and some money in the money market muni funds also. And I have not taken any out. So I still feel confident about that sector. Again, diversification is important. Any one, you know, city or region can go under. But I think if you’re really well diversified and stay with the higher quality and you can do that, I think you’re going to be fine.

Individual Dividend Taxes

Forbes: Now, a big part of return on stocks as we know, is dividends and how much companies pay out ratios and the like. What’s going to happen if the individual tax on dividends goes from the 15 to, it’s going to go up with Obamacare, 2012, it could go as high as 35, 40 percent. That’s not looking good, is it?

Siegel: I am very much for keeping it low. I wrote, even before Bush put in that tax cut for dividends, how important dividends are and we should — our tax code penalizes dividends more than almost any other country in the sense that we used to tax them as ordinary income. We allow no deduction for dividends on the corporate side.

So it’s like a double whammy. I can’t deduct and no one gets a preference. We made — Bush went to 20 and then went down to 15. Now, Obama’s original proposal was going back to 20. Now with Obamacare, I know we have, you know, the first tax, the payroll taxes that’s going to apply to dividends and capital gains I think adds another three percent, three and a half percent to that.

So we can get it up to 23 or 24, and I think that would be a very bad mistake. I don’t like it, but I could survive a 20 percent. You know, my feeling is that it should remain at 15 percent and they should give a deduction for the corporate tax. Of course, we should also lower the corporate tax and broaden and lower it too.

So there’s a lot of things that are going on there. Would it survive 23 and a half? I think so. But it’s very interesting. Because I went to Congress and actually testified when Bush was considering — Congress, had of course, do it — considered lowering the tax. I found many, many Democrats in favor of lowering the dividend tax. They were getting a lot of feedback from their own constituency. The reason why they told me they’re voting against the plan is they didn’t like the other parts of it.

And it’s interesting. Because when Obama did it, he said, “I’m going to bring those top rates up.” But from the very early part of his campaign before even President, he said, “I want to keep it at 20.” Not 15, but at 20. So there’s a lot of sentiment in Congress. And by the way, I think there’s enough sentiment, I mean, I hope we don’t increase any of the taxes.

I’m in that camp over there. But I think there’s a lot of sentiment to exempt the dividends and maybe the capital gains, but the dividends to this dividend income tax. Because listen, I mean, we need to generate income for the retirees, especially if we’re going to start squeezing social security and Medicare down the line.

Investing Overseas

Forbes: Overseas investing, think there’s enough opportunity here, you don’t have to go overseas?

Siegel: Yeah. Well, as I mentioned early on, 40 percent of the profits do come from overseas. But I think you got to do international investing. I mean, in my book “Future for Investors”, I talk about how important that is. First of all, don’t ignore Europe. Europe has a lot of problems. And I think the Euro has a lot of problems.

But European exporters I think can do very, very well. But most importantly, Europe now on average is selling for about a ten P/E ratio. It’s selling at around a 20 percent discount off of U.S. stocks. I think given the problems with the Euro and all that, and I think the ECB is going to prevent a general banking failure in Europe, I think that you can’t ignore Europe. And particularly if you can pick up those exporters from Germany or anywhere else that are not selling to Greece and Portugal.

Forbes: Is the company you’re associated with — WisdomTree — have an ETF in terms of German exporters?

Siegel: We are looking into that. I mean, we have a lot of the WisdomTree which I’m a Senior Investment Strategy Advisor for, we have a lot of emerging market ETFs, dividend weighted ETFs, and in European. One of the things that we have is we have hedged, currency hedged ETFs, because I think the Euro is too strong at 140. And I think it’s going down to around 120.

And we can buy European stocks with hedging that. And we also have Japanese stocks hedged against the yen. Because with its debt, I don’t know. I mean, the yen to me Steve, defies almost all explaining. I mean, it’s disaster, and the yen keeps on going up. But someday it’s going to turn. They can’t have the debt that they have and keep the yen the strongest currency in the world. And that’s what I worry about. So I think you can want to hedge against the yen and I think currency-hedged investing both on Europe today and Japan, and we, WisdomTree, has ETFs there, is also a good choice. So yeah, I’m very enthusiastic about the offering that we have. And it’s met with a wonderful reception from investors.

Stick With Your Strategy

Forbes: You have a basic strategy. Others have different strategies. Some have observed it’s not so much the strategy. The key is have the discipline to stick with it, which most people don’t. Do you agree with that?

Siegel: Oh, absolutely. And that’s it. I mean, how many people I knew back in March of 2009 said, “Jeremy, I can’t stand the pain anymore, what little I have, I have to make sure it’s safe.” I said, “I know you’ve taken a hit here. But history tells us you got one of the best lowest-valued markets I have seen not only in a generation, almost a lifetime. Certainly relative to bonds.”

I said, you know, “Please stay in.” I was able to convince a number of people there. I got them a copy of my book and I said, “Look at these long term drafts. Look at all these points like this. Get the faith back.” And a number did and a number did not. And that’s why even though I like people who invest by their own, sometimes they need an advisor that can hold their hand and say, “Listen. We’ve been through this before. Let’s hold steady here. We’ll work out at the end.”

The Demographic Bear Argument

Forbes: One final bearish argument is demographics. An aging population, we’re going to be selling our securities to pay for all of our elderly expenses. You don’t buy into that?

Siegel: No. I don’t buy into that. And that’s really what I discovered in my research when I was doing the book “Future for Investors,” which talked about how much capital can come from the emerging markets, the younger population. And I know that China has the One Child policy so it’s not as young, but India, potentially Africa, in the Middle East.

If they have any growth, those younger people are going to be acquiring assets. And there’s going to be enormous cross-country intercontinental capital flows. They’re going to be the buyers. The young people are the buyers. And by the way, the U.S. is the youngest of the developed countries. So in a way, we don’t have the problems that Portugal, Spain, Greece and Japan have in terms of their thing.

We have a younger sector that’s also going to pick up a lot of capital. But when I looked at it globally from a demographic standpoint, I saw, thank goodness, enough growth in the emerging markets to pick up all that capital that was going to be sold by the baby boomers and keep the market stable.

Forbes: Should we should be nice to India?

Siegel: We should definitely be nice. They’re going to be very important to us. The whole emerging markets are going to be very important to buying our capital into the future.

Forbes: Jeremy, thank you.

Siegel: Thanks very much, Steve.

source: forbes.com
please give me comments thanks