My Mind on Mortgages

I had the pleasure of sitting in on a lecture yesterday by Dr. Jeremy Siegel (Thanks Gavin!).  If you’re not familiar with Dr. Siegel he is a professor, economist, author, and all around expert on the stock market.  He has degrees from Columbia University & MIT and has taught at the University of Chicago & the Wharton School of Business.  He is probably most famous for writing a book called Stocks for the Long Run.

Dr. Siegel

In his talk yesterday Dr. Siegel made one of the most compelling cases for stocks that I’ve heard in today’s market.  He had a lot of interesting points.  Here are my cliff notes from his presentation:

*If an investor would have invested $1 in 1802 and “let it ride” until today in the following asset classes here is what that $1 would be worth today (note: this is inflation adjusted, assumes dividends/ interest are reinvested):

• Stocks: $495,522 (6.6% annual inflation adjusted return)
• Bonds: $1,295
• T-bills: $302
• Gold: $2.69
• US Dollar currency: $.06

Based on Jeremy’s research he believes that the S & P 500 has another 25-30% rally before it gets back to the 1802-2009 trend line (the regression of returns over those 200+ years).

*Dr. Siegel predicts that inflation in the US economy will remain tame for the next 2 years but creep up to 4-5% by 2012.

*He is predicting that the Fed will begin raising short-term interest rates in the Spring of 2010.

*He forecasts 4-5% GDP growth for the 4th quarter of this year.

*He expects the headline unemployment rate to increase even though the economy is improving as we head into 2010.  Why? The current unemployment rate of 10.2% is based on people currently looking for work who can’t find it.  As job prospects improve with the economy more discouraged workers (those who are unemployed but NOT looking for work and not counted in the 10.2% rate) they will reenter the jobs market but companies will be slow to rehire.  As a result, the unemployment rate will rise.  This is not a bad sign.

*Dr. Siegel pointed out that with low home prices and low interest rates home affordability is at an all-time high.

*He is bullish on emerging markets such as China & India.  He thinks that a stock portfolio allocation of 30%-60% in foreign stocks is NOT out of line.

*Lastly, he is not surprised to see the US Dollar weakening.  Before the financial crisis the US dollar was at all-time lows versus foreign currencies (summer 2007).  With the crisis investors sought safety in the US Dollar driving it up from 2007-2009.  However, as the economy improves investors are accepting greater risk which means the Dollar is reverting to the levels of 2007.